The True Cost of Our Rising Deficit

Mar 25, 2009
Frankly Speaking

According to the non-partisan Congressional Budget Office, the President’s budget proposal for 2010 will produce a $9.3 trillion addition to our current deficit over the next ten years.  As with a person or company that borrows money, the federal government must pay interest on all borrowed funds.  To do this, the federal government sells U.S. Treasury bonds and bills to people, companies, even foreign countries.  Because they were considered the safest product on the market- after all, what other investment could be more sound than the United States government- the bonds and bills were sold at a very low interest rate, giving rise to a low borrowing cost.  The United States would primarily sell these Treasury bonds and bills to Asian markets and countries in the Middle East, but in addition they were sold to companies and people all over the world. 

As the United States deficit grows, however, our need for additional borrowed money grows.  Unfortunately, our two largest customers- Asian markets and Middle Eastern countries- have also been experiencing a market decline and falling oil prices, decreasing their ability to purchase these bonds and bills.  Even more importantly, as our national debt continues to grow, investors will be less enticed to purchase bonds backed by a government that seems intent on wracking up debt without paying it off.

All of this leads to one clear fact: sometime shortly, we will no longer be able to continue to sell as many Treasury bonds as we need to run the government.  So what happens then?

First, the Federal Reserve could continue to purchase U.S. Treasury bonds and bills as they have already done to the tune of $300 billion, basically allowing the federal government to turn on the printing presses.  However, this option should only be used in a limited fashion because printing too much money creates inflation across our entire market, driving down the value of the dollar and increasing the cost to do business.

Second, the federal government can increase the interest rate on Treasury bonds and bills, creating a higher rate of return and an increased incentive for purchasing them.  In turn, our borrowing cost will increase significantly, raising our overall national debt.  Even more important, raising the interest rate of Treasury bonds and bills will force other lenders to raise their interest rates on variable loans and new loans.  This will have an extremely negative affect on small businesses across this country, particularly farmers and ranchers who rely primarily on credit to run their business.  And- as we all saw with the negative affects of the increased business cost on energy companies last summer- any increase in the cost to do business is passed on to American consumers in the form of increased prices.

As we continue to discuss the President’s budget proposal for 2010, we must remind ourselves of the true cost of our mounting deficit.  In addition to burdening our children and grandchildren with the debts of our poor choices, we could potentially be worsening our already fragile economy.  Instead of continuing to borrow our way out of our current financial problems, we must now- more than ever- focus on fiscal discipline.

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