Financial Crisis?

For the last week we have all been treated to the ugly side of our country's financial condition. We are barraged by politicians telling us how bad things are and how much money it's going to take to fix it. The question I have is why should we give more money to the people that caused the problem and trust them to fix it?

As a matter of review, it seems the legislative and executive branch of our government woke up last week and discovered that the good old U.S.A. government is about $10 trillion in debt. And that is just the government, not counting the record level of debt the average citizen is carrying on their balance sheet. One figure I heard is that our annual interest on the debt is $287 billion, which is pretty small considering the relatively low interest rates we are currently enjoying. Just think what it would be if that was on your VISA card! So now we are told that we have to spend up to $1 trillion more to keep the financial house of cards from all falling down. The bigger questions are how did we spend the first $10 trillion and what has changed to make us think the amount won't be $12 trillion in another year?

I have had the pleasure during my lifetime to see the biggest part of this debt be accumulated. Sometime after WWII a paradigm shift occurred in the American psyche that going into debt was a good thing, a way to get what you want now rather than wait until you have the cash to afford it. At the beginning debt was only available with sufficient collateral, such as a home, and was only allowed to basically those who really did not need it. Home ownership really was a dream to most Americans before 1960. Then we hit the $60's and the world changed. My generation, the Baby Boomers, hit adulthood and they were an impatient lot. Instant gratification was the norm, not the exception and we started borrowing money to purchase cars, appliances, and other consumer goods. These debts were generally still tied to collateral and were set on specific payoff terms, just like home mortgages. With the 70's we got general credit cards and as they say the rest is history. Today the average family is carrying $10,000 to $15,000 in debt on credit cards that is used to pay for lattes at Starbucks and just about anything else you can imagine. Most pay the minimum payment each month and the balance keeps growing.

The growth of our national debt parallels the growth of consumer debt, just in bigger numbers. In the 60's we embarked upon the social programs of the Great Society and the deficit began growing. Throw in several wars and skirmishes and deficit spending became the exception rather than the rule. Then we really kicked in to using our tax system to encourage consumer spending and create social equity and the debt kept growing. We mandated programs to make the dream of home ownership a reality for everyone, whether they could afford it or not. We allowed the creativity of the American financial system to work overtime to deal with the debt created by this mandate. All along through the 70's, 80's, and to the current day our government have been spending money it did not have to stimulate growth in the economy. Today the Chinese are a our biggest creditor, much of our country's biggest companies have been sold to foreign interests, manufacturing jobs have steadily moved off shore, and we go hat-in-hand borrowing money to keep it all going. Sound like a financial crisis to you?

Most people my age have experienced a moment such as this at sometime in the past 20 years. Many used bankruptcy, some several times, to wipe the slate clean. Some learned their lesson some didn't. Some declined that option, worked extra jobs, and retired their debt. That experience generally woke them up and they knew they didn't want to go through that experience again.

Since bankruptcy is not an option for the U.S. government the only option is for us to buckle down and pay off the debt. The problem is that nobody wants to pay it now. They all want to try to borrow their way out of trouble. This very rarely works because the lesson is never learned if pain is not experienced. The people that must feel the pain are those that benefited from the excesses of the past. Unfortunately most of those people are now headed into that politically sacred group of over 60 voters. They have saddled future generations with an enormous obligation. The only way they will pay for their transgressions is with a financial correction that devalues what they have accumulated.

So I think the responsible thing would not be borrowing more money but to take your medicine now rather than push it off on our children and grandchildren.

Very unlikely.