We have passed the 20 trillion dollar debt mark with little fanfare. I know that an attitude prevails among many that we keep borrowing and the sky hasn’t fallen in yet. I know that some people will say that federal and even state and local government debt is not the same as personal debt. This is true of course. Still, I cannot help but relay what I learned by working with a client that was deep in debt.
You see, this client has a business and is able to generate a lot of income in very short order. And he had to do so many times while I was working with him. The problem he had was his monthly debt service. If he had no debt or even a normal level of debt then he would have money left over for things like food and gas. But anytime that he did not have special projects his normal monthly business income was entirely used up paying the minimum amounts on his loans. He was constantly frustrated and he had to choose not to take on projects that he would have like to because there was no money left over. The problem wasn’t his income, it was the accumulated debt1
Apply this to your state and local government. Ever notice that there is a constant campaign to tell you that in order to pay for teachers and firemen you must vote for still another tax increase? Yes, in order to pay past debts your state is in a bind. They must pay the debt and so they can’t pay the basic costs that we expect of them.
Which leads me to 20 Trillion Dollars. Sure, right now we can act like it doesn’t exist. But think just how much of our current taxes are required to pay the interest and principle on that 20 Trillion. Now think about this: Currently interest rates are still near zero for much of that debt. What happens when interest rates rise? More and more of the things we want to fund will need to be paid for by adding more debt or by cutting out other things we want. We will of course borrow more which will mean even more debt, even more debt service until…? Until what?
I don’t know if this makes sense to anyone else. It makes no sense to me. But then again I was one of those who said it didn’t make sense at 10 Trillion.