Borrowing to Cover Interest--Who Would Do That?

Recent economic reports put economic growth at a strong 3.5% for 2005. However, the annual budget deficit will reach 400+ billion dollars or around 16% of expenditures. The annual interest paid on our accumulated national debt will end up being around 350 billion dollars for 2005—almost as much as we are borrowing each year!

I can’t help but wonder: What is the benefit of a “strong” economy if it is funded by higher and higher levels of deficit spending? Isn’t this strength a sham based on spending subsidized by borrowings from foreign governments? Can borrowing to cover our annual interest payments produce long-term economic vibrancy?

Our government spends much more than it makes each year. In many ways our government’s fiscal practices mirror those of its citizens. Personal debt is at record highs in America as is personal bankruptcy. One particularly cutthroat source of borrowed money is the rapidly growing payday loan business. I’m sure you’ve seen these “quick cash” stands that are pervasive in urban areas and on the Internet.

These businesses profit by loaning money to people who need cash so badly that they can’t wait till payday. The catch is that they take a cut, which can be as high as 20 percent. These businesses are successful partly because people have not learned how to control their spending. People get into financial trouble in the 15 days between paychecks and must turn to the payday loan to bail them out no matter the cost.

Likewise America doesn’t have the fiscal discipline to control spending. Citizens have not yet demanded that the government operate within its Constitutional limits. Congress has more than proven that it cannot control spending. So we turn to the international “quick loan” to cover our lack of discipline and foresight.

As it turns out, countries like China are more than willing to oblige. In fact, China owns nearly 1 trillion dollars of American debt and continues to buy more. One might (and should) ask why China is so willing to loan more and more money to a country that has demonstrated it can’t keep its fiscal house in order. What bank would loan money, with no collateral, to such a person? The answer may be more devious than you think (more to come on this theory).

The bottom line is that relying on foreign investors and governments to finance our own policies makes us vulnerable, especially when most of the borrowing goes to pay the interest on past debts. I am not suggesting financial isolationism from the world economy. But we as responsible citizens should demand more far-sighted leadership.

I would like to see candidates who will make the tough choices that are necessary to bring discipline back to American fiscal policy.