Debt debt debt! That little four letter word is being repeated every minute of every day by politicians and economists of all stripes. Its quite an interesting word. It implies that you've done something for someone that you would like reciprocated at some point. One thing I notice though is that in too many situations we get the power relationship wrong and we make the mistake of equating all types of debt. I hope to show that much of what we call debt, shouldnt even be called debt at all because it distorts and confuses the real flow of power in the debtor/creditor relationship.
The discussions of debt most popular today are those of governments. Governments sometimes "borrow" from their citizens (or citizens of another country) so they can meet their financial obligations. They guarantee a return of interest on these obligations so that people will feel rewarded for giving up their spending money (thats all saving is, you have two choices with income .....spend or save). Currently, in order to meet these obligations many countries are removing money from their citizens paychecks or laying them off completely in order to make bond payments (Its still amazing to me that a guy in New York can tell the Greek govt to fire a teacher so he can get his interest payment..
..... how did we ever create such a system?) Another choice is to raise taxes on the citizens to make the payment. A third choice exists for some countries like the US, Australia, Canada, UK and Japan....... just make the payment and add it to the deficit.
This choice is very unpopular right now because everyone wants to reduce the deficit.
What I DONT hear many people squawking about is the private debt levels. Not the levels now nor the levels in the late 90s and 2000s prior to our crisis. Private debt levels are a lot higher than our govt debt levels, more than twice. Govt debt to GDP (a very misleading ratio but Ill use it) is around 60%, while private debt to GDP is over 120% and Ive seen some quote 135%. Here's the thing, private debt levels are way more destructive to our continued growth than are govt debt levels. Its private debt that eats our spending money. Its private debt that doesnt change when we lose our job and still need to make the payment. Its private debts, not serviced, that lead to bank failures.
Its private debt levels which are destroying the middle class standard of living and its private borrowing which all the fed policies are trying to stimulate ( to no avail since they have a flawed idea of why people borrow). Every person I hear lamenting our debt refers to our govt debt and fears a default BY our govt. But its private debts which are more inhibitory to growth now.
Try this. Next time you hear someone talking about govt debt ask them if they are as concerned about private debt. They will likely say no, they are not AS concerned. Then ask them if they would rather have a $100,000 mortgage or a $100,000 T Bill.
Of course they would rather have a T Bill because it actually pays them interest. It is an asset to own. A T Bill is also one of the accounting methods of government debt. All govt debt is in the form of a Treasury Security of some maturity and interest rate, which pays an income TO a private citizen somewhere.
The private debt takes money FROM your pocket and puts it in a bankers hands, the Govt debt takes an interest payment and puts it in your pocket. I cant figure out why we want less of this??!!
I'll take TWO please!