Last week, I published an essay in Time magazine about debt, arguing that our current preoccupation with the federal deficit and with debt in general is a dangerous distraction from the real issue (namely, our inability to invest and spend wisely to create the economy of the future). The problem isn't debt per se - after all, the U.S. government took on much more debt during and after World War II, and few would argue that was bad policy or led to disaster. The problem is that we aren't spending our debt productively; instead, we're frittering it away on consumption, tax rebates, military budgets to pay for Cold War-era weapons systems, pork projects, or other forms of spending that will not yield returns in the future.
The piece met with resounding, passionate anger. Writing about debt is a third rail topic on par with religion and sex. People don't see straight when discussing this issue. They react with disbelief, anger, insults, and even threats of physical harm. You'd think I'd advocated water-boarding given the vituperation. Instead, I'd suggested that our concern is misplaced and that all the fiscal austerity in the world wouldn't restore American dynamism, enhance our competitiveness, or create the innovative economy of the future to rival and surpass China, India, and whoever else has been on the same sort of upswing that once was the sole province of the United States.
It's now a cultural cliché to say that Americans have been living beyond their means, that the financial crisis was the great comeuppance, and that now the bill is coming due. But it isn't true. The fact is that more than a third of Americans own their homes outright - they weren't living beyond their means and they never had any mortgage debt or refinancing. Of those who do have mortgages, even at the worst of the foreclosures, about 90% of Americans are current on their payments, as are about 90% on their credit card bills. The fact is, therefore, that the vast majority of Americans have been living within their means. The financial crisis was a product of technology-fueled trading and leverage, astonishingly short-term greed by banks and real estate investors, and a world awash in capital. Government regulations and the lack thereof played a role, but while it's easy to say what might have prevented the crisis, it's hard to know what could actually have been done in the real and dysfunctional world of Washington politics.
Forward to today. Because the borrowing costs are so low at the federal level - 2.5% compared to 6.5% at the start of the millennium - the cost of servicing the debt is also not much different than it has been for much of the past 25 years.
The rejoinders are familiar - interest costs must go up; we are dangerously in hoc to China; only Democrats with their tax-and-spend views could defend debt. In fact, this last issue was the one that figured most prominently in the response to my piece: that I am a Democratic Party shill defending Obama and congressional reckless spending (and that is a much more polite way of putting it than what the piece generated). It's true that I have given to the Democratic Party and to various candidates. But the Republicans have certainly run up deficits (George Bush anyone?) and the hysteria over that was equally misplaced. This isn't a defense of Democratic policies. In fact, the way that spending is allocated reeks of ineffectiveness and at times veers towards the corrupt. But that's a crisis of how we are spending our debt, not that we using debt to fund spending. What's more, in a world that is seeing massive wealth creation outside of Europe and the US with the dollar still the world's reserve currency (for lack of viable alternative), it's not clear that interest rates must go up, and the past may be a poor guide to the future.
The larger issue may be that we lack the ability to argue these issues coherently. America has never been a genteel place of measured arguments, and today's blogosphere attacks and counterattacks would have been familiar to any pamphleteer in the 18th century and anyone standing on a soapbox at the end of the 19th. But our collective inability to get anything done and to act with urgency is paralyzing our ability to deal with the world today, and the tempests over debt are just one more example.
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I have a co-worker struggling with $160K mortgage, young first time buyer, another co-worker purchased a new internet-phone gizmo & asked about cancelling his childs medical insurance, $100 a month premium, because he had to pay another $40 a month for wireless. For the younger group out there, 20's - mid 30's, is it that important to be house poor, buying move in ready instead of fixer upper? Or having the latest techie device at a cost of health care?
Just like the government - they are not using our tax money effectively or productively, spending billions on inadequate defense devices and more on no-bid contracts. Farm programs which benefit million dollar farmers rather than small family farms. Benefits and tax cuts to major corporations while raising taxes on small businesses.
Although I am NOT a fan of the former half term gov. of AK, we need some common sense spending.
1. Our debt is being sold outside the country. Don't you think that this means that our debt is dependent on outside sales of that debt?
2. Things can change quickly and the past trends don't prove anything, anytime.
">>"There is no commodity in the world than could underwrite the amount of M3" Of course there is. If the money is required to pursue the goods, then there are sufficient goods to back the money. It's a two-way equation. Sound commodity-backed money is always convertible forward into goods for purchase and always convertible backwards into a tangible asset when it is held as savings. This is balance. It is impossible for the demand for units of money to exceed the quantity of commodities...
">>"You still haven't told me what you would like to see in place of fiat money....Or how you prevent a total economic collapse if you switch to a commodity backed currency." Why would switching to commodity money destroy the economy? The existing supply of commodities is not changed by the conversion of money from fiat to commodity-backed, and the commodity-backed money is superior because it regains its ability to store value. Currently, fiat money is a fiction. It is alleged to serve as a.
This statement makes no sense. If tax cuts increased revenue then we wouldn't even be talking about deficits, since Bush cut taxes on capiital gains as well as targeted tax breaks to the rich. A substantial portion of our debt is in lost revenue due to overly generous tax breaks for our richest citizens who are under no obligation to do anything with their extra revenue.
"hey stupid, I have a bridge to sell you"
As much as I want to agree with the premise of this article, there is an angle missing that is usually omitted from discussions on either side. Of course the wisdom of the investment is critical, but explaining exactly how it actually will lead to those higher future incomes and tax revenues is usually short circuited. The bottom line is that this economy seems structured so that 95% of people will make no progress, and the often impressive GDP growth is becoming more and more a function of pushing money around in ways that don't deliver anything to the vast majority, if not actually to their detriment.
It might be possible to finally start taking the debt repayment from the top 5%, but if the political will is not there to do that, nor to facilitate restructuring of the economy, then all the investment in the world won't work in the classical way that we believe it
Too few people understand that the Fed creates money our of thin air and then "Lends: it to the government by purchasing government bonds that are interest bearing. The government could print its own money and avoid the interest. In fact, that's what the constitution calls for. Our entire banking system is designed to redistribute the assets of the working and middle classes up to the richest 5% of the population...the Fed is the main conduit for this vacumming up process.
StJames: "The government could print its own money and avoid the interest. "
Here's what I'm finding inconsistent about your position when viewed in total.
You are opposed to fractional reserve lending. You and I agree.
You are opposed to the nation obtaining its money supply from a private bank through the sale of debt that adds interest. You and I agree.
But the three primary components of our present monetary system are 'fractional reserve loans', 'money born from debt with interest attached', and the third,
'fiat money ( not convertible into a tangible asset ) as legal tender'.
Yet, despite your opposition to the first two components listed, you support fiat legal tender. Doesn't it seem logical to think that the bankers are operating a monetary system where every component is designed to work in their favor?
Why would the banks set up a system that featured
fractional reserve lending (bad ), interest payments ( bad ), and, for some reason, fiat currency ( good? )?
It seems more logical to me to perceive the existing monetary system as flawed on all three levels. If the use of fiat money really put the bankers at a disadvantage, why have they relentlessly promoted its use in every economy they gain control over?
When we tore down Glass-Steagall and let the three-legged stool of "banking, finance, and insurance" merge... all three legs fell off the stool.
(1) Finance: A "security" must represent "a perfected security-interest in a thing of value." The security is therefore worthless if it does not represent such a security interest; and/or if the thing does not have value. No one even knows where the mortgages associated with mortgage-backed securities (sic) even are. We do know that there are hundreds of times more of these securities than there are mortgages.
(2) Banking: The borrower has to be able to pay you back with interest. 'Nuff said.
(3) Insurance: You must have an interest in what you are insuring, and you must have the financial capacity to carry out your promise. I can't sell you an insurance policy that the owner of the Brooklyn Bridge won't default ... and yet, they did just that. The crime is identical to Mr. Ponzi's.
Rumpelstiltskin. Tulips. People desperately want to believe certain lies. And, there's a sucker born every minute. But when you rip-off a retirement fund in this way, your crime literally kills people.
Families hush things up, but I have no doubt that many people have ended their lives on account of this economic disaster. Some of them get in the news but I can't see how annihilating peoples' nest eggs avoids some serious 'collateral damage'.
They knew. They did not care. Astonishing...
epu
Banking: The way we create money in this country is to create debt. When a bank lends you $100,000. to buy a house, they don't have that money sitting in a vault...they have maybe (10% of that money...fractional reserve banking) The bank makes a ledge entry of $100,000. as a credit to its account...then another entry as a debit when it sends the "money" to the entity representing the seller...
Technically $90,000. has been added to the "money supply...that M3 figure the Fed no longer reports...
Unfortunately your total interest payments on that $100,000. is going to be much greater than $10K...so where does that money come from? From someone else who borrows money from a bank...and the beat goes on and on and on....
Boy, you hit that nail on the head and with authority. That is the next thing Obama should do, outlaw derivatives (which have been at the heart of some major municipal bankruptcies, too).
As for this article, it may be true that only about 10% of mortgages are delinquent, but up to 50% of all current mortgages are underwater and there is also the impact that untold thousands of homes sitting there empty and unmaintained and could remain so for years.
Also, this argument reminds me of the one the GOP tried to make a few years ago that the Bush deficits were manageable because they were a small enough fraction of our GDP that it wouldn't destabilize our economy. Of course, now that the Democrats are in office, the Republicans are concerned about deficit spending again. How convenient.
In a word: "the music has stopped, all the chairs have been sold out from under us, and Rumpelstiltskin has left the building." The utter and complete folly of the moneychangers has been topped only by the depravity of the politicians ... and all the gold we thought we had is (alas, yet again!) revealed to be smelly straw.
It's "deja vu all over again" ... meanwhile: "NOW what?"
Let us start by squarely facing up to the problem. We can look back in history and find that we are hardly alone in what has happened here. It is an all-too-familiar tale. Neither the politicians nor the bankers will ever pony-up to their folly, but then again, THAT, TOO, is "an all-too-familiar tale." :-/
We have to face the problem squarely. No euphemisms like "lobbying" or "campaign contribution" or (may the gods help us all...) "corporate freedom of speech." Use only the plain word: "bribery." Banish the word "derivative" forever from our vernacular and substitute the plain word: "swindle."
Only "plain words" henceforth are to be allowed. Our predicament is NOT "new." It is ancient. Our forefathers warned us (and warned us that we would not listen). Of course we didn't. But we can learn from them now. We can, at the very least, use their plain words.