You're So Money And You Don't Even Know It: A brief debriefing on the National Debt

Saturday, September 12, 2009

A brief debriefing on the National Debt

***DISCLAIMER*** I am not peddling on fear in regards to this next topic. Nor will I say if the debt is good/bad, real/unreal, etc/etc (you can decide that for yourself). This blog post is strictly meant for a little education on the subject. That is all.

Recently, I had the opportunity to host a discussion forum with certain friends and other guests to discuss topics (religion, sex, money, economics, education, etc, etc) important to our generation. And during this forum someone asked "Why should I care about the national debt? It doesn't affect me right now, at this moment. I have more pressing issues that cause me more concern."

I don't blame this individual at all for feeling this way. I think many people have a disconnect (myself included) about this very large number.

The current national debt is at approx.

. I personally cannot fathom what this looks like. However, I did stumble upon the following graph of what 1 trillion dollars looks like:

(imagine 11 of these fit-to-scale)

I don't blame this individual for feeling this way. Glancing across the room at the discussion forum, it is my opinion that many Americans feel this way about the national debt.

But why?

My best guess is because people can't see, feel, hear, read how 11 TRILLION DOLLARS affects them. And in the following, I will try to explain.

But first, a history lesson.

On Sept. 18, 1789, the new secretary of the treasury, Alexander Hamilton, entered into negotiations for a temporary loan with the Bank of New York and the Bank of North America—the only two banks in the country at that time. The following February, the deal went through and the government borrowed $19,608.81. It was the start of the American national debt under the new Constitution.

What would Hamilton think of his creation today? He would surely be impressed with its sheer size. But he would, I suspect, not be happy with what borrowed money is being used for.

Let's NOT blame Hamilton for creating the National Debt. Hamilton saw the debt as a powerful means of fighting wars (and in 1791 around $75 million in debt assumed by the colonies fighting the Revolutionary War was transferred to the Federal Government), building infrastructure, and getting through economic bad times.

It is also true that the most significant historical increases to the national debt have been due to war time conflicts. The Civil War was the first period of dramatic debt growth, leveling out until World War I and further increasing by an order of magnitude during our buildup and involvement in World War II. The debt proceeded to match inflation until around 1980 when it began to skyrocket.

For the last 30 years and more, however, the national debt has been increasingly used so that no one in Washington ever has to say "no" to anyone. (Hamilton and The Birth of National Debt)

So how does the National Debt affect us?

For starters, the National Debt is increasing by the second. Take a look for yourself: Debt Clock

At the current time (time of this blog post) the debt per citizen is $38,510. That means that every American citizen (man, woman, child...yes, child) can equate to $38,510 of this debt. How did we get this number?

DEBT PER CITIZEN = CURRENT DEBT/POPULATION

Does that mean you have to pay $38,510? No. But you are paying on the National Debt. Currently, 18 cents of every dollar you pay in taxes (and this includes sales tax, income tax, property tax, etc, etc) goes towards the National Debt.

Some argue that the debt can never be paid off and that the Debt-to-GDP ratio is more significant (a measure of a country's federal debt in relation to its gross domestic product (GDP)). <--- this sounds like my next blog post! Some argue that an increase in the national debt affects not only ours, but our children's (and our children's children) tax level and debt thus leaving less and less money in our and their pockets. Both are valid points that deserve further research. I personally know that if the Government wanted to raise taxes or increase what percentage of your tax money goes towards paying off the national debt (say instead of 18%, the Government increases it to 20% or 25% for every tax dollar you pay) you would take notice. You SHOULD take notice.

So that's a brief synopsis about the National Debt. If you think you can control the budget better, play the following game and maybe YOU are the next Secretary of the Treasury: Budget Hero Game