In the last few years, we’ve seen certain municipalities in the US fail to pay their debts, Detroit being the largest. On August 3, Puerto Rico defaulted. Around the same time, Greece defaulted.
This is the tip of the iceberg. While the debt crazed real estate bubble is largely in the rear view mirror, problems with pension and other retiree obligations promised by politicians all over the world are on countdown to explosion. Many of these were papered over in the bear market, with more debt being issued to cover the then-current debts, making the problem worse. Pension liabilities in the US have increased 400% in just the last ten years, and we doubt it’s much better overseas. And I am not even addressing everyday budget deficits in Japan, Europe, and the US; or the giant debt bubble forming in China.
Issuing debt to cover obligations brings trouble if the borrower is not principled, or the lender is not.
By all rights, Detroit, Greece, and Puerto Rico should be disciplined by the markets, which should refuse, for many many years, to lend to them. But the markets are way too forgiving, which is one reason we have debt problems on a routine basis. Greece has now defaulted on its sovereign debt well more than 50% of the time since it has been independent. It’s a puzzle as to why anyone would lend to the country, but they do.
No one contemplates the humanitarian cost of debt loads. In Stockton, in Detroit, in Puerto Rico, in Greece, in every place where debts are too high, people are suffering. Somehow it is seen as noble to pursue debts in order to cover services and payments to the have nots, but as the tide turns, it is those projects and payments that are cut in order to fund debt service. Consequently, a new group of ‘have nots’, who may not have even been alive when the cycle started, suffers. The morality of debt loads is skewed. It is ok to borrow at first to make life better for citizens, but then it somehow becomes ok to cut those same benefits after everyone is used to the better life.
Will we ever be wise enough to strike a balance between current wants and having a more secure future tomorrow, which might mean saying ‘no’ to politicians’ promises? As debt problems proliferate, it’s easy to see we have not yet acquired this wisdom.