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My Rant On Debt, Debt and More Debt

Debt is scourge on the American people. According to America’s Total Debt Report, 2008 debt was $186,740 per man, woman and child – – 6.4 times higher per capita than in 1957. The report also shows that higher debt reduces the level of real national income while adding little to the economy. In fact, according to the report, every dollar of economic growth requires more debt per dollar than ever before. Consider this:

Household debt is made up of consumer debt plus mortgage debt. The Family Income Report shows real median family incomes stopped growing in 1970, and thereafter families tried to keep up by going deeper and deeper into debt ever since – at near 3x the rate of national economic growth – to an all-time high today. Consumer debt payments % disposable income are at historic highs. The Family Income Report cites the reason, with dramatic pictures.

This is just to give you an idea of what lies below the surface. There is a lot more in the entire Grandfather Economic Report series. You should go read it for yourself. All of his debt information is supplied from Federal sources, by the way.

Here is the question Americans, and even those abroad, must answer. If debt got us all into this economic mess, why do we believe more debt will get us out? Everyone should know that you can only leverage your earnings so far before you produce a diminishing return due to interest requirements. According to another source, “In 1946 the debt hit 121.7% of the GDP due to WWII, it’s currently (as of 2003) at 62.4%.” These figures are referring to total debt—business, household, government, etc. What does that mean in real terms for today? According to a March 3, 2009 MSN Money article:

Consumer credit ranged between 12% and 14% of the GDP from 1965 through 1995. It currently stands at 18%. With the GDP at $14 trillion, the American consumer will have to shed $600 billion of debt to achieve a 14% level. It will take years of debt reduction and GDP growth to rebalance the economy.

Put in perspective, that means almost $1 of every $5 earned is paying for debt, rather than producing anything meaningful.

So, I repeat my question. If creating so much debt, which actually reduced economic growth despite driving industrial production, got the world into this economic mess, why do the powers that be believe more debt will get us out? Simply put, debt allows more goods to be purchased, thereby maintaining economic output, if not increasing it. So, in order to keep producing goods and everyone have a job, more debt must be created. But debt actually reduces economic gain after it reaches a certain size. That’s one reason why the US dollar keeps dropping in value as we create more federal debt.

The result of the banking and financial mess was the cessation of the flow of credit. No money is reaching the market. This causes people to be unemployed, because goods are not being produced, which causes a further drop in spending, creating a further reduction in spending, and more goods left on the shelves. In order to counter that, prices would have to fall. This is something called deflation. So, the Federal government is working to cause credit to flow again, by creating more debt. The result being that the viscious cycle just continues.

The one way to guarantee the cycle stops is to cease the increase of debt. But, that would mean 10s of millions of Americans, hundreds of millions of people world wide, would suffer catastrophically. And that is political suicide for anyone in a public office. It is, or should be, morally repugnant to most people. The alternative method is to limit debt, that is place restrictions on the ability to borrow—perhaps using long abandoned security requirements (such as 20% down for mortgages). Unfortunately, that would probably have the same result, just to a lesser degree depending on how limited credit actually becomes

The simple truth is Americans cannot continue to let debt continue to get out of control. We need to stop being the selfish cretins we have become, demanding government bail us out of the messes we create. And, we need to take responsibility for our own actions. I fear, however, that we have forgotten how.

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