The Skimmer’s Version—Just the highlights for those who won’t read the full article
- Step #1—Live above your means
It starts by living above our means. We want something, that we truly can’t afford and we want it now. Leave no money in reserve for an unexpected crisis.
- Step #2—Borrow money to address a Crisis
Encounter a crisis for which we are not prepared and borrow money to address the crisis
- Step #3—Don’t pay off the debt when you can
When things are good we want to enjoy our high standard of living rather than cut back and pay off the debt.
- Step #4—Assume continuous growth
The American expectation is one of continuous and growing prosperity. We always assume that home values will go up, wages will go up, we will get promotions, stock values will go up and the next generation will do better than the last. Recessions are temporary and growth is normal.
- Step #5—Borrow to maintain a high standard of living
When times are bad borrow to maintain the high standard of living to which we are accustomed. We even borrow to create the appearance of continued growth.
- Step #6—Borrow to pay your regular bills
After decades of continuous borrowing there comes a point that we can’t pay our regular monthly obligations. Once we reach this point we are in serious trouble.
- Step #7—Take pride in your clear credit history and your appearance of wealth
We can reach this point and still look like we are wealthy. There can be a tremendous amount of money passing through our hands. We can also have an excellent credit rating. It is possible to have always paid our bills on time.
- Step #8—Demand more credit
At this point we begin to think irrationally. We sense that we are in a financially desperate situation but pride, arrogance and an emotional commitment to living above our means causes us to see the only option as borrowing more money to get us through the tough time.
The real solution is to drastically cut spending, but irrational thinking makes us behave like a compulsive gambler. “I have a sure bet. If I can just borrow some more money to gamble, I will be able to pay it all back and more.”
This demanding of more credit (raising the debt ceiling), views the lender as the responsible entity. The attitude is, “I have a perfect credit rating. If I can’t pay my bills now, it is there fault, because they won’t loan me more money”.
- Step #9—The End
This will end when we stop borrowing money. That can happen in one of two ways. Either we decide for ourselves to stop borrowing. We must, suck it up, cut spending and begin to pay off the debt. It will be very painful and take a long time. Or we continue to try to borrow. At some point the lenders will decide that we are a bad credit risk and they will refuse to lend us any more money. This won’t happen right away. For a time we will continue to borrow and make the situation much worse.
Most of us have no problem understanding this scenario in our personal lives. Many of us have gone through it or have watched a close friend go through it. Why can’t we see that the Government raising the debt ceiling is totally irrational? Either we fix the problem now under our own control or others will “fix” it for us and we will have no say in the matter.
The Home Version
Sometimes we hear about the US Budget and think of it an amazingly complicated thing that only someone with a PhD in Economics can understand. The US budget may be big and complicated but the principles for handling the national budget are the same as handling your household budget. So here is a little home budget metaphor to help us understand the national debt problem.
Our story begins with a young family in 1998 buying their first home. They looked and looked for a home that they could afford. There was nothing in an area in which they would feel safe raising their family. Finally the Real Estate agent found a house that they loved. It was small and more than they thought they could afford but the Real Estate agent assured them that with the tax write-off and some creative financing they could do it. Bank fudged some numbers and did some creative financing and they were in.
It was a financial struggle but it looked like they were making it until both cars broke down. They ended up buying a new car on credit. Then school was starting and they took out a school loan. It would be ok because a degree would mean a better job and more money. In a few years they would be sitting pretty. Kids were starting school too so they took advantage of the back to school sales by using their credit cards.
They limped along for the next 5 years. They always paid their bills on time, but often they resorted to buying things on credit in order to make the mortgage payment. They were piling up a ton of debt; using one credit card to make the minimum payment on another. They had to do something.
They received an offer from the bank to consolidate all of those high interest credit cards by taking out a second on their house. This was the answer! They did it.
Five years later they found that they were in the same boat; a first, a second and a mound of credit card debt. They had to do something. They called the bank and asked if they would raise the debt ceiling on the second. The bank agreed. Ahhhh some breathing room.
This time it only took two years before they were in trouble again. They called the bank but they wouldn’t raise their debt ceiling. Another bank offered a signature loan. They jumped on it even though the interest rate was high.
Quickly they realized that it wasn’t enough. Based on their current method of budgeting they would need to continue to find a new source to borrow money every year. Their credit rating was good. They always paid their bills on time (with the minimum payment), and someone was always willing to loan them money.
I am sure you can see that this cannot continue forever. At some point they need to actually reduce the debt. It will probably mean some pretty desperate cutbacks; sell the house, sell a car, stop eating out, put the kids in public school, no vacations. It may even mean they need to move in with family. The future will be tough, but it is the only thing to do.
That is what the financial counselor told them, but they just refused to accept that change in lifestyle. The counselor explained that their current lifestyle was not real. They had been living in luxury on borrowed money.
It didn’t matter. They called the bank and demanded that they raise their debt ceiling. They said they had to borrow money to meet their obligations. They told their friends that the bank and credit companies were going to ruin them if they didn’t let them borrow more money. They pointed to their stellar credit rating and that they had never missed a payment ever.
A bank officer told them flatly that either they get their spending under control or the bank will do it for them by not extending them any more credit.
This is the situation that the Federal Government is in. They have accumulated so much debt that ever increasing amounts of the budget are going to cover the interest on the debt. There are fewer and fewer dollars for actually running the Government. There is not enough money coming in, and every year they are borrowing more money to pay the bills. Years ago Congress established a cap, a debt ceiling. They determined that when we reach that point we can no longer borrow or we will never be able to pay it back. We will fall into a never ending debt spiral. Well, now it has become a regular thing to annually raise the debt ceiling. We are not dealing with reality. Just like you cannot continue to borrow money to balance your personal budget, the Federal Government cannot continue to borrow money. Someone must tell them NO!. It will either be the Congress, backed by the American people, or, at some point the nation will become such a bad credit risk that no one will loan us money.
I say that the time is now to enforce the debt ceiling.