I woke up this morning to see Ron Baron on CNBC make an analogy of our $17 trillion national debt to the debt on a single family home. He did not expand very much on it nor did he compare Social Security or any other entitlement to credit card or auto debt…so I will.
Essentially, if you have a house free and clear with no debt then you have a very solid footing. The same goes for a nation, if the nation has no debt and doesn’t owe anything to foreign nations (or to “ourselves”) then financially it is on solid footing. The national debt is now virtually equal to the size of the economy, $17 trillion. Janet Yellen talked about this last week; she said that we must grow our debt at a slower pace than the economy grows in order to survive financially. This makes sense right? Too bad it cannot happen.
If you buy a house and put 20% down then over time your equity should grow. You make your payment each month and whittle down the mortgage balance …AND …as the dollar loses value over time your “house” goes up in value right? And the remaining balance becomes less significant. Well yes, this is the theory and in the old days this was correct. So what changed? First, it depends on “where” or at what time in the long term credit cycle you “bought” the house. Did you buy it after a credit “boom” that pushed prices up at truly stupid and manic rates? Also, we have home equity loans that served as “ATM’s” over the last 20 years or so. These “ATM’ machines” allowed many to live the good life, people were able to spend many percentage points more than they were earning to use as “consumption”…with no pain whatsoever (until later). Theoretically the “debt” becomes smaller in absolute AND real terms because it gets paid down and the smaller balance is even less significant because the dollars themselves are “cheaper.”
From a national debt perspective we have done exactly what has happened in the housing market. We have accumulated more debt over time in a manner such that much of our “equity” is gone…it has been consumed. In comparing to a house, home equity loans were originally used to either remodel or expand the house…which morphed into purchasing “fun stuff and going on wonderful vacations.” As a nation this same mentality took over. We no longer “borrowed to make the house a better house.” We have essentially borrowed to pay for social programs. What once went to building roads, plant and equipment that facilitated business to create more activity…has instead been “spent” with no dividends or future value, and it has been eaten just as eating your own seed corn so to speak.
We also have reached a “(in) tolerance level” just as any hard core alcoholic or drug addict does to their choice of poison. It used to be years ago that $1 of debt could create $5 of GDP…debt was “good stuff” if you will because it actually did increase growth. Now however it takes $5 of debt to create $1 of GDP (I have even seen a study where it takes $18 of debt for every $1 of growth)…not such “good stuff?”
I have explained all of the above because Janet Yellen has told us that, “Debt must grow slower than the economy.” She would be correct if we lived in a “traditional world,” we however do not. Because our national “lifestyle” has grown to levels so far above our ability to actually pay for it, debt (deficits) can never go way or even grow “slower” over time. If this were to happen, “depression” would be the result along with social unrest because those receiving “assistance” would revolt. “Revolt” because their “God given rights” were either curtailed or taken away.
The slowing of debt growth also cannot happen because of “math.” Once an economy has come to survive on debt, it cannot mathematically survive without it…lots and lots “more” of it. In order for asset “prices” in dollar terms to just stay level there must be new buyers. Because the macro system is not generating enough “cash” to sustain “prices,” new debt MUST continually come into the system to just maintain prices, never mind pushing prices higher.
In case you had not already made the connection, a Ponzi scheme works in exactly the same manner. “New buyers” absolutely MUST be found and brought into the fold to pay “previous investors.” This is all truly simple stuff but the Fed chair (wo)man has to “say the right things.” She has to tell us that debt must grow slower than the economy because this only makes sense even to 3rd graders with a liberal financial mind…but it no longer is true and has not been since the early 90’s. Slowing debt growth will bring on the end faster than any other policy.
As for the “”house” analogy, the decay rate is increasing because we haven’t done regular maintenance for many many years. Look at our road and bridges. Look at our nonexistent industrial base, capex and R+D has been slashed and yet we live like we live because “we are Americans” and it’s always been this way…we are entitled to it right? The “kids” have been moving back into their parents homes in droves…with friends in tow! Just as in any foreclosure situation, eventually you lose the house!