Why do people still lend money to America?


If I was asked to lend my own money to America, I wouldn’t do it.  The US Federal government owes a massive US$16.7 trillion (US$16,700,000,000,000) to various institutions, but it only collects US$2.7 trillion in tax revenue whilst it currently spends US$3.68 trillion a year on running the country.  This is not an easy sum to imagine, but if we divide everything by 10,000,000, we can see why I would not lend.  By scaling down, we can compare the US situation a British house owner with a mortgage, albeit a large one.

At ten millionths of the level of American government debt, the lovely mansion in our example has £1,670,000 of mortgage debt against it.  The homeowner has a good job which earns £270,000 a year (after tax) but the family spends £368,000 a year and has no savings.  The mortgage is, already, around seven times salary and the household is hemorrhaging cash because the budget is wildly out of control.  This is an exact scale model of the American economy.

Which bank would lend to someone in that situation?  None!  Any bank would tell the homeowner to do one of three things.  First, increase income.  Get a better paid job.  Second, reduce spending, cut the cloth to suit.  Third, think about selling the house and downsizing to an affordable dwelling.  The problem with America is that option three is not an option, who can sell America and downsize?

What the bank would definitely not do in this situation is increase the debt.  But that is what the US government has voted to do by increasing the debt ceiling by US$0.8 trillion.  However, the banks have not yet agreed to lend America money.

What the US government has done is comparable to the homeowner in our example saying “I’ll just make my mortgage £1.75 million.”   How is this possible?  It seems bizarre.  This feels like a dodgy self-assessment mortgage, which is exactly what led to the sub-prime mortgage crisis.  The US government, it seems to me, is bluffing lenders into believing it has the ability to pay them back.  It’s all a massive confidence trick.  Lenders lend on the historic trust which has been established over centuries.  The Americans always pay back their debts.  There may come a time, however, when desire to do the right thing is overtaken by the inability to pay.

It all may well work out well in the end.  Income might well increase and spending come under control, but I still wouldn’t lend my money to America today if I wanted to get it back.

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