“‘There is no practice more dangerous than that of borrowing money’,’ advised George Washington. The great man couldn’t tell a lie, yet while his saying is true, if it were taken too literally capitalism would grind to a halt…For debt, though eminently useful at times, is also a brutal taskmaster. Share values may rise and fall, but when the music stops you are left still holding your debts. All the crises in recent years have involved countries in which debts were run up to excessive levels which then, when circumstances suddenly changed, caused acute pain…Sound fiscal policy is no guarantee that the private sector will borrow wisely and so avoid a boom and bust. Moreover, the savings deriving from America’s budget surplus are being swamped by the private-sector’s net borrowing. As a result, the current-account deficit is running at record levels.”—The Economist, 1.22.2000
“But the risk that everything on the economic front could go wrong this year remains real. It is most pronounced in America; and its most fearsome guise is as a debt trap. In simplified terms, the big worry is whether America might follow a similar road to that taken by Japan ten years ago: a burst bubble followed by a deep and prolonged recession, or even slump.”
“America has a good chance to escape the full stagnant fate suffered by Japan during the 1990s. But the more that the debt trap is ignored, the more the risks will rise.”—The Economist, 1.27.2001
While valid economic arguments can be made about running up debt to help turn around economies, it’s worth noting and paying attention to the risks that come with that debt. As Danial Hannan, a MEP in Britain, told Prime Minister Gordon Brown, “You cannot spend your way out of a recession or borrow your way out of debt.”
