Excessive Debt Levels ... Not Just the Governments' (City, State and National) Problem to Solve .... We the People Have Huge Issues with Too Many Borrowings as Well

There's an old saying I like very much which says that if we're doing the wrong thing, we're probably doing it poorly.

And so it is with saving, investing, spending and borrowing.

We have a national debt of ~$17 trillion which in reality is closer to $100 trillion, and we incur annual deficits in the hundreds of billions of dollars. Yet we proclaim success when the politicians arrive at another deficit increasing deal for the next two years. Next they'll proclaim success when agreeing not to shut down the government early in 2014 by agreeing to raise the debt ceiling.

But the debts will continue to grow and the deficits will continue to flow.

Meanwhile, the Federal Reserve is reducing its bond purchases, aka tapering, and will continue to do so over the next year, thus beginning a process which will hopefully assist in stabilizing our precarious financial position as a nation.

Long term interest rates will rise in small amounts as the tapering unfolds, but short term rates should stay at historical lows for several more years.

The stock market is gong higher, the U.S. dollar is getting stronger, oil prices are going lower, inflation is not an immediate concern, and economic growth is improving. Unemployment is too high but going lower.

So what's the problem? ECONOMIC GROWTH IS TOO SLOW BECAUSE OF EXCESSIVE BORROWINGS IN THE PAST.

We have too little knowledge about our personal financial matters, which has led to too little knowledge about our governments' (city, state and national, including entitlements) financial matters, including debt obligations as well as unfunded liabilities, which when combined have led to excessive borrowings at both the personal and government levels.

And what we do manage to save as individuals is often invested poorly while what we borrow is too much and frequently pursuant to poor terms.

So I'll sum up by quoting a few uncomfortable facts from Meltdown Averted: Bernanke Struggled to Stoke Growth:

"After a financial crisis he didn't see coming, Ben Bernanke steered the U.S. away from a potentially devastating panic. Yet five years later, the recovery he helped engineer with extraordinary policies remains frustratingly weak.

 

As Mr. Bernanke prepares for his final days as Federal Reserve chairman, that legacy—a mix of failings, boldness, persistence and frustration—is coming into sharper focus, and with it a clearer picture of the power and limitations of modern central banking. . . . 

It is widely accepted that the landmark policies Mr. Bernanke championed during and after the crisis—rock-bottom interest rates, loans to banks and controversial bond buying—averted an economic calamity. Their failure to spur a vigorous recovery, however, has created perhaps the biggest unanswered question about Mr. Bernanke's legacy.

 

"I wish I was leaving with the unemployment rate at 5% instead of 7%," he said wistfully during a November discussion with high-school teachers. . . .

 

Yet the economy has grown at an average annual rate of just 2.3% since the recession ended in mid-2009, versus a 4.1% average for the first four years of other expansions since World War II. Had it grown at that rate, today's $15.8 trillion U.S. economy would be larger by $1.25 trillion, about the total annual output of Mexico.

 

The explanations for slow growth are complex: lingering effects of a run-up in household debt; a turn toward tighter fiscal policy at the state, local and federal levels; damage to the financial system from the crisis; structural changes in the economy such as slowing population growth; business and household risk aversion; and the limitations of the central bank's tool kit.
 

Lawrence Summers, the former Treasury secretary and White House adviser, wonders whether the U.S. suffers from an ailment he and others describe as "secular stagnation": a long-standing reduction in the pace of growth related to slow labor-force expansion or waning productivity gains, masked by the technology and housing bubbles.

 

"A central bank cannot fix this," Mr. Summers said. But it can avoid making the problem worse, he added, by keeping interest rates as low as possible to encourage economic activity. "If [Mr. Bernanke] had not maintained a loose orientation to monetary policy, we could have easily gone back into recession" after 2009, Mr. Summers said.

 

Another theory is that the housing bubble itself was the underlying cause of economic lassitude, with effects that still haven't disappeared. Debt is a claim on future income and spending. U.S. household debt soared to $13.8 trillion by the end of 2008 from $7 trillion in 2000. That debt outpaced gains in after-tax income by more than $3 trillion. . . .

 

The housing-boom run-up in debt is an effect some attribute to easy-money policies the Fed adopted earlier, during the post-tech-bubble slump. Its low-rate policies before the financial crisis "provided the fuel to inflate the real-estate bubble," said Michael Bordo, a Rutgers University professor of economic history. . . .

In any case, households since the 2008 crisis have pared $884 billion of their debt—diverting funds that might otherwise have gone to consumption during the recovery." . . .

 

Summing Up

 

We have to reduce debt levels in relation to the size of our economy.

And as individuals we have to clean up our act with respect to debt levels associated with student loans, credit cards, home mortgages and auto loans, too.

And learn to save enough and then manage our individual retirement accounts well in 401(k) plans as we transition from pension plans in the public sector.

As we do these necessary things and as the economy grows, our economic issues will subside over time.

 

Hopefully, we will now take the time to understand that knowledge about how things work is essential to our well being and that of our kids and grandkids over time, as well as that of our nation.

 

Saving, investing, spending and borrowing .... all have been done poorly these past few decades.

 

It's time to learn our lesson and get on with the "pursuit of happiness" in our own particular lives.

 

That's my take.

More to come.

 

Thanks. Bob.