Editor's Note: this column is by David Lukas, co-host of the “The David and Heath Show”
The amount of money our federal government borrows and spends is truly hard to comprehend. Just how many zero’s are in a trillion anyway? Twelve.
I recently read that our federal government borrows forty-thousand dollars per second! By the time you digest this startling fact, the U.S. will have added hundreds of thousands to the debt.
This got me thinking, what would it mean for an American family to follow Uncle Sam's model?
A two-earner family with a combined income of $100,000 would spend $69,500 more than they earned this year if they acted like Washington! That means in addition to spending every penny of the $100,000 they earned, saving nothing for tomorrow, they would borrow another $69,500.
Next year, if this family continues on Washington's course, things will get worse. In addition to borrowing about another $69,500, they will have to pay about $2,000 in interest (assuming they borrow at an average rate of 3%) If they continue borrowing and spending at the same pace, by year five, they'll owe about $347,500 and face about $10,425 in interest payments the next year. That's more than a tenth of their income that they'll be spending just on interest on their debt.
The family likely thinks it can justify this over-spending. Every dollar went to a good cause! They lived in a better house and had nicer clothes than their family could otherwise afford. Besides, they rationalized that since their credits scores were excellent and the interest rates were low, a little extra borrowing wasn't a bad deal.
But what happens to this family now? Do you think at some point this family’s creditors just might cap their credit limit and stop loaning them money? Don't you think that their credit scores are bound to go down as creditors realize they've taken on more debt than they can realistically pay back? Then what? What happens since they have obligated themselves to so many “must have” family budget items?
After 10 years, this family would owe about $695,000 with an annual income of about one-hundred thousand dollars! Any level headed thinking American would say there is little to no chance that this family will ever pay back all their debts. Obviously at this point, this family would have trouble finding someone to continue loan them money.
But let’s assume they are able to continue to borrow.
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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