Some simple principles I have tried to live by: live within your means, don't borrow more than you can repay, don't concentrate your risk in one place, don't lend to individuals of unscrupulous character, and always have a Plan B.
I realize that not everyone lives by these values but I do expect they respect the risk they take on and that they are accountable for it. To risk takers, go the profits but they must also own the perils.
Lately the rules have appeared to have broken down. It seems that now if you are an excessive risk taker and you are excessively damaged by a bad gamble, the U.S. government has changed the rules to help you. Now the government takes on your risk. Multiplied by millions of people, this risk bill has turned into trillions of dollars added to the U.S. debt of about $14 trillion and teetering just under the U.S. debt ceiling.
WHAT'S THE BIG DEAL?
So what is the big deal? If we need more money and the debt ceiling is imposed by Congress, why don't they just raise it?
The debt ceiling is used as a forcing mechanism to instill spending discipline and limits. It's no different than your bank instilling a credit limit on your credit card. Imagine if you had no ceiling? Imagine if you could raise your credit limit arbitrarily? Imagine if you could influence a political process to raise the limit?
I would expect that being so dangerously close to the edge of default, should make us quite sober and focus our minds to decide where to stop spending and what things have to seriously change.
I am getting worried it may not be happening and I don't seem to be the only one. Some of our bond raters seem to have serious concerns about the financial leadership in this country. It is true that money is still very cheap and the world financiers appear confident in U.S. creditworthiness, but that can change in a Greek minute.
Canada faced a similar situation in the 1970s and 1980s: big debt, low employment, unmanageable interest payments stemming from high interest rates. So what happened? What did the government do? It swallowed very bitter medicine. It shrunk government and embarked on a big austerity program (which is a fancy word for higher taxes and less services). Rising inflation and commodities prices fueled demand for labor and increased the ability for the government to manage and reduce the debt. And it turns out to be a pretty nice story now with the Canadian dollar being worth more than the U.S. dollar.
So can we expect the U.S. to do the same? Does the American government have the stomach to make social program entitlements less generous and more efficient? Can the nation learn to become competitive in the global marketplace and adjust labor rates to those in emerging markets?
If the United States is indeed at a default precipice, the U.S. Treasury won't be able to pinch cash from the pension cookie jar for long to keep the nation afloat. After that, all that is left is to hide bills in a drawer and wait for creditors to start collecting by whatever means. Is it worth it?
JOANNA MAKOMASKI is a specialist in innovative enterprise risk management methods and implementation techniques.
June 1, 2011
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