XI. The Curse of the Debt

When the national Treasury is unfathomably in the red, the nation turns color blind. It prefers to believe that red is black, or at least white, that liabilities, if not real assets, are "no burden." When this stage is reached, the doors of the fool's paradise open wide. Actually, the more indebted a nation is, the more immune it becomes from the fear of national bankruptcy. Once the principle that debts have to be repaid sooner or later is for gotten, all monetary inhibitions (which the dis cipline of the gold standard used to provide!) go with the political wind. The mileage of irrespon sibility may be gauged by the Democratic plat form of 1960 which promises additional expendi tures of $80 billi~n for "rights-of-man" items in the next five years, as well as a few billions for in creased military spending, all these on top of a 110 THE CURSE OF THE DEBT current budget of $81 billion. For parallels in fiscal cynicism one has to go back to the days of the Jacobin-controlled French revolutionary con vention.

A large debt necessitates money-printing and brings about price inflation. As it is, debt ~oneti zation virtually is forced on the government by the colossal volume of the debt. An attempt to collect, say, $100 billion savings for permanent invest ment in government bonds is out of the question. Interest rates would have to rise to prohibitive heights, and the flow of capital into mortgages, corporate and municipal bonds would have to b~ greatly reduced, if not stopped altogether. To avoid "excessive" interest rates and an excessive drain on the long-term funds, the Treasury is driven into the short-term money market. At this writing, $70-odd billion marketable obligations are maturing within one year. Another $48 billion nonmarketable bonds and $6 billion convertibles belong, in effect, in the same category, adding up to nearly one-half of the gross debt. Then, too, $73 billion marketables are due in one to five years, which is still a very short range.

To borrow short is very convenient-for finan cial charlatans. No problem of "placing" the bonds; most of the time, banks and others with excess cash can use three-to nine month treasury bills, one-year certificates, and similar instrumen talities. They are as good as cash and also yield a III AN INFLATION PRIMER return. They are equivalent to cash because the government never defaults (how could it when it may, in effect, print the money with which to pay -"borrow from itself"), and there is a safe and secure outlet for them in the central bank. The Federal Reserve is here to pick up the slack, if any, and to turn it into legal tender. To monetize this kind of debt is a political must. Otherwise, not only the Treasury's credit but the entire credit structure would be doomed. In final analysis, our credit system and our eco nomic "security" rest on the national debt. Three fifths of the Federal R~serve's assets consist of public securities. They also constitute most of the "cash" reserves of the corporations and savings and loan associations, and one-half to two-thirds of the banks' "liquidity." Virtually every cent of what we consider as prime liquid assets is either government paper or a claim on government paper.

FICTIONAL FINANCE AND MONETIZATION The implications of this imaginary liquidity are devastating, as demonstrated by the behavior of the average banker. He finds that 40 per cent or more of his assets are "prime liquid," either paper money or claims on paper money to be issued against government paper. The purchas ing power thus created has nothing to do with gold or silver or marketable goods or anything tangible, 112 THE CURSE OF THE DEBT present or future. But his bank exudes "liquidity," as at no other time before 1934. Within very broad limits, he can proceed to make loans in al most any iI-liquid fashion; legally and statistically, his situation remains comfortable and unassail able, provided he observes the customary rituals. It makes little difference how far the maturity of his business loans, mortgage loans and "other" loans is stretched; or how good the credit of the respective debtors is. He pours out installment credit by mortgaging the car and forgetting to check on the car's owner; he uses sight deposits to extend term loans (up to ten years) on oil-in-the ground without a thought to the future price of overproduced oil; he finances construction that will pay its way only if the inflation continues in definitely; he gives, and is encouraged to give, mortgage credit to young couples with or without secure jobs, at little or no down payment; and so on.

Financially, we live in a world of fiction, as we did in the 1920's. Then, a gigantic structure' of stock-market values provided the fictitious liquidity that oiled the wheels of a mythical pros perity. Now, a gigantic structure of artificial bond values generates the lubricant of an equally ficti tious prosperity-at mounting costs, prices and tensions-based on the inlplicit myth of the central bank's inexhaustible capacity to maintain, by debt monetization, the system's liquidity. 113 AN INFLATION PRIMER The direct monetary consequences are patent. Suppose the Federal Reserve would suddenly re fuse to buy, or to loan on, any more obligations of the national government (to say nothing of un loading an appreciable portion of its portfolio). The demand for those obligations could dry up overnight. Banks and financial institutions, busi ness corporations, and many individuals would find themselves in a highly uncomfortable condi tion. Instead of swimming in liquidity, actual or potential, they might be faced with far-reaching liquidations. A scramble for "cash" could develop into an old-fashioned money panic. At any rate, security and real estate values, based as they are on the assumuption of an indefinite credit flow, would be in for a severe beating.

But why should the Federal Reserve stop mone tizing "whenever needed" to maintain the fiction of ample liquidity? And if it were reluctant, what would stop the Congress from forcing the central bank's hand? We do not doubt that the Congress is almighty, so far as legislation is concerned. The question is, merely, whether economic forces can be outlegislated. As things stand now, debt mone tization by the Federal Reserve could not be re sumed on a major scale without giving a fresh impetus to the vicious wage-price spiral, impair ing the balance of payments, and sparking an out flow of gold. Unless we are ready to take another dollar devaluation on the chin, or to accept all114 THE CURSE OF THE DEBT round price, wage, and foreign-exchange control let alone the mass unemployment in the wake of a progressive inflation-the volume of Federal Re serve credit must be kept under control. And there is another Damocles sword hanging over the na tional economy, one that is being neglected, if not ignored, in the controversy about creeping infla tion.

EXPANDING ON OVERDRAFT Technically and psychologically, the inflated national debt is the pillar that holds up an over inflated and rapidly growing structure of non federal (municipal, corporate, and individual) debts. That paper edifice is growing faster than the money volume or people's net income or net savings; faster than productive investment or in dustrial output. Totaling an estimated $603.1 billion at the end of 1959, the net private-plus municipal debt is now three and one-half times~ what it was thirty years ago, when it collapsed by its own weight. But that ominous reminder does not tell the full story. What matters is the self accelerating growth of the non federal debt tower. The addition in 1959 (net, after repayments) amounted to $57.4 billion, the largest ever, $7 billion more than in the previous peak year of 1957 and practically equaling its own increase in eight years of the booming twenties!

Patently, the growth of private, corporate, and 115 AN INFLATION PRIMER municipal debts-leaving aside the federal debt finances our economic growth. It is equally patent that the one "growth" must not, and cannot, run far ahead of the other, for how could the debts be serviced and amortized, if not from the output of the investment which they financed? But the non federal debt zooms ahead of the GNP; at that, a large slice of the GNP consists of things (such as military hardware) and services (of bureaucrats, for example) which cost a lot but are not accept able in payment to creditors. Recourse on the national debt and its moneti zation is the built-in safeguard of the inflationist. Indeed, it is built into his mind. His is a mind equipped with statistics, dialectics, and wishful ness; it lacks nothing but foresight (and hind sight!). Living in a financial Eden, it ignores the serpent in the Garden. Its name is overexpansion. 1 DEBT LIQUIDATION With regard to nonfederal debts, unless the bor rowing is done, in effect, for wasteful consumption or sheer gambling, and some of it .surely is, the mone~ serves to enlarge production and productive facilities. Directly or by indirection, credits (debts) provide the means' of expanding the industrial capacity-from inventories and machines to build ings and plants-and an incentive to do so.

But th.e "leverage" in the financial setup of com munities, corporations, and family budgets gets 116 THE CURSE OF THE DEBT shorter and shorter, and we are heading for a devastating break of the dams which hold a per nicious liquidation from floodin~ the rampart of the economy. The crisis is unavoidable, as it was unavoidable in the past, when people awaken to the understanding that there are no real values, that is, earning power, back of the excessive capaci ties and malinvestments which their claims are supposed to represent. Economic growth may be, and has been, fostered for years by a turbulent expansion of private and corporate debts. When the latter burst at the seams, the government will not be able to step in to save the day and maintain the growth. It may have no untapped tax sources left, and it will have exhausted its debt resources-overdrawn on its own credit. What remains is recourse on the cen tral bank. By then, money printing may smooth the liquidation process, at best; at worst, it will bring about a run on the dollar. In either case, a period of economic stagnation is bound to be the reward for a prolonged process of capital erosion.

CREEPING INFLATION'S SUICIDE , Fortunately, there is salvation in prospect, nay, under way. The built-in automatism (a real one, not man-made) of the financial market place will terminate the reckless debt inflation. It does so by restraining the banks whose liquidity is impaired, with or without raising the interest rates. Rise they 117 AN INFLATION PRIMER must, if the superboom is rekindled, because the vastrcredit demand of the would-be debtors clashes with a growing reluctance of the capital owners and managers to invest in futility. Savings institu tions are compelled to buy ,fixed-interest assets; individual savers may be barnboozled by solemn and meaningless assertions of maintaining artifi cial full employment and stability under the freely spending welfare state. Advocates of the welfare state ignore elementary economics: that full em ployment of a durable nature can be arrived at only if prices and costs adjust themselves to the market. But the necessary adjustments are post poned, if not stymied, by the inflation of debts.

Creeping inflation is a costly and dangerous luxury which only an economy that is not loaded with debts as yet can afford. 1. For an early consideration of this menace, see R. P. Dlin's "Are We Building Too Much Capacity?" Harvard Business Review, November-December, 1955. 118 XII THE DOLLAR ON THE SICKBED "GOOD AS GOLD" The modern history of gold is rich in contro versies. "Gold shortage and global devaluation" was the battle cry of the money cranks in ·the late twenties. Then, in the thirties, an excessive gold inflow sparked freakish proposals in the opposite direction, varying from an import tax on gold to its total demonetization. These proposals were answered on Friday, May 3, 1940) as follows: For the excess of goods we shipped and for the dollar credits we granted we have taken gold in the last six years instead of promissory notes. The phrase "good as gold" still has real meaning in the world. I prefer the gold to pieces of foreign paper. I think most Americans agree with me.