The Smalrus Web Site

A runaway deficit may soon test Obama’s luck

By Niall Ferguson
Published: August 10 2009 22:09 | Last updated: August 10 2009 22:09

Niall Ferguson wrote this book (http://is.gd/2ckAo), which I’ve gotten about halfway through and is an overall economic history, including how debt came to be and how it came to be a big business. He’s specialized in the Rothschilds (obvious capital market players, but also debt market players), written on the Tulip Mania (one of the first recorded asset bubbles in the 1600s), and this book (http://is.gd/2ckRD), which I’ve also gotten about halfway through (a page at bedtime puts me to sleep) and is about the economic construction and collapse of the British Empire.

In essence, debt goes back to nearly Roman times — it was the impetus for funding wars and the pay of soldiers. As I read more and more, the problem I’m seeing goes beyond debt but toward a thrust of consumerism. The irony of me researching marketing isn’t lost on me — I think it has something to do with wanting to understand my deep-seated dichotomy between being anti-consumerist, while simultaneously viewing consumption as a vehicle for improving the standard of living (even for me).

Debt is a bad thing because virtually no debt is interest-free. The Koran forbids usury, but even the Muslim world has found workarounds that test those spiritual waters. As a result, the issuance of debt virtually has to guarantee future revenues — a gamble, if you will — and then some, for one to break even on a loan. It’s a risk-reward tradeoff.

Expansion of the middle class — and thus, more credit — has created an environment of entitlement to goods and services that didn’t previously exist. It’s the same problem with easy-access student loans. While the idea of investing in education is good at best, it is nonetheless a gamble on a significant ROI. It should go without saying that the past year of students who have graduated from university could have barely lent to the ROI of the government and private lenders, given the relative unemployment rate for those already in the workforce, who were also trying to pay back student loans.

Sustainable repayment of debts — be they for goods like military weaponry or for services like health care — relies the sale of two things:

1) Knowledge – It is quite obvious that the U.S. has become a knowledge-based exporter. People from around the world are still attracted to the American university system and private funding has only intensified research. Patents and other copyright applications are still the driving competitive engine behind American businesses and the growth of American GDP. Knowledge is an intangible asset of great value, yet right now it is the primary driver of American output.

2) Production – Since economic theory has always touted the benefits of the outsourcing of labor and free trade, the fact that American politicians put it into place in the past 20 years has contributed to the lack of American surpluses. While there is an intrinsic value placed on knowledge, it only achieves its greatest value when it is complemented with production of tangible goods. Free trade agreements work in economic theory because of the bullshit economic concept of “ceterus paribus,” yet in reality, all other things are NOT equal (ref: Paul Krugman’s Nobel-winning work). By removing production and sourcing it to the cheapest labor, America has eliminated the tangible component to easing deficit-relief.

Tangibility consumption is the key to abating the pain of debt. A while back, I was reading a book called Cities, by John Reader. It basically was a social anthropological look at the evolution of cities. He writes:

“As one city grew [Constantinople] and the other [Rome] shrank in significance on the changing geopolitical stage, the grain from Egypt was allocated to Constantinople and Rome became entirely dependent on supplies from north Africa. But there were fewer people in the city now, its importance was diminishing, and the imperatives of a grain supply system which had fed the city for centuries was slipping away…”

That the Roman Empire fell because of internal politicking is a superficial way of looking at it; the Roman Empire fell because it literally had no food to give to the people; the bureaucracy of Rome controlled neither the means of distribution, NOR the means of production.

Debt is ruinous, regardless of whether it is “honest” or not. Debt is subversive, regardless of its practical merit. And yet centuries of civilization have nonetheless validated its worth (even despite religious inhibition). It is going to take more than luck for the Obama Administration to run forward with its massive deficits. After all, luck never provided Romans a means of replenishing Roman coffers via depleted grain supplies and it’s likely not to provide Americans a means of replenishing the U.S. Treasury coffers via outsourced manufacturing.