How many can recall discussing this with a one-year-old?
The foot bone is connected to the ankle bone,
The ankle bone is connected to the shin bone,
The shin bone is connected to the knee bone,
and on and on
Pity we didn’t carry the process to other subjects
So does personal financial planning. There is a lot of mistake room when you ignore the connections.
That is the amount by which their spending is greater than their income. It is the same for a person, but people are more careful with their own spending deficits. A 20-year-old will have a spending deficit because university costs more than they earn. They finance the difference with student loans. The government sells bonds. Sometimes to the people or institutions, and sometimes by printing money. Students can’t print money.
The student notices their loan sooner. The bank wants their money back and they want it back together with interest. Not so fun. Especially not so fun years later when some of life’s other necessities come along. Governments don’t pay much attention to this part of their existence because they don’t exactly pay the loan back. They “roll it over” into some new larger borrowing and it has little effect on their day-to-day life. Unlike the student, they can borrow as much as they need, rather than as much as they can pay back. At least, they think they can do that.
The deficit connects in two directions. It is the middle of structure. Like the shin bone. Looking upwards the deficit becomes part of the total government debt. No one pays much attention to that except when trying to make political points. I doubt anyone knows how much it is. They could add up all the bonds they have issued , but then there are all the provincial or state debts, and all the municipalities within those. Still possible. But what about things they have committed to pay and for which there is no identifiable amount.
These are “Unfunded Liabilities.” Things like pension plans with few or no assets to support the eventual pensions. Medicare promises, and dozens more.
You have them too. What’s the cost to raise a child or support a spouse if you cannot? Have you ever thought about infrastructure that will need maintenance and repair. Even replacement. You provide for it and you acquire infrastructure like cars, and houses with the future costs in mind. Governments pretend to, but they don’t.
The deficit connects “upward” to the total debt and the debt connects to future spending. Interest and principal matter to to you. Interest does to the government.
The deficit connects “downward” to where spending exceeds revenue.
You know you could not run ever-larger deficits forever, but the government thinks they can. The trick -They can as long as you can.
All loans rely on ability to pay. As long as you can pay the government, the government can borrow. They don’t have any money of their own. They have only the ability to take yours. If that ability to take yours falls away, they’re done. It’s like giving a no-limit credit card to a child. Some of what they spend might be for you, but all of what they spend is your responsibility to pay. They could only spend until you stop making payments.
People eventually cannot pay more. Before that happens, the government expands their trick so you pay but in a different way. They inflate the currency. They print money. That can go on until they run out of paper and ink. It costs you because your savings will not buy as much as they once would. The government indirectly got the value you lost. Some inflations are spectacular. In Germany in 1912, 80,000 marks was enough to retire with. In 1922 it would not buy a stamp.
How much do you spend when you can’t see how to pay the loan that supports the spending? Answer: hopefully none. That is why banks are having trouble lending enough money even though interest rates are near zero. You have to pay the principal too and that frightens people.
Governments don’t have that fear. They think they always get more money and at worst they think they will likely be retired before the birds come home to roost.
Say’s law was first appeared in 1803 in a book authored by Jean-Baptiste Say. It is based on classical economics and asserts that production creates demand. Production creates value and that value can buy other products. The law is well-argued from both sides, but it has a certain simple elegance. Only producing can create value.
Governments like to ignore it to achieve some of their goals. Often the thing they wished for would have been accommodated without them,, just not as quickly as they would like. Urgency is a persuasion tool. The great depression of the 1930s was arguably caused by politicians trying to “do something.” The economy was already recovering before they acted. Ooops!
Deficits are part of their tool set.
When governments spend, they do so with someone else’s money or value.
When they borrow it is only a question of when someone else pays.
Governments have deficits because they spend or promise to spend money they don’t have and haven’t had the people agree to pay.
Governments argue their spending is an investment. Really!?? I think I will invest in a nice steak and a bottle of good wine. Maybe new golf clubs, or a Hunter Biden painting.
Interest is a huge part of the government’s budget. In the 2021 US federal budget it is $378 Billion. 7.8% of spending and that is with interest rates at historic lows. Do they ever, like you do, say what could I do with that money if I didn’t have to pay the interest. They do not. You try to get out of debt so you can save and spend better. They don’t.
As long as the government can delude us into thinking they are doing their best, we are doomed financially. They may be doing their best. They are not doing best. Not even close. They are spendthrifts seeking praise and power.
The money they have was once yours and would have been used differently had you been permitted to keep it.
The spending is connected to the deficit.
The deficit is connected to the debt
The debt is connected to the interest.
The interest is connected to the spending.
How do you see it lasting forever. Herb Stein, “If a thing cannot go on forever, it will stop”
I help people have more retirement income and larger, more liquid estates.
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