Greece has been an experiment in social engineering and is fast becoming an experiment in international financial engineering. There is an important difference. Greece originated and controlled the social engineering experiment. They will neither originate nor control the international financial experiment.
Greece no longer controls it’s future.
The same lessons apply to every other country and every person within those countries.
- Every debt is a call on future resources. If you cannot afford something from current cash flow, borrowing will not solve the problem unless you know how you can afford to pay in the future. If future resources will be about the same and you cannot afford the expenditure now, how will you afford the loan payment?
- There is good debt and there is bad debt. Good debt acquires productive assets that pay for themselves and have something left over. Bad debt pays for consumption.
- You cannot borrow your way out of debt. You just increase the demand in the future.
- Despite what the politicians tell you, spending does not create prosperity if the spending was financed with bad debt.
- If governments promise things that they cannot pay for in the future, people will be angry. People treat expectations as reality until their hopes are dashed. Often, they would have behaved differently had someone told them the truth. Every politician’s promise comes with an implicit added feature. They reserve the right to change their mind.
- People value control over their lives. It is hard enough without believing delusional promises.
- Every debt, results in a little reduction of control. Large or many debts eliminates control. The creditors control you and it is unlikely that their interests and wishes parallel yours.
People have an inherent desire to be financially independent. Debt is a tool in achieving that, but it is a narrow tool with a short shelf life. Good debt, like for a business, for education or for assets that reduce other expenses, is tolerable. Bad debt, like for consumption, or assets that are used, like nicer cars and bigger houses, is self-indulgent.
The world is a perfectly fair place. If you spend money you do not have now. In the future you will be required to spend money for the loan payment. You might need that money for something else.
Everyone must assess the value of any debt they incur. Ask if “future self” will be as pleased at the consequences as “present self” is with whatever was acquired with the borrowed money.
Don Shaughnessy is a retired partner in an international public accounting firm and is now with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.