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Friday, May 22, 2020

Is it possible to be addicted to debt?

I got into a conversation with a real estate agent today. He's been in the business 14 years, so he has seen some ups and downs.

He said in the last few weeks, the market has gotten very competitive. A house goes on the market, and there are 30 bids put on it.

With a quarter of the workforce unemployed, something about this doesn't add up.

I could join the chorus of those noting, the extra $600/week unemployment payment having lots of unintended consequences, but an extra few thousand dollars over a few months totaling less than 5 figures is an insufficient explanation for taking on 6-figure debt at a time like this.

Americans have a lot of debt, and it's at all levels. Our institutions have a lot of debt. There's no shortage of debt to go around.

The issue of debt goes deeper than its existence or pervasiveness.

Debt does not exist without ideas and belief in those ideas. This is not just a reference to whether or not lenders believe someone will pay it back. This is a belief about the nature and power of debt itself.

After the Great Depression, there was a strong aversion toward debt. This legacy was most enduring in evangelical fundamental churches. Even there, that principle has largely faded into pragmatism and balance sheets.

In its place has arisen this idea that some debt can be good. Work the numbers and the clock in your favor, and if you're debt is aimed at future return, then we're told it's good. Maybe that works out for some who land the timing right. My question is not about individual circumstances, but about the principle.

The borrower is the slave to the lender. The borrower may also be slave to debt itself.

There's this idea now that we hear even from the highest levels in the land that debt is the answer to debt. The economy is on hold, but if we go into more debt, we hear we can keep enough in place for it to come back.

The problem with that is it abandons the real idea behind the value of money. Money itself is only worth the value it is being used to exchange. If we're not exchanging value, and we're only exchanging money, that ship has a short journey ahead before it sinks.

Eventually we reap what we sow. Deceivers, however, can exploit the time interval between the two of those things. The reaping comes later, well after the sowing. During that time after the sowing and before the reaping, there may be a short-term hit when more debt feels good. It only takes that happening a few times to create the addiction. That should never be mistaken, though, for the real consequences of debt.

The real consequences of debt are very simple. It must be repaid. The bill comes due.

Not even the U.S. Congress has significantly begun to deal with our debt for the problem that it is. You can tell this because neither side is giving serious consideration to the possibility that we don't have the option to keep spending more using debt—currently. One side thinks “we have plenty of money,” and the other is holding back knowing the bill comes due. Neither side thinks they can't just pass another spending bill right now.

This week Senate Majority Whip John Thune observed our rapidly rising debt-to-GDP level, and “we think that the Federal Reserve thinks it has lots of levers and they can leverage their balance sheet and they can still do things, and they think that, fiscally, we have some headroom that we can maneuver within.”

He also warned for 2020, “Our debt-to-GDP ratio will be 101—1 to 1. That was always the level when we saw the Greeces of the world and all these countries that were just completely in this downward spiral, this quagmire of debt. That was always the metric, 1 to 1, 100 percent debt to GDP. That is the breakpoint. That is when you start entering into that really dangerous territory.”

That breaking point of dangerous territory has a couple tiers to it.

The first is when there's no more debt to spend. When no one will lend to you because they don't trust it will ever be paid back. Our situation is quite painful for some now. It gets very painful for everyone then.

The second is when the only public spending is on debt. The public sector is officially eviscerated at that point. Bare essential finds its true meaning. Then, we're not only in pain, we're vulnerable.

The only good news for us in all this is China's debt-to-GTP ratio is currently much worse than ours at 317%. And that's only if you believe whatever numbers the Chinese Communist Party decides to publish. Apparently no one has officially died of the coronavirus in China for weeks, even in the original epicenter of the outbreak that has also seen a second outbreak. As Chinese ex-patriots will tell you, “None of the numbers from the CCP are believable. If they say, ‘a little’ then you translate as ‘a lot.’” Maybe the state-controlled economy's debt situation is even worse than 317%.

Everyone admits our debt is a problem. That may not always be public, but it's true. We all know this can't continue forever. And yet too many of us believe that we're not there yet, so in the meantime another hit can be dealt with later.

At some point this has to stop. The question is, How? Two options:

1. Does this stop because we resist the rationalization and stop it ourselves?

2. Does this stop because eventually the law of gravity reigns and is not to be forsaken forever?

In middle school one of my science teachers pointed out, It's not the fall that kills you. It's the sudden stop at the bottom.

Skydivers know there's a lot you can control on the way down. I don't know if there's a parachute we can pull in this situation, but we can at least look for and steer toward a softer place to land.

Here are a few things we can do:

1. Stop listening to the voices that claim “deficits don't matter,” “debt can be good,” etc.

2. Tell your representative leadership to do the same.

3. Stop taking on more debt. Stop believing someone else will give you a good future while they're giving you a bad one.

4. Ditto #2 for #3.

5. Don't be a martyr for principle when the whole ship and sea are tossed in the storm. If the government is cutting everyone—or a vast number of people—a check, cash it. This is not to advocate for individual advantage. This is to advocate against individual disadvantage.

It's the flip side of the circumstances mentioned earlier when the timing of some debt works out well for individuals. If the whole playing field is being transformed (as leaders may eventually be forced to do), there's no reason to continue playing by the old rules that no longer apply. Four 1960 dollars don't buy today what they bought then. The principles of debt remain unchanged, but the means of exchange could fluctuate. There's no reason to unnecessarily disadvantage yourself. Jesus “commended the unjust steward because he had dealt shrewdly. For the sons of this world are more shrewd in their generation than the sons of light” (Luke 16:8).

6. Continue to produce value.

7. Be prepared to find alternate means of value exchange in case the money fails. It's happened before (Genesis 47:15), and we shouldn't think it couldn't happen to us.

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