So true. Funny how it seems, always in time, but never in line for dreams. Head over heels when toe to toe. This is the sound of my soul, this is the sound….. I bought a ticket to the world, but now I’ve come back again. Why do I find it hard to write the next line? Oh, I want the truth to be said. So begins the song True written by Gary Kemp and performed by the English band Spandau Ballet on its 1983 album of the same name.
A lot of the time, the things we hear over and over again are not at all True. Things like Its ok that you didn’t win honey, you tried, or it must have gone into my spam folder, or Sorry I don’t have any change, or Mr. Dunham, your car will be there in 5 minutes. One of the great economic mistruths that is repeated over and over again, it that Debt is good. Our old friend Paul Krugman is constantly touting this one, but you hear it over and over again from so-called investment professionals on virtually every channel.
Now with most things (yes sometimes I really don’t have any change) there are nuances. The ability to borrow and issue debt is very important and is a necessary feature of an modern society. If everything had to be completely paid for at the point of purchase, only kings and potentates would be able to buy or build much of anything. This is why history is filled with castles, canals, churches, and fortifications built by kings or gentry. These were the only people able to extract the labor and materials that they needed for large projects through the use of force. Prior to the ability to generally borrow, very few big and lasting things could be constructed.
So debt can be good. If a person can borrow a large sum of money, and pay it back over a period of years, they can purchase a house, or a car, or a farm, or even start a business. Firms can use debt to build a factory today that will pay back the loan over a period of years, and nations can borrow today to help defer the costs of a national emergency, or to make a large infrastructure investment that will be paid back by taxpayers over many years or even generations. Without the ability to borrow, we would not have the interstate highway system, or have gone to the moon, or have defeated the Axis powers.
But borrowing for the sake of consuming is just the opposite. Borrowing to pay for dinner, or for rent, or to buy back stock, or even to pay Social Security benefits, does not create debt in the traditional sense. Neither does borrowing on the part of businesses to finance cash burn when this cash is not going into long term investments. Tesla for example is borrowing to beat the band, and it seems to be making investments in a bunch of things that will likely never pay any dividends. I often call Amazon a ponzi scheme because it borrows and sells equity simply to keep the cost of shipping down, not to invest in new and more productive ways to retail stuff. And companies like, well AOL or even Uber simply borrow to grow share, even though their technology is simplistic and can be easily replicated and – once their supply of virtually free cash is cut off – under priced.
The worst culprit in the borrowing to consume game is the federal government. Over the past decade, the Federal government has borrowed about $11.2 trillion, nearly all of which has gone into consumption rather than so-called public investment. In fact, about 70 percent of all Federal spending consists of transfer payments – literally the government taking from one group of people (or borrowing) to give to another group. This means that about $7.8 trillion of the $11.2 is gone – with nothing to show for it, no new roads, new bridges, new technologies, new Martian colonies, heck we are even out of bombs! This is equivalent to 40 percent of annual GDP. In other words, to pay that debt back would take 40 percent of the entire production of the country over the course of a year.
In the simplest sense, saving is equivalent of taking work done today and putting it aside to use in the future. Debt, on the other hand, is consuming today work that needs to be done in the future. According to the Federal reserve, total non-bank debt outstanding in the US is $48.6 trillion, or over 2 times the entire production of the economy. In other words, we as a country (government, business, and individuals) are already two years behind on our work. And this does not take into account unfunded liabilities like pensions or promises for Social Security or Medicare beneficiaries. This likely means that the overall debt level is double the reported amount. In other words, we are four years behind in our work.
I for one am coming back from a 4-day holiday weekend and am about a week behind in my work at the office. I don’t know how I will make this up, much less a 4-year deficit. Funny how it seems that everyone wants to keep the debt spigot flowing. But if you want the truth to be said, this debt is not going to buy a ticket to the world rather, it may buy a ticket to future privation.