Government Borrowing Alarm Bells

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

Ludwig von Mises (1881–1973), Human Action: A Treatise on Economics, 1949

In recent years, the United States has seen a substantial increase in public debt due to budget deficits.  Deficits have been driven by a combination of high rates of growth in government spending and a reduction in tax revenues and other receipts.  In the last five years, 2006-2011, spending by the federal government has increased on average by 7.5% per year.  Receipts during this time, due mostly to lackluster economic performance, have declined by 2% per year.  The federal government has been borrowing at unprecedented rates to fill this gap.  For example, in 2011, the government will borrow $1,600 billion, which, alarmingly, represents 40% of expenditures for the year.  As a result, the public debt, gross federal debt, has nearly doubled in the last five years from $8,400 billion in 2006 to $15,500 billion estimated for year end 2011.  Adding to the trend, many state and local governments have displayed record increases in deficit spending and public borrowing during this period as well. 

Politicians and legislators are struggling to find ways to rein in spending and increase revenues to reduce government borrowing.  As of this writing, what the outcome will be is uncertain.  Understandably, it is difficult to decide which citizens and institutions should face tax increases, and which citizens and institutions should suffer government benefit cuts.  If remedial actions are not implemented, however, the prophesy from Herr von Mises written above will, over time, come to pass.