Fiscally conservative individuals spend a lot of time lambasting individuals who live beyond their means. In this case living beyond your means simply refers to spending more money than you have available. American consumers hold some $11.38 trillion of debt with the average household owing $15,418 on their credit cards. Obviously Americans are spending beyond their means if the above definition is followed. On the other hand spending beyond your means may actually be a smart investment strategy due to inflation.
The rate of inflation reported by the federal government hovers around two percent at the moment. How inflation is calculated has changed over the years and if we go by the 1990’s calculation method we get a number hovering around five percent and if we go by the 1980’s calculation method we get a number hovering around nine percent. In other words the rate of inflation is notable, especially when you use older calculation methods (the federal government periodically has to change the method it uses to calculate inflation in order to make the numbers appear better than they are).
Inflation is an insidious beast. Monetary policy advocates claim that inflation is necessary in order to prevent individuals from hoarding cash. What inflation actually does is discourage savings, meaning real wealth isn’t preserved for later use. Ideally purchases requiring large amounts of wealth would be paid for through savings. In such a case real wealth is exchanged for a good or service. Inflation discourages such a practice and encourages the use of credit, which is currently nonexistent wealth that is promised at a future date. Knowing this, under conditions of inflation, one can argue that living beyond your means is actually an intelligent economic strategy.
Let’s say you make a dollar. If you spend that dollar immediately you can buy a widget but due to inflation that dollar will not buy you a widget at a later date. Obviously the widget isn’t devaluing at the same rate at the dollar since a dollar can buy one now but not later. In such a case converting that dollar to a widget makes economic sense, since you will be able to trade that widget for more dollars at a later date. Effectively the widget allows you to preserve wealth. Even if the widget devalues, that is to say it becomes worth less due to wear, tear, and obsoleteness, it may devalue at a slower rate than the dollar. Under such circumstances it would make sense to convert dollars to widgets just to preserve purchasing power.
Why would an individual stop there? Wouldn’t it be beneficial to use credit in order to convert future devalued dollars into current goods? If widgets don’t devalue it would be smart to obtain as many of them as possible immediately. Even if you have to buy them on credit it would make sense to do so so long as the devaluation of the dollar due to inflation is higher than the cost of interest. On top of that the dollars you use to pay back your debt will have devalued so you can use credit to purchase wealth preserving goods now and pay back the debt with dollars that are worth less. Even if the widgets devalue you may come out ahead if the rate of widget devaluation combined with the rate of interest on the credit is lower than than rate of dollar devaluation, especially when you consider that the credit will be paid back with those devaluing dollars.
We can add another wrench to this scenario by introducing debt forgiveness. Bankruptcy laws allow an individual to repudiate a great deal of their debt. Through the magic of bankruptcy an individual can buy a large number of wealth preserving widgets using nonexistent wealth then repudiate that debt. People will point out that repudiating your debt will damage your credit score, meaning you’ll have a more difficult time obtaining credit in the future. To that I would point out that any future credit would be worth less than current credit anyways. By converting dollars and available credit into wealth preserving widgets one is able to increase their purchasing power immediately, preserve it, and use it at a later date in lieu of credit. Bankruptcy laws don’t erase all credit, many government loans can’t be repudiated. This may not matter though. If one can erase enough of their debt to come out ahead in the end buying widgets on credit may be a smart decision economically.
The monetary system in the United States encourages living beyond your means. What incentive does an individual have to preserve cash when it’s constantly devaluing? If you spend money now you can buy more than if you waited. Furthermore if you take credit you can repudiate all or a portion of it through bankruptcy. Living beyond your means suddenly becomes a smart investment strategy because one can obtain actual goods and services for nonexistent wealth. Effectively you can get something for nothing.
Perhaps fiscal conservatives have been looking at things all wrong. Instead of saying that the economic problems we suffer under today are caused by individuals living beyond their means it may be smarter to place the blame on the constantly inflating currency and the ability to repudiate debt. An inflating currency encourages the use of credit instead of preserved wealth and the ability to repudiate debt encourages the use of credit that cannot be repaid.