Excessive debt can lead to catastrophic consequences

Another excellent column from Jack DeVine appeared in the Aiken Standard today and it appears below:

 

 

DeVINE: Excessive debt can lead to catastrophic consequences

By JACK DeVINE

Columnist

Not long ago, a letter to the editor published on this page argued that government economics are fundamentally different than family economics. After all, governments can print money, set monetary policies that control inflation and interest rates, float bonds to generate cash. Therefore, we shouldn't allow our personal financial experience to cause us to get too worked up about the nation's ballooning debt - in fact the writer went so far as to brand those who use that "scare tactic" as shameless!

Count me in. My initial reaction to that letter: nonsense. It's like arguing that gravity only works sometimes.

But in fairness to the writer, he actually is in pretty good company, in that his thesis is implicitly endorsed by the Obama administration. The president wags his finger at us for being greedy, he pins the financial crisis on an era of irresponsibility, of living beyond our means. In a recent interview, Treasury Secretary Gaithner postulated that the ultimate positive effects of this ugly recession will be more prudent, cautious spending by all of us.

But at the same time, both are insistent that the administration's current plan to spend our way back into prosperity, and in so doing to run up an annual deficit four or five times higher than ever in history, is not only prudent, it's essential. In effect, they are suggesting that the laws of economics can be applied or suspended on demand.

I think it's pretty simple. The fundamental principles of economics are always in play - for governments, big companies, small companies, families.

As a prime example, excessive debt is a killer, always, in every circumstance. What proves to be excessive may vary from case to case, but the principle always applies.

To illustrate: Millions of American families own houses, but few could pay them off with accumulated savings. So instead, homeowners take on long-term debt - a mortgage. This kind of deficit spending is a perfectly sensible thing to do, provided that: (1) the borrower is reasonably confident that the house will hold its value, at least to the extent that the borrowed amount is covered and (2) the monthly payment is manageable, now and in the future. Different people have different tolerance for debt, but clearly a mortgage payment that doesn't leave room in the family budget for food and fuel would be a big, big mistake.

What's different on the government level? Not much. As with individuals, it gets harder and harder for the nation to borrow money at attractive rates (e.g., from China) as we slide deeper into debt. And printing gobs of money is a delusion - inflation is right around the corner with its whole new set of economic consequences.

Like the family whose mortgage payment eats up the lion's share of its monthly income, our government is now plunging headlong into a level of debt which is a much larger share of our gross domestic product than we will be able to afford to repay.

As another example, let's bring the concept of economic stimulus payments down to family level as well. Suppose you choose to hire your unemployed neighbor to wash your car every day, and you're generous enough to pay him enough money to keep food on his family's table and a roof over their heads - a truly compassionate act on your part. And your largesse would, temporarily and incrementally, help the broader economy as well by putting that money in circulation each week - your own private stimulus package.

But that stimulating effect would last only as long as you're willing or able to keep up the payments. When it's over, you'd have a very clean car and a very appreciative neighbor - but your investment would have been spent and the benefit would be long gone. And if you had funded your generosity by borrowing against your credit card, you probably would both end up in worse shape than before, with compounded debt to be repaid and your neighbor still out of a job.

How is that different from government trying to stimulate the economy by borrowing money to fund temporary jobs - say city beautification projects - with no long-term benefit or return on investment? Not much.

A more powerful alternative might be to stake your neighbor in a fledgling business. That could be a stimulus gift that keeps on stimulating and could even be worth your carrying some debt. Or if you're a government, why not spend some of your stimulus money on a new nuclear plant, with compounded benefits of jobs now (engineering and construction), jobs later (life of plant maintenance and operation) and community benefit (gobs of carbon-free electricity?).

The lesson is simple. Moderate deficit spending can be necessary and manageable, but excessive debt can be catastrophic. Forward thinking investment can help people through hard times and stimulate the economy, but make-work spending doesn't accomplish either very well. Economic principles are always in play, for you and for your president.

The writer is a resident of Aiken and a businessman.