Last night, I had dinner with a long-time friend who is quite bright. He likes to get facts in his head before he talks about a subject. Better than that, though, he critically analyzes, which makes discussions with him enlightening. Anyway, last night, we had a long and interesting conversation about the market and the global debt issues as they relate to the future of the global economy. His vision of the future is dire, but not because he is a cynic. No, like any good person, he wants things to go well.
His problem with the future is he cannot see a way out of the spiraling global debt. In his words, more or less, he cannot see how adding more debt to the debt problem can fix the debt problem. He sees it all as one big bubble waiting to pop, leaving the world with no choice but to default, to simply write off the hundreds of trillions in debt. When that happens, the world will live in a state of deflation for some twenty years. The only thing left of real value will be the U.S. dollar.
As I said this vision is dire, and at this point I am not convinced this is the future, but it does merit some thought. Specifically, one thought he and I bandied about was this future does not have to be, if there were a way out.
In the past, say after WWII, the U.S. and Europe accrued massive debt to fight the war and then repair the shattered remains of Europe and Japan. Relative to GDP, that debt was higher than it is today. My friend suggested the difference between then and now is what we did after we repaired Europe and Japan. Ironically, we spent more money, but the focus was on projects that would return value to the economy. For example, the very expensive GI Bill sent millions of returning soldiers to college for free. This created a whole new class of educated people who then went on to fill the ranks of the newly create National Aeronautics and Space Administration (NASA), which ultimately put a man on the moon. One estimate is that this program returned $17 to the economy for every dollar spent. President Eisenhower spent money to build the Interstate Highway system, which improved commercial transportation and set the seeds for suburban America, which created a massive home construction industry. These two examples point to what he says is a way out – getting a return on investment in debt. His problem, and the problem I will pose to you all, is this.
Currently, the money spent on debt around the world is to secure more debt. He does not see any return on investment (ROI) for the money, so he sees the future described earlier. For example, most all of the U.S. debt in the last ten years is from two wars, several unfunded mandates, tax cuts, and economic stimulus programs. My friend argues that none of these creates the ROI needed to get out of debt. We discussed some areas where debt is producing some ROI (solar power), but those are not enough to counter the trend, he contends. My open question, then, is this – is there anything at this point we can spend money on to get that ROI, or should we, as my friend contends, bite the bullet and let the house of cards collapse, so we can simply start over? Feel free to think about this and respond.
As to my good news finish for today …
Small businesses in the U.S. grew more confident in the economy’s future in November, for a third straight month of improvement, bolstered by a more optimistic outlook for sales and hiring.
Trade in the day – Invest in your life …
