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“Debt” – The Big Picture

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As I write this, debt is front and center on the world stage. In the United States, the Congressional supercommittee failed to reach a compromise that would even begin to address the soaring national deficit. In Europe, the crisis is even more acute, bringing down governments and threatening to take out the euro currency itself.

On the personal front, the picture is nearly as bleak. The U.S. personal savings rate is bumping along at a few percent of disposable income, among the lowest of any modern nation. While average credit card debt is in the neighborhood of $15,000 per household.

To hear the media talk, you’d think “debt” was a giant asteroid out in space, hurtling towards planet earth. An alien threat to all we hold dear. But it’s not. Debt is a problem entirely of our own making.

You won’t read this in the mainstream media, which is obsessed with politics, and statistics, and stock prices, and currency fluctuations. But, in the bigger picture, “debt” is simply a proxy for economic disparity. That’s right, when debt looms as a serious problem in world affairs, it’s because there are extremes of wealth, and poverty. That’s not a value judgment, or a plea for wealth redistribution — it’s just economic reality.

At the street level, debt is created when one person loans assets to another, expecting regular interest payments, and eventual repayment of principle, sometime in the future. In moderation, this is a beneficial transaction for all involved. The creditor derives income from the loan, and the debtor enjoys the immediate benefits of capital — owning a home, or starting a business, perhaps. The problem arises when loans exceed the capacity of debtors to pay.

As a kid, did you ever make “deals” with a younger sibling that they couldn’t possibly keep? Maybe you traded them some old toys for rights to their lunch money? Usually parents stepped in to veto such arrangements. Well, on the world stage, governments are playing that parental role. But governments aren’t nearly as wise as the best parents. Most are filled with conflicting interests, and often have their own hand in the till as well.

There is only so much wealth in the world at any one time. It’s a zero-sum game right now. Central banks can’t create more real wealth by printing more money. So what’s the probable end result of the debt “crisis”? Just this: everybody with assets will be giving some back. It may not always be visible. It may not always be fair. But it’s going to happen, in many forms: directly through business losses and loan write-downs, and indirectly through lower interest rates, falling stock prices, rising taxes, and inflation.

In a perfect world, this debt “haircut” would be precisely computed and evenly allocated according to individual capacity. But, in this world, unfortunately, some people will be hurt, and some people will profit, and none of it will be very predictable. Meanwhile, many will continue to spend time and energy trying to protect their assets from the inevitable, or at least ensure they don’t give back more than necessary.

Comments

  1. Your blog has some great info; however, some of us are already behind the eight ball with debt from a variety of sources and reasons (credit card, overspending, medical expenses, lawsuits, taking care of aging parents, etc). This is one area I'd like to see more info on: Digging yourself out of debt, so you can start employing some of these great ideas of yours.

  2. Darrow Kirkpatrick says:

    Thanks George. That's a worthy request. The honest answer is that I probably won't write a whole lot about debt, because I don't have too much experience I can convey. I prefer to write on topics that I've really lived through and can speak from experience.

    However I have two friends in the blogging world that I can highly recommend, and here are links to their relevant articles:

    Todd Tresidder: Get Out Of Debt Now! The Complete Guide

    Anna Newell Jones: The Spending Fast