Our Debt - How bad is it?

As a teacher, the class I enjoyed most was senior economics. I took it very seriously, since I knew I had one semester to convey as much information as possible about the very important topic of money. Think about that – five months out of twelve years of school devoted to economics. I always felt it was a travesty that we do so little to educate young people about something that will have such a profound effect on their lives. I spent about half the semester talking to my students about managing their own money, but I also introduced them to economics in general. In a democratic-republic, it is important that people understand how our economy works so we can elect people who will make wise decisions concerning jobs, taxes, and spending. After all, we cannot continue to be a strong country unless we maintain a strong economy.

One of the topics I spent a great deal of time on was debt – both personal debt and public. Young people are known for getting themselves in trouble with that first credit card, and I hoped I could prevent that from happening to my students. But I also warned them about our national debt and tried to help them see that THEY were the ones who would have to deal with it. First I informed them of the size of our country’s indebtedness, which is currently over 12,729,000,000 dollars! That’s TRILLIONS. That is a very big number, and most of us really cannot conceive of it.

A trillion is a million million. Now if I had a million dollars, I would feel very rich. Imagine if I had a million million! Not even Bill Gates can conceive of having so much money!

One trillion seconds is 31,688 years. Western civilization has not even existed for a trillion seconds!

A stack of $1000 bills equal to a trillion dollars would be 67.9 miles high! (Yes, there used to be $1000 bills, with President Grover Cleveland’s picture on them. The highest denomination printed today is the $100 bill.) A stack of one dollar bills equal to a trillion would reach a quarter of the way to the moon!

A trillion barrels of oil would be enough to run the entire world for about 33 years if our level of consumption remained constant.

So you get the idea. A trillion dollars is a whole lot of money! And our country owes over 12 trillion. And it’s even worse than that – much worse. Besides the money we’ve already borrowed, we’ve made promises to pay a lot more money in the future, money we don’t have. We’ve promised to pay social security benefits, Medicare, and federal retiree pensions. The US Treasury Department recently reported that our nation has a staggering $62 trillion in these “unfunded obligations.”

Invariably, when I told my students about our nation’s debt, one of them would say, “But don’t we just owe the money to ourselves? What’s the big deal?” I imagine some adults have a similar misconception. I taught my students that our government owes real money to real people just like them! I explained to them that when the government needs money, it sells treasury bills, notes, or bonds to individuals, corporations, local governments, and foreign investors. These securities are basically IOU’s from the federal government. They must be repaid with interest. As with any other debt, the government will, at some point, have to pay back more than it has borrowed.

Now we all know that there is such a thing as too much debt in our personal finances. But as individuals, we have fewer options for paying debt than the government has. It’s also more difficult for us to continue borrowing. Government securities are backed by the full faith and credit of the United States. As long as our government is stable, treasury bonds should be a very safe investment, so people will continue buying them, thus loaning the government additional money. You and I are only backed by the total value of our assets. Once you’ve run through your bank accounts and sold everything you own to pay your debt, there is nothing left. Unlike the government, you can’t raise taxes or print more money. You’ve reached the limit of your credit-worthiness, and no one reputable is going to loan you money. Your last resort is to declare bankruptcy.

The government does have the ability to raise taxes and print money, so there seems to be no limit to the amount of debt it can accumulate. Of course, there are real problems with both those options, but I’ll save that for a later column.

In the past, some economists have believed that our national debt really doesn’t matter. It’s not like all those treasury securities are going to come due at once. As long as we can pay the interest due on the debt, some people believe the amount of the debt itself is not that important. It’s kind of like when people go buy a car and only worry about the size of the monthly payment without giving much thought to the length of the loan or the total amount to be paid. That’s lousy money management, but people do it all the time.

These days, you will have a hard time finding any knowledgeable person who doesn’t believe our economy is headed for disaster if our debt continues to grow as it has the past few decades. So what is so bad about debt? How much debt is too much? Most importantly, how will our growing debt affect us in the years to come? In future columns, I will attempt to answer those questions in terms that people of all ages and from all walks of life can understand. Only when we understand our economic difficulties will we hold our congressmen’s feet to the fire and demand they make desperately-needed changes.