The debate amongst economic pundits and policy makers centers on how best to stimulate the economy. This completely misses the point. What America needs is an intervention, not stimulation. Americans have become consumaholics. What is needed here is recognition that we as Americans have a problem, we spend too much and we need to break the habit. What are needed are not fiscal or monetary enablers, but support as we go through the painful process of breaking our addiction and rebuilding our lives.
Remember Uncle Dave, or maybe it was the neighbor Steve, or maybe it was the coworker Jill. They had a problem we all knew about, but nobody wanted to talk about. And certainly though we all worried, no one really had a good idea what to do about their problem. They drank too much, they used cocaine, or they gambled. Whatever the problem, we knew it was ruining their lives and they needed help. We eventually figured out, that the help they needed was not to cover for them when they called in sick, again. It was not to loan them some extra cash so they could cover that gambling debt. No, the help they needed was to get them the assistance they needed to break out of the self destructive behavior. Only then would they find the path to a healthy life.
The American economy is broken. It’s broken due to the overwhelming debt burden brought on from decades of excess consumption. The Fed in its most recent policy statements has warned that we are facing increasing deflationary pressures, and stands ready to do whatever is necessary to help maintain economic growth and prevent deflation. While it is debatable whether the Fed can do anything about the current situation due to the complete lack of monetary velocity, we should be asking if they even should. Americans are Consumaholics. We have spent well beyond our means for the past decade, which has resulted in the current economic crisis. The Federal government is no better. We collectively, need to cut up those credit cards, and live within our means.
Much like an Alcoholic, we as a society are still in denial that we have a problem. Rather we look to government to find an easy solution to help us maintain our unhealthy lifestyle. And, to a degree they have obliged. Debt service payments as a percentage of personal income have improved significantly. This is certainly, at least in part, due to lower mortgage rates. As can be seen from the above chart debt has been reduced slightly, but still remains well out of historical balance. To date, the administration has focused on ways to restore consumption: cash for clunkers, first time home buyers. The Fed for its part continues to maintain tremendous liquidity, even if no one wants it. And, the Fed tells us, they stand ready to produce more, if the deleveraging cycle produces lower prices.
In the terms of Alcoholics Anonymous, the Fed and the Administration are classic enablers. What is an enabler? An enabler in most definitions is a person who through his or her actions allows someone else to achieve something. Most often the term enabler is associated with people who allow loved ones to behave in ways that are destructive. For example, an enabler wife of an alcoholic might continue to provide the husband with alcohol. A person might be an enabler of a gambler or compulsive spender by lending them money to get out of debt. In this context, an enabler is someone who allows a compulsive consumer to keep spending by making credit easy, by providing incentives to spend, and by devaluing the currency to make the debt hangover less painful. What America needs is not an enabler to continue to incent an unhealthy lifestyle, rather we need to face up to our problems and work through them.
The process through which addicts break their habits is the same as the process American consumers (and the Federal Government) need to take to get our financial lives back on track. I think the difficulties recovering addicts face every day underscores the difficulty we face in getting help to break our consumptive habit.
These steps are an attempt to address the physical, mental and spiritual aspects of recovery. Certainly we can adjust the principals depending on our own preferences with respect to gender and spiritual beliefs, but the principles are consistent. I would suggest that the principles listed here, can be applied to our financial addictions with the goal of emerging healthier in the long term.
1) We need to admit we have a problem, and it has made our lives unmanageable. It may seem obvious, but with the number of foreclosures in the United States, one can certainly argue life has become unmanageable. And, that is just the effect of the current crisis. When one adds the runaway fiscal deficit along with pending retirement and health care liabilities, we can see just how unmanageable things have gotten. Look at Japan, their deficit is 200% of GDP, and they have an aging population. How they got there might be different, but the effect on this debt accumulation is the same. They are in an economic death spiral. When Japanese pensioners look to reduce savings by selling Government bonds to fund retirement, where will the money come from?
2) We need to admit that there is a power greater than ourselves. Our excess consumption is creating an enormous burden not just for ourselves, but for future generations and the rest of the world. If we don’t pay off our debt, future generations will likely face the prospect of diminished standard of living. Similarly, devaluing the currency through QE2. Steals the standard of living from our creditors, domestic savers and foreign lenders. We shouldn’t punish those that have behaved admirably, rather take responsibilities for our own actions.
3) Step three is humility. To acknowledge the impact of our actions on ourselves and others and to make a pact with our spiritual belief, or with the universe, that we will live our lives as it comes, not as we wish it could be. Live within our means.
4) The dictionary defines moral as “of, pertaining to, or concerned with the principles or rules of right conduct or the distinction between right and wrong; ethical.” We must own our current problems. We must repay our debts, and face our responsibility for our place in the global economic landscape. The term moral hazard has become synonymous with government bailout. Wall Street has come to rely on the government to backstop any mistakes. Too big to fail is a perfect example of this problem. If a company is too big to fail, then it should be too big to exist. Managing the systemic risks are critical to a health functioning economy.
Quantitative easing will not solve the problems facing the economy today. The truth is we have created an environment of excess consumption which has led to an excess capacity of nearly everything. Why is unemployment remaining so high? Because in a “normal” recovery, we see a surge in construction related hiring as low interest rates and pent up demand stimulate the need for a boost in the housing stock. Today, we have more homes than we need, so there is no pent up demand, thus no boost to construction hiring. Quantitative easing, or devaluing our currency, will do nothing to affect that equilibrium. Additionally, as was mentioned earlier, one reason why household debt burden were improving was the low rate environment. Promoting inflation will certainly cause investors to demand higher rates, eliminating the benefits of improved debt service levels.
Similarly, the economic stimulus du jour package has not helped. Cash for clunkers and first time home buyer programs did nothing more than draw forward consumption into current quarters, only to have it fall away completely when the programs ended. Not to be too dramatic, but using the example of an alcoholic, further stimulus programs are like giving an alcoholic a fifth of Scotch for their birthday. It completely ignores the problem, and in fact it enables a continuation of the problem.
What is needed is time and discipline. Certainly social programs should provide a safety net for those most in need, but stimulating consumers to continue reckless spending is the worst medicine. It’s time to cut up the credit cards, both for the consumer and the government. We lived beyond our means for the past decade, and now the bills are coming due.