Will the U.S. default on the national debt? All of the political hype and spin may have left you spinning, wondering about what is going to happen to the U.S. if (when) we default on the national debt. Not to worry. In spite of what you may have heard the Federal debt really isn’t a big problem.
First, a couple of definitions. The national debt represents the money that the government has borrowed and upon which it must make interest payments. The deficit is the difference between what the government spends and what it takes in. You borrow money to buy a car . . . the loan is debt. You spend more than you make . . . that’s a deficit. The Federal debt is about $14.3 trillion. The Federal deficit was $1.4 trillion last year[i]
Defaulting on the national debt would mean that we quit making interest payments on the bonds that have been sold to the investors in U.S. debt. The bond holders include pension funds, individual investors and countries like China. China, incidentally, has been the largest investor in U.S. bonds for some time. More about that in another blog.
According to the U.S. Department of Treasury the average monthly interest payment on the Federal debt over the last fiscal year has been about $22.9 billion[ii] . That seems like a lot of money. However, that is a drop in the bucket compared to the revenue received by the Federal government.
Total Federal revenue for 2011 is expected to be about $2.2 trillion or $180 billion per month (and most of that comes from you and me . . . individual taxpayers)[iii]. So do the math. If the government takes in $180 billion per month and spends $22.9 million on interest payments on the debt, then it only has $157.1 billion left (or $1.9 trillion annually) to cover other operating expenses. We ought be able to get by on $1,900,000,000,000.
The Federal government easily has sufficient funds to cover the Federal debt . . . there is no danger of technical default on the debt. The hype about raising the debt ceiling isn’t about covering the debt, it’s a cover story to provide an excuse to raise taxes and rake in more money to fund run-away Federal spending. So what is the problem? Spending.
Is raising taxes on the “rich” a viable solution? Will it solve the “debt crisis”. Assume that rather than taxing the “rich” the government decided to take all of the wealth of the American billionaires. Sounds like a plan, no? That would bring in about $1.3 trillion[iv]. Sorry, even if the government took all of their wealth, not just a tax on their annual income, it wouldn’t come close to eliminating the Federal debt.
The problem is easy to identify, and so is the solution. It’s just that no one in Washington really wants to talk about it. The problem: as a country we spend more than we make. The solution: spend less. Families have to do that. Why shouldn’t we expect our government to do the same?
Just my opinion.
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