I remember having lunch with two of my fellow officers at my first post, our embassy in Panama. We were discussing debt. One of my colleagues, a young woman, said she did not like being in debt, it kept her up at night worrying about paying back the debt. I said, “Why are you worrying? Let the person you owe the money to worry.”

My second colleague, an older woman, said she never bought anything on credit, she paid cash for everthing. I asked her if she owned a car. She said yes. I then asked if she paid cash for the car. Again, she replied yes. I then said I knew that she had recently bought an apartment in Washington DC and asked if she paid cash for it. She said no, she had a mortgage. I then looked at her and said, “There is the difference, when you go into debt, you go big time for a home, me, I go into debt for a weekend trip.”

I say all this because I am hearing too much talk about how we are now being punished for our profligate ways of over-consumption based on mountains of debt. Face it, without credit our economy would be much less than what we enjoy today. Credit is the fuel for our economy - we use credit to buy goods and services and those who supply the goods and services use credit to make these.

I also hear worry talk about China holding too much US debt. Of course China took on that debt in order for us to buy more goods from China. In my book we made the perfect deal, China gave us the money to buy its goods. Even sweeter, China has to continue to supply us the funds to buy its goods, since it cannot afford to lose exports that have allowed it to build a thriving economy.

Those who worry about China holding our debt fear that China may decide not to take anymore US debt. Well, what will the Chinese take in exchange for their exports? They already hold a mountain of Euros as well, since Europeans are also borrowing from China to buy from China. Some suggest that China may decide to hold its reserves in its own currency. Now the value of holding US dollars is that they are backed by the “full faith and credit of the United States of America.” Imagine holding currency that is backed by the “full faith and credit of China.” Not quite the same security.

No, spare me from the Neo-Calvinists and their fear of debt. It is part and parcel of our way of life.

Leo Cecchini
May 2009

Nota Bene - I reported in a previous article that foreigners, mainly governments, hold about 25% of US Federal Government debt, popularly known as the “National Debt.” Of that amount China holds about 20% or 5% of the total. Japan holds about the same amount.