Overspending Results In...
By Alex Saitta
October 19, 2013
While I did not agree with the strategy of conservative Republicans in Washington, I support their overall aim — reducing federal government spending. They see and understand the negative effects of deficit spending.
The US government (more specifically the US Treasury) has run a deficit 36 of the past 40 years and the deficits are getting larger at an alarming rate. Under President Clinton the worst annual deficit was $255 billion. Under President Bush, the worst deficit was $458 billion. Under Obama, the deficits have been over $1 trillion. Total US Treasury debt is now $16.9 trillion.
Whenever the US Treasury spends more than it brings it, it borrows the difference. Specifically the Treasury issues bonds, notes and bills and borrows more money to fund its deficit.
Savings are limited or growing very slowly, so the growing appetite of the US Treasury for credit pushes up interest rates. In turn, rising interest rates slow economic growth, because higher rates make it more expensive to buy a new home or car and make it more costly to build a new factory or start a new business.
Our leaders in Washington realize higher interest rates are harmful to the economy, but they also realize they lack the will to cut spending, so the Federal Reserve Bank (the national bank) steps in to help by printing more money. Since 2009, the Federal Reserve has printed about $2.9 trillion in new money. That is, the last four years the Fed has printed more 3 times the amount of money it printed the first 95 years of its existence.
When the Fed prints money, it creates a surplus of money in the financial system, so when the US Treasury steps up its borrowing, interest rates don’t rise and they remain low. You can see the low interest rates are stimulating the economy and it is growing again.
The problem with all this money sloshing around in the system is it gets spent on everything else too. This causes the general level of prices to rise (inflation). Why a pack of 500 envelopes are $8.99 when they were $5.99 a few years ago. Why, when you ask the local clerk at the home supply store, she says they are getting some sort of price increase every week now. Ice cream still costs $4.99, but instead of getting a half gallon (2 quarts), the container is only 1.5 quarts.
The government’s official inflation gauge (CPI — Consumer Price Index) states inflation is only 1.5%, but like most economic measures, the CPI was made more rosy in the early 1990’s. Using the old CPI, inflation is truly running at about 6%. Put that together with the fact average household income is rising at 2%, we are all falling behind. Doing the math, the typical person’s purchasing power is declining about 4% a year. This will continue, continuing to erode our standard of living.
Using the debt ceiling or by shutting down the government, the conservatives in the US House are trying to get to the root of the problem -- excessive federal spending. I would have gone about it differently, but I do agree with their aim. Federal spending and the resulting deficits must be reduced or we’ll all wake up in 10 years and see we are living a lifestyle that is significantly below what it was just a few years ago.