It strikes me that we’ve been hearing a great deal about President Trump’s promise to cut taxes. It’s not a new promise, nearly every politician claims this. I have to confess some amusement that these promises also claim to improve the economy. In my last post I spoke about the false promise to close loopholes.
Here I want to talk about the difference between the national debt and the budget deficit. Alas, most of the time these two things are talked about as if they were the same thing. They’re not.
By way of explanation let me start with debt and deficit in our own households. Many of us owe money to someone. If you’re making payments on your home, or car, or credit cards, you have debt. You’ve convinced someone to lend you money to pay for something you can’t pay cash for. Your lender (likely a bank) trusts you to pay both the money and interest over time, and if you can’t they can take whatever they financed. Or, if you borrow money on a credit card and can’t pay that back, they can report you to a credit bureau and make it harder to borrow money in the future. The government borrows a lot of money. As I write this the government debt is $20,453,245,142,792.62. If you’re keeping track it’s over $20 trillion.
In other words, our government owes $20 trillion dollars. Fortunately 68% is owned by Americans. Every time you give one of your grandchildren a savings bond you own part of the national debt. You lend the government money and the government pays you back with interest after a fixed time.
That’s the good news. The bad news? While we own 68% of our debt, the rest (32%) is owned by other nations. As I write this, China and Hong Kong own 6.9%. That may not sound like much but 6.9% of $20 trillion dollars translates to $141,127,391,485, or a shade over $141 billion (I hope I have the math right). If they want, they can demand immediate payment and cause a great deal of panic in our markets.
But that’s not what concerns me the most. I’m more concerned over the need to continue to borrow money. Every year the our government spends more money than it collects, we need to borrow money to close the deficit. If we translate this into our household budgets, it’s like going to your bank and telling them that you need a loan because last month you spent beyond your means. Not only that, but you expect to come back next month, and the month after that, and…well you get the point. At some point your bank (or for that matter, your loan shark) will simply refuse to lend you more money, believing eventually you’ll just give up and stop trying to repay your debt. But if you’re the United States you can continue to print savings bonds without limit. Unless something happens to change this trend there will be a limit: there will be a point where people (and nations) will begin to distrust our ability to pay back the loans and will stop lending money.
It doesn’t have to be like this. Many of us have seen our government run budget deficits for so long that it seems like a given. But it’s not. You can read the numbers here but the last few years of the presidency of President Bill Clinton we actually ran a surplus and had the opportunity to pay down the debt.
Since we are currently led by a President who promises America First it’s odd that his tax policy will make us increasingly debtors of other nations.