Don’t Do As the Government Does

This article by economist Brian Wesbury makes the case that the high level of US Government debt (about $1 Trillion annually and about $22.5 Trillion in total) isn’t killing us because interest rates are low, which means the amount of interest we have to pay to bondholders to service the debt remains low (about 1.8%) relative to our country’s GDP. Wesbury goes on to say that the real issues are government spending, the pending insolvency of Social Security and Medicare, and the ramifications of increased entitlement spending on the working populace.

Don’t Make the Logical Leap

You might read this and think, Ok, if the government can pile on debt and not suffer the consequences, then why can’t I? After all, interest rates are low for me, also, right? My job situation is good and I anticipate increasing salary in the future, so why not take advantage of these low rates and buy anything I want now? Why not borrow all I need to send my child to an expensive private college?

The problem with that line of thinking is that You Are Not the US Government. That means that you do not print money, and you do not have the ability to 100% roll over your debt and not make principal payments. Instead, banks who lend to you for your home, car, or credit card, expect that their loans will be paid back. Interest rates may be low, but it is the principal payment requirements that crush people and hold them hostage to their lenders. Also: You can’t borrow at the same rates that the US Government can. At present, the US Government can get a loan for 10 Years at a rate of about 1.7% interest-only. It’s called a 10-Year US Treasury Bond. You can’t get that deal. The best you can get on a home loan is a 30-year loan in the low 3%-range, principal and interest included, with a 20% down payment, collateralized by your house. This is a good deal at a low rate, but it isn’t as good as what the US Treasury can get.

IMO

Don’t do as the government does. Don’t decide, “Hey, rates are low, so let’s borrow up to the hilt!” That’s a poor decision that will keep you in hock for years. Not that the US Government isn’t also in hock for years, but they print the money, and they don’t have to pay back the principal. Don’t look to the US Government as an example of good financial discipline. Instead, be your own example, and avoid adding to your debt pile.

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