How does a country get money? How has the United States developed such a large national debt and budget deficit? Where does the government get money that doesn’t come through taxes and fees? Is there, like, a national credit card or something? We keep hearing that we’re in financial trouble, spending more than we “earn,” but what are we spending?
From the start, the United States government needed a bank of some sort to handle everyday transactions. We have the US Treasury, which gets money from…wherever…but that treasury has to put money somewhere. It’s no different than any organization or club you might join; the club’s treasurer collects member dues and puts them in a bank.
We’ve gone through various banks over the history of the country, with the current bank being the Federal Reserve (aka “The Fed”), created in 1913. The fascinating argument against such a bank is that a country, with its own military, guns and explosives, can create its own money and store it wherever it wants. The Federal Reserve is a private bank, not owned by the United States. As such, America borrows money from the Federal Reserve and pays interest on whatever it borrows.
Every dollar we have isn’t a “dollar.” If you examine it, you’ll see that it’s a Federal Reserve Note. That bank authorizes an amount to borrow, and the US Treasury then prints the money. No other agency in the United States has the authority to print legal tender (money). But before the Treasury can print any money, it must have the approval from the Fed.
Okay, so the Fed bankrolls the country; at least it’s been doing so since 1913. On the other hand, tax money coming in each year is money earned and developed by you and me, corporations and businesses, and all other private enterprise. It’s true that the actual dollars are put into circulation by the Treasury, which borrowed them from the Fed, but we actually create products. We make things, build things, sell things, buy things, and participate in commerce.
At the end of each year, we send a share of our money to the government. Coincidentally, the same year that we created the Fed, we also formed the IRS and authorized the government to collect taxes. That’s “our share” and what we’re sending back to the government. Why? Because the government borrowed the money from the Fed, and the government doesn’t create a single damn thing! It HAS to get the money to pay back the Fed from you and me, in the form of taxes.
In 2010, “our share” amount came to approximately $2.16 trillion. Each year, Our Beloved Congress and Esteemed Leaders spend more than that share on all sorts of programs, most of which you know about. In 2010, the government spent approximately $3.46 trillion.
And so we have a “deficit.” That deficit is the difference between the money America’s government takes in, and the money they spend, in 1 year. The “national debt,” on the other hand is the overall accumulation of all the money that’s been spent beyond what was taken in through taxes and fees.
Yes, I’m oversimplifying.
The Federal Reserve acts like a credit card bank, providing the government (and Treasury) with a line of credit. The government can borrow against that line of credit each time it needs money. Some of that money is used to run the everyday functions of the government. If there isn’t enough cash in the bank account, and Congress won’t allow anyone to borrow more, we have A Government Shutdown.
Meanwhile, every year we keep passing the deficit on to the next year. Year after year, whatever money we don’t pay off on the “credit card” gets added to the balance. That balance now comes to around $14.29 trillion. So far, “the government” has “set” a ceiling and limit on the total amount of money the government can borrow. That “debt ceiling” is $14.3 trillion.
This is like having a limit on a credit card. You can borrow up to that limit, but no more. When you reach that limit, you can appeal to the issuing bank and ask for them to “raise your limit.” If you are a customer in good standing, you pay your bills on time, and you’re paying on your credit card, you might get the bank to raise your limit.
Now consider this: In the old days, the bank would examine how much you were earning and how much you paid each month on your credit card. If it became obvious that you a) were at your limit, and b) you were only paying the minimum amount, the bank would NOT increase your limit! Why? Because you likely would never be able to pay off that balance for the rest of your life!
Nowadays, banks love to increase your card limits, just so long as you have a job. That’s because They Don’t Care if you ever pay off the balance! All they care about is the life-long stream of interest payments you’ll make on each credit card balance. You’ll be in debt for the rest of your life, with no possibility of ever paying down to zero.
Unless you declare Chapter 7 bankruptcy.
For a nation, there’s no such thing as bankruptcy. Nor is there such a process for a state in the union. A city or municipality can declare bankruptcy, but that’s about it. Instead, a nation “defaults” on its debt. It simply stops paying, and tells anyone who’s lent money to that nation to go suck wind.
Alright, so who lends money to a country? How does that happen? It’s done through various securities, issued by the nation and then sold at auction. These securities are bonds, treasury notes and treasury bills. So too, we have municipal bonds and securities, for cities and towns to pay for libraries and bridges. We also can have corporate bonds and securities, where a large corporation needs to “borrow” money from the general public.
Taking it all together, the United States government borrows money from the Fed — our “national bank,” so to speak. It also borrows money from people around the world. It does so by selling securities, then paying interest on those securities over some period of time. It might be only 30 days, or it might be 30 years; it depends on the type of note.
The national debt is made up of all the money America has borrowed — money that’s being spent that’s beyond the annual income revenue from taxes and so forth. The “unfunded” debt is money that’s “going to be spent” but that hasn’t yet been borrowed. That money is for people who we know for absolute-sure are going to need care from Medicare or Medicaid, but who haven’t yet gotten ill. It’s also for pensions, where the people haven’t yet retired but who are owed that money.
Let’s not even bother about the unfunded debt (liability) from pensions and entitlement programs. Let’s just stick with the actual money that’s really been spent, really been borrowed.
Our “credit card” has a limit of $14.3 trillion. That limit is done. We’re there. It’s on the card, and the card is maxed out!
So what’s our minimum monthly payment? The way it works, we’re being allowed to pay ONLY the interest on the debt! That’s not “fiscally responsible,” but nobody cares. We’re not even talking about ANY money going to pay down the actual balance! We’re ONLY paying interest each month!
March 2011: $24,460,282,823.69 ($24.46 billion)
February 2011: 21,759,253,957.26 ($21.76 billion)
I”m getting these figures from Treasury Direct, and just trusting that they know what they’re talking about!
Last week, Our Glorious Congressional Benefactors and Potent Factotums passed an “Historic Budget Cut!” They reduced spending by a whopping $38.5-billion!! Can you imagine? We’re movin’ right along, now, on our way to Fiscal Responsibility!
Well, let’s just add up TWO MONTHS worth of minimum payments (interest only) on the existing debt: $46.22 Billion!
That means we’ve paid only the interest on our “credit card” and decided to stop spending $38.5 billion over the next year. I’m in bliss! Finally, we’re about to pay off our debt! Right?
Every single month, the United States Treasury auctions off various short- and long-term securities. It’s around $75-billion, give or take some gargantuan number. That means we’re borrowing that money from people around the world (some say), and adding to the debt.
Out of that monthly auction, the government is paying off previous securities, paying interest on various paper, and trying to pay ongoing bills. It’s like in Illinois, where the government is more than 6 months behind in regular, everyday payments. The solution? Borrow another $8-billion by selling Illinois bonds!
Same with the US Government! Every month, we borrow the minimum monthly interest payment from “someone,” so we can pay on the credit card for ONLY that month! Who buys all those securities? Some say that China, Japan, England and other nations are buying the securities.
Some say that the Fed itself is buying the bulk of those treasury securities, in order to hide the fact that America is bankrupt. Some say that private citizens are stupid enough to buy those treasuries. We really don’t know for sure. All we know is that “somehow,” “someone” ends up buying the notes each month at auction.
In fact, most of the purchases are done by the top 10, Too Big To Fail banks! They buy the securities with money they have stashed from the bailouts. Then they right away turn around and sell the securities to the Federal Reserve. That way, the banks aren’t out any money.
Oddly enough, that also means that no money is actually exchanging hands and no money is going anywhere! But hey, everyone loves a good shell game, right?
March May 16, 2011 the United States will reach a critical moment. The amount of money we HAVE to pay for monthly interest payments will gobble up ALL the money being borrowed each month. That means there won’t be ANY money left over to pay the daily bills and run the country. We will be Out Of Cash!
At that point, we “must” increase our legally mandated debt ceiling — or so say Our Loving Paternal National Fathers in Washington.
If we can’t increase the max amount on our credit card, we’re screwed! We won’t be able to fly The Most Immaculate President around. We won’t be able to pay the military. We won’t be able to pay the secretaries and managers. We won’t be able to pay for anything!
Let’s you and me do the same thing! Let’s just use Credit Card 1 to pay the monthly interest on Credit Card 2. We’ll ask the bank to increase our credit limit on Credit Card 1 because there’s not enough left to borrow to pay the interest on Credit Card 2. Meanwhile, let’s take out a home equity loan so we can eat and buy gas!
We wouldn’t want to default on our credit cards, would we? Oh my, that would be catastrophic!
FAR more importantly: What the hell are we going to live on when our credit cards are maxed out and we have No More Money each month? Nobody knows! It’s a mystery!