Think about the government the same way you think about your own budget. They “earn” money by charging taxes. They have “bills” that they need to pay, such as government programs, public subsidies, and make payments on loans to other countries. The problem here is that the federal government does not need to balance its budget. It does not have to account for all the money that it spends but can’t actually pay for. If you want to see what we currently owe, check out this debt clock. At the time I’m writing this, each person has to make almost $58,000 more than they already are just to cover the amount of money the government has spent up til now.
This makes me angry. There are plenty of things that I want: a new rug for my ugly apartment, a fancy dinner out every once in awhile, a better computer, the newest iPhone. But these things cost money, and I don’t have enough. Plus I know I am incurring debt through student loans that I will have to pay off. I could use credit to get the stuff I want right now, but someone will come looking for the money. Because I won’t have it, I’ll have to file for bankruptcy. Yes, I might get to keep my new iPhone, but they would probably turn off my service and make it worthless. My credit will be so damaged that it will affect my job prospects and my financial choices.
If I was the federal government, though, it would not matter. If I were the government, I’d have a few choices. I could print more money so that I could pay off all my debt, causing inflation. If I didn’t want to do that, I could just raise taxes and make other people cover my debt so that I broke even. Another option would be to offer bonds. Kind of like that saving bond your grandma got you for your 8th birthday. Investors bid on the bond and whatever they pay for it is what the government earns. The problem with this system is that the loan will eventually come due. With interest. So the government will end up owing even more than they raised. If tax revenue has not increased, they will be unable to pay off the now-due loan. They will be presented with the same three options as before. So they will issue another bond. And it will go on and on.
Eventually, though, nobody will want to buy the bond because it will be too big of a risk. And if you don’t think that is a possibility, look at Greece. Then the government would be forced to either print more money—and make the dollar basically worthless—or raise taxes to a dangerously high level that could force companies out of business and people out of work.
It is a vicious and dangerous cycle. It worries me, and it should worry you, too.