More Government Than We Can Afford
By Harris Sherline
February 16, 2009
After generations of excessive spending, America has entered what is perhaps the most dangerous period in its history. Congress has passed the biggest spending bill ever, to the tune of almost a trillion dollars, an amount of money that's really too big to truly appreciate or understand. Think of it this way: one trillion is a million times a million, or a thousand times a billion. Still hard to grasp, isn't it?
Thinking about it another way, USA Today recently reported, "The federal government spent $952 billion in 2007 on elderly benefits." That includes an average social security payment of $13,184.
However, the issue is not just about the growth of government and intrusion into our lives. It's about much more. It's about how much money is spent to support the services and activities of government and where it comes from.
The problems cannot be fixed with hype and salesmanship. That only goes so far, and when the string runs out, the administration and the nation will pay a big price, which will inevitably show up in the form of inflation.
As the stimulus bill moved through Congress, the U.S. Treasury has been preparing for a record debt sale to finance the cost. However, one of the problems is that Americans don't have the resources to buy enough Treasury notes to cover the tab, which forces us to look to The Federal Reserve Bank and foreign investors and that increases the cost.
The Financial Times recently observed: "At the end of February, the Treasury will start selling seven-year notes every month for the first time since the issue was discontinued in 1993. Sales of 30-year bonds will double to eight times a year and the Treasury will say in May whether the bond will be sold every month."
"For Barack Obama's administration, the step-up in borrowing costs comes as it is fighting to secure an $800bn-plus fiscal stimulus, and is likely to need many hundreds of billions more to fund a banking sector clean-up."
"Traders are particularly concerned about the appetite for Treasuries among foreign investors, who hold more than half the outstanding $5,500bn ($5.5 trillion) in Treasury debt."
"In recent years, demand for US government debt has been stoked by developing countries running huge trade surpluses with the US and recycling their dollars by buying Treasuries. (Think China). However, many are facing growing pressure to stimulate their own economies and are seeing their current account surpluses decline as global demand diminishes."
In other words, we are financing an unprecedented amount of spending with borrowed money. That drives up the cost of borrowing and deprives capital markets of funds that are badly needed for the budget and to "stimulate" the economy.
What happens if the market does not soak up all the debt that's needed to finance the entire stimulus effort, even with higher interest rates? The alternative is to print money and simply put it into circulation to pay the bills. Nice trick if you can get away with it, right?
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