Every individual, family, clan and nation has to live within their means. If the expenses are more than income, the gap has to be filled by the borrowings. For a nation the income is largely from taxes. Lenders look at the borrower’s earnings and payment habits. These two are the most telling dynamics for the lenders. Lenders also charge a fee for renting out their money. Interest is based on these two and perhaps some more aspects, like availability of resources, its demand and future projections.
Unfortunately in the US we have been spending more than we collect. Some of the spending is “necessary” others are not. For example Social security, Medicare and infrastructure projects may be considered as necessary because it creates employment and is useful to our future generations. However, wedging a war or not is our choice. We can avoid spending money on such unproductive and non-welfare matters. We have a debt almost as large as our one year’s income (annual GDP). Most of the debt is from outside lenders, whereas a small portion is internal borrowing from deposits of our trust accounts like social security etc. Debt has gradually increased because our national income is continuously smaller and our expenses are bigger. We are not disciplined.
We as a democratic nation have authorized our representatives in congress to control and manage such matters. But unfortunately our democracy has not remained as simple as doing social work for the country and fellow citizens. For the officials to get elected not only they need your vote but also need a large sum of money to conduct their campaign. Bigger the post, larger the amount of money needed. One may understand that a reasonable sum of money may be contributed by an average well wisher because she or he likes the candidate and the cause. But if the amount of money is large and runs into tens of thousands and then even in millions, surely there must be some hidden agenda for such contribution, as common sense tells us. Those contributors need some return on “investment”. So, it seems that the elected official has got your vote all right, but she or he is under a strong influence of “contributors” to the campaign, be that individual, corporation, lobby groups, vested interest groups or the like. And then those officials get the taste of the “authority” and “recognition” (and of course so many perks, which they have voted for themselves). Hence they want to get re-elected also and to be able to do that, they need to show their constituents (real voters) that they have kept their promises. Now here is the conflict of interest. On one side they have constituent voters and on the other there are contributor’s interests.
This is our dilemma today. We are debtors but our representatives in congress cannot raise tax because they have promised not to, and they cannot reduce the social programs because it will not only be politically fatal but also morally wrong. We can stop unnecessary expenses on war, space technology, some far flung research etc. But those can only be done slowly, without compromising our security and our status in the world community of nations. It cannot be done overnight.
You all must be listening to both party’s political posturing amidst the above mentioned facts. Real issue however is not the debt ceiling, it is not even balancing our income versus our expenses, it is reducing our expenses and increase our income substantially to reduce our debts.
Issue of debt ceiling is almost a no brainer. For a simpleton it is like credit card limit that our congress has imposed upon; they can change it in a jiffy and increase it. This has been done in the past many times without any of this fanfare. It has been increased 10 times since 2001. Issue is that we have already spent lot more than we had our own. By raising the debt ceiling we are only indicating to our lenders that we are intending to spend more. There is no indication for them to see when they can get their money back. Hence they will make the further debt expensive (more interest) or they may even refuse to lend any more although our congress may have raised their borrowing limit!
On TV and media the congress members and journalists have created a drama for all of us. In fact it is very simple. We have one of the following options:
1) Do not raise ceiling:
This is not a viable option at all. If ceiling is not raised, we will not have funds to pay bills. It will seriously affect our status and creditworthiness in the world. If we cannot borrow and the “income” is not enough, where shall we pay from to the elderly, soldiers, veterans, and federal workers?
2) Plan to reduce the deficit by decreasing spending:
This may take care of today’s problem because we may not need to borrow anymore. But what about the debt that has mounted so big?
3) Plan to increase income by adding to taxes:
This may also take care of the issue for today but what about the debt that is already there?
4) Combination of 2 and 3. That is planning to increase income by raising taxes and decrease expenses as much as possible:
This is the only prudent and realistic way for responsible leader of the world like US to do. We act sensibly to be an example for others. We have never defaulted on our obligations and we never should.
Two ratings agencies have already said they are likely to downgrade the US’s rating. This will be disastrous. It will increase the interest rate on our further borrowings, if there is a lender to lend. It will also psychologically and perceptually dent the US reputation for a long time to come. We have already proved ourselves that we are not fiscally savvy. We have allowed the debt to run this high. On top of that if we are downgraded, quoting Bernanke, “Losing that credit rating would be a self-inflicted wound”. This will also be bad for economy, unemployment and overall recovery.
Our congress must take hard decisions. Leave politics aside. Look at the country’s long term interest. In your personal life would you want to be called bankrupt? If not, why would you let US be called so, when we can tighten the belts and do the needful? Don’t wait for 2nd August. Do it today. Please.