12. February 2014 · Comments Off on Raising The Debt Limit · Categories: Economics, Politics · Tags:

To raise or not to raise. How is this even a question? For those of you who know how politics works, the answer is simple… anything that is put to a vote becomes a card in the game we call politics. “I’m not going to give you my vote unless you give *ME* something.” The reason why the question even becomes a card in the first place requires an understanding of a very simple concept. In a nutshell, it doesn’t matter how much debt you carry as long as you make your payments on time. If you don’t make your payments on time, you loose credibility.

Unfortunately, our government doesn’t have the cash to pay off what is due, so the idea is to borrow more money so they can – and since the government has already reached it’s self-appointed debt limit, they need to raise that limit first. This may sound insane, but  it’s really no different than what millions of Americans are doing when they use credit cards to pay their overdue bills. They are borrowing more money to avoid the immediate consequences of not paying what is due. And yes, it *is* insane, but I think most reasonable people will find that in general, it’s better to carry more debt than to default on payments. As long as you make your payments on time, you can carry an increased debt at least until you come up with a long term solution, which shouldn’t be hard to recognize… it’s called living within your means.

Of course for a non-profit government like ours, the only means available is tax revenue. So then, to live within it’s means, the government should spend no more than what it gets in taxes, right? So why can’t our government do that? Is it just spending too much money? Is it wasting money? Is there some corruption going on? These are the same questions a CFO in the private sector will ask of a company’s operations, which can be roughly equated to the obligations of a government. It’s not unusual to find waste, corruption or both in corporations as well as government, but since corporations are private affairs we tend to hear less about it. Another thing a CFO will look at is operating costs.

The operating cost of the government’s obligations are without a doubt escalating. And why wouldn’t it? The government still has to buy supplies and equipment from the market just like any corporation does – it still has to pay it’s workers, just like any corporation does. In fact government is just as affected by prices up the supply-chain as any corporation is. Then you factor in the the increasing number of customers, or in the case of the government, the increasing number of citizens. So naturally, the cost of a government’s obligations are going to escalate the same way the operating costs for a corporation does. So how does a corporation solve this problem? It seems the most common approach is to pass the cost to the customer through price hikes. Customers might be annoyed but at least the company stays balanced. The equivalent solution for a government of course is to raise taxes, but this isn’t what’s happening. In fact, while our population was getting more expensive to serve, the government has actually been cutting taxes and therefore reducing it’s means. So the only other sensible option then is to cut the operating budget to stay within the shrinking means of a tax cutting government, spending has to be cut accordingly and as we just saw, neither the Democrats nor the Republicans want to cut their spending programs. So now what?

Borrow, that’s what. If you’re operating costs exceed your revenue and you can’t change either, you borrow until you can find a way to either expand your revenue or reduce your costs.

 

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