Off the Cliff

AFP via Yahoo News:

US debt shot up $238 billion to reach 100 percent of gross domestic project [sic] after the government’s debt ceiling was lifted, Treasury figures showed Wednesday.

We are—by any measurement—off the financial cliff. While the total public debt ($14.58 trillion) is a pretty scary number, that’s not the most immediate problem. Right now, it costs us about $29 billion per month¹ to service the debt. You can think of that as making the minimum payment on your credit card. You’re not paying much principal—if any—you’re just covering the interest payment.

The most severe effect from the recent raise in the debt ceiling by $2.4 trillion is going to be the negative impact it has on our credit rating. We’re currently rated AAA by most rating agencies, but most are re-evaluating our debt and it’s ever likely that our credit rating will be downgraded. Standard & Poor’s already lowered it’s outlook on the US credit rating to “negative outlook”, and one Chinese firm has just downgraded our rating for the second time since Obama took office.

A downgraded credit rating causes two important effects: 1) Our interest rate goes up, and 2) our credit limit goes down. If our interest rate goes up, that inflates the $29 billion in monthly debt service payment (since it’s mostly interest charges). Total receipts for the US are about $172 billion per month. So, if our debt service payment goes up, that leaves less money left over to pay for the things we spend money on.

This is a huge problem because we spend about $307 billion a month. An increased debt service payment means we need to borrow more money to pay for it. Do you see the problem here? We’re in a position where we literally need to borrow money to service the payment on monies we’ve previously borrowed. There are two ways to remedy this. We could raise revenue, or decrease spending.

Raising revenue is a bit of a problem. GDP last year was $14.53 trillion, and the Federal Government already confiscates about 15% of that (i.e. net receipts for the government are about $2.2 trillion per year). Confiscating more of a recessed economy will only cause it to recess further. This, clearly, is not a valid option.

The only viable option to controlling our debt is to cut spending. We’re not only refusing to cut spending, we’re increasing it. The budget increases based on a baseline every year. Over the next ten years the baseline increases the budget by $10 trillion. The recent bill enacted doesn’t cut spending by $2.1 trillion as the media would leave you to believe, but cuts the baseline by that amount. Which means even after this crisis we’re on track to increase the budget by more than $7 trillion over the next ten years.

The graph of our national debt over the past hundred years is eerily similar to the graph of an exponential function. It’s rising at an ever-increasing rate, as demonstrated by the fact that the largest two increases in our debt ceiling have occurred in the past two years—even adjusted for inflation.

There’s one thing about this, combined with the threat of our credit rating downgrade that I haven’t heard a single person talk about: our credit limit. So far, we’ve had a great credit rating. We’ve always made the minimum payments on our debt, and lenders have allowed us to continue borrowing as much as we want. It’s odd to me that we all talk about our self-imposed debt limit as if we can just raise it on a whim. This is true right now, but what happens when lenders start looking at our exponentially-rising debt and decide they don’t want to lend any more?

We’ll be forced to cut our spending. Spending cuts will be painful for people who are dependent on the government instead of themselves to sustain their lifestyle. However, they’ll be a lot more painful if we have to cut spending at the mercy of our creditors instead of willingly doing it now.