Let's talk about debt, baby. Let's talk about you and me. Let's talk about all the problems, and the bad things that may be...

Alright, so perhaps that isn't exactly how you remember that song from the 80's, but unlike "Salt 'N Pepa," this problem is here to stay for a while.

Last week the US Senate voted to increase the federal debt limit by $781 billion, raising the debt ceiling to nearly $9 trillion. Soon thereafter, the congress passed a $2.8 trillion budget including $92 billion in additional war spending and hurricane recovery funds.

Let's take a second and let those numbers sink in. The United States owes about $9 Trillion. That's more than 3 times the budget we just passed for next year. There are about 300 million citizens in the US. Quick arithmetic shows that each and every man, woman, and child in this country is now in debt around $30,000 to cover this. Congratulations, I guess we all just bought new cars (yes, including the baby).

Anyone curious can actually see the current government debt, to the penny by looking at the Dept. of Treasury's website. The interest expense on this debt is also available from the treasury. This shows the interest payments for 2005 to be just over $352 billion or about 16% of the 2005 budget ($2.15 trillion).

In order to get a clear picture from these statistics, let's generalize for a moment. Imagine the federal budget as a large round pie. Now slice that pie into 3 nearly equal thirds. The first third represents the part of the budget eaten by defense. The second third represents the "entitlement" or non-discretionary spending of the United States (Medicare, Social Security, etc...). The last third represents everything else, all the discretionary spending from highways and parks, to education and housing. Now take this last third that represents all the government programs that are so dear to many voters and cut it clean in half. Take one of these halves and give it to your lender for that represents the interest we are paying on our debt.

Unfortunately for all of us, every single one of these "slices" is growing and the tax revenue from the economy is not keeping up. The difference, of course, is what we are borrowing to make ends meet and that is the federal deficit ($318 billion in 2005). Every time the deficit is a positive number, we have just borrowed more money and are increasing our debt. Every increase of the debt requires more interest maintenance leaving less and less for discretionary spending.

Of course, like our own families, the government can't continue borrowing money forever. In the short term, increased debt means higher interest costs to borrow more. We are already seeing this take place as real interest rates have risen dramatically over the last two years. In the long term, we simply cannot have our entire discretionary budget be eaten up by interest payments so something needs to be done. What can be done? Just like we all need to decide for our own family budgets, there are really only 3 options: 1.) Make more money (raise taxes) 2.) Spend less money (cut programs) 3.) Continue borrowing at higher and higher cost.

President Bush inherited a surplus when he took office in 2001 and has run deficits ever since. Politicians naturally prefer to borrow more money, as opposed to raising taxes or cutting programs as there is far less fallout in the short term from voters. California is a particularly poignant example of this policy. The problem is that they are simply delaying the problem (and making it much worse) for the next officeholder. Whoever wins the next presidential election will likely have no choice but to combine cutting spending and raising taxes, a sure-fire approach towards short term economic shrinkage. In real terms, this means that our standard of living is likely to drop in the future to pay for the spending-spree we've been "enjoying" over the last few years.

In reality, tax cuts, two wars, high energy prices, homeland security spending, natural disasters, and a major expansion of Medicare have left us in need of vast amounts of money that much of the rest of the world have so far been happy to offer us in exchange for higher interest rates. As most of us realize at home, it's easy to spend money, especially borrowed money. It's much harder to pay it back. We, as a country, have managed to spend ourselves into a pretty deep hole that will require some painful discipline to extricate ourselves from.

One of America's greatest poets, Ralph Waldo Emerson once warned "A man in debt is so far a slave." The United States used to be world's largest creditor, now we are the world's largest debtor. While much of our debt is still to ourselves in the form of privately held government bonds, we are increasingly beholden to foreign powers lending us money. If we are to retain our place as the world's greatest economy and wish to set our policies according to our own interests and not that of our creditors, we absolutely must start putting our own financial house in order.