Friday, February 4, 2011

It Takes Debt to Pay Debt?

I was quite young when I first heard the popular saying, "It takes money to make money." That statement, of course, refers to the fact that in order to invest in any profitable opportunity, one must have funds to do so.

Now it seems that it takes debt to pay debt. Both Timothy Geithner and Ben Bernanke are concerned that if Congress does not raise the federal debt ceiling and, hence, make it legally possible for the U. S. Government to borrow more money, it may default on current debt. Last month "Geithner warned that a failure to raise the debt limit would mean the government would not be able to make the payments on the current debt, which stands at $13.96 trillion." Yesterday Bernanke told the National Press Club that not raising the debt ceiling would have "catastrophic consequences" and put the United States Treasury in the possible position of defaulting on previously issued debt.

So we need to take on even more debt to pay back money we have already borrowed?!? You know things are a fiscal wreck if the government has to borrow more money merely to keep from defaulting. Bernie Madoff's Ponzi scheme worked on just the same principle, we have to keep money flowing in to pay clients who were promised phenomenal returns. 

It is customary for normal people, if they have taken on too much debt, to alleviate the problem by not borrowing anymore and by reducing spending until the debt is paid down. In fact the website of the Board of Governors if the Federal Reserve includes a page devoted to helping people manage their credit. About credit cards they tell us:
To get the most from your credit card, do your homework. Review your income and expenses, estimate how much money you might have available to pay down your credit card debt, and consider cutting back on, or eliminating, optional expenses.
If you've fallen behind, are using cash advances from one credit card to pay off another, or your credit cards are maxed out--that is, at or near your credit limit--there are steps you can take to help yourself.
These steps to do not include borrowing more money from Peter to pay our existing debt to Paul. That is exactly, however, what Bernanke and Geithner say we must do to avoid catastrophe. The phrase, "Physician heal thyself" comes to mind. Alas, it seems that the government, like Nick Caraway said about the rich, are different from you and me.

4 comments:

  1. What is it that Adam Smith said? "What is prudence in the conduct of every private family, can scarce be folly in that of a great kingdom." If it is prudent for families to cut back on spending in order to address their debt, it is ludicrous to suggest that this approach won't work for the government.

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  2. Cato did a podcast on this issue and pointed out (if I remember correctly) that they could suspend interest payments on agency-held debt and ameliorate this problem. And of course they could always impose some real austerity measures . . .

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  3. You are right! They could do a whole host of measures. They could sell off Federal assets, such as some of their vast land holdings.

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