Who's Loaning Us Money?

Where does the money to pay for President Bush's Deficits come from? I mean a deficit implies that the United States is borrowing money to make up the difference between national expenditures and national revenues, doesn't it? So who's loaning us money?

Well some of the money is coming from foreign nations; possibly this part of our debt is no problem. I mean if, say, Japan wants to call in the money we owe them, we'll just beat the crap out of them. Maybe. But, unfortunately, a lot of that money has been loaned by ordinary American's like you and me (as well as corporations and local governments and so on and so forth). Everytime you buy a Treasury Note you are, in effect, loaning the Government money. A lot of people have T-Bills in their portfolio.

Here's Paul Krugman's sobering analysis of the long term effects of President Bush's deficits (which I previously quoted).

Here's one way to look at the situation: Although you wouldn't know it from the rhetoric, federal taxes are already historically low as a share of G.D.P. Once the new round of cuts takes effect, federal taxes will be lower than their average during the Eisenhower administration. How, then, can the government pay for Medicare and Medicaid — which didn't exist in the 1950's — and Social Security, which will become far more expensive as the population ages? (Defense spending has fallen compared with the economy, but not that much, and it's on the rise again.)

The answer is that it can't. The government can borrow to make up the difference as long as investors remain in denial, unable to believe that the world's only superpower is turning into a banana republic. But at some point bond markets will balk — they won't lend money to a government, even that of the United States, if that government's debt is growing faster than its revenues and there is no plausible story about how the budget will eventually come under control.

At that point, either taxes will go up again, or programs that have become fundamental to the American way of life will be gutted. We can be sure that the right will do whatever it takes to preserve the Bush tax cuts — right now the administration is even skimping on homeland security to save a few dollars here and there. But balancing the books without tax increases will require deep cuts where the money is: that is, in Medicaid, Medicare and Social Security.

The pain of these benefit cuts will fall on the middle class and the poor, while the tax cuts overwhelmingly favor the rich. For example, the tax cut passed last week will raise the after-tax income of most people by less than 1 percent — not nearly enough to compensate them for the loss of benefits. But people with incomes over $1 million per year will, on average, see their after-tax income rise 4.4 percent.

Something to consider. But of course, the working poor, those "Lucky Duckies" have life a little too easy anyway.