I can easily understand the animosity being felt toward debt -- any kind of debt -- at the moment. It wasn't that long ago that even being in debt was considered sinful and immoral and interest rates above a single digit minimum were usury and illegal. There was a shame attached to being in debt and worse should someone file bankruptcy.
But these are different times and different systems and those feelings are not necessarily valid. To understand our economic system requires a little history. We set up the Federal Reserve System in the early 20th century in reaction to the crash of '28 and in anticipation of putting aside the gold standard of currency and letting its value float freely, it was designed to be an independent regulatory system that would be a control over the economy by setting the prime rate and printing money. Other developed nations did the same thing. Then in 1971 we and the rest of the world left the gold standard and everyone's currency and investments were valued at the market. Well, being the biggest, baddest and wealthiest, the U.S. became the standard for the world. Everyone's currency was valued in dollars and we enjoyed that status. This set the free market economy loose in a way that gold never could. There was only so much gold and finding more and processing it was becoming harder and more expensive. It was an anchor on a global economy that was chomping at the bit, wanting to be set loose. And it did fine. The wealth of the U.S. and the world, measured in it's productivity or Gross Domestic Product grew rapidly. In 1973, just two years after we left the gold standard, the global GDP was more than $16 trillion and just last year had more than quadrupled to $75 trillion. That's more than 400% return in just two years. Of the trillion dollar economies in the world, the U.S. still ranks first at $14 tn, followed closely by China with $8 tn. Next comes Japan ($4 tn), India ($3.4 tn), Germany ($2.7 tn) the United Kingdom ($2.1 tn), Russia ($2.1 tn) and France ($2 tn) followed by the rest of the nearly two hundred nations which figure prominently in the global economy. But as it is with our species, we tend to go to extremes and have a larcenous nature. That our new found wealth was based on a fiat currency, as some sneeringly call it, and it's true to a degree, but that fictional currency the Fed seems to print so freely, still buys hard goods and services. Banks became so wealthy they started to loan money to anyone at anytime for anything and threw in credit cards just to make it easier. And we all followed that unentitled exuberance right into two wars and the biggest debt we've ever had (dollarwise, that is. Compared to the GDP we were in deeper after WWII). We now found we'd mortgaged all our assets many times their real value and overall, we -- government, business and individuals alike -- were in debt an average of three times our annual incomes. Like all card houses they must eventually fall and Bang! -- in late 2007 fall it did. Or the bubble popped. However you prefer to look at it, it's still the same event. All that over-extended debt came due and the bill couldn't be paid. The first thing to fall were property values since that was where most value and debt lay. Since '07 property values have fallen 25% to 40% depending on location. Then the investments based on those mortgages began to fall because they'd been leveraged into thin air. But this is not a real fall or loss of value in that the perceived and actual value didn't exist. It had been leveraged into thin air. People were losing what they never really had. By mid 2008 the banks and investment houses which had trillions invested and at risk in these highly leveraged and worthless investments were coming apart. Lehman Brothers, a 130 year old and respected investment house went bankrupt overnight. This was when it became clear that the banks were next to fall since a lot of their balance sheet assets were tied up in these risky and now worthless investments. This scared the hell out of a lot of the people at the top because if the banks failed, then we'd really be back in the dark ages. There'd be no economy, no trade, no business, no goods or services, nothing. So to save economy it became necessary to save the banks immediately just to keep the world economy moving. We could not let it stall. An economy needs momentum to stay alive. Fortunately most of the movers and shakers of the world recognized this crisis and responded appropriately -- borrowing money to shore up the banks. Unfortunately fear of collapse scared most of the middle and lower classes in the wrong direction. They railed against saving the banks and begged the government to give the money to Main St., as it was euphamized, rather than Wall St. They were not sufficiently educated to see what had to come first and were reacting emotionally. So the first TARP funds -- remember? Troubled Asset Relief Program -- helped the banks stay out of bankruptcy. Unfortunately the lower case fears kept the recovery and next stimulus too small to do the job properly, so we've still got falling values and high unemployment. Without spending we've taken the slow road to recovery which may last ten years while increasing the spending -- and yes, that means increasing the debt as well -- would have brought us out of this hole in maybe two or three years and back to full employment (4%). But the question is about debt. Many people see the growing national debt -- the amount of money we are borrowing via bond purchases and printing money -- as an albatross around the necks of the next two or three generations. This is a common perspective if debt is not seen in its proper perspective. Remember, we cut loose from gold in 1971, so there isn't a $10 trillion lump of the metal hanging around our necks dragging us down. Our currency and it's value is based roughly on how much we produce in goods and services each year. Since we still have 91.5% of our workforce actively producing and earning and most all the rest of us still consuming, our annual GDP has not dropped below $14 trillion during the recession. So we're standing here now with at worst a $10 trillion debt and earning $14 trillion a year. That debt doesn't look so bad now, does it? Debt is generally meaningless in and of itself. It only takes on meaning when compared to and balanced with other economic factors. Other economic factors that can reduce the value of a debt are the growth of the economy which reduces the value of the debt proportionally; an increase in debt owed to us also reduces our own debt directly; debt can be rolled over numerous times and over time the principle can actually disappear with growth of the economy; debt can and is quite frequently forgiven for political purposes; and the value of a currency can appreciate so much that it takes but a small amount to retire debt. So in a fiat economy such as we have, it can truthfully be said that the economy is a fiction -- i.e., the value we give our currency is arbitrary and fluctuates constantly. So if our currency is a fiction, doesn't it follow that our debt is a fiction as well? All of this is then good reason to spend our way out of the recession and let the debt be serviced over time in the best way possible while we crank up the economy and go along our merry way creating more goods, services and wealth for most all of us. A free market capitalist system of economics works. What ruins it each time is human failure -- incompetence, ignorance, greed, envy and lust. One more thing I'd like to say about our economy. We can bitch and moan and groan about the top 2% and how they control us and want to rule the world, but the fact is that while the do rule the world -- when you have most of the money in the world you can pretty much do as you please -- they are helpless without the rest of us. Any economy works from the top down and those at the base are the ultimate consumers -- the ones who work to earn then spend. Without a consumer base there is nothing to be at the top of. The elite actually need us more than we need them. Consumer power is just beginning to come to the fore. With all due regard for having to plow through my words, /e
