BLOG: What is Debt?

Among the most important issues of our time is the question of debt.  Every one of the "western" nations has fallen into the trap of massive debt.  Politicians speak of repayment of that debt as an option, not a duty.  Voters seem only vaguely aware of its size.

This video of Nial Farage is a sobering indictment of the mess that is Europe.

Unfortunately, Americans do not seem to understand what debt is.  Debt is a promise.  I buy a house and get a mortgage.  I promise to pay that mortgage, and some investor lends me the money.  I get the house, and pay the investor over 30 years for the use of his money.  We see the lender as some large impersonal bank, but it is much more accurate to see the lender as some elderly widow who has her savings in a 401K and is relying on those mortgage payments for income in her declining years.  We hear a lot about the poor borrower having to make payments, but almost nothing about the widow, who will lose both her savings and her income if the borrower defaults on his mortgage.

The foundation of our economy is integrity.  We make deals and make promises.  Nothing works if we cannot be counted on to keep our word.

The troubles in Europe are not some kerfuffle over big banks and meaningless large numbers.  Politicians spent money, and made promises to repay with the money of future taxpayers, and the bills are coming due.  No one - not the politicians, nor the voters, nor the bureaucrats who "guaranteed" the loans - is willing to own up to having made massive errors in judgement and take the fall.  It is a giant ponzi scheme that makes Bernie Madoff look like an amateur, and no one wants to admit the obvious.

Every ponzi scheme crashes.  This one will, too.  When it does, trillions of dollars of illusory wealth will evaporate.  No one will "destroy" it any more than you can "destroy" a mirage.  It never existed.

The Europeans would do well to admit that they are running a ponzi scheme.  To prolong the ponzi is to make it bigger, and then it will do even more damage when it collapses.  That delays the day of reckoning, but will save no one from the crash.  Unfortunately, no one has the courage to allow the music to stop.

Our situation in the US is similar, but our debt is much larger.  Americans are still capable of repaying our debt, if we choose to.  The question is whether we will have the courage to take some pain now, before the crash, or take the cowardly path chosen by the Europeans, and keep the music playing until all hope of keeping our word is gone.