Mom & Dad and the Credit Downgrade

The recent credit downgrade shouldn’t come as a surprise to anyone who has ever had to run a household budget. This probably explains why it’s absolutely shocking to politicos in Washington, but I digress. The media claims that the downgrade shouldn’t have happened because Congress ended up increasing the debt limit and that it was really caused by the debate that took place beforehand, shaking investor confidence. It actually happened because raising the debt ceiling did practically nothing to address our fundamental inability to pay for our bloated government.


Imagine Dad (Republicans) and Mom (Democrats) are faced with a dilemma; they’ve maxxed their credit cards. Naturally, a debate ensues (which probably includes some accusations and name calling, ignoring all the times they both agreed to spend more money). Mom tells Dad he needs to get a second job to pay for the credit card bills. Dad tells Mom she needs to start spending less money. Neither suggestion is well received. Finally, with the due date to pay the bills rapidly approaching, they reach a compromise. They agree to call the credit card company and increase their credit limit. In return they agree to consider establishing a balanced budget and they agree to consider maybe possibly spending less money… next year.

After watching this whole episode, the neighbors are well aware that Mom and Dad have made no attempt to live within their means. Furthermore, they’ve done absolutely nothing to reduce the likelihood of having this same argument next year when they max out their cards… again.

Why the downgrade after raising the debt ceiling? Because for once it looked like having a deadline was going to force the politicians to roll up their sleeves and face the grim reality that Uncle Sam spends like a drunken sailor (no offense; sailors are much more responsible even when intoxicated). Instead, they made some vague promises about the future and failed to make any fundamental changes today, kicking the can down the road. S&P downgraded the US of A because Congress just missed a huge opportunity to demonstrate real fiscal discipline.

China and the Deficit

We are responsible for the low standard of living in China, but not in the way you might expect.  We buy cheap goods from China while their workers barely see any of the resulting profits.  Our government and the government of China have a tacit understanding that facilitates this state of affairs.  Rather than distributing profits via increased wages, the Chinese government uses this money to finance US government debt, keeping the currency exchange rate low and keeping their goods monetarily cheap.

This would not be possible but for the US government requiring foreign financing to continue functioning on a day to day basis.  While this arrangement benefits US politicians by allowing them to fiscally have their cake and eat it too, it has also led to a steady flow of manufacturing jobs from America to China.  Without this government manipulation, and the compliance of American politicians, China would not have been able to build their industrial base as rapidly as they have; thus why the Chinese government continues to plow billions of dollars into depreciating American debt.

We really only have three possible exits from this cycle.  One is to hope that growing domestic discontent in China will lead to wage increases from their artificially depressed levels.  Two is to hope that American politicians (or American voters) will lose their appetite for irresponsible spending and refuse to play their part in perpetuating the cycle.  The last option is the endgame where the Chinese government realizes their goals; a strong industrial base at home and America a hollowed our shell of the competitor it previously was.  China inherits the best of both worlds with increased domestic demand and a strong trade balance.

In simple terms, the Chinese are saving and investing for a higher standard of living in the future, while America is living it up on the credit card but, unless we change, will ultimately face decline and poverty.

Marx vs. Smith

Key to Marxism is the argument that the laborer has always been forced to work for the bourgeoisie. Although true in the days of slavery and serfdom, when those in power used violence to extract labor, it is a stretch to believe this is true today. The “force” supposedly compelling today’s laborer is the threat of unemployment. However, as Adam Smith points out in Wealth of Nations, man in his natural state works only for himself. Therefore, the alternative to employment is not death by starvation as the Marxists claim, but rather that which man naturally possesses: self-employment. Ironically, those in power are willing to raise taxes on the self-employed Americans that make up 70% of the “businesses” in the United States. At least they have generously offered to return some of those tax dollars, for a small fee; in the form of small business loans.