Only one issue really matters in this fall’s election, and that is how to get the economy moving again. Say what you want about student loan debt, gay marriage, Iran going nuclear, etc. but if we get the economy wrong, we will all be in big trouble regardless.
Two weeks ago, the French elected socialist Phillippe Hollande as their new prime minister. Liberals are widely heralding his election as a victory for prosperity over austerity.
If only it were that simple. Putting the argument that way sets Hollande up for failure.
Think of it this way. The challenge facing Europe and the U.S. is that we are trying to dig our way out from under excessive debt. If the things people use as collateral for loans are valued correctly, bankers know whether or not to make a loan based on several risk factors that usually result in good decisions. What happened five years ago, however, is that the world discovered that global wealth wasn’t worth nearly as much as was on the books.
Why? Because thousands of borrowers and banks put unrealistic values on property used for loan collateral and governments encouraged lending with no collateral at all to people who were poor credit risks, thus creating debt that could not be repaid.
The world’s wealth was worth only a fraction of what we thought it was. Since the amount of goods in the world didn’t change — at least not immediately — that meant we had too little wealth chasing too many goods.
That can lead to deflation, meaning that prices begin to spiral downward. People stop buying anything they don’t absolutely need because they can get a better price tomorrow than today.
To counter that, the world’s central banks do everything they can to inflate the supply of money. That way, the theory goes, prices stay up and people keep buying.
That’s why interest rates are at record lows. That’s why we had a stimulus package. That’s why the United States has increased its national debt to $15.7 trillion.
That debt amounts to more than $52,000 for every citizen, young and old. This week, USA Today reported from a University of Michigan study that only 14.6 percent of American households have at least $50,000 in savings. Factor in the debt owed by this government of the people (and realizing that if one includes the unfunded liabilities for Medicare and Social Security, the debt is actually $65 trillion), even Warren Buffett and Bill Gates are ultimately insolvent.
Today, it seems as if the economy is growing a little. Car sales are up. The jobless rate is too high but stable.
However, few people think happy days are here again. Why? Because the pile of debt keeps growing.
Debt is an insidious thing. Borrowing a little to buy a car can be a good thing. The car makes it possible to get to work, which makes it possible to repay the debt.
But our wealth doesn’t change, even if we feel like royalty when driving the new car off the lot. And, if we allow debt to grow so large that we can’t pay it back, we go bankrupt. Then the debt is absorbed by society at large, and we all become a little poorer.
New York Times columnist Paul Krugman has been saying for some time that more stimulus is needed, not less, and by that he means more debt.
The problem with that theory is that it calls for creating and then consuming more money than we are earning. More importantly, it offers no solution for tipping the balance sheet in the other direction so that we can begin saving some of what we earn.
However, Hollande essentially ran on Krugman’s program and won in France.
The other side of the argument comes from Germany, the financially strongest nation in all of Europe. It agreed to bail out Greece, and ostensibly save the euro — but in return Greece has had to adopt austerity measures, paying down its national debt. The Greek jobless rate has since soared to 21 percent, and people are becoming increasingly desperate. Many Greeks are mad at Germany for imposing austerity on them, preferring not to accept responsibility for their predicament.
Meanwhile, many Germans are upset with their own leaders for taking on the Greek debt, doubting it will ever be repaid.
If it ended with Greece, it would be a footnote in history. However, it doesn’t. The next country that will be unable to pay its debts will be Spain. The Spanish economy is much larger than Greece’s. In fact, it’s too big to bail out.
Why does any of this matter to us in Central Minnesota?
In a global economy worldwide wealth will decrease substantially as the inevitable austerity sweeps across Europe. If people or nations can’t pay their debts, then we have to lessen the value of the assets on which they owe those debts, and we get poorer. It doesn’t matter if it happens in Greece, Spain or right here. It affects the whole world.
My Midwestern values tell me that if you want to get out of a hole, first you have to stop digging. But I have no illusions about how big this hole is or how painful it will be to climb out of it.
We can go on hiking our debt and pretending that things are OK until there is no hope of repayment, or we can bite the bullet until such time that we reduce our debts, both personal and national, to a manageable level. I would prefer the latter, but think it is a close call which way we will vote.
Tom West is the editor and general manager of the Peach. He may be reached at (320) 352-6569 or by e-mail at [email protected]