In ten more years, this family could owe 1.3 million dollars. Under the best of circumstances (assuming their borrowing cost remains low) this family would have to pay around $40,000 per year in interest payments alone. But if interest rates climb to 6%, rather than stay at 3, the annual cost to service that $1.3 million debt would be $78,000 per year. Remember, this family makes $100,000 per year.
Clearly, they are on the path to bankruptcy, if they haven’t filed already.
This family needs to cut spending. In fact, this family would have most likely run out of borrowing options long ago and probably never been allowed to go this far in debt.
This is just an illustration of what could happen to an over-spending family to give you an idea of the debt trouble our “American Family” faces.
And this is exactly the trajectory our American Family is on. Our federal government has tools at its disposal that this family wouldn't have. However, the policies of raising taxes on job creators or additional Quantitative easing (which would boost inflation, to make it easier to pay off debts, but erode the value of all American families' savings) are destructive and will ultimately make matters worse by further damaging the economy.
Yet this is exactly what the current administration is advocating.
Washington politicians need to get back to the basics and recognize that they must first cut spending to bring it back in line with revenue. And that needs to happen right now.
If Washington continues on its present course, America will soon be hopelessly mired in a massive debt that it will not be able to pay back. If the “American Family” continues on its current borrowing and spending spree, just like our hypothetical family, it will reach a point of no return. It is a mathematical certainly.
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