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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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August 6, 2012

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By Charles Hugh Smith

The incentives to take on debt are so ubiquitous that we underestimate their pernicious power to trigger self-destructive behavior.  Want to go to college?  Just borrow the money now, with no payments until you graduate.  Need some consumerist-retail therapy to lift your sagging spirits?  Just use plastic, and pay for the splurge later.  Want to buy a house?  Hey, the interest on that 30-year mortgage is all tax deductible.  It’s crazy to pay taxes when there’s a big fat deduction for mortgage interest.

This same set of incentives works on a national and global scale, too.  Put yourself in the shoes of the typical spineless, campaign-donation-dependent politico whose primary obsession in life is clinging to power via winning the next election.  Every heavy-weight constituency is protesting any tiny reduction in their share of the Federal swag, so drastic cuts are out of the question.  What’s the only painless option?  Borrow $1.5 trillion every year to make sure the swag is fully funded and the restive constituencies are quieted for another election cycle.

But debt has a consequence called interest that feeds a destructive self-reinforcing cycle.  At a certain threshold, there is no painless way to pay the interest except to borrow more money.  That increases the interest payments due next year, and so the “solution” is to borrow yet more next year.

This same dynamic plays out in heavily indebted nations.  Take Japan, for example.  Its national tax revenues barely cover its interest payments and social security program, despite interest rates below 1%.  The rest of its government expenditures must be borrowed, adding to next year’s interest payment burden.

Once a critical mass of income is devoted to paying interest, there is not enough income left to invest in productive investments.  Without increases in productivity, income declines, further squeezing budgets as income falls but debt service costs remain fixed.

As the relative share of income siphoned off by interest rises, there is less available for either investment or consumption, so “growth” also declines.  Borrowing more to pay the interest only adds to next year’s interest payments.

Incentivize debt, and you end up relying on debt as a substitute for productivity and income.  Increase debt, and there’s not enough income left for productive investments that might boost income.  Incentivize debt via making interest tax deductible, and you create a self-reinforcing feedback of a rising share of declining income being devoted to interest payments.  With demand and borrowing both suppressed by debt-serfdom, demand for housing, goods and services declines.  Borrowing more to consume simply speeds the cycle of rising interest and falling net incomes.

Incentivize debt and you create multiple overlapping death spirals.  We are seeing the death-spirals play out in a fractal manner, from households to nations to entire regions.  High debt levels lead to high interest payments which lead to low investment and savings rates which lead to lower productivity which leads to stagnation of income, consumption and investment:  in other words, a death spiral.