Postponed Debt

As a cultural economist, I am very curious about the phenomenon of postponed debtthat I observe as I travel around the world. Cultural economics tries to deal with both sides of one coin: How do the people affect the economics of a culture? And: How do the economics of a culture affect the people? The issue of postponed debt has everything to do with economics and everything to do with culture . . . and also, it has everything to do with character.

In many of the Lesser Developed Countries (LDC) where I travel, if more money is needed to meet the economic demands and pay the bills, a very simple method is used. The dictator simply prints more currency. That method has an immediate impact on the value of the existing currency. With the same amount of goods in the market, but additional money in the system that was printed and spent, the prices for those remaining goods in the system go up. No one has to vote or agree for the price to go up, they just do. For example, if there were ten cherry pies and there were ten dollars in the money system, each cherry pie would cost you one dollar. But, if another ten dollars were to be created and put into the system, you would have twenty dollars chasing the ten cherry pies, and you would end up paying $2 to purchase your desired pie. The pie wasn’t really worth more, but the value of the money was worth less. 

In the U.S., our method is a bit different. When the Congress overspends, the Treasury is overdrawn. The Treasury creates and issues treasury bills and bonds and sells them at auction (IOUs), on the assumption that someone, some institution, or some foreign entity would rather have an interest-paying bond than a cherry pie. For the government to pay off the T-bills and bonds, it is necessary to either raise taxes on the citizens, sell off national assets, e.g. oil reserves, coal reserves, harbor and port rights, national forests, military armament, air space, etc., or allow the Federal Open Market Committee of the Federal Reserve Bank to start calling in the IOUs and paying them off. What Method would they use to pay off those T-bills and bonds? You guessed it . . . more newly created money!

A bond dealer would receive the T-bills or bonds and make the appropriate payment to the holder. The Federal Reserve Bank would receive the T-bill or bond and issue a check to the bond dealer who, in turn, would deposit that check into his bank account. The check, when deposited, would be credited by the Federal Reserve Bank to that bank’s required fractional reserves and that bank would then be entitled to make loans against that new reserve, or exchange it for cash. Why did the Federal Reserve Bank have the right to issue the check? Because it was backed up by the U.S. Treasury IOU that it just purchased!

In essence, what happens in the transaction is that the federal debt, a liability, is transformed into an asset by the U.S. Treasury signing a note, and the notebecoming an asset of the Federal Reserve Bank. In other words, the debt of the government has been miraculously turned into spendable money. That is calledmonetizing the federal deficit! It gives an illusion and a false assurance that the government has a never ending source of money and store of wealth.

Those T-bills and bonds have an intended and expected postponement in being paid back. Some may be designed to not be paid back for up to thirty years. That postponed repayment defers the immediate impact on the monetary system. And when the debt instruments are paid back, they are nearly always paid back with money from more postponed debt, generated by the selling of more T-bills and bonds. The ultimate effect, however, is exactly the same as if the government did not issue the T-bills and bonds in the first place, but simply satisfied its debt with newly printed currency fresh from the presses.

The combination of postponement of the debt, and inflation, is the ultimate, subtle taxation. No one escapes the effects of inflation. When employing the method of inflation to settle overspending, there is no cost to the government for collecting taxes, no votes have to be taken for approval, and the government is the sole beneficiary. Those decisions come from the people who affect the economics of our culture. The activity ends up being a form of the old Ponzi scheme, where the early investor is hopefully repaid by the investment of a later investor. But I have never heard of any country in history whose traditional economic system could tolerate the monetizing of $26 trillion dollars into its system. Historically, a more likely result would include bankruptcy and civil conflict.

So, what is the psychological problem with the postponement of debt? How do the economics of a culture affect the individual people? William Shakespeare instructed us, "Defer no time; delays have dangerous ends." And, we might add that postponement is perhaps the deadliest form of denial, because the longer we wait, the more the sharp edge of urgency wears off. Our minds actually start telling us that the responsibility to keep the promise is not that important anyway. Something that can be done at any time will probably be done at no time. Postponement and the ignoring of accountability can become cultural suicide on the installment plan. Many of the leaders of foreign countries I visit really believe that the loans the U.S. has made to them should now just be forgiven and forgotten. They figured that they would repay “someday,” and then discovered that “someday” is not a day of the week.

I am sensing that the people of our culture have carefully observed our attitudes of looseness toward the integrity and responsibility regarding debt. The assumption seems to be that it makes no difference if we purchase homes we can’t afford, or lease cars without concern of the residual balance at the end of the contract. When one credit card is maxed out, just go get two more, stack up student loans depending on the political leaders to simply forgive the ballooned amounts before the next election, and make personal commitments and relational promises we have no intention of keeping. I think we have some serious problems that have resulted from a breakdown of integrity and accountability.

Albert Einstein said, “We can’t solve problems by using the same kind of thinking we used when we created them.” And a culture can’t rationalize away what it has behaved itself into. The heart has reasons that reason does not always understand. We can be assured that where there is an intellectual disconnect from personal integrity, the reasoning and intellect will try to synthesize a substitute connection for justification. I think when it comes to integrity, in order to change the culture there has to be a change of heart. The economic practices of a culture will definitely affect the people. And the morals and integrity of the people involved will ultimately affect the economics of a culture.