Economy built on debt
As an accountant with the City of Detroit for 31 years, I do know first-hand that an economy built on debt will eventually come crashing down.
Modern Monetary Theory as espoused by today’s economists is a crock. You can’t keep on spending what you don’t have.
Sometimes government borrowing is necessary in tough times such as the Great Depression, World War II and the COVID-19 pandemic. However, borrowing to pay for past borrowing as the debt comes due and to prop up an economy won’t last long especially when lenders wise up. Like many before them Detroit’s lenders and creditors learned you may not be paid back or at least paid in full.
The U.S. after World War II generated a significant increase in GNP (Gross National Product) and was able to liquidate the large debt it incurred for the war and depression. At the time America was known for its manufacturing capacity, productivity and the quality of its products. Today we are more of a consumer nation that relies more on the buying and selling of goods produced in other countries. We, as a nation, no longer have the capacity to produce a sufficient GNP to generate the tax revenues to liquidate our massive national debt, which is now nearing the $30 trillion mark. The real value of our debt is much greater than the real value of our national economy.
Investors buy U.S. Treasury debt because they believe the U.S. has a strong economy and will pay its debts. When an economy ceases to produce value and debt is incurred to sustain and prop up a failing economy foreign and domestic investors will look elsewhere.
Today, the federal government is issuing debt to stimulate the economy, fight the COVID-19 pandemic and pay debt that comes due from past borrowing. The FED (Federal Reserve) is buying much of the new debt issued, which is the same as printing money and flooding the economy with cash — “easy money”. The FED and federal government have been undermining and devaluing our national economy for years in the pretense of maintaining prosperity. In reality our government has mortgaged the future and guaranteed a lower quality of life for our children and their children.
There is or should be a basic economic principle that “You can’t spend more than you have”. Borrowing to kick the can down the road doesn’t work as we found out in the City of Detroit. Eventually the bills come due and can no longer be postponed and the lenders won’t provide any more capital. When that point is reached it’s too late. A telling sign of the inevitable is the decline in the quality of life of the taxpayers. Another sign is the increasing gap between the wealthy and the poor and the decrease in the middle class. As in Detroit, an impoverished tax base can’t provide sufficient funding for even basic services. Such a government is not only financially insolvent but service insolvent. If the U.S. and FED couldn’t print and borrow money our country would be fiscally and service insolvent. That future is not too distant.
The printing of money and issuance of federal debt has increased the liquidity in the economy. The FED has depressed interest rates which negates the investment return of bonded debt and savings. This has contributed to the increase in the value of stocks like Amazon and Apple. These stocks have become a safe haven for investors in financially distressed times like gold has been through the ages.
Businesses have issued massive amounts of debt to take advantage of favorable interest rates. Some of the bond proceeds have been used to purchase their own equities which also contributed to the increase in the stock market value.
As a new retiree, I’m reliant on my City pension and social security. Like most pension plans in this country my Detroit pension is seriously underfunded. The fund pays out more than it takes in and will likely be insolvent within the next ten years, especially if the City is unable to make up the shortfall. The social security system in this country is also underfunded and in the 2030s will be unable to meet all its obligations. The financial outlook for many senior citizens is not good.
Most pension and retiree health plans in this country have invested heavily in the stock market and have contributed to the increase in the value of stocks. As the number of “baby-boomer” retirees grows and amount of benefits paid out increases over the next few years, the plans’ stocks will have to be liquidated to pay benefits. This will have an adverse impact on the stock market values.
Local and state governments have not received stimulus funding to make up for their loss of revenues due to the pandemic. Many prior to the pandemic were having fiscal problems. If the economy doesn’t improve sufficiently they may be unable to sufficiently fund basic services such as education and public safety let alone legacy obligations such as pensions and retiree health care. Without a bailout from the FED they may in the near future default on their obligations. Their pension and retiree health plans will become more underfunded forcing the liquidation or reduction of their equity holdings which would add to the reduction in stock values.
In addition, the businesses that have contracts with the local and state governments, which if reduced or eliminated, would have a huge adverse impact on the economy. If a significant number of governments and businesses default on their obligations the collapse of the economy will soon follow.
You can’t sustain an economy on debt. Eventually the bills come due, the cash runs out, and you can’t pay for it. Detroit in 2013 was the proverbial canary in the coal mine.
