JOPLIN, Mo. —
Does it make a difference if individuals spend more than they can repay or if their government does the same? There is a difference in that a central bank (the Federal Reserve here in the United States) can perhaps either inflate the economy or devalue the currency, where as individuals don’t have that option.
Inflating an economy has a huge downside when a government has lots of debt on its balance sheet, i.e.: $16 trillion — off-balance sheet commitments in entitlements are more like $70 or $80 trillion. Inflating, of course, would push interest rates up on the government’s debt as well as the debt of individuals. This would make it even more difficult (and more costly) to fund overspending and refinance current debt. The United States has been racking up debt for decades, but only in the past five or six years has the amount borrowed gotten beyond any foreseeable possibility to repay.
Devaluing currency is another way to modify debt. That also has a huge downside. Our Federal Reserve has been pumping money into our economy for the past four years as a way to cover for the spending above tax revenues on the fiscal side. The initial effect has been to push interest rates to lows that date back to the 1930s. Somewhat surprising has been the length of time (multiple years) that interest rates have remained low. This is not what I expected to happen. Normally, I would have expected interest rates to skyrocket. Why haven’t they?
Housing is a huge user of money and creator of debt for individuals — the largest single asset on most homeowners’ balance sheet. With the collapse of the housing market, home values swooned, lending requirements tightened, construction of new homes slowed and buyers for new homes disappeared. The demand for new homes and the ability to refinance died.
A second reason is technology. Technology has allowed businesses to reap the benefits of increased productivity, with a lesser work force needed to accomplish even more. It’s been amazing to watch the changes in production and delivery of goods, services and information.
Another reason interest rates have remained low without creating inflation is the Federal Reserve’s monetary policy and actions. Who would have believed the Federal Reserve was empowered to buy our own government’s debt? I sure didn’t know. I thought you had to find another country or individual investors to buy our government’s overspending, with the buyers buying at a market rate of interest getting higher as the supply of debt increased and the number of buyers available lessened. Supply and demand, but kind of in reverse.
This hasn’t happened because our Federal Reserve has been buying our government’s overspending by printing money. They have offset what would normally be a shrinking number of buyers for our debt instruments, U.S. Treasuries, thus keeping interest rates low. In addition to buying our federal government’s debt, the Fed has been purchasing billions and billions of residential mortgages.
The famous twins, Fannie Mae and Freddie Mae, are now owned by you and me, thanks to an infusion of $175 billion (more or less) from the Troubled Asset Relief Program fund. They went broke with trillions of mortgages still on their balance sheet. Hidden in the real losses has been Fannie and Freddie’s opportunity to continue to carry 30-year mortgages using low interest rates for funding. This doesn’t include federal housing and the billions propping that government agency up. With the government and the Fed both flooding the market in bailouts via buying, borrowing and printing money beyond any historical comparison in U.S. history, interest rates remained low.
Keep in mind that our dollar is worth about 80 cents compared with a decade ago, and unemployment is about 6 to 7 percent higher than it was when the norm used to be around 4 to 5 percent.
However, look at the stock market. It has been reaching all-time highs. Of course, you know a lot of investors borrow on the margin to invest more in the market, and pension and 401(k) funds need a place to invest. Initial public offerings of new companies coming onto the stock exchange is happening at a snail’s pace. The supply of shares of stock has not kept pace with the increases in money supply. We’re chasing a limited supply of stocks with a greater demand — there’s lots of money available to invest.
Now, back to the original question: Does it make a difference if excessive debt is on our personal balance sheets or that of our federal government? Probably not, in the long run. It’s just hidden for a longer period of time if the government has the debt. If it was you or me with debt beyond repayment ability, the lender would be sitting at our door demanding payment.
Can we devalue our currency fast enough to offset the excessive fiscal spending? Should we beware? Sure we should.
Just tell us when to leave the party.
Konrad Heid lives in Joplin.