Just about everyone understands what happens if they only pay the minimum payment on their credit cards while continuing to buy things on credit using those same cards. There’s even a joke about it…
“How did I go bankrupt? Slowly at first, then all at once.”
As you continue to spend, the cost of maintaining your debt slowly goes up (interest on additional expenditures plus interest on the carried-over balance) until all of a sudden, you can no longer afford to pay the minimum payment the ceditor requires. You have entered into a debt spiral… the next sound you hear will be your finances impacting the Earth at terminal velocity.
The NTSB calls it “controlled flight into terrain.”
I felt like it would be appropriate to remind ourselves of these basic economic facts on the same day our Congress voted to spend another Trillion Dollars, this time on “Infrastructure.”
For most of our nation’s history, our budgets rose slowly (although at an ever-increasing rate) and more-or-less predictably. It took 15 years for our budget to rise from $1 Trillion to $2 Trillion. It took another 7 years for the Budget to rise to #3 Trillion. And then we sat in the 3s for 9 years before finally breaking through to $4 Trillion.
And then, just like the guy with the maxed out credit card, everything changed all at once. The Federal Government spent $4 Trillion for a mere two years before we skipped right over the 5s and went straight to $6 Trillion dollars. We had never before skipped over an entire number before.
R.I.P. $5 Trillion…. helloooooooo 6!
But George, you’ll say, a lot of that was emergency COVID spending… yes of course, you’re right. But to go back to the analogy of the guy with the maxed out credit card… why is it important to live below your means? If you have X dollars available every month, why is it important to try to spend X minus 10% instead of X plus 10%?
Precisely because you never know what emergency might be lurking right around the corner. For the guy with the maxed out credit card, if he blows out his car engine, where would he find the $5K to fix it? His credit cards are maxed out, and it’s unlikely that he has any savings.
Our Government got COVID instead of a blown engine,. and they can print money to cover the gap between spending and revenue (which maxed out credit card guy can’t do) but the laws of economics don’t change just because you can print your own money. Or at least they don’t stay changed… not for long.
What’s infurtiating about it all is how they spend like drunken sailors during the good years, never putting any money away as a cushion for emergencies, and then when a legit crisis pops up like 9/11, or the banking collapse of 2008, or the current crisis of COVID combined with crumbling roads and bridges, they throw up their hands as if to say “hey man, what can you do? Gotta give us another 3 trillion or we’re all screwed. Not our fault… just another one of those danged unexpected emergencies, dontcha know.”
And now, as predictable as the sunrise, we have entered a debt spiral. We jumped from $4 Trillion budgets right on up to 6, and we will never go back, because that’s how budgets work. They always get bigger, they never get smaller. Before the next Presidential election, it’s likely that we’ll jump from 6 to 8. We will have taken gradual 1 Trillion dollar leaps and transformed them into 2 Trillion dollar leaps virtually overnight. Could 4 Trillion dollar leaps be far behind? As the bills rack up, interest rates go up and the cost of servicing the debt rises… it seems almost a certainty.
Hey, does that mountain look like it’s getting a lot closer, or is it me?