Washington, D.C. Financing for Dummies (the "Dummies" are in Washington)

1. Washington, D.C. Financing for Dummies By Tom Tierney
26 July 2011
The “dummies” I’m referring to are in Washington, D.C., not the reader of this note.
Currently, we are watching Congress and the President debate the national debt, national deficit and
the national debt ceiling: only in Washington D.C. can the “borrowers” of capital decide how much more
they want to “borrow” without any “OK” from those they want to borrow from, the tax payer.
Let’s run the numbers: the U.S. Treasury brings in about $200B in revenue (taxes) per month, roughly
$2.4T per year; Congress spends all this money and in addition is “borrowing” almost another $1T more
to spend; we have roughly $14.5T in existing debt and Congress is currently discussing raising the debt
ceiling (amount they can borrow) another $2T or so, to roughly $16T.
How about an example of how this works if the U.S. Congress were a typical family? Well, let’s say you
make $50K per year but you want to spend $100K per year. You borrow on your credit card (national
debt) the extra $50K but are bumping up against your credit limit (national debt ceiling). Since you are
Congress, you get to negotiate your own credit limit and like magic, you now can “afford” all that extra
spending. The beauty for Congress is: they aren’t responsible for all this debt, the tax payers are!
It gets worse: the Federal Reserve although constitutionally prohibited from directly paying for the U.S.
debt (can’t “monetize” or “print money” to pay for the debt), has been buying back U.S debt from other
creditors (U.S. Treasury Bond holders); this is called “Quantitative Easing”.
Isn’t this “printing money” to pay the debt? Well, technically it isn’t, but what the Federal Reserve does
is create “reserves” to cover buying back this debt (essentially, increasing bank balances to buy debt –
technically not printing money but really doing it “digitally” by increasing bank reserves like “magic” via
computer).
So let’s review: the U.S. government brings in roughly $2.4T in revenue (taxes), borrows roughly $1T
more to spend, increases its borrowing limit (debt ceiling) without creditor approval and uses the
Federal Reserve to essentially “digitally” print money to pay for some of the debt. It’s a game of
Monopoly where the government is banker, borrower and creditor, but the tax payer is ultimately on
the hook for those playing the game. And don’t pass “GO”, they’ll raise your taxes!
Tom Tierney lives in Encinitas, CA and is a member of Tech Coast Angels (www.techcoastangels.com).
Also see http://en.wikipedia.org/wiki/Tech_coast_angels for more background information on the TCA.