Would you lend money to the US?

I was asked a question on one of the forums I follow and I thought this would make an interesting post for the “Your thoughts” section of the blog. I was asked to explain the budget deficit and the national debt. When you look at these numbers they are huge, but most people have trouble with the concept of billions and trillions of dollars. I know I do. So I scaled back the numbers, proportionately. It’s kind of a scary site really. The numbers below do not include Social Security or Medicare entitlement programs.

Think of the deficit in terms of a personal budget. The more you borrow, the larger the percentage of interest and principle payments you must pay each month on that debt. Now imagine that your current income is $100,000 a year but your total credit card debt is $1,200,000. In addition to that, you are running a deficit of about $130,000 this year (so you are making $100K but spending $230K). The interest payments are pretty steep. You are looking at $55,000 a year in minimum payments on that debt. You go to the bank looking for money and the bank doesn’t really want to lend you money. You go to the credit card companies and they say the same thing. You aren’t a good bet. You decide to go to a loan shark because you feel like you are drowning. The loan shark wants a higher interest rate for giving you the loan and can pretty much demand that you pay him back at anytime.

That’s the United States right now except I scaled back the numbers to make them easier to understand.

The projected national debt is projected at 12,000,000,000,000 (12 Trillion dollars)
We currently have a 1,300,000,000,000 (1.3 Trillion dollar) annual budget deficit.
The annual debt obligation for the national debt is 550,000,000,000 (550 Billion dollars).
Obama’s proposed budget for FY 2010 is a little over $2 Trillion which means almost 25% of our budget is debt payments.

Because no one wants our debt, the interest rate on treasuries is rising. Simple law of supply and demand. How much more can we borrow before people who own our debt will want their money back because they don’t think we can pay them?

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