January 24th, 2008
Debt is one of the primary underpinnings of the economic turbulence we are now experiencing. In the last 50 years debt has gone from something occasional to something universal, embraced and now endemic. Borrow against the future to pay for today. Debt, debt, debt, debt is like the drip, drip, drip, drip of a faucet that slowing fills up a sink and overflows. The four debts referred to here are personal, corporate, city and state and federal. All of them feel as though they are beginning to come home to roost and the outlook, if not faced and dealt with, will come together with dire consequences.
Personal or consumer debt is a relatively recent phenomenon. Diners Club launched the first widely used credit card in 1950. Before that, consumers paid cash or made a down payment and had a short term low interest payment. The idea of the Diners Club card and then seven years later the American Express card was to allow people who entertain or travel to not have to carry large amounts of cash. It was expected that bills would be paid in full every month. Up until this point, consumers bought goods when they had the money to pay for them. Now of course people buy things with cards as they often donâ€™t have money to pay for them. Immediate gratification in a materialistic society that bombards consumers with literally hundreds and thousands of advertising messages a day.
Companies have long used credit and debt to build enterprises as most businesses need to invest in advance of revenues. This led to the creation of rating agencies to rate debt for investors. Companies that had a track record of prompt debt repayment or had strong balance sheets received top ratings and lower ratings went to those that didnâ€™t or as is now often the case, had already taken on too much debt.
In the second half of the 20th century cities and states undertook all kinds of infrastructure projects and issued bonds to pay for them. This led to an ever increasing reliance on debt markets to fund build and expand, usually driven by local boosterism and political promises made. Once the drinking from the debt trough became accepted, ever more debt was taken on. There are many states that require balanced budgets. In order to balance the budgets, states often borrowed from accessible places such as state pension plans. For example the state of Illinois must, by law have balanced budgets, but as of this writing they have only balanced budgets by taking on debt that now totals $50 billion. Somehow this is to be paid in the future by current and new residents. Keep the people happy today and forget about tomorrow.
The most disturbing debt, in term of long term consequences is the federal debt. The federal government states that the national debt is only a bit over $9 trillion. When you add in the obligations for social security, Medicaid, Medicare and veterans benefits the total increases to over $55 trillion. To put this in even more perspective, it took the time from the presidency of George Washington to the presidency of Ronald Reagan to accumulate $1 trillion of national debt. The inability of the federal government to control spending, combined with tax cuts, combined with compounding interest has, in the last 27 years added $4 trillion to the national debt. But our public debt does not include all of the promises that we owe our seniors, including our veterans. If you include these commitments, our national debt totaled $20 trillion in 2000. In the eight years since then this debt has grown by $34 trillion. Every living Americanâ€™s share is now more than $180,000. By the way there is no â€œlock boxâ€ for social security. There is nothing invested for social security. Payments come from incoming tax receipts. As many regular readers know, I have worked with the Institute for Truth in Accounting to launch the web site www.truthin2008.org which provides a wealth of information about this time bomb. Educate yourself, for as Thomas Jefferson said: â€œAn informed citizenry is the bulwark of a democracyâ€. For more quotes related to the national debt, click here.
The national debt is one of the key issues America must face within the next decade if it truly wants to remain a great nation. In this election year, the two questions to ask any candidate are: How do you plan to pay down the national debt? And then: Where will the money come from to fund the programs you are advocating? I promise that you will not get a straight answer on either question. This is the other inconvenient truth; the one that most politicians want to avoid. By any measure of acceptable accounting, the Federal Government of the U.S. is bankrupt. It doesnâ€™t take a futurist to understand the consequences of not facing up to a bankruptcy.