In part 1 of this 2 part series I will discuss the spending our way out of debt, the next part will discuss the cost of increased spending, focused on wage to service imbalances in our economy.
On the verge of spending trillions of dollars on recovering our economy, which is gripped with a credit access crisis, what is it we are actually doing here. The problems with our economy and our nation is essentially too much debt. F rom the federal government to Wall Street investment firms to large capital and small capital business to individuals we are all straddled with too much debt. Our government has a plan, sped our way out of debt.
How do you spend you way out of dept? Normal people can not do that. If we have personal debt, student loans, credit cards, department store cards, car loans, home mortgage, small business loan, etc. you can not spend you way out of debt. This was made painfully clear this year by the collapse of the housing market. People were trying to spend their way out of debt by burrowing against the equity of their homes, when the market crashed their access to funds dried up and all the debt they held was not due. Now people have to get out of debt the only way you realistically can, cut spending to less then income to a point you can apply more resources to debt until it is gone, then, once done, you have the free capital to spend again, until this time you will only incur more debt if you continue to spend.
Businesses seldom spend their ways out of debt. This is because many companies are small and unable to access large pools of capital for long terms. Companies have to be efficient enough to have positive cash flow, negative cash flow is never sustainable if occurring for extended periods of time. Most businesses today gave up on their liquid cash assets of 50 years ago. They spend money to expand, renovate, research and develop, or produce new revenue generating products, however they have to ensure they can cover their current and new debts the actions incur with the new products, if not they are doomed to failure, it is just a matter of time.
Government is unique in that it takes the approach of only spending to try to get out from under debt. Realistically government needs to take the excess revenues over its costs each cycle to apply to debts to eventually reduce them, however governments are unique in that they can print money on demand but it must be remembered this does not pay down the debt, just delays it. In our current case the governments of the world are attempting to spend their ways out of the credit excess debt crisis by flooding their economies with money. The long term effects will cause increased spending, in theory and therefore cause markets to welcome more risk to grow revenues again. Still government can not pay down its debts unless its tax revenues increase to exceed the operational costs to a level they can be applied to the national debt (monies owed to banks, countries, organizations the government utilized for keeping currencies at ideal values or to fund desired activities). The problems is when governments print more money, money is valued against other currencies and the GDP of each country now days, the value will go down or you invite inflation to grow as more money will increase prices and cause values of all items to increase.
So how does spending the way out of debt work? During the Great Depression President Roosevelt introduced the New Deal. Governmental programs that put people to work through public works projects, provided safety nets for people out of work, Social Security, and the creation of governmental oversight programs to protect citizens form unforeseen financial events, the creation of the FDIC. Freed up our currency by dissolving the gold standard, and introducing regulation over public utilities and higher taxes on wealthy individuals. The measures all had short term success but failed to bring the country out of its depressed economic condition, it was the build up of heavy industry and war materials for WWII that eventually pulled the country out of the hard times, not governmental spending.
In 1974, yes I can remember the period but only barely, we were facing a looming economic set of problems similar to what we are seeing today. President Ford was highly unpopular for pardoning Nixon, the fall of Saigon drawing the end to the Vietnam conflict, and mediocre yet temporary inflation controls. This lead to the election of Jimmy Carter in 1976 with the condition of the US economy into a state of stagnation and minimal recovery he pledged to clean up government and control spending but ran a deficit during his entire administration, created more government by creating new agencies, and was hamstrung by a Democrat majority congress over his battles on decreasing ‘pork barrel’ spending projects. During this time the national debt skyrocketed, unemployment rose, and inflation was only held in check by high interest rates making loans more costly to those seeking growth in the business sector. Business growth and development was stagnant during this period, keeping the economy stuck and unable to expand.
This time around trying to spend our way out of an economic problem like Roosevelt or Carter did will result in about the same responses based on the following. Government will not be radically empowered or grown as it was previously. The policies created or drafted in those times are still around today, so they can only be expanded, cost more money, and the results will not be as dramatic as they were then, and finally people today are much less willing to listen and sacrifice then they were back then. The real problems are not different this time around, but the solution being used is in its third attempt and success will be limited due to the lack of effect it can have this time around. We need more wealth generation to pay off our debts across the boards, not more debts to pay off tomorrow.
Sure, public works will create tens of thousands of new jobs for infrastructure upgrades, and they are needed, but they are short lived gains and those workers will not be better off once the projects are completed, 3 to 5 years time. “Reinvesting” in education or access to it will yield little as tuitions, quality, and conditions of the current state of our system will only expand, not improve, under new funding only measures. Not instituting a longer range objective or shaping the industrial sector of our nation into sustainable future industries our competitors can not clone or copy in short order will do little to ease the underlying problem of our national state of crisis. The problems are too deep and pervasive to be solved by merely flooding them with cash.
The reality of the situation is two fold, banks and people have lost money and they will not spend easily now as they feel compelled to recover their recent losses. As described earlier business will need to become more efficient to regain a position of credit worthiness to access credit when banks feel ready to issue it again. Banks have taken massive write downs on holding and seen losses in stock holding to the point they have little capital to back up their own operating costs, much less to extend credit to others. They will want to build up more cash reserves before lending again, and then their policies will be more strict and fiscally sound. Only when they loosen their grip on their reserves and allow business to access it, therefore business will grow and create more jobs, will people begin to stop hording their cash. Because credit is tight and business is gearing down, people are laid off, scared of losing jobs, etc. and seeing nearly 30-50 percent of their retirement savings invested in the markets evaporate these people will not want to spend anything but rather try to recover as much of the lost retirement savings as they can, many of which are retirement age now. Only when this fear and comfort is restored will they begin to spend, creating more demand and starting the cycle of spending that grows business and generates more jobs and wealth.
When governments print more money, for whatever reason, they invite a very unwelcome guest to the table, inflation. Currencies are based off of GDP and relations to other currencies. Our only saving grace currently is that everyone else’s currencies are as bad if not worse off then our own, therefore decreasing the effects of inflation. The issue is though when we print more money to give to people who are not spending it the prices of goods will increase in value in anticipation for the potential cash infused into the system. Inflation is inevitable when we print money for no other reason then to spend our way out of debt. It didn’t work well for Germany in the 1930’s and it won’t work well for us either. Next is our national debt. It is already into the trillions, thanks to the last 2 wars, and the interest on this debt is growing each second of each day. The average piece of the national debt held by each American has risen so much they had to get new signs with more zeros on them to calculate it. Finally the proposed spending is on unsustainable programs that are mere bandaids to the real underlying issues of our economic crisis. Cash infusion is not going to do much good when the fundamental economics of our country are broken, ancient, antiquated, and invested in the industries of yesteryear, and successfully copied and resold to us cheaper by foreign emerging markets who have wholesale human capital at fractions of the price. Federal programs are not sustainable indefinitely. We need to look forward and entice business to change to more future technology and economy systems that innovate and build off of what we are currently doing, surpassing our current industrial climate into one that is not in direct competition with resources we can not compete with.
In conclusion to part 1, the massive spending, bail-outs, and creation of larger government programs and initiatives will not get us out of the current problem in my opinion. The reason we are in this mess is more to do with our current point of view to fiscal responsibility and reality then to a lack of cash. Spending out way out of dept by flushing cash into the system will not work. When we have banks scared to loan, who in turn refuse to lend, and baby boomers near retirement who have lost up to half their life savings more worried at hording any cash they can get to make up lost savings, well flushing cash will mean it will get absorbed and stuck until the climate warms to allow enough confidence to foster more liberal spending and loaning again. Flushing cash into the system is risky and flirting with inflation that could begin to overvalue all sectors of our economy causing more rounds of problems. If the government really wanted to do something to help, they would capitalize on the disaster as an agent of change to steer the country away from past industrial models and into more sustainable future industries. To do this they need to implement part 2 of this discussion, the changing of our pricing and valuing structure.