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The False Default Scare

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Let’s assume that I am earning $5,000 per month and that I have the following monthly expenses:

Mortgage
Food
Car
Clothing
Interest
Entertainment
Other
Total

$1,000
1,000
1,000
1,000
500
2,000
2,500
$9,000

Do you see the problem? I’m bringing in $5,000 a month and spending $9,000 a month. That’s a deficit of $4,000 a month.

That’s precisely the problem facing the federal government. It’s spending a trillion dollars more than what it’s bringing in with tax collections.

Okay, what are my options? One option is to go the bank and get a line of credit that enables me to borrow $4,000 a month indefinitely. In that way, I can continue spending what I’m spending and paying all my bills as they come due.

That’s precisely what the federal government has been doing for decades

If I follow that route, the amount I owe in debt will continue to mount. After a year, I will owe the bank around $50,000. Added on to my credit card debt of $50,000, my total debt will be $100,000.

I decide to put a ceiling at $100,000. Once I reach $100,000 in debt, I promise myself: No more debt. Otherwise, I place myself in a precarious financial condition.

What happens a year from now? My situation will be the no different than before except that now I have $100,000 of debt to repay. Then what? I decide to raise my debt ceiling. I return to the bank and ask for a new line of credit. At the end of the next year, I will then owe $200,000. And then $300,000. And then $400,000 in debt, and climbing.

That’s what the federal government has been doing and continues to do.

There is another option. I can slash expenses by eliminating eating out, getting a smaller car, buying no new clothes, eliminating all entertainment, and reducing other expenses. Here is my new state of affairs:

Mortgage
Food
Car
Clothing
Interest
Entertainment
Other
Total

$1,000
500
500
0
500
0
1,500
$4,000

Do you see any default there? No, because I’m using my available funds to not only pay the interest on the debt I owe but also reducing the principal a bit. Remember: I’m making $5,000 and now spending only $4,000. That leaves me extra money to apply to principal on my debt.

That’s what the statists and big spenders (I’m being redundant of course) just don’t get. They keep saying that if the federal government isn’t permitted to keep borrowing, there will be a default. That’s ridiculous because it assumes that the federal government is required to keep spending what it’s spending.

But the government doesn’t have to do that, any more than I have to keep spending what I’m spending. It can slash its expenses. The problem is that for a statist, that’s anathema. In his mind, the federal government is a fixed entity, one that cannot abolish or drastically reduce welfare-warfare state programs, departments, agencies, and expenditures.

Nonsense. We’ve already seen that large portions of the government can be shut down without America falling into the ocean or having the sky fall in, despite all the dire prognostications. There are lots of non-essential functions that can be eliminated or reduced. In fact, what an opportune time to do so, rather than retain them and continue adding to the mountain of federal debt for which the American people are ultimately liable for.

Remember: If they take on more debt this time, they’ll be faced with the same situation the next time the ceiling is reached. And they’ll just do the same thing again, adding more and more debt onto the backs of the American people every time.

Needless to say, all this goes to show what a massive failure the entire welfare-warfare state way of life has been. Not only has it made so many Americans helpless and hopeless wards of the state, and not only has it brought about a massive garrison state to our land, along with such things as secret surveillance, torture, assassination, coups, and support of brutal dictatorships, it has also led us in the direction of national bankruptcy.

Ultimately, when the amount I owe gets large enough, the bank will refuse to lend me any more money. The same thing will happen to the U.S. government. Americans would be wise to do something about this situation now rather than later.

 

 

This post was written by:

Jacob G. Hornberger is founder and president of The Future of Freedom Foundation. He was born and raised in Laredo, Texas, and received his B.A. in economics from Virginia Military Institute and his law degree from the University of Texas. He was a trial attorney for twelve years in Texas. He also was an adjunct professor at the University of Dallas, where he taught law and economics. In 1987, Mr. Hornberger left the practice of law to become director of programs at the Foundation for Economic Education. He has advanced freedom and free markets on talk-radio stations all across the country as well as on Fox News’ Neil Cavuto and Greta van Susteren shows and he appeared as a regular commentator on Judge Andrew Napolitano’s show Freedom Watch. View these interviews at LewRockwell.com and from Full Context. Send him email.