Commentary

The Culture of Debt

I have something that I’m quite proud of to share with you this afternoon. It’s an essay called The Culture of Debt, and I wrote it about three years ago. At the time, the credit bubble was still growing, feeding a boom in real estate and fueling all manner of mindless consumption. I wrote this essay for a class that I was taking at the New School.

Now, three years after I wrote The Culture of Debt, the American government is scrambling to clean up the enormous mess created due to the reckless accumulation of debt by financial institutions and private citizens. Our elected officials have spent hundreds of billions on the financial bailout of our banking industry, and passed a gigantic economic stimulus package to spur spending, and hopefully, job creation.

This essay was written as a cautionary tale. Unfortunately, this tale is no longer dark speculation, but grim reality. As our elected officials, in supposed unison with other leaders around the globe, try to combat the wealth and job destroying effects of the demise of the credit boom and the asset bubbles it spawned, it is important to ask why this occurred, and to scrutinize the way our politicians’ plan to dig us out. I have been following the financial bailout saga, as well as the economic stimulus follies, with the same critical eye that I cast upon the fools who built this pyramid of debt under the cover of lax regulation and with complicity from the consumer class. I think we should all watch our elected officials very closely, because the remedies they are applying may very well cause bigger problems down the road. But, it’s Friday, so please read this essay and enjoy.

The television tells me that I can have everything now, and that I don’t have to worry about paying for it until later, much later. The government tells me that we can remake the world in our image, rebuild large parts of our storm devastated country, and give prescription drug benefits to seniors- all while cutting taxes. It all sounds too good to be true. It is just that. While we spend like drunken sailors on extended shore leave, the amount of debt we are leaving in our wake is developing into a storm that could one day sink us all. At the last count, the total for federal IOUs stood at $7.93 trillion; consumers owe a grand total of $2.15 trillion. This does not include mortgage debt. What is most disturbing is that the growth in liabilities shows no sign of slowing. In just the last four years, our leaders added $1.7 trillion worth of red ink to our ledgers, and since 1998, U.S. shoppers have increased their debt burden by 41 percent.

This is all happening without much sense of alarm. In fact, the eruption of indebtedness actually props up economic activity, 70 percent of which is derived from consumption. It also allows the government to fund an increasing portion of its activities. What is being discounted by the buying masses and their elected officials is the negative effects that carrying such onerous quantities of debt can have on our standard of living, economic growth, job availability, and our nation’s ability to fund public infrastructure, education and research and development. In addition to these unpleasant consequences, we must also consider that foreign governments currently hold large portions of our debt. This may jeopardize our geopolitical standing as creditor nations continue to gain financial leverage over the United States. The substantial buildup of financial liabilities can endanger this country’s position as a world power and its economic stability.

The continuing rise in government and consumer debt can reduce our standard of living by increasing interest rates and inflation, and reducing long-term economic growth. As we travel down the road in borrowed cars to gorge on imported goods we haven’t the cash to pay for and while our government taps strategic competitors to fund projects at home and abroad, the bills we have yet to pay reach toward the sky.

The government sells Treasury bonds to help pay for expenditures. Buyers of these securities may demand a higher interest rate to compensate them for the risk involved in holding the debt of such profligate spenders. We owe large amounts of money to foreigners, and if they shy away from buying our bonds, interest rates will rise. This will put stress on consumers and government by increasing the costs of their loans. As interest rates rise, the stock market and the economy would feel the pain, and in turn make the U.S. a less desirable place to invest, causing the dollar to fall in value against other major currencies. Since most commodities are priced in dollars, and we import much of what we purchase, the prices paid by consumers would increase, and inflation would begin to take root. The government’s receipts would decline at the same time as its borrowing costs increased, leaving less money for spending on public infrastructure, education and research and development.

Many in our nation’s ruling circles seem blind to the dangers we may face in the years ahead as we become less able to fund the programs that ensure our economic and social viability. Overall government spending, excluding defense and homeland security, has increased by a third in just the past few years. America’s mountain of IOUs has been transformed into one its greatest resources, fueling consumption and in turn economic growth, and funding an increasing portion of government spending. Far from being a blessing and an ingredient to better days ahead, our continually growing pile of debt means that we are merrily traveling down the road to financial ruin, our bills increasingly being paid by foreign interests. The U.S. Bond Market Association estimated that in 2004, nearly 47 percent of U.S. Treasuries were held by those residing outside of our borders, compared with 20 percent in 1990.

Given the fact that America shows no signs of curbing its errant ways, other nations may grow nervous holding so much debt in one currency. And this is when the naked emperor may feel the first chilly winds. At this point the U.S. could become dependent on borrowing to cover minimum debt service payments as well as a large potion of everyday expenditures. As anyone with a spotty credit history knows, dealing with creditors can be a difficult task. Our relations with foreign governments that hold large portions of our debt may suffer due to our weakened financial position.

The continuing growth in debt can imperil America’s global leadership position, taking funds away from both physical and intellectual infrastructure. This could cause the U.S. to become less attractive to investors, and less competitive in an increasingly global economy. In addition, ever-increasing liabilities can negatively impact purchasing power, job availability and economic growth. The relaxed attitude toward spending well beyond our means must change. The economic and geopolitical stability of America may suffer greatly if this problem continues to be ignored.

And, here’s a cartoon that was also ahead of its time:

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