Debt, it isn’t what it used to be.

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Used to be a time when debt was something you actually planned to pay off. People used to have “mortgage burning” parties, after that final payment was cashed by the bank and the homeowner truly became one, it wasn’t uncommon to have all their friends over, serve food and drinks and then ceremoniously burn the mortgage. It was before my time, but I saw a depiction of this once on an episode of Eight is Enough when I was a kid.

Going back even further, conventional wisdom in textbooks stated what was then, the obvious:

Any corporation, private or governmental, that wishes to provide for a sound and equitable continuity of its business must take steps towards the systematic retirement of debt immediately after it has been incurred. Postponement of all payment for property or priviledges by those who presently enjoy their benefits is calculated to bring uncomfortable consequences to them or those who succeed them.

(emphasis added)

This quote was taken from an old textbook I found in a bookshop called “Engineering Economics” by C.R Young, which was published in Canada in 1949. The quote begins Chapter 5: The Systematic Retirement of Debt. Other chapters cover topics such as Costs, Present Value, Depreciation, Valuations and Appraisals. All standard issue financial knowledge which remains with us to the present day. Save for one.

The Systematic Retirement of Debt is no-longer an economic imperative. Anything but. Today, debt is merely intended to be rolled over, perpetually.

As a layman, I was shocked when Professor George Athanassakos glibly remarked that “all short-term debt eventually becomes long-term debt” when I attended his value investing course a few years back. He didn’t say it as if it was “a good thing”, he was more generally observing how these things play out on company balance sheets.

The worst offenders of course, are the governments, who are blowing out debts to such unsustainable levels it is arithmetically impossible to systematically retire them short of some kind of sovereign debt default. This includes the US, big time, but it is still impolite as dinner conversation and talking about it openly on CNBC will basically get you kicked off the show.

The inevitable debt default will only be talked about openly in retrospect. Like recessions. Fashionable pundits and officialdom  will never admit to a recession being “in progress”, even if they have to fight their way through bread lines and a food riot on their way to the podium to make the pronouncement. No, recessions are something that ended last year some time, if they ever occurred at all.

So it will go with the sovereign debt defaults: nobody respectable will call them that, even as governments resort to printing money (which isn’t allowed to be called that, either).

As individuals, you have to just do the math. There is ample objective data out there that clearly shows that the US is broke and it will never be in a position to pay off its debts and it’s just a matter of time before the current monetary regime is replaced with something else. Nobody knows for sure what the other end of that looks like, but the astute wealth preserver should be factoring things like “the end of USD as a single global reserve currency” into their calculus. I know I have been in my business affairs for years.

On a more personal level, in dealing with our own affairs, anybody who is subscribing to the government model of perpetually rolling over debt (and relying on every rising housing values to refinance, for example) either got crushed in the Global Financial Crisis, or they live in Canada.

If it’s the former, they are micro examples of what will happen on a sovereign basis in the years to come. If it’s the latter it cannot be stressed enough how urgently they must abandon that “strategy” and figure out a realistic plan to systematically retire their own debt, especially non-productive debt, before the next round of the global malaise comes home to roost.

One response to “Debt, it isn’t what it used to be.”

  1. […] that the debt will be repaid – sometime in the indeterminate and nebulous future [ also see "Debt, It isn't what it used to be" – Ed.] . Further, most mainstream media examinations of the fiscal problem facing any particular […]

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