Wednesday, April 22, 2009

Understanding the Deficit

It is perfectly understandable for many people to be lost and confused about the complex topic of America's national debt.

As a I stated before, America has always been a nation in debt. However, that is not entirely true. The debt was almost liquidated several times. This is proof that the United States has some history of paying off it’s debts. In other words, America hasn't always suffered under a condition of increasing debt load as seen in the graph below:

A simple way to understand the history of America's debt problem is think of it in terms of dieting. Some people attempt to lose weight and are successful at it. However, some people are only briefly successful at reducing the excess weight in which the weight comes back on or find themselves even heavier before they tried to slim down.

In keeping with the diet analogy, America's history of paying off the debt is similar to the problem of yo-yo dieting. The best way to visualize America's struggle with yo-yo debt reduction is by looking at America's deficit in chronological order of Presidential Administrations:

As you can tell, America has a habit of almost reducing the debt, letting the debt get bigger and then trying to pay it down again. This is Yo-yo debt.

One of the reasons why America struggled with paying off the debt is that it pays down the principal but has not been paying down the interest. However, the biggest factor is spending. One can argue about the amount of deficit spending between Bush and Obama but the truth is that the blame lies with both the Republicans and the Democrats.

Neither party has been financially wise or prudent in the management the taxpayer's money. Just look at how much money the Republicans and Democrats have been spending since the collapse of Freddie Mae and Freddie Mac.

If we are going to be serious about permanently erasing the national debt, you cannot do it by massive spending and bailouts. Spending money to erase a debt doesn't work. It doesn't work in personal consumer debt or business debt. Why does the government think its the exception to this rule!?

Trying to get out of debt by massive spending and bailouts is like going on a diet with the hopes of losing weight by consistently going to the local all you can eat food restaurant.

1 comment:

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