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A National Mortgage

I’ve made a few posts about the National Debt before, but it baffles me that people don’t understand what a bad thing it is, while also being a good thing from time to time.

The National Debt is exactly like a mortgage on your house. You take out a loan against future earnings, for the next 30 years maybe, to buy something you couldn’t afford now. You leverage your earnings 3-4 times or more to do so. A person making 50,000 dollars a year might take out a home loan for 200,000 dollars, 4 years of wages before taxes.

The government does the same thing, issues bonds against taxes to be collected on, money made in, the future. Money you make. The government, in theory, does things to encourage the economy to grow, wages to rise and people to prosper, and in turn buys back the bonds it has issued.

Government debt is a good thing in that it is a very safe place for individuals and companies to invest. It’s best when that debt is used to provide services that help the private sector. Roads, bridges, more efficient regulation etc.

Government debt is bad when it is used like a credit card held by a person who can only afford to make minimum payments and uses it to finance their everyday life. Unfortunately this is what our government has done. If you are making the minimum payments than your creditor is very happy, they will make money, they aren’t losing anything on you and they aren’t going to demand payment in full as long as you can make those payments.

The problem is, that creditor is going to revoke your card and not continue lending you money at some point. That point is when you can’t afford to pay that minimum payment. When the government finances everyday operations with debt it just keeps increasing and like a credit card company, when they can’t afford to make the payments anymore, the buyers of bonds will stop buying and the day to day operations will stop being financed.

Debt can be a good thing, in fact it is what drives the economy. A bakery borrows 100,000 dollars to expand its baking capacity, makes and sells 10 times the usual amount of cakes and pays it’s loan back with interest, expanding the bakeries income and making the investor, the bank some money too.

Like I outlined debt can be a bad thing too, when day to day operations and no meaningful improvements are financed this way. It becomes a dead albatross hanging hanging around the countries collective neck.


Categories: Uncategorized
  1. 2011/03/01 at 19:03

    Excellent analogy, though as our recent mortgage crisis indicates, not even some economists seem to understand the danger of bad debt.

  2. 2011/03/02 at 02:22

    What debt? Oh this albatross? I wear it for other reasons.

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