Wednesday, August 3, 2011

Please Listen: The Problem is Too Much Debt

For the past two years or so, my prediction for the cumulative debt of the United States government over the next ten years has been in the $15 to $20 trillion range.  This would more than double the current amount of government debt outstanding.

Since the events of the past few days in Washington, D. C., my prediction for the cumulative debt of the United States government over the next ten years is still in the $15 to $20 trillion range.

The most descriptive characterization of the “debt deal” that I have heard is that Congress (and the President) has just “kicked the can down the road.”

In this, the United States government seems to be in the same league as their “kin” in the eurozone.  One has to look hard to see any evidence of leadership. (See my post

As far as the Obama administration is concerned, in my mind, this “team” has observed the creation of three “camels” on its watch.  The first camel was the health care bill.  The second was the Dodd-Frank financial reform bill. (See my post

The third camel is, of course, the just passed “debt deal”. 

The general comment about all three is that at the birth of all three, people were very unhappy with them. 

Never can I remember, except maybe under President Jimmy Carter, a President that exhibited less leadership in such important areas.  President Obama presented no “plan” to Congress in any of these efforts.  People say that the administration was responding to the “health care plan” rebuff experienced by the Clinton administration in the 1990s and wanted to involve Congress more from the start of any legislative attempt.  I believe that this was a gross mis-reading of the events surrounding the Clinton initiative. 

However, this strategy of holding back and letting Congress take the lead in proposing and disposing resulted in something more like chaos or anarchy than leadership.  And, this strategy has produced three camels that nobody really likes. 

And then people worry about jobs and the state of the economy.  How can you create smaller deficits through cuts in government spending without causing further danger to the health of the economy?

It seems like we are in some kind of situation in which everything that is proposed contradicts everything else.  President Obama, after the passage of the “debt deal” stated very clearly, that the issue now becomes one about jobs.  In fact, the President plans a bus trip in the Midwest the week of August 15 as part of his new jobs push.  Whoopee!

To me, there is only one thing that ties all the different problems we are experiencing together.  It is the fact that there is just too much debt outstanding today…and, this debt load extends throughout the nation (and throughout Europe).  Consumers are still burdened with too much debt.  So are many businesses.  So are state and local governments.  And, so are sovereign nations. 

“Consumer Pullback Slows Recovery,” we read in the Wall Street Journal (  Why are consumers not spending?  They are saving…they are paying back debt…to get their balance sheets in line.  They are not buying homes because of the problems with bankruptcies and foreclosures (

Many businesses are not borrowing because of a decline in their economic value and the increased pressure this puts on the amount of liabilities they are carrying on their balance sheets.  (See my post

And, the state and local governments are also getting headlines about their budget problems.  What about the city in Alabama that is declaring bankruptcy?  And the municipality in Rhode Island?  And, what about the problems in Harrisburg, Pennsylvania?  And, California?  And so on and so on?

This is the scenario called “Debt Deflation”.  Debt deflation occurs after a period of time in which credit inflation has dominated the scene.  Credit inflation eventually reaches a tipping point in which the continued inflation of credit can no longer be sustained.  Once this tipping point is reached, people, businesses, and governments see that they can no longer continue to operate with so much debt and so they begin to reduce the financial leverage on their balance sheets. (See my post

This process is called “Debt Deflation” because it is cumulative.  As these economic units begin to reduce their financial leverage, it becomes obvious to them that they must reduce this leverage even further than first imagined.  Whereas “Credit Inflation” is cumulative and leads to people adding more and more debt to their balance sheets, the reverse process is also cumulative.

The only short-term way to avoid this debt deflation from taking place is to create the condition called “hyper-inflation.”  This is exactly what Mr. Bernanke and the Federal Reserve System has tried to do.  I say short-term because all hyper-inflations come to an end sometime.

We have had fifty years of government economic policy based on the Keynesian assumption that fiscal deficits and the consequent credit inflation that results from the deficits are good for employment and the economy.  This assumption has, to me, been disproved given that the compound rate of growth of the economy has averaged only slightly more than 3 percent over the last fifty years, about what was expected in the 1960s, and the amount of under-employment in the economy has gone from less than 10 percent of the workforce in the 1960s to more than 20 percent of the workforce, currently. 

Furthermore, the income/wealth distribution in the country has become more skewed than ever toward the wealthy during this time period.  This is because the wealthy can protect themselves against inflation and even position themselves to take advantage of it.  The less wealthy do not have similar opportunities.  And, in the current situation, some, the more wealthy, are doing fine because they are not as indebted as others and so can continue to prosper during these difficult times of excessive debt burdens.

Getting back to my projections for the cumulative federal deficit over the next ten years and the “debt deal”: I really don’t see a fundamental change in the underlying economic philosophy of the Obama administration (which includes Mr. Bernanke) and/or Congress.  They seem to see the current problems as a “temporary” aberration from the existing “Keynesian” credit inflation philosophy that underlies all that they do.  They seem to believe that once this “period of discomfort” is passed that business will continue on as usual. 

Until this attitude is changed, I see little reason to change my prediction for the cumulative federal deficit over the next ten years.


Anonymous said...

You fail to account for the massive increase in worker productivity over the last 50 years and the export of manufacturing jobs and profits over seas. We are at 20% unemployment because consumer spending fueled by the mortgage/home equity bubble kept the economy going until the crash in 2007. How interesting that the number of unemployed closely mirrors the percentage of the economy that was related to the housing boom.

plantman said...

Driven by investors for short-term profit, companies have moved labor, then manufacturing and now technology offshore for lower costs. Unfortunately, such transfers don't come back.

Mike, I am interested in your analysis of who gets the interest monies. Who benefits and get the 40% on the dollar? Is this "wall street" or foreign governments? How are they lobbying continued flow to them, and how can we counter it?

plantman said...
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tdballer said...

Mr. Mason, I am sorry to say that you are completely wrong. As an economist, it is difficult to know where to begin. Your argument that the economic contraction we are see in 2011 is caused by "debt deflation" fails to take into consideration that in 2010, corporate profits were at record levels. You took issue with the health care reform. Over 1 million young adults under 26 now have insurance coverage. And in Utah where the Health Exchange has been set up in advance of 2014, employers are able to lower their health premium costs which will go a long way to lower health care costs in the long term regardless of what current actuaries show.

I can go on and on how skewed you are in your arguments against Keynesian economics but my take is you are very out of touch with your knowledge of economics and really need some brushing up.

kevin said...

your absolutely right. too much debt is the problem. as a result i think our current condition will continue for several more years. i had $90,000 in debt and paid it off over the last two years. thats exactly what everybody who can, was doing and is continuing to do.
unfortunately, poor folks cant do that. they continue to spend every cent they have expecting the government will take care of them when they are absolutely destitute.
both republicans and democrats are both right and wrong. it is going to take great courage from our politicians to tell the american people the truth. there is a site i ran across called that may have the answer.

kevin said...

plantman, u said "such transfers don't come back". i hope ur wrong. don't u think there is any way they might come back?

kevin said...

tdballer, if u feel mr mason is wrong, please tell us how u think we can get out of this mess we're in. i'd love to leave this earth knowing my kids and grandkids will find some peace, safety and economic security some day. thanks

plantman said...

Businesses continually evaluate locations for expansion based on costs, talent and regulation. US off-shoring could lessen when the US becomes the most attractive location when compared not only to China, India and Brazil, but to the next tier of countries (e.g., Vietnam, Malaysia, and Indonesia). Changes in tax policy and government labor programs would change the dynamics and speed. For Federal Government contracts, regulations for services could create award limits or evaluation preference for services performed in the USA (like the Buy American agreement that applies to product purchases).

kevin said...

our company has zero chance of winning foreign sales unless we guarantee contractually, in the proposal, that most of the labor and materials will be contracted in the country of (sales) origin. maybe its time the United States starts playing hardball with some of these countrys. sometimes it feels like playing poker with your competition where they get to choose whatever cards they want and you get whats left