THE BLOG
08/01/2008 05:12 am ET | Updated May 25, 2011

Let's Add More Debt To the National Total

From a story talking about the new housing bill:

From the WSJ:

The package could also come at a significant cost to the U.S. government, which would be authorized to invest billions of dollars in troubled mortgage giants Fannie Mae and Freddie Mac, as well as insure up to $300 billion in refinanced mortgages. As a result of the bill, Congress will raise the national debt ceiling to $10.6 trillion from $9.8 trillion. It will also give Fannie Mae and Freddie Mac a new, tougher regulator.

Let's just add more debt to the total, shall we? After all, we don't have enough debt. And we certainly wouldn't want to do anything that remotely resembles fiscal responsibility. That might send the wrong message to the markets about the US government's intentions.

Let's review. First, here is the yearly total of total US government debt outstanding at the end of each federal fiscal year.

09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

Why are these figures important? Because they indicate there is a systemic problem with the US government's budgeting system. Since the end of fiscal year 2002, the federal government has added at least $500 billion dollars of net new debt per year every year. That indicates the budget has never even come close to being balanced over the last 7 years -- despite rampant claims to the contrary. "But Bonddad -- the national press says the budget deficit is small!" Right -- that's why we're borrowing all that money -- because we're balancing the books of the federal government. Anyone who is reporting the federal government's books are balanced should resign from the financial press right now because they have no idea what they are talking about.

But there are three deeper and far more important reasons why this continual raising of the debt ceiling is so incredibly dangerous.

The first is psychological. At the national level the federal government has continued to abdicate fiscal responsibility. The US went to war and didn't raise taxes to pay for it. The US increased domestic spending and didn't increase taxes to pay for it. Instead, we acted as though the debt didn't matter and that tax cuts pay for themselves. As a result we are left with an ever-increasing mountain of debt which we continue to kick down to road. By not making tough choices now we make it easier to not make tough choices tomorrow.

The second reason is far more practical. As the debt load of the US has increased, the value of the dollar has dropped. Although the US economy was in an expansion from November 2001, the value of the dollar continually dropped. Why? An expanding economy should attract investment which in turn bids up its currency. Yet the dollar dropped. Some of the reason for this is interest rate policy which is an important determinant in currency valuation. However, the US -- which is the world's largest economy -- was seeing the value of its currency continue to decline. This has lead to inflationary pressures because commodities are priced in dollars. A drop in the value of the currency a good is priced in amounts to a de facto price increase in the good. In other words, one of the primary reasons for the spike in oil prices is the dollar's long-term drop in value. And we can thank fiscal irresponsibility as a primary reason for that.

The third reason why this development is important is it continues to push the national economic foundation closer to the edge. At some point all of this debt may cause very serious problems. Suppose that US creditors (bondholders) looked at the US' books and said, "I don't think you're going to be able to repay this loan I'm making to you. I need a higher interest rate as compensation for the risk I'm taking by lending you money." At that point, US interest rates increase. Imagine if that happened right now when the economy is at the beginning of a recession. In other words, we're creating a situation that is rife with possible future problems. And some of these problems are serious -- as in they could lead to the financial system freezing from a random world event.

"But Bonddad. We've been doing business like this for almost 30 years and nothing bad has happened! It must be OK to do things things this way." Fine. Try smoking a pack a day for 30 years. You may not get cancer. But your chances of contracting it are a whole lot higher. That's why doctors will always advise you to quit.