The Debt Made Me Do It

The Daily Reckoning – Weekend Edition
February 11-12, 2006
Baltimore, Maryland
By Kate Incontrera



Michigan, 2000: A man killed his pregnant wife, their three children, and then himself after losing around $100,000 in Vegas.

Paris, France, 2002: A married couple poisoned their five children, killing one, and then attempted to kill themselves. The family was $360,000 in debt.

Massachusetts, 2006: Neil Entwistle, a British man in his late twenties, has been charged with shooting and killing both his 27 year-old wife and nine month-old daughter in their home outside of Boston. According to news accounts, Entwistle had become “increasingly desperate as business ventures failed and debt piled up.”

Apparently, Neil Entwistle had around $3,000 in credit card debt, $25,000 or so in student loans, and was paying $2,400 in rent. He is unemployed and allegedly in debt to some shady characters.

Does this sound stressful? Yes. Out of the ordinary? Not in this country.

We hate to be the ones to break the news…but U.S. federal debt is at $8.2 trillion – and growing every second. That leaves each and every American’s portion of the federal debt at over $27,000.

Add that to soaring consumer debt and a negative savings rate and it just equals disaster for our economy. Does that mean that we’re putting ourselves in danger every time we go to the mall…all those people with loaded credit cards…who’s to say a crazed shopper racked with guilt over spending $350 on a Coach bag isn’t going to lose it? While that’s a highly unlikely scenario, we do hope that people will start facing up to the reality that a negative savings rate means that we are spending more than we’re earning – and then some.

Another way to think about our debt-driven economy is to think about it in terms of the trade deficit. The trade deficit figures for 2005 were released yesterday, showing a record high for the United States – $725.8 billion. The “pathological consumption” that is driving our economy is an individual version of a trade deficit, explains Addison.

If you were to quit your job and live off your home equity, you may stay home all day, buying things online, ordering take-out – consuming instead of producing. “But remember, you didn’t win the lottery;” warns Addison, “you are financing this ‘new plan’ with borrowed money.

“The lender will want that repaid.”

Something that hit a little too close to home for Neil Entwistle. And if he pleads insanity, the defense intends to use the “debt drove him crazy” angle.

“If Entwistle were found not guilty by reason of insanity,” says a Boston Globe article, “a hearing would be held to determine whether he should be sent to Bridgewater State Hospital until his mental status improved.

“The lawyers also said that an insanity defense must have prior evidence of mental health issues to be persuasive. Entwistle, according to prosecutors, was not getting mental health treatment, but was facing ‘tens of thousands of dollars’ of debt.”

In response to this, Harvey A. Silverglate, a Cambridge defense lawyer and civil libertarian said: ”I don’t think it passes the laugh test to have an insanity defense because you are in debt.”

Kate Incontrera
The Daily Reckoning

P.S. More from Addison on pathological consumption below – and look for more from him on how debt affects our country in the next few weeks. A Boston reporter has asked him for his insights in regard to the Entwistle defense of insanity by debt. We’ll keep you posted…

In the meantime, you might want to take a look at our country’s balance sheet…we’re certainly doing our best to rack up as much debt as possible, all the while spending above and beyond our means.

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THIS WEEK in THE DAILY RECKONING: The past five days of The Daily Reckoning have been chock-full of interesting tidbits…from the Flat Tax to Peak Oil. Did you miss an issue? No worries, we’ve thoughtfully catalogued all of them, below…

Ivan’s War    02/10/06
by Bill Bonner

“People, who believe that mankind is on an upward slope, always marching toward greater good for greater numbers, have some explaining to do. Bill Bonner explores…”

Life During Wartime    02/09/06
by Dan Denning

“America continues to consume more than it produces. Debt has driven a boom in American consumption right alongside a war that doesn’t seem to interrupt the daily life of many Americans.”

The Spirit of Reform    02/08/06
by Steve Forbes

“The flat tax is a reform of our federal income tax system. It does not affect, for example, state and local taxes. But, contrary to what some may fear, it will generate increased government revenue.”

Peak Oil and the Sorry State of the Union    02/07/06
by Byron King

“President Bush said, ‘America is addicted to oil,’ and set a goal of replacing 75 percent of the nation’s Mideast oil imports by 2025 with ethanol and other energy sources. Who is he kidding?”

Mister, Can You Loan Me A Buck?    02/06/06
by The Mogambo Guru

“An economy requires that people have to be out spending money, making money, borrowing money, investing money, and loaning money, all of which it takes to make an economy go. And suddenly, we are ‘None Of The Above.'”

FLOTSAM AND JETSAM: Well, the trade deficit numbers are in…and they aren’t pretty. The trade deficit is one of the most debated – and most misunderstood – economic indicators, and Addison Wiggin aims to explain what these figures really mean, below…

Pathological Consumption
by Addison Wiggin

I’ve spent a lot of money on booze, birds, and fast cars – the rest I just squandered. -George Best

Most people can relate to the realities of how jobs and profits shift, and why. The idea that higher-wage manufacturing jobs are being lost and replaced by lower-wage retail jobs, for example, is a reality that working people understand. They get it. The same is not always true when we talk about trade deficits. Like the falling dollar itself, it’s worth asking the question: how does it affect you, the individual?

The trade deficit – the excess of imports over exports – has a direct and serious effect on the value of our dollars. As long as we continue having big trade deficits, it means we’re spending more money overseas than we’re making at home. Our manufacturing profits are lower than our consumption. If your family’s budget has a “trade deficit” of sorts, you’ll soon be in trouble. If your spouse spends $4,000 for every $2,000 you bring home, something eventually gives way. This is what is going on with the trade deficit.

In fact, the trade deficit is one of the most important trends in the economy, and the one most likely to affect the value of the dollar. Combined with our government’s big budget deficit, the trade deficit only accelerates the speed of decline in our dollar’s value. Speaking in terms of spending power of the dollar, the trade deficit is the third rail of the economy. Here is what has been going on: The United States used to produce goods and sell them not only here at home, but throughout the world. We led the way, but not anymore. The shift away from dominance in the production of things people need has allowed other countries (most notably, China and India) to pass us up, and now the U.S. consumer has become a buyer instead of a seller.

This international version of conspicuous consumption is financed not from the profits of commerce, but from debt. Let’s think about this for a minute. If we were buying from domestic profits, the trade deficit wouldn’t be such a bad thing. It would mean we were spending money earned from domestic productivity. But this is not what is going on. We are going further and further into debt to buy goods from other countries. Our wealth is being transferred overseas and, at the same time, we are sinking deeper into debt.

This is taking place individually as well as nationally. Consumer debt (you know: credit cards, mortgages, lines of credit) is growing to record levels, and the federal current account deficit is moving our multitrillion-dollar national debt into new high territory.

Sure, we should be concerned about retirement income from savings, investments, pension plans, and Social Security. But a bigger danger is that, even with a comfortable retirement nest egg by today’s standards, what if those dollars are worthless when we retire? What then?

The big question today is, how long can this debt-driven economy continue? If you quit your job and refinance your home, you could live for a while on the money. The higher your equity, the longer you would be able to spend, spend, spend. But then what? This is precisely what is going on in the U.S. economy and, at some point very soon, we are going to have to face up to it and change our ways. This individual version of a trade deficit (the deficit between generating income and spending money) is what is happening on a national level in the United States.

This is the problem that is directly affecting the value of the dollar; and the situation is getting worse. We know that the dollar is in trouble because we see it depreciating against the floating currencies of other countries. America has a lot of wealth, but that wealth is being consumed very quickly. History shows that no matter how rich you are, you can lose that wealth if you’re not productive. Meanwhile, the dollar’s value falls and – in spite of the Fed’s view that this is a good thing – it means our savings are worth less. Your spending power falls when the dollar falls, and as this continues, the consequences will be sobering.

The dollar’s plunge has taken many people, currency experts of banks included, by surprise. For many of them, it is still impossible to grasp. Some talking head on CNBC said that he was at a complete loss to understand how such weak economies as those seen in the European Union could have a strong currency. For America’s policy makers and most economists, the huge trade deficit is no problem. They find it natural that fast-growing countries import money while slow-growing economies export money. At least, that is the recurring theme.

So Americans traveling abroad may continue to complain that “it has become so expensive to travel in Europe” as though the problem were somehow the fault of the Europeans. But in fact, it is the declining spending power of the dollar that is to blame, and not just the French, the Italians, and the residents of the so-called “chocolate making” countries.

This problem is pegged not to some speculative or fuzzy economic cause, even though the concept of currency exchange rates continues to mystify. A historically large trade deficit is at the core of the declining dollar. Somebody needs to get over the notion that our economy is strong and other economies are weak, merely because this is America. In the United States, the reason for the trade deficit is not a high rate of investment as we see in some other countries, but an abysmally low level of national savings. We are spending, not producing.

A second argument offered by some is that “capital flows from high-saving countries to low-saving countries, wanting to grow faster.” Under this reasoning, a deficit country, looking at both consumption and investment, is absorbing more than its own production. But whether this is good or bad for the economy depends on the source and use of foreign funds. Do those funds pay for the financing of consumption in excess of production (as in the United States) or for investment in excess of saving? That is the key question that ought to be asked in the first place about the huge U.S. capital imports.

To quote Joan Robinson, a well-known economist in the 1920-1930s close to John Maynard Keynes: “If the capital inflows merely permit an excess of consumption over production, the economy is on the road to ruin. If they permit an excess of investment over home saving, the result depends on the nature of the investment.”

The huge U.S. capital inflows (economic jargon for money coming into the country), accounting now for more than 5 percent of gross domestic product (GDP), have not financed productive investment. America’s net investments are among the lowest in the world, meaning we prefer spending and borrowing over actual production and growth. The huge capital inflows have not helped finance a higher rate of investment. America has been selling its factories and financial assets to pay for consumption.

It’s helpful to use a real means for measuring economic strength. Money coming here from overseas finances higher personal consumption. The steep decline in personal saving is a symptom of our spending, and along with that habit we have lower capital investment and a growing federal budget deficit.


Addison Wiggin
The Daily Reckoning

Editor’s Note: Addison Wiggin is editorial director and publisher of The Daily Reckoning. He is also the co-author, along with Bill Bonner, of the recently released New York Times bestseller, Empire of Debt: The Rise of an Epic Financial Crisis.

To get your copy of “the most feared book in Washington” at a discount, click here:

Empire of Debt: The Rise of An Epic Financial Crisis