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2-12 Economics — A Primer [CH 2

over $27.5 trillion—is beyond most people's comprehension. However, one could
consider that if one were to spend $38,500 per minute, it would take the individual
2,700 years to spend this amount. This figure represents a debt for each citizen of

$83,250 at birth that continues to grow; it becomes a debt on their children and
children’s children two or three generations. There are those who like to say that the
national debt is a debt that we owe ourselves. If that be the case, then maybe we
should “forgive us our debts.” As that will not happen, forgiveness, then we may

conclude that the national debt is not a debt we owe ourselves.

The Federal Deficit influences the Interest Rate you pay
Each year that Congress establishes its spending budget, it does so in the hope that
there will be sufficient income (tax revenues) to meet its expenditures. Congress has

income estimates that indicate there is always not enough revenue. So Congress must
make up this difference to have a balanced budget, the difference is made up by
borrowing money. And this borrowed money is called “the Federal Deficit” and
becomes debt added to the National Debt each year.

Rate of Interest/ Money is a commodity just like hamburgers, and its price is known as the rate of
Interest rate: interest. Interest rate is a percentage of debt paid the lender by the borrower.
Percentage of a sum of Individual consumers, businesses, and government (federal, state, and local) all
money charged for its compete to borrow money at the lowest possible interest rate. Because the federal
use (the cost of money).
The interest rate, government must borrow so much every year to finance its operation, it competes with
expressed as a businesses and private borrowing. By government not managing its expenditures with
percentage, is used to its revenues (taxes collected), it goes into the money market and buys up (borrows) the
calculate the amount of money supply. Thus it has a great influence in driving up interest rates when the
interest due (cost of
borrowing) per period, federal government, and even state governments, has to borrow money to make up the
as a proportion of the difference between tax revenues and congressional spending.
amount lent, deposited Business fears rising interest rates because this makes the cost of borrowed money
or borrowed (called the more expensive. More expensive money makes consumer spending more expensive,
principal sum).
and consumers respond by spending less. Less consumer spending threatens economic
recession. Many economists believe rising interest rates could make it more difficult
for the government to reduce the deficit; they see the deficit and high interest rates
would breeding a self-perpetuating cycle.

Businesses that want to borrow money for expansion or replacement of plant and
equipment hold off from, or do not make capital improvements because of higher
interest rates. Their costs increase and under pressure they pass these higher costs on
to consumers by raising prices.
Lower Interest rates and reducing income tax rates has a tendency to stimulate an
economy. This stimulation results in encouraging consumers to spend more, business

to expand by replacing plant equipment, and reinvesting in capital goods. For the
merchant this could mean opening new stores with increased inventory in more
locations; for the manufacturer replacing manufacturing equipment with newer models
and or adding more product lines to produce; for the cattleman expanding their land

holdings, and purchasing more breeding livestock. With improved production
equipment overall productivity increase reducing the cost of goods. Lower cost of
goods result in more consumer purchasing. Increased consumer spending increases
total revenues and also increases total government tax revenues; as profits increase the

amount of income tax dollars also increases in direct proportion.

A Strong Dollar and Growing Trade
When deficits and tight money policy press interest rates higher and encourage
capital from abroad, the value (purchasing power) of the dollar jumps in comparison to
the value of other currencies.
As a result, American goods cost more abroad and foreign goods become less
expensive for U.S. consumers to buy. Americans benefit from the dollar's strength
when they bought Japanese cars and electronic equipment, Reeboks and other shoes

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