Managing Debt

"I place economy among the first and most important virtues, and debt as the greatest of dangers to be feared." - Thomas Jefferson

We have a full-blown debt crisis in the United States. But lest you condemn my words as those of a zero-debt zealot, let me first make it clear that I do not consider debt in and of itself to be a bad thing. On the contrary, we need debt. Without the use of leverage, our society would never have advanced as far as it has in the last couple hundred years. Without debt, most of our great buildings would not have been built; nor our interstate system and highways. Many businesses would not survive without the use of debt. So no, debt itself is not the problem - it's America's abuse of it that is the problem.

Consider these facts:

According to the Grandfather Economic Report Series, counting the combined debt of its citizens, the United States owes a total of $53 trillion, or $175 thousand per man, woman, and child living in the U.S. That is a staggering amount of money.

The Federal Government Debt Report reveals that the U.S. government itself owes $9.2 trillion.

In 2007, total American debt increased five and one-half times faster than the gross domestic product.

Even more disturbing than the incredibly large total amounts owed is the rapid pace at which the U.S. government and its citizens are accumulating new debt. For instance, America's external debt increased from $6.4 trillion in 2003 to $12.5 trillion in 2007, nearly doubling in four years. I believe our government's habit of taking on debt at a rate faster than the growth of our economy has set a bad example for the American people. Since 1990, American household debt has increased 60% faster than the economy.

For how many years can this go on?

80% of our country's total debt has been created since 1990. This suggests that our economic growth for most of the last two decades has been fueled by debt, rather than improved efficiency or productivity.

One consequence of a debt-saddled government is inflation. Inflation actually helps a government deal with its debt because it lowers the burden of future debt payments. In fact, there have been numerous occasions throughout history when a country has essentially eliminated large chunks of debt through inflation. The reason is that a specified amount of money due at some point in the future is worth less, or costs less, today because of the lower present value of those future payments.

Our government places a high level of importance on preventing the decline in the value of Americans' assets. Real estate values have already taken a hit, so it is important the values of other types of investment assets, such as securities, remain stable. As asset values fall, consumers pull back on spending, which creates further strain on the economy. So we become locked in a vicious cycle - creating debt to sustain current economic momentum, yet crippling future opportunity.

So what can you, the average American, do? The first thing is to get control of your debt. And I don't mean to not use debt at all. But use it wisely. Do not make excessive purchases of things you don't need. Don't buy over-priced assets. Don't agree to loans that are going to result in a payment you can't afford if economic situations change.

Regardless of the recklessness with which our leaders sell off more and more of our country, it is still up to every one of us to individually take responsibility for our personal situation and get control of our debt. If we do this as individuals, then maybe the rest will fall into place.

"There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved." - Ludwig von Mises