Family Budgets, the Debt Ceiling and the O'Jays

"For a small piece of paper...it carries a lot of weight." — "For The Love of Money" as performed by The O'Jays

Most of us budget our personal discretionary spending, spreading out major purchases over several months and paychecks. For a really large expenditure, we may even utilize the time-honored process of saving for several months or, heaven forbid, even a year.

Our Federal Government? Not so much. Theirs is a "spend what we want now, and borrow more if we run out of money" approach. The Treasury Department recently announced that if Congress doesn't raise the federal borrowing limit before their August recess, the government will likely not be able to pay its bills come September. This raise-the-debt-ceiling game has become all too familiar in recent years.

First, let's acknowledge that running a country and running a family's finances are two very different things. After all, you and I can’t print more money at will. But let's also admit that federal spending relative to taxation has been growing for many decades and has only gotten worse in recent years. The national debt is well in excess of $22 trillion. When I began penning this column, the federal debt clock read $22,498,792,584,268...that's 22 trillion, 498 billion, 792 million...

What’s worse is the current pace of debt accumulation. We’re now running trillion dollar deficits, meaning we’ll tack an extra trillion dollars a year onto the debt. That’s during good times; deficits automatically grow in bad times as tax revenues fall and welfare payments increase.

Granted, this is an oversimplification of a complicated issue. But the larger point is this: consistently spending more than you have can bankrupt the largest personal fortune or eventually even a solvent government. 

Yes, we operate a fiat system and can always print more money. But, relative to raising taxes or cutting spending, money printing is such an easy solution that it tends to be abused once the genie is out of the bottle. It’s a tale as old as time. 

There’s a growing chorus of economists promoting “Modern Monetary Theory,” that essentially states governments can borrow as much as the market will lend to them at low rates. It sounds good, right? That may turn out to be true, but it’s an unproven, scary gamble. Even with today’s ultra-low rates, interest costs consume nearly 10% of the budget. A spike in interest rates could easily double that percentage.

To the average American family who makes sacrifices to afford life's necessities, that's a discouraging method of money management. It also sets a bad example. By the way, as I finish writing this column, the new federal debt has risen by $48 million. It's now $22 trillion, 498 billion, 840 million...


Margaret R. McDowell, ChFC®, AIF®, author of the syndicated economic column “Arbor Outlook,” is the founder of Arbor Wealth Management, LLC, (850.608.6121 – www.arborwealth.net), a fiduciary, “fee-only” registered investment advisory firm located near Sandestin. This column should not be considered personalized investment advice and provides no assurance that any specific strategy or investment will be suitable or profitable for an investor.