The Debt Parable… What The U.S. Needs To Learn
There once was a man who was a very hard worker. He sold widgets and spent day and night working to grow his business. Eventually, he became so successful from all of his hard work, that he had an enormous company with thousands of employees. He had billions of dollars and lived a very comfortable life.
To bask in the glow of his success, the man decided that he deserved to have a nicer car and a larger house. Eventually he saw the need to add all sorts of upgrades to his vehicle and many decorations to his large house. His cash began to dwindle, but he still had an enormous company worth lots of money, so he decided to get a credit card. But, this was no ordinary credit card.
Due to his success, the man was able to get a credit card that was not backed by any single company. Instead of saying Visa or Mastercard, Bank of America or Citi, the card merely had his name on it. He was able to spend as he wished on the card and then he would go off and sell his debt to one of these companies. All of the big banks would clamor for his debt business because he was well known for having great wealth and always paying the interest promptly.
Over time, the man’s need for new gadgets and gizmos became insatiable. He no longer had any cash, but he still had his credit card and the banks were still buying his debt. But one day, things began to change. The man had, over time, begun to hand over the business to other people for them to run, so the wealth of the company was no longer entirely his. He also began to spend so extravagantly, that a few banks began to question whether it would actually be possible for him to continue to pay the interest. Tensions between the rich man and banks grew.
Eventually, the man had so much debt that he was unsure if the banks would continue to support him. In an effort to make his debt look more attractive and keep the interest payments low, the man came up with a plan to buy his own debt. He decided that his factory could simply produce millions of more widgets than normal and he would purchase his debt with the value of the extra widgets.
Then, something went horribly wrong. The banks saw the man buying his own debt, and began to doubt that he would ever have enough money to pay his debt off. They began to shy away from buying anymore debt. The man, meanwhile, had to continue forcing widgets out of his factory to buy more and more of his own debt as the banks were no longer supporting him. The widgets, once worth a great amount of money, began to plummet in price. With millions of surplus widgets flooding the market, they quickly lost their value; supply far outstripping demand.
The man, long ago having run out of cash, no longer having complete possession of his factory and piled up with debt, ran out of tricks. The widgets that he used to buy his own debt became practically worthless and he had nothing left. His crash from supreme wealth to utter desolation was swift and startling. Looking back, he could see that his initial error was the spending, but his final error was his printing of widgets.
Now, unfortunately, the United States has found itself in the shoes of the rich man. Yesterday, Ben Bernanke and the Federal Reserve announced that they will buy $300 billion in long-term Treasuries. We, as a country, have consumed far too much and our debt has ballooned as we used foreign countries as our source of funding. Our biggest creditor, China, is starting to get skittish about our debt decisions.
If demand for our debt truly does dry up, as some evidence is already suggesting, the printing presses will have to go into high gear or interest rates will sky-rocket. Although it is possible to still rectify the situation through saving and producing, the government and central bank have decided to follow the foolish path of the rich man. The story has not completely unfolded for the US, however, the conclusion will almost always be the same. Abraham Lincoln stated:
“America will never be destroyed from the outside. If we falter, and lose our freedoms, it will be because we destroyed ourselves.”
If only we had listened and gotten out of our own way…
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