No matter your political party affiliation there is one thing that we can all agree on. We Americans have a debt problem. Most people are buried in credit card debt, student loan debt and mortgage debt. Just recently, credit card debt in America crossed one trillion dollars. Yes, one trillion!
Runaway Spending
But that pales in comparison to the total United States national debt. The current national debt is over $34 trillion and climbing. The interest on that debt alone is over $1 trillion.
You are probably wondering how someone or in this case, a country can rack up so much debt. Well let’s look at the math. The United States brings in roughly $5 trillion dollars a year in tax revenue. But yearly government spending exceeds roughly $7 trillion.
That gives us a deficit of $2 trillion. Simply put the United States increases its debt burden by around $2 trillion dollars every year.
So if the debt increases every year, will it just keep rising indefinitely? When will the debt actually start getting paid off? I thought about this for quite some time and then realized something.
Maybe the plan isn’t to pay it off quickly, and instead the plan is to the increase the overall standard of living of all Americans. If the economy keeps doing well, if the stock market keeps hitting all-time highs, then why should we pay down the debt now, and instead let the economy keep growing.
You see as the economy grows, more money enters the marketplace. This causes inflation which raises the prices of all goods and services. As a result, it also increases wages and salaries. So, the average person earns more money, and the government takes in more money as tax revenue. A higher tax revenue would easily be able to pay off the debt.
Don’t get me wrong, runaway government spending which is rampant these days needs to stop. But the way the government manages its debt is a lesson in wealth building we can all use to generate riches.
Borrowing To Build Wealth
Let’s say you purchased a new home. The mortgage amount is $400,000 at a 6.8% fixed interest. As time goes on, inflation will increase the money supply in the economy and as a result your income will increase. Paying off that debt with higher inflation is actually easier then when inflation is lower because your salary is higher.
In conclusion, all debt is not bad debt. Surely credit card debt and student loan debt are burdens that keep families from reaching financial independence. But certain debt like mortgage debt if managed properly can actually lead to generational wealth. This is a trick used by governments and the wealthy, but it is something that everyone can use if done correctly. The key is to make sure that you do not borrow more than you can manage.