The Burden

In our seemingly universal concern that the U.S. government’s debt is too high, there is a seemingly universal phrase that is spoken to underscore the danger. Come on — we’ve all heard it: “This is a crushing debt that will burden our children and grandchildren….”

Just for the heck of it, I Googled the phrase “burden our children and grandchildren.” Guess how many hits I got? How about 8.9 million? Simplify the search with just the words “burden” and “children” and you get 28 million. That is one big burden.

Has this phrase become popular because the speakers really think that our children are going to have to pay our debts? Maybe the first 28 thought that. But not the rest of the 28 million.

I am sure of this, based on clear, cold logic: Debts that are paid by our children and grandchildren, by definition, are not crushing debts. They are only crushing if we have to pay them.

And you know what? We might.

As it happens, I was involved in the rehabilitation of an over-indebted nation in the early 1980s. The region that was sick in those days was Latin America.

The first country to get into trouble was Mexico, and largely the problem was not the government’s debt level, but just the economics of a growing and highly-indebted country. Mexico came upon the day when the central bank did not have enough coin in the vault to pay for its imported goods. This seemingly novel situation made the lenders take a look at other countries, and sure enough, three months later Venezuela and Brazil also had trouble making payments. Their situation was not markedly different 90 days later, but the situation in Mexico made the market scrutinize them that much more closely.

My point is that it is hard to tell when a country has entered the crushing-debt phase. Certainly, ratios do not tell the whole story.

Market psychology has more to do with it. One third-world nation got into trouble in the 1980s and both the practical and psychological similarities visited the same trouble on other third-world countries in the region. In the 2000s, the trouble is in developed, high-debt countries. It only follows that other such countries will be looked at very closely. This is called “contamination” by the economists.

If you buy the contamination theory, the future could be very bad for us. Because more than one contaminant is out there.

The nations that are experiencing debt crises now are: Ireland (Debt to GDP of 1,305%) Greece (public debt of 167.2%); Italy, (141.3%); Portugal, (231.2%) and Spain (176.9%). The U.S. is at 98.4%, although the current deficits of the U.S. may be making our debt to GDP ratio grow faster than other countries. However, anyone who thinks that the U.S. is in trouble should look at the list of the 20 worst debtor nations. We are the best of the bunch.

Here is a not-likely-but-it-has-happened-to-others debt crisis scenario for the US:

Day one. A market participant (say, Brazil) says that it is going to start putting more of its eggs in a non-dollar basket. It wants gold or oil or renminbi in its investment pool. In response, U.S. government officials say that the dollar is a strong currency and Brazil is too small to make a difference to our debt offerings.

Day 90. The interest rates charged to US banks for overnight funds (the so-called LIBOR rate) start to diverge from the rates charged to German and Brazilian and U.K. banks. This is normally not the case. Commentators opine that, since money is fungible, this can only represent a short-term blip in the market because of price-equalizing supply and demand forces. Yet a premium remains for weeks.

Day 180. The Chinese indicate that they are considering abstaining from a U.S. government debt auction in favor of public spending in their own undeveloped regions. They give no timetable and no actual announcement of abstinence is made. For the time being, the debt auctions proceed smoothly.

Day 270. The Chinese are rebuffed, on national security grounds, in their efforts to buy a US aerospace company. And an oil company. And a coal company. They explain that they hold a lot of U.S. currency that they would like to put to good use. The reply is a raspberry.

Day 360. The stock market falls five percent. No one knows why.

Day 365. A clerk in the U.S. Treasury tells her boss that the expected payment from the Chinese in a 10-year bond offering has not come in. He explains that this has never happened before and that she must be mistaken.

But when it is discovered that in fact the auction failed, market reaction increases interest rates from 2% to 4% and then to 10%. Suddenly, people who hold U.S. debt want cash. Interest rates soar.

A bank or two fail. In some cities, ATMs do not dispense cash. Then debit card machines stop working. The cost of everyday goods soar. Exporters of wheat and soy are happy — until the cost of bread rises so high that the congress demands price controls and export restrictions.

Gasoline shortages appear. Public employees are fired and essential services are not provided. Many companies go out of business because of the sudden rise in costs. The government prescribes contradictory economic advice. So do the newspapers.

Fear abounds. And the phrase “crushing debts that will burden our children and grandchildren” is met with a sardonic laugh because the burden came sooner than we had hoped. And we wish we had back those days when moderate personal sacrifice would have prevented long-term misery.

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