We Don't Need No Stinkin' Debt

If only central bankers had the discipline of 4-year-olds.

In the 1960s, a group of psychologists at Stanford University wanted to test the ability of children to delay gratification.  Using children in the university day care as the subjects, the psychologists would sit a child down at a table with a marshmallow on a plate.  The child was told that he could eat the marshmallow whenever he wanted, but if he waited until the adult returnrned, he would get two marshmallows.  Then the child was left alone in the room.

Some kids ate the marshmallow at once.  Others toyed with it.  One tried to tear out a chunk that might go unnoticed.  A few were able to hold off completely.  The video of this experiment is available online, along with a number of similar studies, and is very funny.

What is amazing is the correlation between the ability to defer gratification at a young age and success later in life.  The researchers followed up with the same kids later in life and found that those who could hold out for two marshmallows did better in high school, better on standardized tests, and better in college.

Which brings me back to central bankers…

It’s no secret that the Federal Reserve has kept U.S. interest rates low to encourage borrowing which, aside from student loans and car loans, has been slow to materialize.  Maybe U.S. consumers can pass the marshmallow test while Fed bankers cannot.

Or, more likely, many consumers are in no position to borrow, and those that are qualified borrowers earnrned that status by avoiding a bunch of debt in the first place.  Now, the European Central Bank (ECB) is getting in on the act.

The ECB recently began another loan program, whereby the central bank will lend to traditional banks at very low interest rates, hoping that those banks will in turnrn lend to private companies.  The goal is to stimulate borrowing that would ostensibly be used to buy equipment, supplies or some other business input, which should lead to more economic activity and growth.

The ECB plans to push roughly one trillion euros into the euro-zone economy through such loans, but borrowers aren’t playing along.

Instead of rushing to take advantage of the program, many qualified businesses are refusing to borrow.  Perhaps they remember just a few short years ago when troubled banks called many loans — whether businesses were current on their payments or not — because the banks needed the capital.

Saying No to a Loan

Business owners don’t want to be in that situation again.  Maybe they don’t see enough demand to justify jumping into debt and are not interested in using the strategy of “build it, and they will come.”  Whatever the reason, it appears that like most qualified U.S. consumers; qualified European business leaders can also pass the marshmallow test.

The most frustrating part of this is that central banks are in the debt (or marshmallow) business at all.  I believe that central bankers are smart, well-read people who understand exactly what is going on.  The problem is they have been given an impossible task — to make economies grow, no matter what.

The tools at their disposal, generally interest rates and money, mean that their plans will always revolve around cash and debt… they must.

So what do you do when the nation has binged on debt and spending, which would naturally be followed by a period of contraction, write-offs, and deflation?  Let the cathartic but painful process unfold, or try to hold back the natural economic ebb and flow?

As central banks prove ineffective at turnrning the tide year after year, the more obvious the answer becomes.


Rodney Johnson

Rodney’s investment focus tends to be geared towards trends that have great disruptive potential but are only beginning to catch on to main-stream adapters. Trends that are likely to experience tipping points in the next 5 years. His work with Harry Dent – studying how people spend their money as they go through predictable stages of life and how that spending drives our economy – helps he and his subscribers to invest successfully in any market.