Thursday, October 31, 2013

Beware The Debt Monster

"As a very important source of strength and security, cherish public credit.  One method of preserving it is to use it as sparingly as possible."

George Washington (1732-1799)

The word "public" in Mr. Washington's day meant gubment and by credit he means borrowing or debt.

Under the Articles of Confederation, the Continental Congress and during the Revolutionary War the country had amassed huge debt by the time Washington was elected president.

The First Report On the Public Credit was issued by Alexander Hamilton.  Its purpose was to analyze the country's financial standing, set up a system to organize the federal debt and to arrange for public credit.  At that point the combined US debt, consisting of domestic, foreign and the states combined, added to a huge $77 million.  

Not getting bogged down in the details of how this was handled, the population at the beginning of the country stood at about 3.5 million.  Dividing that number into the federal debt would leave about $22 per person to pay it off.  A daily wage in those days was much less than $1.  The average hourly wage in 1790 was about 2 cents.  

The debt would also have worked out to about $6 million per state.

The debate on how to pay the debt centered on speculation as regards promissory notes (enriching only a certain class), which Hamilton referred to as "redemption," and a James Madison opposition, which he called "assumption."  Madison's idea was that the gubment should help shield the less powerful, agrarian interests that composed his constituency.  He wanted the IOUs that "battle-worn veterans of the war for independence" had been paid to be honored to allow them better opportunity toward capital development for their farms and plantations.

With the help of Jefferson, a dinner party was arranged between Hamilton and Madison, during which a major concession was made in the restructuring of Virginia's debt.  And Madison acquiesced.  Congress voted in favor or Hamilton's plan.  

Washington was in favor of Hamilton's plan insofar as it paid off the state and federal debts, established a tax system (excise and tariff) to help pay it off and establish a national bank.  He did not want to grow the federal debt.

What would Mr. Washington think about the country today?  

We have operated year after year without a budget, instead relying on "continuing resolutions," designed to hide what monies are spent on, and extended debt limits to "fund" the gubment.  And with this increased borrowing our gubment tells us that doing so does "not increase debt."  Well, okay.  But exactly how is that again?

As the debt has burgeoned interest rates have not.  What if, when interest rates increase, as they surely will, paying only the interest of the debt exceeds our financial ability to do so?  Personal savings is way down now, which has lead to a large decline in capital investment.  No capital investment means no economic growth.  No economic growth means, well, no economic growth.  And that at a time when there are those pressing for increased immigration and national "health" care as an added federal and state debt feature.

If we are borrowing to the point of the inability to pay, at the same time as obligations increase, and capital investment stagnates or continues to decline, what happens to the  
"strength and security" 
that Mr. Washington was pleading we preserve?  Are we stronger and more secure?  Or not?

Think carefully.

No comments:

Post a Comment