This week I got into a debate on Facebook (if you can call it that) with a friend-of-a-friend and I found myself trying to explain a few basic economic principles. Long story short, once the guy realized he was playing checkers, while I played chess, he shut up. I’m told he went on to post his own status saying, "I just love people that are under 25 and think they fully understand how the world works just because they've had a few college level economic classes..." All I can say is thanks for believing I'm under 25 and I hope you live in a great state like South Carolina where we have enough smart voters to cancel you out.
This got me thinking. Do some people really believe this government spending won't affect their pocket book? Do they think it must be good for them because they don't have to pay for it??
First, if you believe that, you're either stupid or ignorant. I still haven't found a cure for stupidity but we're all ignorant from time to time so I’ll try to help with an example of why excess government spending is bad for everyone.
President Obama's administration has doubled our annual deficit to over $2 TRILLION. This staggering figure represents nearly $7,000 for every man, woman and child in America. Once you figure only about a third actually pay taxes, this is over $20,000 PER TAXPAYER in excess what you already pay.
The government can't levy enough taxes in the short-term to cover this deficit without crippling our economy. Therefore, in addition to tax hikes, the Obama administration is flooding the market with record amounts of government debt (bonds). This is really not much different than you and I borrowing money, which brings me to my point.
When we borrow money an investor ultimately holds our debt. When we pay it back, he collects the principle along with interest. The interest rates we pay are driven by the investor’s appetite to hold our debt and the new government bonds will compete with our next loan for investors’ dollars. As the government over saturates the market, bond prices will fall which drives yield up. Let’s look at a simplified example of what this means.
Let’s assume the government issues a $100 one-year bond at 5% interest, but investors are only willing to pay $90 due to excess supply. When that bond matures the investor will still receive $105 (the $100 face value plus 5% interest). That’s a $15 return on a $90 investment. When the price fell, it drove the yield to 17% ($15/$90).
If an investor can buy government bonds at a yield of 17%, which they could in the early 80's, why would they ever buy our loans at 6%? To make our debt more attractive to investors the rate has to go up...way up!
This impacts all consumer debt from mortgages to credit cards. Excess government spending will drive up our cost to borrow money, which for most Americans represents their largest household expense.
For those smart enough to connect the dots, the next place this leads is inflation. That loaf of bread you're paying $1.99 for today might cost $4.00 in a few years. A $35,000 car becomes $70,000. Again, we saw inflation like this in the early 80s and given the unprecedented magnitude of current government spending I believe our next round of inflation could be even worse.
The national debt will impact all of us for years to come. We must take a stand. The time to control spending is now. I'm not saying it will be easy, but American families balance their budget every day and it's time for the government to do the same.
Next up is this MASSIVE health care reform Obama is trying to cram through congress. Please, let your voice be heard. Write or call your representatives and tell them we just can't afford it.
Stepping down from the soapbox,
Jeff French
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