The Meaning of Private and Public Debt

CNN ran a hard hitting series last week on “Broken Government”.  Since advertising funds broadcast content it is a good window into the mind of the audience.  In this case, it was free credit reports, sleep aids and retirement plans. People are clearly having trouble sleeping. They are worried about their credit scores and their retirement. The mounting public anger seems to be about debt and deficits; our own debt and our governments’ debts. The people have it right. This is all about too much spending and too much debt individually and collectively.  The concern I have is that the public sees the problem and is demanding that it be solved by the government at the expense of someone else.  I don’t fear that our government is unresponsive to the public. I fear that we have the government that we deserve. Government paralysis accurately reflects our social self-contradictions. Washington hears 300 million Americans screaming, “fix this problem, but don’t make me pay for it”. Politicians respond rationally by saying “vote for me and I’ll do that”. Politics then becomes the art of making sure someone else gets blamed for the impossible not being accomplished.

CNN watchers are probably doing what the ads imply. They are reducing debt and planning to work longer. Their expectations for retirement are different than they were in 2006, but they want a financial manager they can trust. The mood is “I don’t mind working longer and I don’t really need all that stuff I thought I would have in retirement, but I just want to be able to sleep at night. Could someone please tell me what I can safely earn on the money I have left?”   The mood CNN advertisers address is the mood I observe in the course of my daily dealings with individuals and companies. People are making expense cuts. They are willing to sacrifice upside for safety. They are willing to work harder and longer with lower expectations. They want to help their neighbor in need but they have a short fuse for those with a sense of entitlement.  Health care is big on their minds. They care about the cost of insurance and gaps in coverage; for themselves and others. Charles Krauthammer explains that the administration’s Health Care Reform initiative is failing because “its central premise – expanded coverage at lower cost- led voters to conclude that it would ultimately lead to more government, more taxes and more debt.”  

Banks facilitated and encouraged too much borrowing and they leveraged their own balance sheets to the point of a near collapse of confidence in the US banking system. The Federal Government did need to intervene to restore public confidence in the financial markets.  In the heat of the panic in 2008, even healthy banks were losing confidence in the system. The mechanism of routine financial exchange was breaking down day by day as banks wondered if even their daily transaction counterparties might be the next Lehman. Many banks experienced enormous losses on the collapse of Fannie or Freddie.  This necessary intervention didn’t solve the crisis of debt. It only provided a narrow window for us to begin seriously deleveraging. 

Individuals, healthy banks and companies are all strengthening their balance sheets. Sound banks are encouraging prudence in their customers. None of us are quick to take over another bank’s troubled borrowers.  Naturally, banks and their customers are wishing that there were some magic wand the government could wave to ease the pain of cutting expenses and paying down unproductive debt. Politicians from both sides of the aisle keep offering the false promise of pain free solutions. The net effect has been a massive transfer of leverage from the private sector to the public sector. The public intuits that public excess is not the solution to private excess and is angry.

Washington is speaking with one self-contradictory voice. The message is “I have the answer for your pain, but those bad guys won’t let me fix it for you”. The bi-partisan commission of retired politicians is a dodge. Congress and the President have the power and the obligation stop us from punishing our children for our profligacy. This gridlock will be broken, but not easily. Either courageous leadership will emerge to lead us to make serious federal, state and local expense cuts or our creditors will impose upon us the discipline we lack. Internal courage is highly preferable to external discipline.

Debt is always a borrowing against the future. Healthy debt funds investments which enhance the future after repayment. Healthy debt borrows from the future in order to improve the future.  Tens of millions of Americans have borrowed to wastefully spend today what they hope to earn tomorrow.  When individuals do this the consequences are visited upon them and those close to them.  When nations borrow from their future they can do so productively.  The greatest generation’s borrowing to fund World War II mixed with the courage and blood of our soldiers was an investment in the freedom, the security and prosperity the baby boomers have enjoyed.  Apparently their sacrifice for us was not enough.  We are sacrificing our children’s future to perpetuate our fantasies about what life owes us.

One Comment