Debt is the fatal disease of republics, the first thing and the mightiest to undermine governments and corrupt the people. – Wendell Phillips
Through the mid 19th century in Western Europe (and until the 1830s in the US), citizens who could not pay their debts were sent to debtors prison. Debtors were not released until their debts were paid, and because being in prison made it nearly impossible for them to repay, debtors were typically there for life. Debts were often handed down to the heirs for repayment. If the heirs failed to pay, they might suffer the same consequences.
Of course, today’s answer to debtors prison is forgiveness or bankruptcy. But can you imagine if debtors prison existed today? Nearly 15% of the US population, or roughly 48 million people, would be in debtors prison.
I just finished reading the excellent book “House of Debt” by Atif Mian. The author provided a sobering reminder of just how many Americans drowned themselves in debt before the global financial crisis hit in 2008. Many suffered financial calamity that was on par with the devastating Great Depression.
Yet the world remains awash in debt, and it continues to grow at an alarming rate. And it’s not just individuals who continue to take on debt. Governments around the world have squandered the wealth of future generations in favor of a band-aid fix. At some point, there will be a reckoning.
‘The rich rule over the poor, and the borrower is servant to the lender.” – Proverbs 22:7
Burgeoning debt and out of control spending have always led to a financial crisis of considerable magnitude. Whether the currency is devalued or a debt consolidation happens, nothing good comes from borrowing.
Fortunately in 2009 the Federal Reserve Bank bought all the debt it could find and took care of one side of the problem – keeping rates low so borrowing could commence. That move prevented another Great Depression. Today, the Fed holds $4 trillion of Treasury debt. While it’s not accumulating more, it cannot unload the debt without harming the economy or increasing interest rates substantially.
But the world is in a very precarious place as it relates to outstanding debt. A virtual debt bomb is ready to explode. Once lit, it’ll be quite difficult to avoid the shrapnel, given the size and propensity of the explosion – just about every country on earth has amassed enormous amounts of debt. Check out the video below by Grant Williams.
https://www.youtube.com/watch?v=CLQsT9BPHpg
The ideal situation (and most responsible) of course would be for the US Treasury to buy back the debt, but as we can see from the US debt clock, they are not collecting enough US tax revenue to pay it back.
The world debt clock is even grimmer. The obligations continue to pile up, and there is no stopping it. How and when will this ever be repaid? Have we heard any politicians anywhere in the world talk about a debt repayment plan yet?
How do we stunt this rising problem?
Simply put, the economies of the world have to grow their way out of it (expand GDP, jobs and tax collections, then pay off the debt like responsible citizens do!). It is a huge undertaking that requires time, intelligence, strategy and discipline. The problem here is that, like a recovering alcoholic who enters a bar, there are just too many temptations.
Until that happens, we are kicking the can down the road and hoping we don’t light the debt bomb.
Copyright: falara / 123RF Stock Photo
