Home > Uncategorized > Hope and Change Cartoons

Hope and Change Cartoons

I like this one. We don’t need a spending freeze, we need spending reductions. We need a balanced budget amendment. We need to stop borrowing so far beyond our means. At some point there is a limit to how much we can borrow and when we reach that point all of these programs deemed “untouchable” are going to come to an abrupt end. At some point we will being paying all of what we take in in revenues to pay the interest on the debt.

If we were to require a balanced budget, paying off the debt would be a much easier task. As time goes on, and God willing, inflation continues, “monitization” of the debt and application of surpluses should reduce the debt.

How this works is as inflation continues on, hopefully at a low rate, the value of assets such as debt decrease and can be paid back dollar for dollar with money worth less than the amount that was borrowed in the first place. For example.

The government borrows 100$ in 2009.
Inflation is 3% over the next year.
That debt is paid off 1 year later for 100$, in 2010.
(I’m leaving interest on that debt out for the moment)

On the face of it you might think “nothing happened, the government borrowed and paid back 100$, it still cost 100$ in the end”. That’s not true though. The value of that original 100$ has decreased by 3%. It was paid off for 97$ in “2009” dollars. A technical “gain” of 3$, this is what is called “inflation tax”.

The kick in the balls is interest. If interest on that original 100$ was 4% than the debt would require 104$ (or if you have been paying attention about 101$ in 2009 dollars). This is where a budget surplus is needed to pay down the debt.

It can go a few ways than, either inflation outstrips interest and the debt holder loses money, or interest outstrips inflation and the debt holder makes money, but less than they would if the value of money remained the same over time or deflation occurred.

The bottom line is if we get the budget balanced and stop borrowing than it drastically reduces the cost of paying the the national debt off.

(This works on your house as well, if you have a 30 year mortgage you will end up making payments worth less and less over time, even though the amount should remain the same, assuming you have fixed interest. The bank should also make money if they have projected the interest to outpace inflation. Win/win)

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