CNN has been running an interesting quiz on the deficit in recent days via their money section (thanks to Barry Ritholtz for pointing it out), but their quiz didn’t really cover any of the pertinent topics regarding the deficit and was even a bit misleading. If you can answer the following questions you really do understand the United States budget deficit and its potential ramifications:
1) True or false: China owns the United States because they are the largest foreign owner of US Treasuries valued at $907B.
2) True or false: The United States must manage its finances exactly like a household, state or business.
3) True or false: The U.S. government must always finance itself via taxes or bond issuance.
4) True or false: The government “crowds out” the private sector by competing for funds which drives up interest rates and acts as a tax on the cost of capital.
5) True or false: The unusually large deficit means we are at a very high risk of becoming bankrupt like Greece or suffering hyperinflation like Zimbabwe.
6) True or false: Quantitative Easing has “monetized the debt” which allows the government to spend more money.
7) True or false: If the United States had been running a budget surplus over the course of the last 200 years the country would have never found itself in the current debt crisis.
If you answered “true” to any of the above questions you do not understand how the United States monetary system works. More thorough answers can be found here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.