In the 1980s, as I was just starting out my career, my wife and I lived modestly to save for a down payment on our American dream. Our lives were in stark contrast to one of the couples in our group of friends who always seemed to have more toys than the rest of us. They went on foreign vacations, drove fancier cars, and seemed to always dress in the latest styles in their carefree lifestyle. A few years later, the husband of our friends took me aside to quietly ask my advice. It turned out they had become addicted to credit.
They had been living beyond their means and now had credit card debts exceeding 90,000 dollars. I counseled my friends to establish and live within a budget. They cut up all but one credit card. The husband took a second job and they began the long journey of paying for the goods and services that they had long ago consumed. While they became enslaved to their past consumption, others who had saved for our dreams went on to accomplish them.
By the 1980s, Americans had grown accustomed to believing in the hopes our parents had for us of a better life than they, the “greatest generation”, who had come before us. As America’s culture shifted to two income families, it seemed we would in fact be able to achieve the allure of a higher living standard. Our houses were bigger, our technology was fancier and our stock market was higher flying. And while many Americans were unfortunately accumulating more consumer debt, the growing values of our stock market portfolios and homes, also both buoyed by massive debt, falsely assured us that our individual investments were offsetting our debt.
Beginning in December 1991, when America’s Bureau of Economic Analysis began to emphasize Gross Domestic Product (GDP) over GNP, Our government announcements of rising GDP, broadcast across America’s media, reinforced our mistaken belief that America’s productive economy was growing. The outside material signs of America’s wealth, our stocks, our houses, and our stuff, along with this new measurement GDP, hid the fact that America was living beyond her means and consuming her future much like my friends had consumed theirs.
The confusion not exposed by the media or clearly understood by the lulled public was that GDP included consumer purchases from borrowed money. Rather than represent a true domestic output, GDP rather added the output of the future that was borrowed to pay for earlier consumption. As Americans borrowed to fuel a growing stock market, to bolster rising housing prices, to feed our government entitlements, we also collectively increased America’s GDP. But instead of representing a healthy, growing, productive capacity, our growing GDP really only reflected that America was collectively spending beyond its means on obsolescing goods.
To feed our burgeoning GDP, America’s credit limit was repeatedly reached and irresponsibly increased by a Congress that was unaware or unconcerned that our domestic economy was failing from within, and our banking experts repeatedly supported their recklessness by purporting that our rising debt contributed to a rising GDP, as if this was undisputedly a good thing for America. Neither our banks, our congress, nor our leading economists explained that in order to grow current GDP by adding debt for consumables, America would have to “take a second job later” to pay for it.
Unlike productive debt that is spent on assets and services to increase future economic output, much of government and consumer debt during the last three decades purchased obsolescing goods and services that were unproductive yet that contributed to a rising GDP. Of course, much of our accumulating business debt that would typically be spent on building future economic capacity, was transferred instead overseas along with its opportunity for future economic and job growth.
Now debt is a critical success factor for a country. The ability of America to take on debt to acquire needed infrastructure, manufacturing capacity, intellectual capital, startup funding and labor is critical to its economic growth. Because the collective capacity of a nation’s people and businesses to carry debt is finite, it is imperative that America not squander this precious commodity by living beyond its means. Flash back to our last three decades. We wasted much of our country’s private debt capacity that could have been used to grow future productive output on fleeting moments of excessive living and have since grown our private debt to the limits that this credit deprived economy will permit under our Federal Reserve led banking structure.
America now has few bullets left in her arsenal. Her multinational corporations grabbed what credit was left at the end of the last decade’s credit binge and are now hoarding some capital that could be enticed back into America. However, it will likely be spent elsewhere unless our politicians act on the issues I am attempting to clarify here. In addition to our large corporations’ funds, America still has some sovereign debt capacity with which to jump-start our private economy.
Unlike each of our private citizens’ debt capacities that are limited by income or our businesses’ debt capacities that are limited by growth potential as perceived by the banking industry, America’s debt potential until recently has been perceived as boundless. Our fiat currency has been accepted the world over as reserve currency and has been buoyed by the world’s belief in its retained value. Unfortunately, our banking industry’s recent forays have perhaps forever diminished the world’s belief that America’s debt capacity is infinite, creating a worldwide perception that we are approaching a finite, even if yet unknown, debt limit above which much of the world now thinks America could accelerate into hyperinflation and collapse.
This trepidation that has crescendoed since the credit crisis began culminating with our Congressional spectacle has highlighted that while the Congressional debt ceiling is just an artificial cap, America is fast approaching a real cap in our ability to increase borrowing, imposed by our inability to absorb accompanying higher interest rates. America must preserve our remaining credit while we weigh our options on how to invest in our collective future. We are on course to waste our remaining precious commodity chasing the last of our obsolescing American way. Our federal budgets are targeted to repeat the errors of our past for the remainder of this decade or until the world shuts off our debt spigot.
Urgent care is required. Laser focus on helping to redirect multinational corporate investment of remaining capital back into America is imperative. Our other domestic businesses will also clearly require credit to restart our failing economy and our future depends on saving a portion of America’s remaining sovereign credit for their resurgence. We also know that America’s transition to tighter credit will require additional reserves and that our current budget projections cannot be allowed to recklessly consume our chances for a turnaround. These budget projections must simply be obliterated from any legitimate national dialogue as farcical.
One thing is for certain, America’s future productive output will require capital input and we have few remaining internal sources. America’s credit card is, under any future scenario by whatever legislated means we finally compromise as a way forward, therefore critical to our survival as a nation. So rally round the great compromise,” Our remaining sovereign credit is our life force. Guard it!”