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Washington dc financing-for-dummies

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Washington, D.C. Financing for Dummies (the "Dummies" are in Washington)

Washington, D.C. Financing for Dummies (the "Dummies" are in Washington)

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  • 1. Washington, D.C. Financing for Dummies By Tom Tierney26 July 2011The “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 andthe national debt ceiling: only in Washington D.C. can the “borrowers” of capital decide how much morethey 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 moreto spend; we have roughly $14.5T in existing debt and Congress is currently discussing raising the debtceiling (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 youmake $50K per year but you want to spend $100K per year. You borrow on your credit card (nationaldebt) the extra $50K but are bumping up against your credit limit (national debt ceiling). Since you areCongress, you get to negotiate your own credit limit and like magic, you now can “afford” all that extraspending. 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 othercreditors (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 doesis 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” viacomputer).So let’s review: the U.S. government brings in roughly $2.4T in revenue (taxes), borrows roughly $1Tmore to spend, increases its borrowing limit (debt ceiling) without creditor approval and uses theFederal Reserve to essentially “digitally” print money to pay for some of the debt. It’s a game ofMonopoly where the government is banker, borrower and creditor, but the tax payer is ultimately onthe 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.