Debt Wave Still Growing

For almost three years now I have been highlighting the dangers of an entire world that consumes more than it creates; read: uses debt to extend its means.  Most recently I talked about this issue on 31 May, 2011 in my post entitled, “Top 5 Problems Facing the Economy: Chronic Fat, That is Spending Beyond Our Means.”

The problem is that if the world kept its accounts honestly then those that borrow money would do so by finding a willing lender.  That is, those with a surfeit of resources find those with an excess of resources to lend to them.  The interest on those debts would be paid by profits (i.e. real economic growth) earned by having invested that debt in something that earned a return.

In terms of personal finance, people would borrow money to buy something useful, like a car that could get them to and from work.  With a car, more jobs are available to the job seeker just because it expands the geographic radius of where a job could be had.  In part, the additional money earned by this job – that couldn’t have been earned otherwise – goes to pay off the debt financing for the car.  This is debt that makes sense economically.

Unfortunately, the debt wave that is still growing across the world is not being financed by those with excess resources.  No, instead what is happening is that those living in the present are borrowing from those living in the future.  The financing of debt has largely been carried out by governments printing money.

This process of printing money has been going on since the dot.com bubble burst back in 2000.  When the value of the stock market started declining, followed by September 11, 2001, the U.S. Federal Reserve pumped the U.S. economy full of money.  They did this by cutting interest rates dramatically.  But now a full decade on and the interest rates have never really gone back up.  Essentially the world’s economy has been flooded repeatedly with cheap, almost free, money.

The massive, worldwide real estate bubble was largely created by this process.  But the real estate bubble wasn’t the only abuse of credit – consumers levered themselves to crazy levels of debt.  They bought houses when they shouldn’t have.  They bought second houses when a first house already taxed their monthly incomes.  They bought cars when they shouldn’t have.  They bought cars more expensive than their means could justify.  They took out home equity loans to finance new home projects so that their kitchens could sit unused like before, but look better doing so.  They used credit cards to buy stuff they didn’t need.

Importantly, this took place all over the world, not just in the United States.  But why bring this subject up again?  Because, while it may be a tired refrain on the blog, it is not a subject talked about publicly very often.  Yet, this morning’s Wall Street Journal is thankfully talking about this at last.  In a piece entitled, “Debt Hamstrings Recovery,” they state:

“Around the globe, the inability of governments and households to reduce their debt continues to cast a shadow  over Western economies and the financial health of individuals.  Today, U.S. consumers have more mortgage and credit-card debt than they did five years ago, and the U.S. budget deficit is worsening.  At the same time, European governments are having to throw billions more euros at Greece to keep it afloat.

“The repercussions are likely to play out for years to come in the form of patchy economic growth, further government market intervention – such as last week’s decision by oil-consuming nations to release more oil onto the markets – and frequent financial-market swings.

“The fundamental problem is that reversing the trend of piling on the debt requires some combination of cutting spending, growing income or the economy, and inflation.  But wage growth is stagnant and home prices, which underpin much of the debt problem, are still falling.

“Meanwhile, in a vicious circle, businesses aren’t hiring or investing because they know consumers are tapped out.  Banks, for their part, are hoarding cash, being stingy with new loans.”

I could go on.  I guess my point is that the real issues underlying the economic crisis are finally being talked about.  All of the dots are being connected by those with a large public voice.  This is disappointingly slow, but it is encouraging.

My personal definition of wisdom, shared in “The Intuitive Investor: A Radical Guide for Manifesting Wealth” is the degree to which you are in accord with reality.  Put another way, the degree to which you are not delusional.  Right now, the economy and decision makers are finally getting wise.