Principles of our parents

There are no more easy options. In fact the notion that we had easy fixes and painless solutions to over-consumption and declining competitiveness, compiled over decades, has likely contributed to the scale of the challenges financial markets are grappling with this week, and we are all likely to endure for the next couple of years.

I include us in this mix with the US and Europe and indeed all developed nations. Yes there are variations and Canada has done better than some in pulling back on our debt burden—but we all bought into the general notion that we could consume ourselves to wealth and prosperity.

It was a trick our parents missed out on. They believed, naively it turns out, hard work and producing something useful was how they got ahead.

Still today there are very smart folks telling us, rather urgently, that it isn’t the mass of debt we’ve piled up that is the problem— but instead its our tentativeness to spend our way out of our collective funk— and borrow to do it.

They point to the Great Depression and observe that it took a world war and the vast deficit spending required to fund that enterprise that eventually pried the global economy out of a decade of pain.

Today and in the weeks and months to come these smart folks will be urging governments to once again ramp up spending, this time on roads, bridges and waterworks to get the economy moving again and to stave off another depression. Spending will create jobs. Earners will spend money. Banks will lend and we’ll be right as rain before you know it. Or that is how the theory goes.

These smart folks might be right. I profess no training in economic theory. And I don’t have any particular insight into history to guide my view—but, boy, it sure seems wrong.

Moreover, we are in a very different situation than 1939. The US today has a public debt of about $14.6 trillion—or about $47,000 per person. Add consumer debt of about $2.4 trillion ($8,000 per person) and each man, woman and child is walking around with a $55,000 debt burden on his or her back. Interest payments alone chew up 40 per cent of earnings in the American economy.

In 1939 national debt expressed as a percentage of gross domestic product—or the value of the goods and services the nation produced in a year—was about 50 per cent.Today the national US debt (government, business, households and financial institutions) is equal to about 100 per cent of GDP. In Italy it’s 130 per cent. In Canada it’s 70 per cent. The western world had room to add debt to support the war effort then. This time around we have spent and consumed ourselves into a box in which the old tricks, I fear, will no longer work. At some point, whether today or the next time we hit the crisis wall, we will have to come to terms with our debt. It isn’t an abstract concept. We borrow—we are obliged to pay it back. If we borrow too much—there are consequences to both the lender and the borrower.

So far, the prevailing strategy seems to be that we continue to borrow more to pay the interest payments of those nations and states who can’t.We’ve done this to ensure debtholders get paid—fearing these lenders will stop lending if forced to face losses. We’ve extended the pain to folks who did everything right to shield the folks who profited from our over-indulgence.

Nature must be allowed to take its course. By prolonging the delusion that there were easy answers we have only made matters worse.

We need a reset.We need an orderly restructuring of debt—meaning significant writedowns and writeoffs. Some banks will fail. More jobs will be lost. Savings and pension plans will be ravaged. Confidence in the economic system will be tested.

It will take time.There is much excess to be shed.

Then we must rebuild—rebuild on a true and honest footing. Once the dust clears we will, I suspect, return to the principles of our parents—hard work, innovation and ingenuity. Spending only what we can afford and borrowing only what we can pay back.

rick@wellingtontimes.ca