Friday, January 22, 2010

The last time deficits were very high....

If you look at the graph on the top of this blog, you'll see that we are currently in a historically unprecedented position of a huge deficit. Not since World War II have we seen deficits anything close to current levels.

What does all this mean for the future of our tax system and our economy in general?

This is the first of a series of posts in which I'll be discussing these issues for my students--and anyone else who is interested.

In brief: out of every dollar earned by Americans, the federal government is currently collecting 15 cents in taxes of all kinds (income, payroll, corporate, excise) but it is spending far more than that 15 cents!

Total federal outlays (spending) are currently running 25 cents on the dollar.

How is it making up the difference? It is borrowing--from Americans AND from everyone all over the world--including other sovereign governments--who chooses to buy US Treasury debt.

Question 1: How much is all this borrowing costing the US government?

The answer might surprise you.

And the implications are frightening.

A business school professor I know asked a question like the one below to his introductory finance students on the first day of class this week. They found the answer pretty surprising.

If you have $10,000 to invest for three months, and you decide you want to play it safe, you can invest in three month US Treasury bills. Guess how much you'll get in investment interest at the end of the three months?

Take my anonymous poll to see the answer, as well as some information about responses given by other people.

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