Basic Economics and Borrowed Spending

Economics 101?

Much has been said about the burgeoning federal debt recently. Since being inaugurated, President Obama has spent more money than all previous United States Presidents combined, adjusting for inflation. That being said, President Obama has spent money that doesn't exist. Estimates by the Congressional Budget Office, the place that reviews money coming in and going out that the government proposes in legislation, has pegged our trillion dollar deficit as dangerously near the point of no return. If something isn't done to curtail, cut and stop spending soon, the United States will lose it's credit rating, and for the first time in history, default on it's debt.

So how did we get here. I'll see if I can explain simply. As we should learn about budgets and income and expense, every single dollar the Federal Government spends, has been collected through some tax placed on the individuals and businesses that fall under it's power, in this case, the United States citizens. We work to provide for ourselves and our families, enjoy vacations, save money for retirement and live our lives. The government taxes us and levies fees against us for the work and products we provide and produce. If the government spends more money than they take in, the difference is called the deficit and must be made up by borrowing money. More often than not, the government will sell bonds to another government, like China, and pay interest on those bonds so they can continue to spend when they don't bring in enough from taxes.

President Obama and Democrats in power have decided that spending money that hasn't even been earned yet, by ourselves and our unborn progeny is the way to remove us from the recession. This line of thinking comes from Keynes, an English economist during the early 20th century who wrote extensively on the spending power of the government and what it should be able to accomplish during periods of negative or no economic growth; i.e. during a recession with high unemployment, few jobs, and little goods and services being rendered or produced.

With almost 100 years of time between Keynes economic theories and the present day, we do have quite a bit of real world data to use in examining how accurate Keynesian economics really are and if they work on planet earth. The short answer is they don't. They fail miserably and prolong the recessionary periods during which they are implemented.

FD Roosevelt, who is championed as the President who brought the country out of the Great Depression during the 1930's followed these principles to the letter through his burgeoning deficit spending and "job creation" at the government level with all of his projects across the country like the WPA, NRA and a host of other alphabet soup government agencies. He did this using borrowed money and by raising taxes. His principal belief was that the government could make people work to bring the economy back around, using their own money, or lack thereof to do it.

In order to understand this theory of economics, it would be like you being out of work with no income or reduced income. You take a cash advance or special offer from your credit card company to borrow against your credit line to have some money back in your pocket. If you think that by borrowing money from your credit line, putting it in your pocket and then saying, you've got income again is preposterous and doesn't make any sense, you'd be right. You haven't improved your ability to care for yourself at all, you've only made yourself a slave to the issuer of the credit card company that loaned you the money and now wants you to pay interest on the loan. You still have no income and now have debt you have to pay for because you borrowed money you didn't have. This is insane.

Rational people understand that eventually you'll reach your credit limit and not be able to borrow anymore. You still have no income and are now in danger of defaulting on your payments of borrowed money to the bank and are in fact worse off than you were before.

This describes exactly the problem the we face now. Only, when you and I reach our credit limit, we can't just raise our limit and borrow more money to spend away that which we haven't earned. This is exactly what the Democratic Congress has done this year on more than two occasions, rather than stop spending. We only have so much time left, before our debt literally renders our country bankrupt and finished.

To conclude, Keynesian economic theory does not work. Never has; never will. In fact, those countries that didn't spend, specifically in Western Europe, during the 1930's Depression, on average saw their economic activity and countries improve a full 7 years before the United States did, and only the onset of World War II allowed us to ramp up our production and start putting people back to work and not living on borrowed money as we are doing once again, right now.

As history repeats itself, we sure aren't electing anybody to lead us who knows anything about history and basic economics.

About this Author

I'm Dan Orr, an entrepreneur with businesses in real estate and e-commerce. I work with rent generating property and recently entered the online affiliate and money-making web based products world.

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