"I'd Gladly Pay You Tuesday for a Hamburger Today"

Are we being Wimpy when we worry about household and government debt? This post looks at U.S. indebtedness today and some of the associated risks, and the post that follows examines how attitudes toward debt have changed over time:

Reasons to Worry, by Niall Ferguson, NY Times Magazine: ...[A] question for economists is whether the United States is capable of evolving out of its present excessive indebtedness. Or could the global economic environment change so drastically as to threaten ... decline relative to smaller, more dynamic economies?...

Since becoming president, George Bush has presided over one of the steepest ... rises ever in the federal debt. The gross federal debt now exceeds $8.3 trillion. There are three reasons for the post-2000 increase: reduced revenue during the 2001 recession, generous tax cuts for higher income groups and increased expenditures not only on warfare abroad but also on welfare at home. And if projections from the Congressional Budget Office turn out to be correct, we are just a decade away from a $12.8 trillion debt — more than double what it was when Bush took office.

Big public debts are not always bad, to be sure. It could be argued that in his first term Bush wisely used fiscal policy to boost aggregate demand and counter the impact of the dot-com bust. Public borrowing also allows "tax smoothing" by spreading out over time the cost of big one-off expenses like wars, three of which the United States has fought since 1999.

On the other hand, by requiring larger interest payments, big public debts devour revenue that could be spent on other programs. They may crowd out private investment by pushing up long-term interest rates. They may also have a regressive distributional impact, transferring economic resources from taxpayers to bondholders or from future generations to the present generation. ...

The trouble is that the officially stated borrowings of the federal government are only one part of the U.S. debt problem. ... Ordinary American households have also gone on prodigious borrowing sprees. ... Not only do Americans borrow as never before; they also save remarkably little. ...

The trouble is that, for demographic reasons, Americans need to save more... According to the 2006 Retirement Confidence Survey, 6 in 10 American workers say they are saving for retirement, and just 4 in 10 say they have actually calculated how much they should be saving — many of them figure that they will simply work longer. According to survey data, the average worker plans to work until age 65. But it turns ... about 4 in 10 workers end up leaving the work force earlier than planned.

This has grave implications for the federal budget. Already, Social Security, Medicare and Medicaid consume nearly half of federal tax revenues. And that proportion is bound to rise... In short, the federal government seems to have much larger unfinanced liabilities than official data imply...

American consumption has been the principal engine of economic growth in the world over the past decade. But the readiness of American households and politicians to borrow has an inevitable corollary: the United States has become the world's biggest debtor.

In almost every year since 1992, the gap between the amount of goods and services the United States exports and the amount it imports has grown wider. ... What this means is that foreigners are accumulating large claims on the future output of the United States... As a result, there has been an immense rise in foreign ownership of American securities of all kinds, but especially government bonds...

To those familiar with the Latin American debt crises of the 80's and 90's, there's a case to be made that the United States is on the road to becoming a Latin American country. ...[But] there's a difference. Latin American countries have generally had to borrow in the currency used by their creditors. ...

But the happy position of the United States is more like that of Britain in the aftermath of World War II, when a substantial part of its war debt was owed in sterling... Because Britain borrowed in its own currency, it had control over the unit of account. As the pound slid from $4 to below $2 from the 40's to the 70's, its sterling liabilities were reduced by half...

Could the dollar follow a similar downward path? ... As a fiscal strategy, dollar depreciation has much to recommend it. At a stroke, American exports would regain their competitiveness... leading to at least some contraction ... of the trade deficit. Foreign creditors would take the hit, finding their dollar assets suddenly worth much less in terms of their own currencies.

So what's the catch? A sudden increase in the dollar price of American imports could stoke inflation in the United States. ... It's a pretty safe bet that if a dollar decline shows signs of boosting inflation, the Federal Reserve will raise interest rates. ... Two important categories of debtor spring to mind. First, there are the households with adjustable-rate mortgages. More Americans have variable-rate mortgages than ever before...

[T]he second category of debtor vulnerable to higher short-term rates ... is ... the federal government... The protracted decline of long-term interest rates since the 80's has been a boon for an indebted government. ...[N]ow that they have started going up, ... big slices of the federal debt that have to be refinanced at higher market rates. And that creates a new source of budgetary red ink: rising interest payments. It turns out that George Bush has the biggest A.R.M. in the world. ...

The most important lesson to be drawn from the history of debt is this:... The crux is whether the interest payments you have to make are more or less than you can afford to pay. And that, in turn, is a function of whether or not the rate can move, whether or not your income can change and whether or not inflation can help you or hurt you. On this basis, both subprime American mortgage-holders and a distinctly subprime administration may find the months ahead more painful than they anticipated. ...

The global economic climate seems to be changing. ... Dollar depreciation and inflation have saved the [economy] before. The assumption seems to be that they will do the trick again. Yet this time may be different... [O]ne obvious inference to be drawn from the British experience of an indebted empire and a sliding currency is that eternal life is not on offer.