What a Loan Officer Would Say to the U.S. Government

Does the Size of Our National Debt Really Matter AnymoreFor a moment, consider yourself a loan officer at a major bank. Would you approve a loan for a customer who says they earn $1,000 a month, spend $1,300 a month, and don’t have a job? They also tell you they have unpaid debts of $17,000.

I don’t think anyone would authorize that kind of loan because the chances of getting the money back are next to zero. The individual spending more than he earns is a prime example of a financial disaster waiting to happen. It is unsustainable living; when someone does this, they break the most basic principles of Personal Finance 101.

So why does the U.S. government get away with it?

The United States Department of the Treasury, Bureau of the Fiscal Service reported the budget deficit for the month of February was $194 billion. The U.S. government received $144 billion in revenues and spent $338 billion; the government spent 134% more than what it earned. (Source: Bureau of the Fiscal Service, March 14, 2014.)

So far for fiscal year 2014 (which began in October of 2013), the U.S. government has incurred a budget deficit of $380 billion on revenues of $1.10 trillion and expenses of $1.48 trillion. Since the beginning of its current fiscal year, the government has been spending 34% more than what it takes in.

The U.S. national debt, which has now surpassed $17.0 trillion, has skyrocketed since the Credit Crisis of 2008.

There are two important facts about our rising national debt that don’t get a lot of mainstream attention (and I certainly don’t hear the politicians talking about them):

Point #1: With higher national debt comes higher interest payments.

Point #2: Interest rates are rising.

So far this fiscal year, the U.S. government has paid $166 billion in interest payments alone on its national debt. For the entire year, it expects to pay about $420 billion in interest. The more debt we pile on as the years go by, the more interest we will be paying on that debt.

As for interest rates themselves, they have been rising. Since mid-2012, the yield on the 10-year U.S. Treasury has gone up from 1.4% to 2.7% today, a whopping increase of 92%.

When a family is in trouble, it tries to make at least the minimum payments on its debt. Right now, the U.S. government isn’t even making a minimum payment. It is covering its interest payments on its debt by borrowing more; something the individual in our example above cannot do.

In fiscal 2013, the U.S. government registered a budget deficit of $680 billion. The politicians were very quick to say, “Look, it’s not the $1.0-trillion budget deficit we’ve been running for each of the past five years…we’ve come in lower!” They pat themselves on the back. But they don’t talk about the massive national debt we have created, how we are borrowing more money simply to pay our interest costs on our debt, how rising interest rates in 2015 and 2016 will just propel the national debt higher.

Maybe the amount of national debt no longer matters because we’ve all concluded it simply can’t be paid back. Or maybe it doesn’t matter because Japan’s national debt is equal to 205% of its gross domestic product (GDP), and Japan’s not broke yet. (Our national debt-to-GDP stands at 105%.) I guess that, according to the Japanese example, the size of a country’s national debt, or its relationship to GDP, really doesn’t matter anymore.

I am skeptical. What happens when one day the Japanese and China, which have already cut back on buying U.S. Treasuries, say “We want our money back”? Oh, that’s right. That won’t be a big deal because the Federal Reserve will just get the printing presses going again and buy all the new U.S. bonds coming on the market with newly printed money. Yeah, that will work.