Debt: the issue of the decade

The recent volatility seen in financial markets across the world has been a not-so-subtle reminder of the beginning of the “crisis” in 2008. Although there seem to be glimmers of hope spread throughout mainstream media, an overwhelming issue is just coming to the surface in Europe. The trillions of “dollars” of debt that have been created all over the world to prevent a lengthy global recession or depression is beginning to affect countries that have no ability to make good on their obligation to pay these debts. Countries like Greece and others in Europe are facing major economic and political issues primarily because of the proliferation of debt. This issue is also here in the U.S. and growing rapidly.

The debt of nations — sovereign debt

A debt crisis arises when the fiscal policy of a particular nation becomes unsustainable. At this point most nations try everything in their power to fix the issue. The most dangerous of such efforts is using short-term borrowing to fund many of its long-term obligations. This artificial stimulus works well when interest rates are low but can be a major problem as rates go up and the long-term obligations are still there. Borrowing trillions of dollars from central banks ignores common sense rules, and countries face ever-increasing levels of debt. The burden of these debts lies on tax-paying citizens of these countries (including the U.S.) This often results in higher taxes or a reduction or elimination of benefits that once were thought of as being bulletproof (Social Security, Medicare, etc.)

Our household debt

Over the past several decades, household debt has reached unsustainable levels as well. There are so many similarities between the fiscal policy of nations and individual families. Often, borrowing is used in both cases to cover emergencies. When reserves are not kept to cover urgent needs, debt is utilized to cover each unforeseen circumstance.

Beyond emergencies, the primary reason for accelerated debt levels for households has been instant gratification. It is so easy to use debt to buy something we want right now. All too often though, this is pushed to the point where it is unsustainable. When no more than minimum payments can be made because income is stretched so thin, only the interest is serviced each month. All it takes is one emergency or an unexpected increase in interest rate, and the minimum payments cannot even be made. This can either end in diligent budgeting to climb out of debt or unfortunately bankruptcy.

An example to follow

We have discussed how governments are not good examples of how to manage debt, but where should we learn? It would be wise to ask someone that was an adult before the explosion of debt began in the early 1970s how they managed their finances. This may be a grandparent that could offer some insight about the use of money and limited use of debt. This perspective may give you the knowledge needed to navigate in a world controlled by debt.

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