It's All About Debt, Part 2

You've probably heard about America's debt problem. (If you read "It's All About Debt, Part 1," you learned a bit about it from me.) But if you are like most people you probably don't know exactly the extent or cause of the problem, what its consequences will be, or what to do about it.

The extent is bad. So bad that we will never repay our debt. We will either attempt to inflate it away or we will default on it. Either option will cause great financial hardship to Americans, but that's the reality of the situation. It's as much a fantasy to believe we will grow ourselves out of this debt as it is to believe it can be endlessly ignored. We don't have the will to cut spending, let alone pay anything back, let alone pay anything back approaching the amount we owe.

Before I say more, it's important to face that our debt problem is not a Democrat or Republican problem. Republicans blaming big-spending Democrats and Democrats blaming tax-cutting Republicans are like two little siblings bickering over who broke their mother's lamp. It misses the point, and may even be designed to miss the point. Both parties have indulged in our national vice of living beyond our means for decades, and we citizens have enjoyed the benefits. But the chickens are coming home to roost, and blaming tax cuts or entitlements in the same old politics-as-usual way is just childish finger-pointing and won't solve anything.

Although balanced budgets are worthy goals, our problems go deeper than that. The United States became the world's biggest debtor nation because almost all our leaders have embraced an economic philosophy that addresses almost all economic problems by deficit spending. In Washington, where politicians never look past the next election, there is now never a good reason not to deficit spend.

Truly, we've reached the point of being like drug addicts. The drug is killing the the addict, but it's the only thing that makes him feel good. Debt has become our drug. Debt has become the only way to forestall the inevitable crash that debt itself is causing. We are trapped in it. They don't call it a vice for nothing.

Another factor is that we have gone from being a productive nation to being a consumptive nation--from having net exports to having net imports; or, said another way, from having a trade surplus to having a trade deficit. When a country imports more than it exports, it must make up the difference by exporting money. When it doesn't have the money it must borrow it. That's exactly what we do.

Borrowing money is not all bad when you borrow to invest to become more productive. But we don't do that. We borrow to consume. Consumption is not bad; in fact, it's the ultimate point of production. But if you consume more than you produce you are digging yourself into a hole. That's exactly what we are doing. Politicians like consumption, though, because it gives the appearance of economic vitality, that is until the bottom falls out. 

So who are we borrowing from? More and more it's not from American investors, but from foreigners--first and foremost China. Basically China is buying us. They loan us money by buying our bonds, we blow the money on non-productive consumption, keeping our "standard of living" high. We are like a family that eats out every night, charges the bill to our credits cards, with no intention of ever paying the balance. 

So what should we do? The way to begin answering that is to say we will get a major economic recession one way or the other. We can put it off with more borrowing, but that will just make the inevitable crash and hangover worse. So what we must do is severely restrict our borrowing. This will force us to stop spending so much, and will likely force us to restructure, or default on, most of our debt. The status and living standards of America will be significantly reduced, but at least we will give future generations a chance to climb out of a shallower hole.