Friday, February 17, 2012

Fiddling as Rome burns: Federal Debt

I am sure that most have seen the images of Greece ablaze after the passing of the newest austerity package.  The depictions of a developed European state quickly falling to the level of a third world country is quite sobering.

Though there are a number of things which caused the crisis, for the most part it can be quickly summed up with three simple words: too much debt.  Too much spending and borrowing for too many years have caused this terrible crisis.  It seems so strange that those in charge could not have seen this coming.  I mean, it is a pretty simple concept.  If you borrow too much, your creditors are going to start seeing you as a riskier bet, and as a result they are going to increase the interest rates they charge you for any future loans to help compensate them for that increased risk.  This is what happened to Greece.  Of course the problem is that Greece is already maxed out and can't even afford to maintain its current debt load, much less handle the increased rates on any new borrowings.

Though the Greek situation is tragic, you would think that it would at least be a wake up call for us here in the good old US of A.  Well, apparently not.  Recently congress passed the payroll tax cut extension thus keeping the Social Security withholding rate at 4.2% for the rest of 2012.  This is a tax cut for a program which is now paying out more in benefits than it takes in from withholding tax.  Of course congress is not going to do anything to reduce the benefits the program pays out, so where is the money going to come from?  Well for most of Social Securities history it actually took in more than it paid out but instead of putting that money aside, the government spend it on other things and left Social Security with a bunch of IOU's in the form of government bonds.  Well, I guess that they will have to cash in those bonds which means that the federal government will have to take the money out of another pocket.  This essentially means that it will just be another thing to help keep our enormous deficit spending going.

Now I'm not suggesting that we are in quite as bad of shape as Greece is.  But I do have to wonder if our politicians will have the political will to really deal with the federal debt before it is too late.