I.O.U.S.A. (33 page)

William Bonner

William Bonner founded Agora Inc., a fi nancial research and publishing group, in 1979 in Baltimore, Maryland. Bill is the author of the
Daily Reckoning,
a daily free e - letter about contrarian investing that is read by 500,000 subscribers. He is also the author of three bestsell-ing books;
Empire of Debt,
his 2005 New York Times bestseller with Addison Wiggin, was the inspiration for
I.O.U.S.A.

Q: Why you were drawn to economics and why do you enjoy it?

Bill Bonner
:
I was never really drawn to economics. I didn ’ t like economics, and when I studied it I found it very boring. But as I began to read and pay attention to what people were actually doing in life and how economies worked, gradually I became aware that I had become an economist. I was not studying the economy or economics in the way that it ’ s traditionally taught or studied. I was trying to understand why people did what they do.

And that, as I found out later, really is classical economics.

Q: In
Empire of Debt,
you say that the American empire of debt
rests on 10 delusions. Why is it that people believe things that
history has proven are not worthy of belief? Do you believe that
these delusions are dangerous?

Bill Bonner
: People cling to delusions because life can be extremely complicated, and delusions can be a source of comfort.

Since the book came out, I ’ ve done a lot more thinking about why people do what they do. People prefer delusions because the truth itself is just too complicated. That ’ s true when you ’ re talking about economic truth; for example, if you ask why the price of gold is going up or down, the answer is infi nitely complicated. You can ’ t reduce it to a formula or a simple logical expression. All of life is that way. When you have a political campaign, for example, the most complex issues get reduced to a single phrase, like “ protect 111

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freedom. ” People need those kinds of things in order to be able to operate. Otherwise it ’ s just much, much too complicated to try to fi gure out how things actually work. And so they end up believing what they want to believe, but what they believe is so far removed from the facts that it ’ s a delusion.

Q: What are some of these delusions?

Bill Bonner
: People always want to believe that their houses are always going up in price. They want to believe that they ’ re going to earn more money next year. They want to believe that their investments will go up. And they want to believe that they can get away with spending more money than they actually earn, and they do that in America now because credit is readily available.

These delusions don ’ t all happen in the same way. They ’ re episodic and cyclical. In one generation, over a period of time, a delusion builds up; it builds up like debt, in fact, until it ’ s crushed by events. The way our parents and grandparents looked at things is very different from the way we look at them. They had delusions of their own, of course, but their delusions were very, very different. Our parents did not think that they could live on credit and borrow their way to prosperity; they believed that if they borrowed some money they ’ d have to pay it back.

I remember how happy my own parents were when they paid off the mortgage. The mortgage they had taken out on our house in the late ‘ 50s was something like $ 5,000, with a 5 percent interest rate. And when they paid that mortgage off, they were delighted.

But today, people would be delighted to have that mortgage. My parents were children of the Great Depression and didn ’ t have the delusion that you can get away with spending more money than you earn. They thought that not spending too much was the way to go, and they thought that savings were important. The delusion of debt had been crushed out of people in the United States in the Great Depression, but gradually it took hold again. And we who grew up after the ‘ 50s and ‘ 60s never had that experience. So here we are in the twenty - fi rst century. We ’ ve never suffered from a real debt defl ation and we don ’ t know what it ’ s like. I think we ’ re going to fi nd out, but it ’ s not going to be pretty.

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William Bonner
113

Q: What do you think lies ahead, given the lifestyle that we live
today in our country?

Bill Bonner
: We had an expression in the book that basically said that there are not many people who can afford to live like Americans today, and too bad Americans can ’ t either. The fact is that Americans live beyond their means. This is a very, very old concept, but today people don ’ t even think about it because they don ’ t know what their means are. You know, when you start down this path where you ’ re introducing so much credit and monetary infl ation, which just means that there are more and more dollars fl oating around, then people don ’ t know what a dollar is worth.

For example, when you get a credit card in the mail with a credit line of $ 2,500, does that mean that you can spend $ 2,500? As Warren Buffett has explained many times, you can ’ t live beyond your means forever; eventually it catches up with you. What ’ s happening in America today is that people are taking their credit cards, spending money they don ’ t have, and believing that they ’ ll never have to pay that money. But they will, somehow, sooner or later. That mathematics has to catch up to them, and they ’ ll have to spend less money, because they ’ re right now spending more than they can afford.

Q: If the current generation is getting into a position where it
can ’ t pay off its debts, who is going to pay those debts? Is it
moral; is it fair what ’ s happening? With both a family that has
large debts and a country that carries large debts, what happens
to the next generations?

Bill Bonner
: Jefferson went on record saying that it was immoral for one generation to load up the next generation with debt.

And in private life we don ’ t do that. A person goes to his grave and his debts go with him, more or less. In public we have this system whereby one generation can spend money before it ’ s been earned. Then somebody ’ s got to pay that money in the future, and that somebody is the next generation. To me, that is an immoral situation, and it ’ s not just immoral, it ’ s fundamentally wrong —

and mean — for one generation to spend the next generation ’ s money .

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During the Depression, people didn ’ t have any money, but at least they came into the world without money. They didn ’ t have any debts either, so they came in as free people and they could create whatever lives they could for themselves. But now, when a person comes into the world and into the United States of America, he carries with him this enormous public debt. It ’ s like part of his time and money has already been spent and now he will have to spend time earning money to pay for things that people enjoy today. The offi cial public debt is $ 9 trillion, but the fi nancial gap is something like $ 60 trillion. If you divide that up among all of these babies being born, each one has a lot of money to pay out over his lifetime. When a person goes to the drugstore and gets some pills on Medicaid, where does the money come from for that? His children and his grandchildren will have to work to pay for those pills that he took in 2007, or roughly speaking.