Washington, D.C. Financing for Dummies By Tom Tierney

26 July 2011

The “dummies” I’m referring to are in Washington, D.C., not the reader of this note. Currently, we are watching Congress and the President debate the national debt, national deficit and the national debt ceiling: only in Washington D.C. can the “borrowers” of capital decide how much more they want to “borrow” without any “OK” from those they want to borrow from, the tax payer. Let’s run the numbers: the U.S. Treasury brings in about $200B in revenue (taxes) per month, roughly $2.4T per year; Congress spends all this money and in addition is “borrowing” almost another $1T more to spend; we have roughly $14.5T in existing debt and Congress is currently discussing raising the debt ceiling (amount they can borrow) another $2T or so, to roughly $16T. How about an example of how this works if the U.S. Congress were a typical family? Well, let’s say you make $50K per year but you want to spend $100K per year. You borrow on your credit card (national debt) the extra $50K but are bumping up against your credit limit (national debt ceiling). Since you are Congress, you get to negotiate your own credit limit and like magic, you now can “afford” all that extra spending. The beauty for Congress is: they aren’t responsible for all this debt, the tax payers are! It gets worse: the Federal Reserve although constitutionally prohibited from directly paying for the U.S. debt (can’t “monetize” or “print money” to pay for the debt), has been buying back U.S debt from other creditors (U.S. Treasury Bond holders); this is called “Quantitative Easing”. Isn’t this “printing money” to pay the debt? Well, technically it isn’t, but what the Federal Reserve does is create “reserves” to cover buying back this debt (essentially, increasing bank balances to buy debt – technically not printing money but really doing it “digitally” by increasing bank reserves like “magic” via computer).

So let’s review: the U.S. government brings in roughly $2.4T in revenue (taxes), borrows roughly $1T

more to spend, increases its borrowing limit (debt ceiling) without creditor approval and uses the

Federal Reserve to essentially “digitally” print money to pay for some of the debt. It’s a game of

Monopoly where the government is banker, borrower and creditor, but the tax payer is ultimately on

the hook for those playing the game. And don’t pass “GO”, they’ll raise your taxes!

Tom Tierney lives in Encinitas, CA and is a member of Tech Coast Angels (www.techcoastangels.com).

Also see http://en.wikipedia.org/wiki/Tech_coast_angels for more background information on the TCA.