Government Borrowing: The Simple Source of the Problem
I was listening to Michael Medved recently, and he made what seemed to be an off-hand remark about our economic crisis: The problem is Government Spending, not sub-prime loans. Basically, because the government is borrowing money, it is harder for the rest of America to borrow money. He then went on to other topics, but I found this to be a very profound comment on our crisis.
In order to spend money, Congress must get the money from somewhere. It has three choices to get the money: (1) raise taxes (which actually lowers tax revenues), (2) print more money (which is a hidden tax on Americans by making each dollar worth less, causing purchases to require more dollars), or (3) borrow the money (which means they expect future tax revenue to cover the borrowed money). The first two make life harder on current Americans while the third delays the pain to future people. Borrowing the money is especially attractive because congressmen could be kicked out in 2 years, so they do not have to worry about paying it back, the guy 5-10 terms from now has to worry about that. So borrow it is!
When people
lend money, they are giving out money to people they expect to eventually return it. When China lends money to the U.S., they want that money back, plus interest. They don't care how they get it back, they just expect to get the money back. They could lend the money to people within China. They could lend it to England, France, Germany, Japan, Iran, or any of a number of countries. But they decided that the U.S. is a safe enough bet with a large enough return that it is worth lending money to us. This means that other countries have to look at other places to get their money.
(By the way, this is also why it is good that the Japanese bought up American companies back in the 80s. It says that they believed in the American worker more than they believed in the Japanese worker to grow their
money.) Before Russia's collapse 20 years ago, they were issuing treasury bonds with 85% returns. This is a fantastic deal for lenders who know they will get their money back, but Russia was desperate to get cash to keep themselves afloat, which they couldn't do, and eventually defaulted on those obligations.
There is a limit to how much money can be lent out. If I lend money to James, I do not have as much money left to lend to Jill, and vice versa. China and the other people of the world only have so much money they can lend. By lending to the government, they have less money they can lend to other people or invest in the stock market. This means that it is harder for people who want money to expand their businesses, etc. to get that money.
They have to either pay more interest on the loans they get, or they have to offer some other incentive that encourages people with money to give them money.
The U.S. government doesn't pay very high interest rates
for the loans it takes. This makes it less attractive as a place ot invest. However, it guarantees those interest rates with American tax dollars, so it is a very safe place to lend money. As a result, people are more likely to loan their money to the government because they are certain they will get their money back. If they lend their money to Zimbabwe, they probably won't. In addition, because the U.S. is always on the prowl for large quantities of money, the government is a great place to go to loan out a large sum of money. A multi-billion-dollar loan is harder to make when it has to be divied out in 5 million-dollar chunks.
One big loan is easier to deal with than several hundred smaller loans.
Now, here is the key problem: because the government is taking out these loans, there is less money for the rest of the country to borrow. This is why there is a shortage of credit within the system. This is kind of like in "It's a Wonderful Life", how if everyone suddenly went to their bank and wanted to borrow money to buy houses (I know, in the movie they wanted to withdraw all their savings, but I needed a more fitting way for people to pull their money out), the bank would run out of funds because even though the bank is worth millions of dollars, most of those dollars have been lent to other people. The funds the bank has on hand are kind of a slush fund that helps keep the bank employees fed, and takes care of all the little withdrawls that people perform every day (a check here, a bill there, etc.).
So, because the government is hogging a large chunk of the available credit (i.e. money that can be loaned), and it is getting increasingly difficult for average Americans to get the credit they need to keep their company operating normally, the best way to free up that credit is for the government to take out less credit. This means one of three things: (1) raise taxes (this just makes everything more expensive), (2) print more money (same problem as before), or (3) quit spending so much money. However, although option 3 is the best from a tax-payers perspective, from a politician's perspective, that is a lost opportunity to impress the people back home and hopefully keep their job.
We need government to spend less money, but that will not happen until we have a majority of people in the house and congress with spines strong enough to finally say "No" to anything that is not essential for the government. In the mean-time, we definitely need a hatchet and not a scalpel to cut out the waste.