You must control debt before it controls you

If a country goes into debt, no one gets sent to debtors’ prison, no one is declared bankrupt, the furniture is not sold off to recover the money. It’s more subtle, but in the end the country is forced to draw down on its capital and over time living standards fall. If you have debts you want to pay off you divert income into repayment and cut expenditure. One way or the other, those are the choices.

The picture below is not Australia’s debt, it is the timeline for American debt stretched out to 2024. It’s the same kind of picture we have here but in Australia we have a government that is intending to do something. And the picture comes with a story about Janet Yellen, the new Chair of the Fed in the United States.

yellin us federal debt

The only bit that is ridiculous in the story is that the timeframe is projected into the future, Fed Chair: ‘Deficits Will Rise to Unsustainable Levels’. What do they think happens when the government diverts output down various plug holes, that the entire country disappears into thin air? What happens is that over so slowly real incomes begin to fall and the communal environment begins to crumble. There will certainly still be many wealthy people, but the average will move in only one direction. Detroit becomes the national future.

In the US they pretend that time is on their side but it isn’t. Things are long past being just line ball. There will be a fall in living standards, in fact, it is already happening. The only question is whether there will be a recovery and if so when. Personally I do not see the slightest evidence of a will to change things around in the US.

But at least here we do have just that chance. We are dealing with a junior version of just this debt problem ourselves. The ALP talks about what geniuses they had been since debt-to-GDP was only about 37% when they left office. They never dwell on the figure when they came into office – ZERO – nor where debt levels are likely to go if nothing is done about the legacy they left.

This stuff is hard and generally uninteresting for most people. Just gimmee the loot or I’ll bring in the other mob who will. We here may not quite be at that stage but perhaps we are. What Janet really would like to say is what Joe Hockey’s been saying: THE HOUSE IS ON FIRE! THE HOUSE IS ON FIRE! but she can’t because she does not wish to bite the hand that fed her. But she knows. Keynesian though she is, she knows perfectly well that debt is a problem, and it is pure sophistry to argue that it’s not a problem because we owe it to ourselves. And when it comes to Australia, I can only hope that enough of us here know it as well. And looking at our own debt projections, it is certainly not an argument to say that that fire’s not all that big at the moment so why worry?