The Debt Limit Applies To Individuals And Sovereigns

Debt_Ceiling

Source: CNA – US to reach debt limit on New Years Eve

The United States government will reach its statutory 16.39-trillion-dollar debt limit — a ceiling imposed by Congress — on Monday, Treasury Secretary Timothy Geithner said.

“So what’s the big deal?”, one might think. “The government will take care of it.”

It’s interesting that we understand the consequences of unsustainable debt at the individual’s level. We understand that if we as individuals spend more than we earn and borrow to fund the spending, we will end up in debt. We will need to pay high interests on money borrowed. Our credit worthiness to banks or even friends takes a hit. And if we do not show an improvement in our ability to repay the debt, only fools will continue to lend to us to fund our lifestyle of consumption.

We also understand this when it comes to businesses. If a business does not make a consistent profit, it may still survive. But when it makes a deficit, it eats into the cashflow. Once the cashflow dries up, the business fails… unless it goes into debt to borrow. But borrow to do what? Sane businessmen will borrow to invest. The crazy ones will borrow to consume.

When it comes to the national level, somehow we stop associating such logic and think that national fiscal discipline is something else. We think the government is exempted from such principles. They are not. Here is a satirical short film taking a look at the national debt and how it applies to just one family.

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