Our House of Cards

The House and the Senate just added another story to our $17 trillion house of cards.  What that means, of course, is that when the house of cards finally does implode, the cards at the top have farther to fall.

Congress --- the House and the Senate --- proved once again that an unlimited government of men, instead of a limited government bound by law (remember the Constitution?), is dangerous.

Kick the can down the road, goes the metaphor.  And so it goes. Thank goodness Harry Reid and Mitch McConnell were able to save the day yet again!  Congress veered away from the fiscal cliff a few months ago, only to do a U-turn and head straight back toward it at higher speed. 

A government that will not be bound by laws will certainly be bound by men instead.  Our highest leaders' refusal to follow not just the Constitution, but even the rules that Congress itself wrote to govern its own behavior, speaks volumes.

Why am I wasting time this morning writing this pitiful refrain?  I really do not know.

What To Do About the Debt Ceiling

Here we are again.  Right back at the edge of the fiscal cliff.  I wonder what happened to those colorful words this time around?  The term "fiscal cliff" became all the rage just a few  months ago.

Government borrowing is not the problem.  Incidentally, Congress will raise the debt ceiling, but probably not for a few more days.  We haven't had enough political theater just yet.

Just like you and me, governments should borrow sometimes, but only for the right reasons.  Borrowing to finance productive activities (like successful businesses do) and borrowing to finance long-lived capital goods (like businesses and consumers do) is just fine --- provided businesses and consumers have reasonable expectations of being able to repay their borrowing.   Borrowing to finance continued transfer payments that cannot be sustained is not a right reason for governments to borrow.  What is hard to understand about that proposition?

More than two years ago, EconoBlast featured an article that seems completely timely today.  So, at the risk of boring regular readers, I point today to the EconoBlast archives.  You will find the article here.

Lot's of digital ink will flow over the next several weeks as Congress continues NOT to do its job.  Until Congress gets to the business of why we have Congress at all, the United States and the rest of the world will face the plunge.  It's a long way down, Mr. Speaker and Mr. President.  You both should be saying "not on my watch."

Saving, Not Borrowing, Will Heal America and the World

Here, Gregory Bresiger explains why saving is so vitally important to our nation's economic health.  Modern political thought, and sadly enough, what passes for main-stream economic thinking, even from Nobel Prize winners like Paul Krugman, tells us that borrowing to spend on consumption goods is the path to prosperity.

Borrowing has its place.  Most of us borrow at sometime in our lives.  But prudent people borrow for one of just a few good reasons.  People who borrow to finance a productive activity that will earn enough to repay the loan plus interest on the loan plus income to sustain themselves borrow prudently.  Business owners who produce and sell a product lots of people want to buy do this kind of borrowing all the time.   

People who borrow to purchase big-ticket capital goods (such as a house) that will generate a continuing future stream of value for them may be borrowing prudently, if they have a reasonable expectation of being able to make regular monthly payments over the life of the capital good.  Obviously, people who borrow without a reasonable expectation of being able to make those monthly payments do so imprudently and to their impending peril.  We have lots of experience in the recent past with that sort of imprudent borrowing.

What about borrowing by governments?  The guidelines for prudent and imprudent borrowing don't change just because its a government doing the borrowing.  Borrowing to finance productive activity --- activity that generate sufficient returns to repay the loan plus interest --- can be very prudent government borrowing.  Any number of people believe that a good example of this sort of borrowing is the American space program and its forays to the moon.

Government borrowing to finance spending on capital goods such as roads to somewhere lots of people want to go, bridges to somewhere lots of people want to go, and technology to defend ourselves from bad guys can certainly be prudent.  But only if the value streaming from those capital goods is sufficiently high, and only if government can reasonably expect to be able to repay the loans plus interest.

Government borrowing to finance current consumption with no reasonable expectation of repaying the loan plus interest is imprudent, just as it is if you or I borrow to finance current consumption with no reasonable expectation of repaying the loan plus interest.

I have written in EconoBlast more than once that you can't borrow what hasn't already been produced and saved.   Today's politicians don't seem to get that message.  Until they do, America's economic future is in jeopardy.  Europe's perilous economic future has already arrived in the body of the PIIGS.  Despite the lack of continuing mainstream media coverage, the PIIGS are not anywhere near out of the woods.  Some people think that the next stock market meltdown will be precipitated directly by the ongoing European debt problem, even though we haven't heard much about it in recent months.

Imprudent borrowing, like the borrowing the PIIGS have done and like the United States Congress continues to do, will be our undoing.  Saving like our grandparents and parents did could heal America and the rest of the world.  Regular readers of EconoBlast may be growing weary of it, but it's still true.  You can't borrow what hasn't already been produced and saved.