HBCU Money

By William A. Foster, IV

Imagine for a moment you were superman/woman. Would you ever walk? Or drive? Or better yet, catch a flight to get anywhere? Of course you would not because you do not have to. You are faster than a speeding bullet  and have the ability to do something that nobody else does – for better or worse. This is the mentality of many governments on the face of the Earth – and maybe on other planets. Too often just because we can, we do.

I am residing in Houston, Texas at the moment. A place that as a whole has been largely insulated from the great recession due to its strict borrowing regulations on real estate and conservative rise in real estate prices which limit the amount of speculating that drowned the rest of the country. As a result of a stronger economy than the rest of the country, there were a large number of bond votes that Houstonians voted for or against in the past few years. Recently, a survey was done on how Houstonians felt about their financial future and it came back so positive that many bonds passed with relative ease. Yet, one has to ponder even for a city so highly insulated from the real estate bubble, but potentially vulnerable to the energy industry is there an unforeseen danger to constant leveraging of tomorrow today. Just ask Detroit.

A government bond is essentially a debt instrument that governments can use to bridge the gap between their tax revenues and their expenditures. These expenditures can include everything from paying employees, funding retirements, improving infrastructure, and a host of other things. On the states level many state constitutions require a balanced budget meaning states can not spend more than they take in a fiscal cycle. This is sometimes misleading as with most things in life there are loopholes. However, at the federal level though there is no mandate to have a balanced budget. The federal government can run deficits meaning it can spend more than it takes in by simply borrowing the margin it needs. I sure wish I had this option in my household, do not you? At the moment that gap (deficit) is annually running at about $1 trillion dollars which has helped create a national debt of approximately $16 trillion. Usually when a household, company, or organization runs a deficit for a prolonged period of time they end up in bankruptcy. The federal government though has the power of the purse meaning they can either print more money or increase taxes, but even this has its limits. That is because it can only work so long as there is an agreeable buyer to buy the debt as an investment.

America’s culture of borrow, borrow, and borrow some more is a recent phenom in America seemingly ushered in with the rise of the Baby Boomer generation to power as you can see in the graph above over the past 60 years or so. Americans use to be more prudent savers prior to World War II. In stark contrast, Asia has and continues to be an increasingly acute saving society. The Asian Development Bank studied 14 Asian countries and the Chinese territory of Hong Kong and found their average savings rate to be 29.3 percent (see below) across the continent in its most recent data. Meanwhile, the United States current savings rate according to the St. Louis Fed shows America at 4.3 percent. In other words, it would take a 582 percent increase in America’s current savings rate to match Asia.  We know as the people’s behavior goes so goes their government’s. After all, governments are of the people and so is their fiscal behavior.

For some reason it has never dawned on governments to plan ahead. It has never dawned on them that debt to finance future purchases is not actually necessary. America’s current infrastructure is in disarray to put it kindly, but when these structures were built did no one think that one day they would decay? The moment we buy a car are we assuming it will run forever? Or it will never need maintenance? Instead, we have taken the attitude that these deferred maintenance or replacement cost can just be borrowed against more and more. Each time requiring more debt than previously borrowed and deferring the liability to another generation. Historically low interest rates are currently suppressing the net interest we are paying on our $17 trillion in debt. As of 2013, we are paying $223 billion in interest or 6 percent of federal outlays. Internal HBCU Money calculations estimate the percentage would be 59 percent of federal outlays or $10 trillion if the Fed funds rate adjusted to market demand.

The American Society of Civil Engineers gave the U.S. a D+ on its infrastructure and estimates it would cost $1.6 trillion to “catch up” by 2020. My elementary math might be a bit rusty, but that equates to currently seven years of interest. I could go on and on about the many number of things America could be doing with that $223 billion like improving our education system, providing more assistance for veterans, or simply putting that money away for a rainy day.

There is joy in taking a walk, taking a country drive, and even in letting someone else do the flying and looking out of the window at the Earth’s beauty. Financial stress even at the most macro level of government seeps into American households and stresses the very fabric of a country. We see this with the rise of the TEA party and Occupy Wall Street movements. A change in culture is needed and it is needed within our homes. We must be fiscally responsible and teach our children to do the same so that the future generations of leadership in this country can start to remove the glutton of entitlement corrupting the veins of America. A family, community, country must be strong and part of that strength is its fiscal house or as my mother often told me – just because we can do something does not mean we should, superman. There is after all strength in restraint.