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A Trillion Dollar Deficit! What Does That Even Mean, Seriously? Part I

A trillion dollars is incomprehensible.  It might as well be the same as a gazillion.  It’s almost meaningless unless you’re talking about our deficit. Then, we probably need to at least have an idea of what it means and the impact it will have on us.

There are no trillionaires in the world, not yet.  But, the US does have a couple of banks with a trillion dollars in assets. I guess that means “Too Big to Fail” doesn’t mean a damn thing. But, with a growing trillion-dollar deficit, we will fail.

Let’s talk about our country’s trillion-dollar deficit.  What does that mean other than we have spent a trillion dollars more than we took in? Let’s talk through, not what that means in absolute dollars necessarily, but the impact it has and will have on us, and by us, I mean every US citizen.  What I want to do in this post is to give you some information about our economy as it relates to deficit spending; the impact on our economy both from a national perspective and for your household.  What I also want to happen, as a result of this post is for you to be so steaming mad at the end of this “opinion” that you’re motivated to act.

Before I get into it, let me say a couple of things, kind of a setup if you will.  First, as I do with any economic post or opinion, I apologize to my financial friends for oversimplifying economics. I think as a category of friends, financial folks may be the biggest group of friends I have, except for maybe teachers. One of the things finance people have to do in college is to take courses in economics, some of us more classes than others but we all have the basics and I’m going to simplify a semester into a few paragraphs. So, my apology is for those financial folks that put in the work to understand economics.

The other thing I want to say upfront is not all of the blame for the trillion-dollar deficit should be laid at Trump’s feet. Congress plays a huge part in determining how we as a country spend money; they also set tax policy.   The president sets the tone and provides leadership as to what tax policy and spending policies will look like under his administration. In that regard, insofar as leadership is considered, put that at Trump’s feet. President’s run for office partly based on their economic policy.  It can be bad policy and I’ll say it, Republican economic policy tends to be focused on rich folks.  For the entire country, that is bad policy, in my opinion.  Economics is complicated and people generally don’t understand what they are being told in a campaign, in this recent campaign, we all were lied to but I’m not sure that mattered.   

Back to the president’s role.  President’s come up with a plan or have a plan for what they want to do, particularly with tax policy and hopefully, with spending. Congress has the responsibility to pass tax and spending policy laws that they see as appropriate for the country.  When one party controls the White House and Congress, it makes it pretty easy to align the president’s wishes or desires, relative to taxes and spending, with what the “political party” sees as the direction “they” want to go.  Such was the case with the tax “reform” that was implemented or signed into law in 2017.

A few clarifications

To keep this simple, I’m going to try to leave out numbers as best I can. I’ll use some percentages when needed but I think using dollars is meaningless because the numbers are so damn big. For simplistic sake, I’m going to use your household to represent the country, for the most part. When I want to speak to you and your particular household, I’ll be very clear.

In your household, you have the money you earn from working or rents or however you get it. I consider self-employed income, income.  For general purposes, let’s call money coming into your house income.  Likewise, you spend money on rent or a mortgage, food, fixing your house, buying a car, education, etc. For general purposes, let’s just call the expenditures, expenses. All the money you don’t keep, that you give to somebody outside your house, we’re going to call those expenses.

In the best-case scenario, you have more income than expenses.  When you have more income than expenses, let’s call that “extra,” a surplus.  When you have more expenses than income, we will call that a deficit or “a really bad look.” 

Pretty simple so far, right? Let’s make it more complicated, muddy the water. 

When you have committed expenses, things you have an obligation to pay for, rent, repairs to the house, healthcare, etc., and you’re outta money before all the “obligations” get paid, you gotta either figure one of three ways to handle that. Normally, you decide what you’re not gonna pay for or you borrow money so nothing gets taken off the table; or, you figure out a way to increase your income., or you decide that some of those commitments are not necessary and you forego purchasing them. Those are really the only choices you have.  I guess you could get shit you never pay for but that’s only going to last for so long because that service provider or product provider will say no more and start demanding the money you owe them for the things you bought, a point we probably shouldn’t take too lightly given our current administration.

If we talk about having a household deficit, it’s only fair that we talk about having a household surplus, right? After all, it would be inaccurate to assume that our household would never be in a situation where we break-even or we couldn’t have a surplus.  That would mean that we’re living responsibly, pretty much.  In the case of a surplus, you have some options as well.  You could just save that “extra” money.  You could take that “extra” money and pay down any debt you incurred to handle the deficit. I guess finally, you could just buy more shit, that would leave the debt incurred as a result of the deficit spending untouched.  You would still owe the people you borrowed from.  

If I think about it, there is one more option, you could reduce your income so you don’t continue to run a surplus.  Insofar as the government is concerned, that would mean a tax reduction. That happens, occasionally with local governments. Put a pin there, not because I think the federal would reduce taxes because we’re running a surplus. Quite the opposite.  We’re reducing taxes in the face of deficit spending!

Let’s tie these household examples to our country and then walk through how we handle the options relating to a deficit and a surplus.  I’ll spend a few paragraphs talking about some things kinda unique to the government and I’ll end with a couple of opinions and some suggestions for you.

The income I mentioned relative to your household would be the taxes our government received from “taxpayers.”. For the government, there are other income sources that are not taxes, per se, like fees for certain services. The simplest thing that comes to mind right now oddly enough is passport fees. Don’t ask. For simplistic sake, let’s call all the government revenue, taxes regardless of the source. I’ll get to some specific taxes in a bit but for now, it’s just “taxes.”

The expenses or cash out for our household, let’s call that the same for the government, expenses. The surplus and deficit for our household, let’s use the same terminology for the government, a deficit for the shortfall and a surplus when the government takes in more than it spends.

I should probably stick this little comment in, just so we’re clear and there is no confusion.  The government is not a “business” in the true for-profit business sense.  It exists to solely serve the people.  The goal is not to “make money.” It should not be thought of in “transactional” terms.  The goal should be “break-even,” spend no more than we take in and take in no more than we expect to spend, in most cases.  I’ll address an exception to this philosophy in just a second.

In keeping it simple, when the government runs a deficit, it has basically the same options as your household, 1) spend less, 2) take in more money, 3) borrow to cover the gap, and 4) don’t pay people for the shit it has bought.

Can I digress for just a half-second, again? Remember the bullshit when one of the credit reporting agencies, Standard & Poor’s, decided to lower the credit rating for the strongest, largest economy in the world? They laid the blame at President Obama’s feet because the Republican-controlled Congress couldn’t come to an agreement on a “spending bill?”  Now, this post is not about that but here’s a reference for you.

Ok, let’s get back on track.

I spent a little time talking through options on what you do in your household when you have a surplus.  I’m going to talk about the government surplus here.

When the government runs a surplus there are a few options the government has. First, the governme can pay down the debt, the money it borrowed to cover the deficit, just like in the household example. This would be the same as you paying down your credit card balance, balances you incurred when you bought shit you didn’t have the cash to pay for upfront.

Let me explain borrowed government money so we’re all on the same page.

The government borrows money by issuing various types of notes or bonds. Think of a note or a bond as an IOU. Government bonds are kinda complicated so I’m going to take a couple of liberties in explaining them.

Let’s do a very simple, IOU that you would give to a friend or anyone that would give, I mean, lend you money. You promise to pay them back with interest over a certain period of time, maybe a few months, maybe a few years, depending on how good of a friend they are or how much they trust you or how much money you need.  When you give them the IOU they give you cash!

The government issuing notes or bonds are really just IOUs, unsecured debt, kinda like your credit card debt. The government IOUs are issued by the US Treasury department.  The amount of IOUs is based on the expenditures approved by Congress.  There’s more to it than that but we don’t need all of that detail for my point.  Put this IOU conversation in the back of your mind for a minute.  Not all the way in the back because I’m going to reference it again.  Just keep the concept fresh.

Another FYI or side note, the IRS is a part of the Treasury department.   

Did you get it? Let me recap just so we’re still on the same page. Congress decides what the government is gonna spend and what the tax revenue or income is going to be, based on the desires of the executive branch, in most cases. The Treasury Department collects the income and borrower’s money to cover gaps. Pretty simple and I took you on the scenic route to get here.

Now back to what to do with the surplus. As I mentioned, you can use the surplus to pay down what you borrowed.  The other thing you can do with the surplus is to buy more shit, ignoring your deficit or outstanding debt balance. It doesn’t sound very smart. It’s kinda sad but the government hasn’t had a surplus in years so I’m not gonna spend any more time talking about it but, you get the idea.  Some of my parting comments will discuss managing the deficit and what we shouldn’t be doing.

This is not really a digression but you might think it is. Just hear me out.

Deficit spending for the government is not always bad. Let me explain.  

A few months ago, I wrote a piece on how our economy works, the allocation of resources; what stimulates and what slows it down.  When we’re in a recession or experiencing an economic downturn, one of the things the economy needs is for money to be spent, for consumers to buy stuff, particularly domestically made stuff or just retail stuff. This gets dollars flowing through our economy and people get to work and it begins to escalate and by escalate, I mean the more money that gets spent the more jobs are created because people are buying stuff that is for sale and stuff is getting manufactured.  We’re not really a nation of savers. We spend what we get, generally.  Consequently, putting money in people’s hands is critical to our economic health.  People with jobs pay taxes. I should say corporations that make money also pay taxes but I won’t.  Don’t want to mislead you.

You can read my post about Economic Policy.

Most people don’t realize this but the biggest purchaser of goods and services in this country is the Federal government.  Really! So, deficit “spending” is beneficial to the economy, in some cases.  Managing the deficit is just as important.  It should never, ever, never grow at the rate it is currently growing.

I don’t know if this post has a most important part but if it does, I think this next segment would be the most important.

Remember, I mentioned that revenue for your household is the equivalent of taxes for the government? I also mentioned one of the ways to cover the gap between excess expenses over income or covering the deficit gap, I said you increase revenue or lower expenses. Obviously, doing both will cover the gap quicker.

The other thing I said you can do to cover the gap was that you can borrow to cover the gap but long term, that wasn’t really a good idea.  The stupidest idea that doesn’t make sense for your household or for the government is to cut your revenue and increase your expenses.   Decreasing your Income and increasing your expenses is just dumb but that is exactly what has happened under the Trump administration. Nobody is sounding an alarm.  Let me explain.

One of the big things that Trump touts is “his’ tax cuts and the alleged benefits they have had on the economy, the growth that has resulted. The argument Trump and Republicans made pushing for this dumb idea of tax cuts is that the deficits created by the tax cuts would be offset by the expenditures individuals and corporations would be made by having more money to buy stuff. Taxes, income would be generated as a result of economic growth. More people working, companies selling more stuff making bigger profits, etc.  This concept, called “trickle-down” economics, is a favorite of Republicans and has been disproved as a legitimate way to increase economic growth every time they have done it, dating back since Nixon. There is no evidence it works.  It’s smoke and mirrors. It’s a way to redistribute wealth under the guises of benefiting “everybody.”

I referenced deficit spending as a way to boost economic growth.  It is, and it does work but the problem is when the Republicans cut taxes, the biggest tax cuts go to companies and to rich individuals that really aren’t gonna spend enough to generate the economic growth they promise. What are they gonna spend money on? Investments? Stock buybacks? That shit doesn’t contribute to growth in manufacturing or retail or housing. Those are the expenditures that grow the economy.  Cutting taxes for the rich increase’s deficits, period, hard stop. Expenses don’t get cut. The lie we are told is that the “fresh money” in the economy will generate jobs and incremental tax revenue.  Bullshit!

At the end of the Bush administration and at the beginning of the Obama administration, there were tax cuts and increases in government spending to jump-start the economy because of the deep recession of 2008. It worked! But, because of the hate for Obama, there could never be an agreement on how to balance the budget, create a surplus or reduce the deficit.  There were a bunch of incoherent compromises to keep the government running but nothing to address management of the deficit which at the end that the Obama administration was, $585 billion. That is after 8 years. The deficit at the end of 2019 was $1 trillion, that’s after three years of the Trump administration.  Sorry, I said I would try to stay away from numbers but these are needed as a point of reference.

I really need to mention Social Security, Medicare, and Medicaid. What I’m going to do is do that in a Part II. It will be part of the same conversation but I need to do a half-bow here so I don’t lose you. Let me introduce what I’m going to say about Social Security, Medicare, and Medicaid and I’ll do the details in Part II.

The Republicans plan is to cut Social Security, Medicare and Medicaid to pay for the deficit created by the tax cuts.  This is basically a redistribution of wealth to benefit the rich, a doubling-down on the redistribution of wealth. I’ll get into the details in Part II.

The other things I promised to do is to tell you the impact the deficit will have on you and your family and to make you mad enough to act. I’ll repeat this exact same closing in Part II.  Hopefully, you will be mad when I finish up here and be boiling mad at the end of Part II.

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Now for the Close

Earlier, I mentioned one of the ways to cover the deficit in your house and the government is to borrow? For the government, the way to borrow was to issue IOUs, as I mentioned. Well, those IOUs require interest payments, just like the balance on your credit card. 

The interest on the national debt relative to the budget is approximately, 9%. That’s not the interest rate, that’s how much of the budget is just interest. Think about your household income.  What if 10% of what you made went to pay the interest on your credit cards?  

The deficit and the debt are not the same. The deficit is the gap between your income and expenses. The debt is how much we as a country owes, the balance on your credit card. The national debt is $22 trillion.  Before you have an oh shit moment, let me explain further. It’s still gonna be oh shit but you will understand a little better.

Tracking the Deficit

Our government borrows money for a lot of reasons. I’m just gonna give you one example.  I think you will get it. The overwhelming majority of tax revenue comes in the second quarter of the year. We spend money all year. Without borrowing throughout the year, we would have a cashflow problem.  So, a lot of borrowing is done to take care of the timing problem of when we spend money versus when we get money in. 

Let me give another example; otherwise, I will be misleading you.  The government also borrows money for big infrastructure projects.  I know we, as a country, haven’t addressed infrastructure in more than a minute but some of that $22 trillion is for past infrastructure projects. My financial friends are probably cringing that I’m not using financial terminology but, I’m going with infrastructure to keep this simple.  

The deficit, unlike the debt, that’s money we don’t have and is the gap between income and expenses.  That gap is growing, exponentially.

You hear the phrase, that we are creating a problem that our “kids and grandchildren will have to pay for?” I mean we used to hear that from Republicans, prior to Trump. When is the last time you heard that? I don’t have time to wait for you to remember.  I’m trying to finish Part I.

Here’s the deal, with the deficit, the more we have to borrow to cover the deficit the more our debt increases.  In the absence of additional revenue or in the face of decreased revenue, the bigger the debt, the more we borrow to pay the interest. At some point, we are going to have to forego some of our national interests, like defense and the services we provide our citizens. It’s going to become more than a financial gap; it becomes a gap in our standard or quality of living.  The other biggie, taxes for the next generation will be higher, much higher assuming we want to pay for the debt we owe or close the deficit.  Maybe a better way to say that is pay for the redistribution of wealth. 

I’m going to get to Social Security in Part II but how would you like to not have Social Security because we have used it to cover the deficit created by giving tax cuts to those that don’t need Social Security?

Trump doesn’t understand economics or the way our government works.  He doesn’t care to understand it.  People that are touting his business experience fail to either remember or bring up the fact that this fucker filed bankruptcy 5 times. He is on record as saying he ‘loves debt.’ The reason he loves it is because he never pays it back. As a country, we can’t afford that. Our credibility has already been ruined by us not keeping our word with agreements with our allies. What’s gonna happen when we don’t pay our debts? Oh, let me put this out there, our biggest creditor, the creditor that holds the most of our IOUs, is China. What if China decides it no longer will lend us money.  Who will we borrow from then, Russia?

I mentioned early in this post that Trump is not solely responsible for the deficit; however, it is absolutely correct that it has grown exponentially under his lack of leadership and the Republicans, catering to the rich.  But, Congress pass that tax cut. So, all of them are to blame. Keep in mind, that Democrats didn’t control Congress when the tax bill was passed. That’s an important side note.  Democrats control the House now but little is being said about getting the deficit under control, even from the Democratic presidential candidates.  This is where you, we, come in.

We have to hold Congress, Trump or whoever the next president is, accountable.  Go to town halls, send emails, call and by all means, VOTE. We can fix this. WE CAN FIX THIS. WE HAVE TO FIX THIS.

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