Be it their homes or their government, Americans are running out of time to deal with
debt and thus risking a sudden crisis. If ‘Debt Is Slavery’, then in our homes and
legislatures Americans are giving up liberty of action and soon will be at the
mercy of events rather than in control.
Former Vice President Dick Cheney was roundly mocked for his
claim that ‘deficits don’t matter’. But he later found support in President Obama,
who tells us the deficit is a small issue.
Such bi-partisanship is normally reserved for issues such as drone
strikes, kill lists, domestic spying. So
when these two men stand shoulder-to-shoulder on debts and deficits it should generate
unease.
Government debt transfers wealth from people living in the
future to people living in the present. Politically this works because future
people don't vote in current elections.
Thus politicians wave away debt concerns by asserting we will ‘grow our
way out of it’. But we can only grow our
way out of it if we actually grow. When debt is a drag upon the economy then we
don’t grow. And if we don’t grow, the crisis is inevitable.
Federal debt exceeds $17 Trillion, over 100% of GDP, a level
not experienced since WWII. It appears
the official strategy to deal with this overhang is “Default By Inflation”,
printing endless dollars and paying back debt with increasingly worthless currency. However, inflation is toxic to the economy.
Think America in the 1970s.
Another solution is one put forth by those such as international
investment expert Doug Casey who recommends the government default “in an
honest way” by paying current debt holders less than promised which he sees as
preferable to, “saddling the next two generations with indentured servitude.” Bond holders will howl, but Casey wonders, “how a creditor can cry foul when
the government to which he is lending has implicitly said that the value of the
money he lent will shrink?”
This debt also has more than just economic effects, but
national security implications as well. Because more than half the federal debt
is held by foreigners, other countries are gaining increased leverage over American
politics and the US economy.
In his book on the financial crisis, Too Big To Fail, Andrew
Ross Sorkin details a disturbing moment from the summer of 2008 when Russia
made a high level approach to China proposing they jointly dump their US debt holdings,
resulting in a even bigger collapse of the US economy. This Russian proposal coincided with their
launch of war upon Georgia, an American ally. While China declined Moscow’s
offer the after effects did resonate in Washington. In his memoirs, Treasury Secretary Hank
Paulson admitted astonishment that the Russians were doing a lot of strategic
thinking about US debt.
Debt holders have power over debtors. In 1956 President Eisenhower sought to block
the British from occupying Suez he didn’t need Marines. Instead Eisenhower
merely threatened to dump the vast American holdings of British debt thus
collapsing the English economy. In that case, a bond was more effective than a
bullet.
Debt can beneficial when used to invest, but ultimately a
country only gets richer is when production exceeds consumption. In the past 40 years American households have
been consuming more than they produce, hence creating trade imbalances and massive
private debt.
In 1970, US household
debt was 40% of GDP and the national savings rate hovered around 10%. Over the next four decades household debt
exploded to 100% of GDP while the savings rate plunged to 1%. Thus we have replaced vaults of wealth with
bags of debt. The credit reporting
agency TransUnion reports 46% of all Americans carry a credit card balance from
month to month. Nearly 40% of new car
loans in 2012 were made to those with credit scores below 619, by definition
sub-prime. Then there is the other major
sub-prime calamity, student loan debt,
which now exceeds $1Trillion. The net
result of all this baggage is a society driven by the never ending need to
finance personal debt and hence leaving Americans economically enslaved.
Debt plagues both the public and private sphere, but the solutions
are what they’ve always been: earn more or spend less. Unfortunately family
incomes remain stagnant, so households must tighten their belts. In addition, with no growth in personal
incomes there is no growth in income tax receipts. Thus we must resist any
economic fear mongering and demand a real shrinkage in the size and expense of
government. We can chose austerity
today, or have it forced upon us tomorrow.
In our home and our legislatures debt constrains our
options. We can choose to pay now or try to pay later. But the longer we wait
the steeper the bill. Any solution will
bring pain, but that is a good thing. Being
a debtor should hurt. In the direction
we’re headed, it’s going to hurt a lot.
