With the approaching exhaustion of government borrowing authority, and “raise the debt limit” bellowing from every progressive mouth, it's time to go over this again – because the polls keep showing that the vast majority of Americans don't understand it.
It's really very simple, just as the video says.
Our federal government spends more than it takes in (from taxes). Much more. Year after year after year. The only way they can do that is by borrowing money – which they do by issuing Treasury Bonds. Those bonds are for a fixed period of time, as short as a few months, as long as 10 years. When they expire, the federal government must pay them back, with interest (not much interest, but there is some). This is a large scale version of what a family does with a bank loan or a credit card: they borrow money, then pay it back.
In mid-October, the federal government will have borrowed as much as they're authorized to borrow – they will have hit their credit limit, just like a family might hit the credit limit on the credit card.
It's what happens next that's important.
Obama and his minions are proclaiming, loudly, that without the debt limit being raised, the country will default on its credit. By that, they mean we'd stop paying back the people who bought bonds. That's exactly like a family who hit their credit limit telling the bank that if their limit isn't raised, they can't make any credit card payments. How well do you think that would go over with the bank?
And yet that's exactly the situation this country is in. We spend so much money on other things that we have to borrow to make our “credit card” payments. Our government tells us that there's no way they can spend less. But of course there are ways – many of them. They're just politically unpalatable ways, and the politicians are afraid that if they propose them, they'll be voted out of office – and they may well be right, because American voters are so damned stupid about this that they wouldn't recognize good governance if it smacked them in the head.
Remember the financial disaster sometimes known as Greece? This is precisely the difficulty they got themselves in, albeit even deeper than we have. The rest of the moneyed world all got together and forced them to cut expenses and start repaying their debt.
Who's going to force us?
I think there's only two ways.
The hopeful, but unlikely, way is that American voters will wise up and start voting for fiscally sane politicians. I'm not holding my breath for that one.
The probable way is that something – possibly a default – will wake the Treasury Bond borrowers to the reality that they might not get paid back. This will cause the interest rate the U.S. must pay on its debt to skyrocket. The result will be greatly increased cost of new borrowing. Thanks to “quantitative easing” a very high proportion of our outstanding debt is short term – and as those low-interest instruments expire, they'll be replaced by high-interest Treasury Bonds. The only alternative to that is to actually cut expenses – which I'm sure the politicians will start doing once the public starts complaining about the pains induced by high interest rates.
If you've still got an ARM, now would be a good time to convert it to a fixed mortgage. Those ARM rates are going to go up, and my bet is that they'll go up much like they did back in Carter's time – up to well over 10%...
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