Review & Outlook

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The Socialization of Debt and Some Thoughts on What It Means

9 February, 2011 by Mark O'Brien in Commentary

In the investment business charts and graphs can be more like Rorschach tests than explications of the market or the economy.  By Rorschach test I am referring to black ink drawings that one man says looks like, say, a flower pot while someone else says a horse and rider; the point is that the image elicits a response that says more about the observer than it says about the subject of the image. In any event one such chart recently crossed my desk and it elicited a response from me that may be more revealing of me than anything about the economy.  But here goes.

The chart displayed how a big chunk of total debt in the economy had shifted over the past three years from the private to the public sector.  Whereas three years ago the locus of the debt was in a column labeled “bank debt and household debt”, now the big chunk of debt appears under a column labeled “the federal government.”  What struck me about the chart was how the block of debt passed undiminished in size from the private to the public sector.  It looked as though some official somewhere blew a whistle and said, “All right, move all that private sector debt over there to the public sector column”, and so it was done.

So here’s the question: If the total amount of debt is the same, does it matter to the system where or by whom it is held?  Debt is debt, is that the idea – – as long as someone is spending, that’s all that matters?   The answer would appear to be “Yes”: policy makers are getting the country deeper into debt at the same rate private individuals and companies are getting out of debt.  Policymakers want to maintain overall spending because in the short term, goes the theory, that keeps employment and stock prices high, or appears to.  But, as I said, this is all theory and there is not much proof it works.  Indeed, the current crop of policymakers has not exactly covered itself with glory in other areas; one thinks of the housing bubble and financial regulation.  I think the larger question is why this crowd should be allowed to get us into more debt, which we have to pay off, on the theory that it might do some short-term benefit? When I see the chart of the debt shift, I see the presumption of policy makers, and it leaves me wondering why Main Street, quite apart from Wall Street, puts up with it.