I've written often enough about the problem of debt in the past. Now Charles Hugh Smith reminds us of the grim reality of this burden that overhangs each and every one of us as individuals, and our society as a whole.
We are now totally, completely dependent on expanding debt for the maintenance of our society and economy. Every sector of the economy--households, businesses and government--all borrow vast sums just to maintain the status quo for another year.
. . .
Borrowing more money from the future is easy, painless and requires no trade-offs, sacrifices or accountability--until the debt-addicted economy collapses under its own weight of debt service and insolvency. People keep repeating various versions of the story that "debt doesn't matter" because "future growth" will outgrow the skyrocketing debt, or inflation will make it all manageable, or that central banks will do whatever it takes to make sure everyone has enough money to service their debt burdens: negative interest rates, helicopter money, etc. etc. etc.
We want to believe in financial magic because we want things to remain easy.Borrowing from the future is easy, making sacrifices and being accountable is hard.
But eventually the cost of servicing even low interest-rate debt squeezes spending, eventually capital tires of chasing negative interest-rate bonds, eventually lenders realize that leverage has skyrocketed along with the debt and risk is piled up like dry tinder in a drought-weakened forest.
. . .
If you believe that going from a total debt burden (government and personal debt) per household being 79% of median household income to debt per household being 584% of median household income doesn't matter and will have no consequences, you believe in magic. Unfortunately, thinking something will be easy forever and have no consequences is not the same as the real world of skyrocketing debt and leverage having no consequences ... Believing that debt has no consequence, that the status quo is permanent, that all the promises based on soaring debt can be paid--it's all an appealing fantasy, magical thinking at its most enchanting. Believe these fantasies at your own risk.
There's more at the link. Essential reading, IMHO, and highly recommended.
Debt is the single most important, and most critical, financial issue facing our nation at this time - and it's getting worse every day. The so-called 'fiscally responsible' Republicans, who now control the House, the Senate and the Presidency, have ignored all their promises by jacking up government spending to a record $400 billion plus every month (much of it funded by new borrowing). The tapped-out, debt-burdened US shopper is spending less and less, thereby imperiling our consumer-based economy. New car sales, a key area of US industry, are dropping, and bank loans to finance vehicle purchases are doing likewise. The signs are everywhere: debt is crippling our ability to continue on our present path, as individuals, as states, as a nation, and as a society.
The problem is not limited to the USA. The International Monetary Fund warned last year:
Global debt has hit a record high of $152 trillion, weighing down economic growth and adding to risks that recovery could turn into stagnation or even recession, the International Monetary Fund has warned.
. . .
“At 225pc of world GDP, the global debt... is currently at an all-time high. Two-thirds, amounting to about $100 trillion, consists of liabilities of the private sector which can carry great risks when they reach excessive levels,” the IMF said in its fiscal monitor.
“The sheer size of debt could set the stage for an unprecedented private deleveraging process that could thwart the fragile economic recovery.”
This debt burden is mounting at a time when slow growth means inflation and interest rates will remain low, making it hard for companies, individuals and governments to earn their way out of debt.
A combination of low growth, high debt and weak banks could push the world in a dangerous financial and political direction, the IMF said.
Again, more at the link.
Folks, I can't emphasize too strongly that each and every one of us needs to do the following:
- Pay off existing debt as soon as possible.
- Refuse to enter into new debt for short- to medium-term needs (e.g. vehicles, furniture, etc.) Pay cash or do without, unless it's absolutely, critically necessary.
- Enter into debt for long-term needs (e.g. housing) only when absolutely necessary, and in such cases, buy within one's means - certainly less than the banks (who are looking after their own interests, not yours) will lend you. I'd suggest an absolute maximum of 25% of your household's net income (i.e. after taxes and other deductions at source) should be allocated to such debt; if you can get it below 20%, so much the better.
- Enter into debt for the shortest period you can afford (e.g. monthly payments on a 15-year housing note will be more expensive than a 30-year note, but you'll be debt-free much faster with the former than with the latter).
- Build up a reserve of at least six months expenditure, and if possible a year's worth. It will be invaluable if hard times come around.
These are not just financially prudent measures; they're security measures. If our economy goes haywire, only those who have reserves, and are not over-burdened with debt, will likely keep their heads above water.