Picture this scenario: you’ve maxed out your credit card, missed a few payments, and collection agencies are calling every day. You phone up your credit card company and say, “hey, don’t worry, I’m just going to get another credit card to pay you off, and it’ll all be fine.”
What do you think a credit card company would say to that proposition? What would a financial planner or debt counsellor think? Do you think someone else would give you a credit card?
As ridiculous as the above example sounds, this is basically what most industrialized countries in the world now are passing off as fiscal management. In a sign that politicians the world over now seem completely and utterly unable to tell their constituents the true cost of the entitlements and services they have become accustomed to, industrialized nations have slipped into a vicious debt cycle. And it’s not getting any better.
That isn’t to say that debt, whether incurred by an individual, business or a government, is a bad thing per se. Debt is useful, and the leverage it provides, when used responsibly and with full recognition of the fact that one day it must be paid back (with interest), is a fundamental element of any capitalist economic system. But as any economist or financial analyst will tell you, debt has the effect of creating magnifications and distortions in the way that a company (or economy) reacts to fluctuations. When people, businesses and governments take debt and debt markets for granted and act recklessly, it is a recipe for disaster. When governments encourage people and businesses to incur debts and then incur bigger ones for themselves, you get what we have now.
Debt catches up to you, eventually. The present example of Greece illustrates the point perfectly. Here we have a country that chose, willingly, to spend amounts on government expenditures far exceeding their actual revenues and intakes (i.e. taxes). You don’t have to be a Wharton economist to know that this isn’t exactly sustainable. Nevertheless, in style with the “live for today, to hell with tomorrow” attitude of most governments over the past decade, Greece lived the good life. But you can’t run from your debts.
Now that the shit has hit the proverbial fan, Greece is real trouble. And it’s not just that they’re in debt way over their heads with absolutely no credible plan to get out of it. Now it has come out that the Greek government hired Goldman Sachs to develop an intricate swap arrangement in order to shield the true amount of debt they were incurring in order to comply with the debt requirements set out by the European Union.
The key question for debate is this: should Greece be bailed out, either by the EU, Germany, France or some form of international organization, such as the IMF?
The problem is, should the Greeks be bailed out, what is to say that the other members of the so-called PIIGS (Portugal, Italy, Ireland, Greece & Spain) nations of Europe, whose deficit and debts-to-GDP ratios are just as scary if not more scary than those of Greece?
This discussion raises the larger question of moral hazard. Moral hazard is defined as a situation that arises where an individual or government fails to heed the consequences or responsibilities of its consequences because it knows it will be saved regardless of what it does, creating a self-perpetuating tendency by all similarly situated parties to act less carefully than they otherwise would have. If somebody bails out the Greeks, what is the incentive for everyone else to get their fiscal house in order? And who will bail out the “big guns” should something else bad happen? There isn’t a right answer to this question.
It is important to recognize that the economic and political problem of debt has a tremendous social element; indeed, one could argue that society has to a large extent driven this crisis. Simply put, to paraphrase Marie Antoinette, people want to have their cake and eat it too. Completely unaware of the tremendous fiscal costs of their entitlements and governments, people, particularly North Americans, obsessively complain about their high level of taxation while simultaneously complaining about the poor quality of government services (these arguments must seem foreign to the Nordic countries of Europe, who have both higher standards of living and much higher marginal tax rates that more accurately reflect the cost of the services provided).
Governments have for the last 20 years compounded this problem and helped to shield their constituents from the true costs of their government’s activities. When the debt markets are easily accessible, this is the politically perfect solution: the people get immediate gratification, politicians keep their jobs without having to make difficult choices or bargains, and the problem gets deferred to some point way off in the future.
Problem is for us, the point has seemingly arrived.
In many respects, debt is like an addiction for people, businesses and government because it provides the easy fix, the instant gratification, and best of all, defers consequences. Problem is, ask anyone who has ever tried to grapple with an addiction, whether it be smoking, drugs, obesity, what have you – changing one’s habits can take a lifetime. And it’s not easy.
All in all, I have little doubts that the defining crisis that the up and coming generation (of which I am a part) will be the ability to come to terms with the tremendous overleveraging of the global economy that has occurred over the course of the last 10 to 20 years. Imagining, developing and implementing a strategy of sustainable and responsible economic growth is going to be a tremendously difficult proposition. Deleveraging is not going to be an easy process (just ask Japan if you’re curious) and it’s going to take a long time before we see sustained private-sector driven growth based on solid economic fundamentals.
But it sure as hell looks like a better alternative than continuing on with the present course.