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Debt as a Destroyer

August 15, 2016

Debt can be good in moderation.  But it can also be dangerous and addicting, much like a drug. I’ve seen it up close and personal too many times. People can’t withstand the temptation to “buy buy buy,” even if they can’t afford it.

 

Reversing debt addiction is tough, just like kicking a drug. A sign of how tough overcoming debt addiction can be is the fact that our politicians won’t go through the necessary detoxification, but keep chasing the fix by borrowing more.

 

Overall debt is rising so much that pretty much everybody owes somebody something. Whether it’s debt of the private, government or household variety, it’s all intertwined and getting larger worldwide.

 

Think about it. Last year it was China. Before that Greece. Now the United Kingdom, Germany and Italy are the concern. It seems the whole world is addicted to debt.

 

The results are troubled and tantrum-filled equity markets, wider credit spreads and lower long-term interest rates. It all leads to distorting of business markets, such that many businesses’ best interest is to buy stock with cheap money (competitors’ stock or their own), rather than compete or innovate.

 

In that sense, debt is harming both employment and productivity. Central banks and their policies don’t seem to be helping the situation. In fact, they’re acting more like debt dealers than anything else, fueling the addiction.

 

And that’s the thing – we hold a belief deep down that central banks will save us from catastrophe. What if they can’t because they’ve exhausted all their options? Businesses won’t succeed, investors will lose, and so on. The scale could be massive. If that happens, it could cause even more social upheaval. I can’t predict the future, but I know this much – we don’t want to go there.

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