If you take smaller numbers and create an example of the relationship between deficit spending and credit crises you gain a clear understanding of what the nation is facing and how it came about. It is not at all complicated as the politicians want you to believe because as you will see their role is the problem.
The example can be understood by framing it as an individual would experience the issue. Suppose you earned $500 dollars a week and you spent $600 a week. Someone would have to loan you $100 every week that you spent more than you earned.
This is the simple relationship between spending more than you earn and the need for credit. You cannot spend more than you earn unless you have a source of credit. This is true for everyone and that includes governments.
If a government is taking in $2 Billion and spending $3 Billion someone is loaning the government $1 Billion. This means of course the government owes someone $1 Billion and unless it pays the someone back, the interest on the loan continues to mount.
Now how can a credit crisis arise from this simple act of spending more than you take in. Back to the individual example. If you don’t pay the lender back or pay him back with money that is worth less than the money you borrowed from him he is less likely to loan you more money.
Say you borrowed $100 that was worth $100 when you borrowed the money but when you paid him back you paid him back with money that was worth only $90. That means that he would lose money from loaning it to you.
If you were a counterfeiter you might slip in a ten dollar bill that would not pass and the lender would only have $90 of the original $100 in purchasing power he loaned you. It would not be long before you would have a credit crisis because the lender would not loan you money and the lender would be in trouble because he was operating at a loss which means he too would need credit.
All this because you couldn’t live within your means and borrowed money you couldn’t or wouldn’t pay back.
Let’s see how this works with the government. The government borrows some money to cover the amount of spending it wants to do, but doesn’t have tax revenue to cover it. When it comes time to pay the loan back it still doesn’t have enough revenue coming in so it says we will borrow more money to pay for the money we borrowed. This goes on until the…
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