Thrift used to be a virtue in America. In Asia, thrift remains a way of life—for example, it is estimated that the average Chinese family’s thrift rate is 30 to 40 percent—which helps explain the rapid growth rates there.
A century ago, the sociologist Max Weber credited the so-called “Protestant work ethic,” combining thrift with hard work as the engine of America’s economic preeminence. How times have changed! While many Americans are thrifty, many are not. The political divide of blue-state and red-state Americans is replicated in an economic division between red-ink and black-ink personal finances.
The gross totals of debt in the United States are, well, gross. Private debt owed by Americans is nearly $14 trillion—approximately the size of our Gross Domestic Product. Corporate debt exceeds $6 trillion. Uncle Sam’s official debt is $9.4 trillion. If one includes unfunded liabilities for Social Security, Medicare, and who-knows-what, then you can add several more multiples of GDP to our total national indebtedness.
What explains this mountain of debt? Primarily, it reflects an attitudinal shift, the gradual supplanting of the ethos of deferring present gratification by an ethos of “enjoy now, pay later.” This ethos, so evident in the spectacle of millions of Americans drowning in nearly a trillion dollars of high-interest credit card debt, is manifest at the macroeconomic level in our country’s public polices. The massive debt of the federal government is the costly result of special-interest politics, enabled by the evolution of our political system from a constitutional republic, strictly limited in its powers, to a nanny-state democracy that redistributes wealth and tries to be all things to all people. Voters like politicians who spend money to their benefit, but detest politicians who tax them, and so all the political incentives lead toward deficit spending and ever-increasing debt.
The federal government is partly to blame for corporate debt, too. By imposing multiple taxes on businesses, including up to 35 percent of corporate profits, Uncle Sam and state governments have decreased the ability of businesses to self-finance improvements and expansions. Combined with the policy of making business debt tax-deductible, federal tax law has increased the incentives for businesses to borrow.
On the individual level, besides the credit-card junkies, many Americans have more debt than savings, primarily due to mortgages on their houses. How many Americans realize that a 30-year mortgage on a house at 6-percent interest results in eventually paying the lender more than twice the sales price of the house? In China, by contrast, 80 percent of houses are paid for in cash, freeing those homeowners from having to pay a significant portion of long-term income to a lender.
One reason why so many Americans buy houses on credit is, once again, the incentive created by tax laws. Those laws discourage savings by taxing interest, dividend, and capital-gain income, and encourage by making mortgage debt tax-deductible. But there is an additional, more insidious factor: inflation. The ongoing depreciation of the dollar, caused by ever-increasing government spending and the replacement of a gold standard by fiat money, discourages thrift while encouraging debt. After all, why save dollars, if those dollars are going to lose purchasing power? And why not go into debt, since you will probably be able to repay those debts with cheaper dollars?
There are signs, though, that America’s debt burden has reached a critical stage. As U.S. debt has escalated, domestic economic growth has become increasingly sluggish, despite surging global growth and marvelous technological breakthroughs. Each dollar of debt in 1960 produced 64 cents of GDP growth, but four decades later, each dollar of debt generates only 15 cents of GDP growth. We’re getting less bang for our borrowed buck than ever before. The marginal productivity of debt is trending toward the point of accomplishing absolutely nothing.
All debts eventually are settled. The honorable way is for debts to be repaid with money that has retained its purchasing power or assets of comparable worth. There are two dishonorable ways of retiring debt: repudiate it outright and default on repayment, or repay it with depreciated currency. Since the federal government is the largest single debtor and authorizes a Federal Reserve-controlled money monopoly, it will determine which of the three approaches to debt will prevail. Of these three, I see no possibility of Uncle Sam ever having the political will to repay debts the honorable way; nor do I anticipate outright repudiation, which would plunge the world into depression, maybe even war. That leaves the entrenched decades-long trend of dollar depreciation as the most likely course. The government will continue to overspend, the Fed will continue to inflate, and dollar-holders will continue to repay debts in depreciating dollars until creditors no longer accept those shrinking dollars.
Debt and its Siamese twin—dollar depreciation—likely will continue in the U.S. until the whole financial system and monetary regime arrive at some cataclysmic denouement.