CINCINNATI BUSINESS COURIER
March 20-26, 1989
Investments
By Charles D. Vaughan
Debt Gets Deeper, Challenge Gets Bigger
You load 16 tons and what do you get ?
Another day older and deeper in debt.
This refrain from a 1950s Tennessee Ernie Ford song may set the tune for world economics in the 1990s. Debt in its many forms is the number one economic challenge of the next decade.
How we deal with it may determine not only our standard of living, but possibly whether we are at peace or at war. We read daily of the savings and loan and bond crisis. We hear constant chatter from Washington about how to deal with the federal deficit. These are merely Trivial Pursuit when compared with the problems of Third World debt.
In our comfortable “ostrich stance” it is easy for us to ask, “What has that to do with me?” It isn’t my problem that greedy Latin American politicians took advantage of overzealous bankers several years ago. Exactly! That’s what the residents of those countries are now saying in even louder tones.
Latin American countries alone owe more than $400 billion to foreign (mainly U.S.) banks. The problem they can’t pay. Chile is a good example. Its debt of $21 billion is 113 percent of its gross domestic product (GDP). Crushing austerity programs set up to appease foreign bankers are causing people to rebel.
St. Peter, don’t you call me ’cause I can’t go.
I owe my soul to the company store,
Left wing politicians see this as an opportunity to take over. They campaign on a platform of debt repudiation. The recent efforts to poison fruit, Chile’s second largest export, are thought to be a Communist effort to bring down the fragile economy.
For many countries no amount of refinancing, debt extension or other hocus-pocus can alter the fact that they are broke. The effects are devastating. Inflation runs rampant while economies wither. Those who watch our domestic growth rate as a sign of inflation should look south of the border.
Argentina ($55 billion debt equal to 79 percent of GDP) is facing a downward spiral in its economy along with a 400 percent inflation rate. Matters are worse still for Peru ($18 billion debt equal to 49 percent of GDP) a shrinking economy and a 1,700 percent inflation rate. Perhaps we should listen to Nobel Laureate economist Milton Friedman who said, “Inflation is always and everywhere a monetary phenomenon.” It is rooted in excessive levels of debt. As always, governments will ultimately monetize it. That is they will in some fashion print money to make up for debt. The problem may belong to the bankers, but rest assured, the solution will be found in your pocket.
Our theories of growth and inflation are based on out national experience. We have virtually always been a creditor nation. In the past few years, we have joined the debtors in a big way. As debtors, we now face the reality of running to stay even. Inflation may be merely monetary, but its effects are real.
By allowing foreign bankers to support our buy now- pay later economy, we have lost our status as bankers to the world economy. The majority of the top 10 banks in the world are now in Japan. The trend continues. Latin American debtors are now in a position of being able to topple our banking system, We will have to deal with them. The Reagan administration plan to lend more to our debtors to help them grow out of debt failed. The Bush administration plan to give lenders an incentive to reduce debt may help. In the end, those who can’t pay, won’t. You will.
On the other hand, our foreign creditors will expect full payment with interest. We will pay. The price to our economy from the combination of failing debtors and strong creditors may be high. We may get a taste of higher inflation and slower growth. The result is lower standard of living on a national level.
Those who continue to think in terms of our previous position in the world economy will lose ground. Those realistic enough to watch and react to unfolding trends should be able to keep pace. The first step is to view economics as being global. An increasing percentage of our domestic assets is moving into foreign hands. The second step is to be brutally realistic. In one way or another, our government is going to spend $100 billion or more to bail out the banking system. It will not be done through increased taxes, but through the only unlegislated tax inflation. The third step is to realize that you can offset the effects of these trends by a partial reallocation of investment assets. If you can sit still, you will probably lose ground.
You load 16 tons of number nine coal.
And the straw boss says, “Well bless my soul. ”