"... you are borrowing from your children and grandchildren..."
I heard this statement on TV. I wasn't watching the program so I don't know what it's about... but I am interested in this subject of borrowing and living withing our means that I did a search on it and came across an article by Dan Denning that I've placed in this blog entry below. And here's what I learnt from the article written by Dan Denning.
"Borrowing is not wrong,
... but borrowing with no
intention of repaying is."
~ paraphrased from a statement below by Dan Denning, February 26, 2004
"Debt isn't immoral per se.
But taking on debt you have
no intention of repaying is."
~ Dan Denning, February 26, 2004
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More at...
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Do Deficits Matter? ~ by Dan Denning, for the Daily Reckoning, February 26, 2004
Editor's note: Dan Denning is the editor of Strategic Investment. He is currently researching the calamitous effects a correction of the U.S.'s "twin deficits" would have on the economy. If you'd like to learn how this relates to you as an investor, and how you might profit from an imminent deficit blow-out, see Dan's report:
How does government borrowing affect the long-term viability of an economy?
Is it even 'moral' to borrow – if you don't intend to settle your debts?
Strategic Investment's Dan Denning weighs in with his view on the matter, below…
Do government deficits – and by extension, government debt – matter? I would argue that they do. In fact, over time, they erode the long-term ability of an economy to create wealth…making the pie smaller for all concerned.
Government deficits are unique in the world of debt. The government doesn't borrow money to create income-producing assets or make capital investment. The purpose of government borrowing is not to create wealth, but rather to redistribute income. And because the government pays off its bonds with tax revenues which it commands from citizens under threat of imprisonment, it's able to borrow at much lower interest rates than the private sector.
To the extent that non-productive government borrowing crowds out productive, private investment, the economy is in trouble. But how do you measure the size of the deficit? At what size does it begin to matter?
If you measure government deficits as a measure of GDP, they may not seem historically large. But that is not the main issue – rather, the key economic question, in terms of sustainability and capital formation, is how large government deficits are as a percentage of gross saving.
Government Deficits: Crowding Out Private Investment
How much is the government claiming from the pool of available funds? In other words, to what extent is government borrowing crowding out private investment and capital formation?
In the 1970s, the federal deficit was 11% of private saving. By contrast, last summer, the projected federal deficit of $304 billion was just under 20% of gross saving of $1.5 trillion. Today, with this year's projected federal deficit of $521 billion and gross savings in 2003 (excluding December) of $1.8 trillion, the federal deficit is nearly 30% of gross savings. That is an outrageous ratio.
In short, the higher the debt – and the deficits – the more the government has to go into capital markets. Using its coercion-protected franchise as the "payee of last resort," it attract funds from savers into its Treasury bills and bonds that otherwise would have gone into corporate stocks and bonds, thereby creating wealth by financing new job-creating enterprises. Instead, the savings, once sucked into the government's vortex, are mostly squandered in wasteful and ineffective enterprises. (Hey, let's go to Mars!)
Government borrowing diverts savings away from productive investment and towards simple wealth redistribution. Over time, capital formation slows down…and so does business investment. The long-term ability of the economy to create capital and wealth is hollowed out.
That's my main economic argument against government deficits. But my most serious bone of contention is moral. The more content we are with regular government deficits, the less responsible we become for ourselves. Borrowing increases actual indebtedness…but it increases dependence, too.
People get used to expecting things to be paid for and provided by the government. Once created and funded, how many government programs have gone away? Very few. These programs develop a constituency of bureaucrats whose paychecks depend on them, and/or taxpayers on the receiving end of the wealth distribution.
Government Deficits: Looking for Your Own Piece of the Loot
The whole exercise in democracy then becomes a shameless debasing game of looking out for your piece of the loot at the expense of your neighbors and friends…and your children and grandchildren.
The root of this argument is that public debt – debt taken out in the name of the people and not by an individual or corporate risk taker – quickly becomes a creature of the political process and winning elections. In time, this becomes corrosive to private morality.
A useful example is provided by the heat wave experienced in Europe this summer. In France, fifteen thousand people who survived the depression and World War II died in their homes or unattended in hospital beds from the heat. Their doctors, neighbors, and children were at the beach, on vacation, confident that the tax dollars they spent were taking care of their loved ones.
When Chirac gave his speech to the nation addressing the human catastrophe, he said that no one person was to blame, but that all of France was to blame. That's pretty convenient. All of France means not me and not you but all of us. So let's just do better next time.
Maybe in their private moments the children and neighbors of these people do blame themselves for subcontracting their responsibility to take care of their elders to the government. And then again, maybe they don't. Maybe the cumulative effect of letting the government become the moral middleman is that you don't care about anyone but yourself anymore. You care about your job, your leisure time, your life. You work less, have fewer children, and stop believing in God.
It may be a stretch…but I think it all starts the moment we accept that spending more than we earn – as a nation, through our government – is morally tolerable. If it's not good for a private household to do it, not good economically and not good morally, why would it be better for the government to do it?
Lots of people will claim that only the federal government can and should spend money on things like wars and self defense. Perhaps. But in addition to being controversial, it's a bit of a red herring. Right now, for instance, are we really in a war in which the bulk of our national resources ought to be dedicated to the military to the same degree as they were in WWII or the Cold War? And even so…it's the non-military, non-discretionary spending that's busting the budget anyway.
Government Deficits: 70% of Spending Tied Up
Seventy percent of government spending is locked up in non-discretionary promises to pay for things the government does now, but which used to be done by families, churches, or the private sector. We have cast these promises in political granite and have closed the discussion of whether we ought to or can afford to keep making them.
I would suggest that we not treat our economics as mere mathematics. Economics used to be called moral philosophy. The study of the choices people made with their money couldn't be separated from whether the choices themselves were "good."
The market judges "good" by whether the good or service you provide makes things better for people. If it does, you get rewarded for your risk. If it doesn't, generally, you fail.
Debt isn't immoral per se. But taking on debt you have no intention of repaying is.
And doing so in the name of the "State" or the "people" may give you the political cover you need to explain away your recklessness. You disguise it as concern for the "public good" or for "society." But morally speaking, when you sanction it, you're contributing to the impoverishment of your economy…and the debasement of your own morality.
Regards,
Dan Denning
For the Daily Reckoning
February 26, 2004
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And here's Dan Denning giving a speeach on YouTube.
And here's Dan Denning giving a speeach on YouTube.