As a cultural economist, I’m very curious about the phenomenon of postponed debt that I observe as I travel around the world. Cultural economics tries to deal with both sides of one coin: How do 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 it also has everything to do with character!
In many of the Least Developed Countries (LDCs) where I travel, if more money is needed to meet economic demands and pay the country’s 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 prices to go up; they just do. For example, if there were ten cherry pies and ten dollars in the system, each cherry pie would cost one dollar. But if another ten dollars were to be created and injected into the system, you would have twenty dollars chasing the ten cherry pies, and you would end up paying two dollars to purchase your desired pie. The pie wasn’t really worth more, but the money was worth less.
In the United States, our method is a bit different. When Congress overspends, the US Treasury is overdrawn. The Treasury then creates and issues treasury bills (T-bills) and bonds and sells them at auction (IOUs) on the assumption that some individual, institution, or 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’s necessary to raise taxes on US citizens, sell off national assets (e.g., oil reserves, coal reserves, harbor and port rights, national forests, military armaments, air space, etc.), or allow the Federal Open Market Committee of the Federal Reserve System 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 US 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 US Treasury signing a note, and the note becoming an asset of the Federal Reserve Bank. In other words, the government debt has been miraculously turned into spendable money. That is called monetizing the federal deficit. It gives the illusion and false assurance that the government has a never-ending source of money and store of wealth.
Those T-bills and bonds are issued with the express intention of postponing repayment. Some may be designed not to 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 selling more T-bills and bonds. The ultimate effect, however, is exactly the same as if the government simply satisfied its debt with newly printed currency fresh from the presses rather than issuing T-bills and bonds.
The combination of postponed debt and subsequent inflation is the ultimate subtle taxation. No one escapes the effects of inflation. When inflation is employed to settle overspending, the government avoids being blamed for a congressionally approved increase in taxes while reaping the benefits of an indirect inflationary tax increase. 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, hopefully, the early investor is repaid by the investment of a later investor. But I’ve never heard of any country in history whose traditional economic system could tolerate monetizing trillions of dollars into its system. Historically, a more likely result would include bankruptcy and civil conflict.
So what’s the psychological problem with postponing debt? How do the economics of a culture affect the individual people?
William Shakespeare instructed, “Defer no time, delays have dangerous ends.” And I 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 a promise isn’t that important anyway. Something that can be done at any time will probably be done at no time. Postponement and ignoring accountability can become cultural suicide on the installment plan. Many of the leaders of foreign countries I visit really believe that the loans the United States has made to them should now just be forgiven and forgotten. They figured that they would repay “someday,” and then they discovered that “someday” isn’t a day of the week.
I’m sensing that the people of our culture have carefully observed our government’s loose attitudes toward the integrity and accountability required for handling debt. The assumption seems to be that it makes no difference whether we purchase homes we can’t afford or lease cars that have a residual balance at the end of the contract. We simply accumulate more without worrying about the consequences. When one credit card is maxed out, just go and get two more. Stack up student loans, depending on political leaders to simply forgive the ballooned amounts before the next election. Make personal commitments and relational promises with no intention of keeping them. I think we have some serious problems resulting from a systematic 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 its reasons which reason does not know,” wrote Blaise Pascal. We can be assured that where there is an intellectual disconnect from personal integrity, reason, and intellect will try to synthesize a substitute connection to justify the current state of affairs.
I think that 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 will ultimately affect the economics of a culture.