Thursday, September 16, 2010

Debt and the Economy

"For decades we have piled deficit on deficit, mortgaging our future and our children's future for the temporary convenience of the present. To continue the long trend is to guarantee tremendous social, cultural, political and economic upheavals."

That was from Ronald Reagan on his first day as President of the USA.

We know that when President Reagan left office, the US had the largest deficit ever achieved in its history, had been changed from the biggest creditor nation in the world to the biggest debtor nation in the world, and the middle class had shrunk to the point where it was smaller than the poor and rich classes combined, first time ever..

All successive Presidents have done as badly or, in the case of Obama, worse, apparently in emulation of Reagan.

Yet all Presidents campaign against debt and deficit, and malign those who cause it. Are they lying? Are they hypocritical? Perhaps. But I think it is something else. What that may be I don't know. But  if we don't start asking questions we'll never find out.
There are some things I have learned from this latest financial meltdown that I didn't know before. The most surprising of these was to learn how important credit is to the daily operation of our nation's businesses.
Apparently most corporations, large and small, depend on ready lines of credit for the payment of salaries, overhead, and purchases on a weekly or monthly basis. To express this same fact differently, these businesses do not have a 90-day or even a 60-day cushion of capital as an element of their business model. Who knew?
Most individuals cannot survive without the credit offered by the credit card. Trillions of dollars of consumer household debt attests to that.
This is probably due to the not-talked-about-enough fact that real earnings have not kept up with inflation.
SO, let's sum up:
The Government needs debt in order to keep the economy strong.
Corporations need debt in order to survive and grow.
Individuals need debt in order to survive.
SO - why is debt a dirty word?
Why don't we admit we can't live without it and stop all this phony denunciation of it?

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