Debt makes the world go down

Greece is teetering on the edge of default. They are also threatening to take down Spain, Portugal, Ireland and who knows who else. Iceland has already gone through the wringer. Japan is in bad shape, even before the earthquake came around they were on life support. In addition to that, the world continues to be caught in the throes of a recession that won’t go away. Home prices keep falling. What is the common denominator between all of these things? Debt.

There is both private and public debt, but that line has increasingly become blurred. Governments around the world promise more benefits than they can afford. When the bill comes due, they raise taxes to try to generate the funds necessary. Is that public debt? When the mortgage crisis hit, governments were quick to rush in and take care of bad debts. Is that private debt? The European countries that currently have the biggest problems don’t have the excuse of costly wars to use. They were just going about business as usual when all of a sudden, they couldn’t afford it any longer. Other countries like France, Germany, the UK, and the US are hoping to avoid getting to that point.

Debt puts you in a precarious position. You might be able to keep borrowing in order to pay current bills as long as nothing comes up. But then there’s an earthquake, a housing bubble pops, or your lenders simply decide you aren’t such a good risk after all. The further in debt you are, the less it takes to really screw you up.

 

Living debt free, or even with a surplus is obviously a better way to live, but few want to do that at any level. There are too many incentives to go into debt, not least of all the taxation of income from investment. Put tax breaks for home debt and forced low interest rates and you have the perfect combo to convince people to spend instead of save. I think absent screwed up incentives, people would save more and avoid debt.

Would the governments? Not they way they are structured now. Politicians will always have the incentive to promise people more for their votes. The only way around this is to set limits. I would like to set limits on what the government is involved in, but I would be happy with setting limits on what it can spend. Balanced budget anyone?

Debt is bad, debt is dangerous. At current levels, it will also be a big burden on the generations to come. We need to foster a culture of saving, not of debt.

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