Are you having trouble understanding the U.S. debt ceiling and its implications to the economy?
One way to think about it is to compare it to a family with rich parents and an adult child who will spend as much as he or she is given.
In this comparison, the U.S. government is like the wealthy parents who own a company and the governments around the world are like their clients. The problem adult child is, of course, the U.S. economy.
The child comes to Mom and Dad and says: "I need more money for car, clothes, house, vacations, etc." The parents are disappointed that their 30-year-old is not self-sufficient but he or she suffers from Affluenza.
Wikipedia defines Affluenza as: 1) A painful, contagious, socially transmitted condition of overload, debt, anxiety and waste resulting from the dogged pursuit of more. 2) The bloated, sluggish and unfulfilled feeling that results from efforts to keep up with the Joneses.
Although the parents don't want to give the child more money, they are afraid. What if their child ends up on the street? What if he or she ends up hating them? They feel they have to give them money - ergo raise the debt ceiling - because they simply can't imagine what would happen if they did not.
The 30-year-old child thanks the parents and keeps on spending thoughtlessly. Obviously, the child will keep coming back for more money. The amount of money the child wanted when he or she was 12 was smaller. Now, as a 30-year-old, he or she can burn through $100,000 without a problem.
While the parents want to change the pattern, as long as they are rich and have the money to give, they don't have the strength to impose tough love. Fortunately, their business continues to prosper. As long as they have money, they can't bring themselves to say no to their kid.
The U.S. government is in the same boat. As long as they can print money and issue debt the rest of the world will buy - even paying very low interest rates - then they will not deny the American people. Americans, after all, will not likely vote for anyone who says no to them.
The problem is the American economy is getting weaker, weighed down by mounting debt. The rest of the world has been buying U.S. debt for decades because it was the safest option in the world. As the U.S. struggles with more debt, it will eventually lose that safest-option status. One reason why gold prices are rising is that many countries are starting to think it is safer than U.S. debt. At least until another currency that replaces the greenback as the 'gold standard.'
Getting back to the family, at some point their business will run into problems - maybe in part due to the issues, stresses and worries created by their adult child. When it happens, the parents will have no option but to finally say no to their child. At that point and only then will major change take place.
They may ultimately be good changes as the child may be forced to take responsibility, get a job and cover their own expenses. Or they may be bad changes, where the child is unable to cope and does end up living on the street. This may not happen for many years, but that day will come.
Likewise the United States may be able to put off major pain for a long time, but not indefinitely. A government can only raise its debt higher for so long. Eventually their debt will be downgraded and the U.S. dollar and government will no longer be seen as the safest.
When that day comes, look to current events in Greece for an idea of what impact it will have on the average citizen and the country's global standing.
Affluenza, it turns out, can be found in families, economies and governments. And like a spoiled reckless child, the U.S. will also eventually have to be held accountable for its actions.
Ted Rechtshaffen is president and CEO of TriDelta Financial Partners, a firm that provides independent financial planning advice. He has an MBA from the Schulich School of Business and is a certified financial planner. He was vice-president of business strategy at a major Canadian brokerage firm.
Follow Ted on his blog at The Canadian Financial Planner.
Ted Rechtshaffen