They think you’re crazy if you expect default. It’s crazy if you DON’T
On May 12, 1780, John Adams wrote to his wife Abigail,
“I must study politics and war that my sons have the liberty to study mathematics and philosophy. . . in order to give their children a right to study painting, poetry, music, architecture, statuary, tapestry and porcelain.”
(… to which I would add, “so that their children can hide from the world in their safe spaces.”)
There may be no other quote that so succinctly surmises the rise and fall of empire.
In the early days, people had no illusions about the hard work and dedication required to create a civilization out of nothing.
Yet as a country approaches the zenith of its wealth, the mentality begins to shift.
People become less focused on production and more on consumption… enjoying the benefits of all that hard work.
Towards the end, there’s hardly anyone left alive who can even remember the days that the nation had to work hard and produce.
All anyone has ever known now is consumption… being the ‘richest country in the world’, and enjoying all the benefits that come along with that title.
This is why there’s so much debt.
Wealthy nations have become so accustomed to their lifestyles that, rather than buckle down, work hard, and produce more to keep the good times going, they’d rather simply borrow from future prosperity to pay for consumption today.
In fact, in its semi-annual Global Financial Stability Report released just a few days ago, the International Monetary Fund tells us that overall global debt is at an all-time high, now at over 225% of total world GDP.
Rich countries are leading the way with average debt at an even higher 277% of GDP, a level that makes it “difficult to grow out of the problem.”
Famous economists in rich western countries have come up with all sorts of catchy reasons why no one should worry about the debt–
Reasons like, “because we owe it to ourselves,” or “because we can print our own money…” abound.
People have been spouting this illogic for years to the point that it has become dangerously axiomatic through sheer volume of repetition.
If you say something enough, it eventually becomes true… no matter how wrong it happens to be.
The reality is that debt is incredibly dangerous. Even the ancients understood this.
Much of early theology and human civilization, from the Hebrews to the Romans, focuses on debt repayment and jubilee.
Even the concept of karma in Buddhism and Hinduism is about maintaining a positive moral balance sheet.
Debt is a killer. And the reason why is precisely because one person’s debt is simultaneously someone else’s asset.
Right now if you have, say, a $100,000 bank deposit, you have an asset. But the bank has a debt– they owe you $100,000! It’s your asset, but the bank’s liability.
Similarly, if you have a $1 million mortgage, you have a $1 million debt.
To the mortgage company that receives the interest payment each month, however, that $1 million loan is their asset.
So in fairness, a record amount of debt in the world also means that there’s a record amount of assets.
Here’s the problem: The laws of the financial universe can be bent… but they cannot be broken.
So whenever debt levels grow too large, especially when debt is being squandered on consumption and growing at a far faster rate than the economy itself, then there must be a default.