Eric Fry

“Mint Poison Cookie” is not the name of a Ben & Jerry’s ice cream flavor. But it might as well be…if you happen to be a Chihuahua with a sweet tooth.

Last Saturday night, your editor’s Chihuahua, Tango, consumed a near-fatal quantity of chocolate, which got your editor to thinking that debt is a lot like chocolate: Sweet and delicious in some circumstances; fatal in others.

Ben & Jerry’s “Mint Chocolate Cookie” ice cream is the favorite flavor of your editor’s youngest son, Ethan. He loves chocolate. So does Tango. When Ethan eats chocolate nothing much happens. When Tango eats chocolate he spends the night in “Animal Urgent Care,” undergoing emergency chocolate de-toxification. No kidding.

Sometime on Saturday, Tango chowed down a few brownies while no one was looking. The poor little guy’s heartbeat raced up to 240 beats-per-minute, necessitating a battery of emergency de-tox procedures at the Urgent Care Center.

One sleepless night and $1,600 later, Tango came trotting out of the doggy ER as if nothing had happened. But something had happened. The 5-pound pooch nearly overdosed on chocolate.

Greece is that 5-pound pooch. The US is a St. Bernard, relatively speaking. But while Greece eats a few too many brownies, the US is busy inhaling the entire inventory of a See’s candy store. From the Mediterranean to the Pacific, the nations of the West are gulping down life-threatening quantities of debt.

But remember, debt is like chocolate – sometimes sweet and sometimes fatal. Debt-financed investment, for example, is often sweet. Capitalistic initiative frequently requires debt-financing to succeed. And even after achieving some measure of success, capitalistic enterprises can magnify their profitability by taking on additional debt.

Debt-financed consumption is entirely different. It does not facilitate capitalistic initiative or leverage success; it merely advances demand from the future to the present. At the outset, debt-financed consumption often seems as sweet as chocolate to a Chihuahua. But the resulting consequences can be nearly as dire.

Over-indulging in debt-financed consumption produces a kind of financial tachycardia, in which debt-service obligations race ahead of cash-flow, and the debtor struggles merely to maintain his vital signs. Sometimes the debtor treats his affliction in time to recover. But sadly, many debtors respond too late to save themselves…and succumb to their over- indulgence.

Despite the hazards of debt-financed consumption, very few of us modify our behavior. As long as someone will provide the financing to buy a car, or a La-Z-Boy or a collector’s set of Obama-Biden china dishes, we will avail ourselves of it. At the individual level, this behavior may not be a big deal. But at the national level, it is a very big deal indeed.

Increasingly, the credit that used to fund private enterprise in the West is funding mere consumption. Decreasingly, therefore, the nations of the West possess the wherewithal to “grow themselves out” of difficulty.

“In 1957, 54 cents of national income resulted for each dollar of debt,” according to the Grandfather Economic Reports, “But, today only 20 cents of national income results per dollar of debt. That’s a 63% drop in national income per added dollar of debt.”

Expressing the identical data in terms of debt per unit of GDP, the Grandfather Economic Report observes, “In 1957 there was $1.86 of outstanding debt for each dollar of national income. But, today’s economy needs $4.91 in outstanding debt for each dollar of national income… If we look just at the period 2000 to 2010 total debt increased $30 trillion, while US GDP increased [only] $4.6 trillion. In that period it took $7.50 in new debt to produce one extra $1 of added national income.”

The remedy to this lamentable trend lies on the expense side of national income statements, not on the revenue side. If an overly indebted Western nation hopes to emerge from its extreme indebtedness it must reduce the cost, size and intrusiveness of its public sector in order to liberate financing and other resources for the private sector.

In Chihuahua terms, the governments of the West must stop eating chocolate. But that’s rarely the inclination of elected officials…or of the constituents they represent. Neither the elected nor the electorate is eager to correct its self-destructive behavior. They’d rather find mechanisms to absorb or conceal the consequences of it. (I.e. “No” to spending cuts; “Yes” to raising the debt ceiling).

The solution, they argue, is not to avoid eating chocolate; it is to hire more veterinarians for the Urgent Care Center. So don’t expect the West to stop eating chocolate until its national treasuries suffer cardiac arrests.

The Greek treasury may be the first; it won’t be the last.

Eric Fry
for The Daily Reckoning

Eric Fry

Eric J. Fry, Agora Financial's Editorial Director, has been a specialist in international equities for nearly two decades. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short-selling.  Following his successes in professional money management, Mr. Fry joined the Wall Street-based publishing operations of James Grant, editor of the prestigious Grant's Interest Rate Observer. Working alongside Grant, Mr. Fry produced Grant's International and Apogee Research, institutional research products dedicated to international investment opportunities and short selling. 

Mr. Fry subsequently joined Agora Inc., as Editorial Director. In this role, Mr. Fry  supervises the editorial and research processes of numerous investment letters and services. Mr. Fry also publishes investment insights and commentary under his own byline as Editor of The Daily Reckoning. Mr. Fry authored the first comprehensive guide to investing internationally with American Depository Receipts.  His views and investment insights have appeared in numerous publications including Time, Barron's, Wall Street Journal, International Herald Tribune, Business Week, USA Today, Los Angeles Times and Money.

  • John M. Keynes

    Politicians have allowed the banking industry to grow larger than manufacturing. This was a bad mistake. Especially so in the United States where the top five banks control 40% of all deposits. The banks are so under-regulated and risky they are a danger to themselves and the public.

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