Credit may be blinding us to severity of our situation

By James McCusker Herald Columnist

A person who is bleeding profusely is in mortal danger and needs help right away. It is a life-threatening situation. If the outflow of blood is not stanched quickly the person will not survive. There will be no future.

Businesses resemble people, at least in one sense. If a business is faltering because it is consistently spending more money than it is taking in, the first job is to stop the bleeding – the negative cash flow. As turnaround experts know, regaining control of spending and cash flow is job one. Unless that is taken care of promptly, all other efforts to get the business back on its feet are doomed.

Sovereign governments are also dependent on cash flow. But that doesn’t mean that governments with negative cash flow issues recognize how life-threatening this symptom really is.

What’s the secret behind their worry-free lack of urgency about fixing the problem? Credit.

Credit is the Great Enabler. As long as you have access to credit, the negative cash flow problem can be pushed into the future. Credit encourages denial and allows individuals, businesses and governments to continue spending.

There is, of course, a good and useful side to credit, even when it is used as a substitute for incoming cash. Borrowed money can be used to smooth over the peaks and valleys in cash flow that occur during a year, or sometimes even a longer period.

When those peaks and valleys occur naturally, as part of the revenue cycle of a business, government, or an individual, negative cash flows are manageable through the use of credit. The real trouble begins when the negative cash flow isn’t part of a manageable cycle but a symptom of a serious problem. Credit enables a prolonged denial stage and allows unfunded spending to continue.

In most cases spending continues at this unhealthy rate because those in charge simply cannot imagine life at a lower spending level. Credit-fueled denial allows them to believe that the problem will somehow solve itself or go away because of some outside factor. The outside factor may be as vague as “things will turn around” for individuals or, in the case of governments, a reliance on fantasy-level economic growth rates that will fill revenue coffers to the bursting point.

Fantasies endure even as access to credit collapses, largely because they are rooted in the inability, and later the unwillingness, to imagine a business, or a life, sustained at lower spending levels. Government, business and household budgets are filled with things that “cannot be cut.”

In Italy, for example, chronic government overspending eventually caused a credit crisis, just as it had in Greece. Government budget cuts were mandated by the terms of their credit bailout package from the eurozone countries that were still solvent.

Many Italians, though, still believe that somehow the government spending programs will be restored and things will return to the way they were. What is increasingly clear, though, especially for young people, is that the Italian economy holds no future for them.

The austerity programs installed now, assuming they work, will restore Italy’s access to credit, but they cannot restore the country’s future. Only economic growth and productivity increases can do that. But now Italy is facing painfully high unemployment and painfully slow growth that extend beyond the page margins of the economists’ spread sheets.

How this will translate into societal and cultural changes isn’t known, but given Italy’s already under-sustaining birth rate, there is room for genuine concern. Neither a culture nor an economy can exist for long without young people.

Will our economy be as futureless as Italy’s? We are certainly making many of the same mistakes, and some of our own.

We are still in denial that negative cash flow, even a trillion dollars’ worth, represents a mortal danger. We are substituting good credit for good sense. And we have developed an economy where much of private enterprise has become part of the entitlement sector, as dependent on government spending and regulatory largesse as any other group. None of that sounds healthy.

Despite all this, there is good reason not to lose faith in the American people. We can be wasteful, and even lose our way at times, but there is no way we are going to give up our future without a fight.

We will have to roll up our sleeves and take an interest in the loathsome, boring government budgets and regulations that we have successfully avoided knowing anything about for all these years. We will have to demand more clarity and more accountability from public institutions and officials than ever before.

We will have to change things. And if we do these things we’ll be OK. The future is in our hands.

James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.