I commented that it is more like building up credit card debt. The friend challenged me to explain the difference. I thought it would take more than a Facebook wall post to explain why, so here goes.
| Individual | US Government | |
|---|---|---|
| Income | Salary | Taxes, primarily income taxes |
| (Relatively) small expenditures | Food, clothes, gas | Parks, research, education, roads |
| (Relatively) large expenditures | Medical expenses, college | Medicare, Social Security, defense, Iraq, Afghanistan |
| Lenders | Banks | Bondholders, China |
| Raters | Experian, Transunion, Equifax | Moody's, et al |
| Financial engineering | Paying credit card with another card | Quantitative easing |
| What has happened in the last decade | Negotiated a drop in salary to keep job | Lowered taxes to get reelected |
| What has happened in the last five years | Employer cut salary | Income tax receipts dropped because of economy |
I'm not saying (yet) that any of this is good or bad, I'm just trying to set up a useful analogy or model. One of my friend's commenters said that credit cards was not a good comparison to the US Federal debt since the government can get a much better interest rate for money loaned to it. No argument here, but that's just a difference in the value of one variable. I think this table demonstrates that both equations have the same terms and the same variables.
So what is my point? If an individual cardholder runs up debt equal to 100% of his or her income, much of it in the last 5 years, and seems completely unable to control his or her spending, what will happen? Maybe nothing. After all, the borrower has always kept his or her promises, never missing a payment. The credit rating agencies have a long, complicated formula to estimate how reliable a borrower is and therefore how much they can be safely lent and at what interest rate, and may favor on-time payments more than any other factor. But what if something goes wrong? What if the borrower's salary drops again? What if he or she has to make another big purchase? What if another borrower more reliability and the market decides to invest money there instead?
I get the argument that cutting back on spending and raising taxes will do harm to the economy. But our politicians have shown no ability to cut spending and raise taxes in good times or bad times for the last 40 years. I think we need to put and maintain pressure on them to do something anytime any of them shows the slightest willingness to do so.
