Wednesday, 20 February 2013

The debt culture; how can we change it?

I would like to talk to you about debt. What I think it is and what I think it means to us. I am not much of an economist but instead would like to try to provide an answer by applying my own sense of logic.

Many years ago; a friend of mine told me his story. He took out a loan out from the bank. It cost him somewhere around 5% a year. This loan was a business loan. The idea and concept behind it was that he could borrow money, invest it in the wider business he was working for, with the idea that he would have a bigger part of the pie in return. In simple terminology, take a risk, borrow, invest and get a bigger reward. That way he could pay it back and have more for himself.

His business was a service and client orientated business based on closing mandates with small to large corporations. It was a business dependent on growth and a healthy economy. What he did not know however was shortly thereafter, there was no growth and as a result there were no mandates to close. Therefore he was not able to make enough money. This meant he could not pay his debts. The banks to no surprise piled on the pressure, and wanted their repayments, and when he could not pay, they took him into special accounts for poor payers. This meant higher interest and punitive fees, which in itself is illogical and his debts grew and the situation worsened. At the same time a wolf pack closed in on him for other payments. A high stress level descended onto him which affected his personal life as he knew that perhaps his living standards or financial expectations were going to be affected.

Clearly something needed to be done. He quickly forced himself to cut down on all spending; he sold off many assets in order to reduce his monthly fixed costs. His primary concern was to keep a roof over his head, pay his basic bills, and that his family had enough food and water to eat and drink. There were times he simply ate rice, and bread. A boiled egg turned out to be a luxury.  He would continue to work harder.

To his disbelief as things thereon still did not improve, ultimately he had no choice but to take the decision to close down his business and declare insolvency. He realised then that his attitude had to change and learning lessons the hard way, he began to focus on his skills and talents into another direction where he could really contribute. In addition to this other direction, he wanted to be risk free, never in debt, ever again and to have a normal, realistic and happy existence. Today, making money no longer became his primary concern. His primary objective became how to offer and best utilise his talents in the best possible way; to live more simply and at the sametime by doing something useful for the society that he chose to live in and ultimately to be happy and get rewarded for it. He takes it from there, without the burden neither of stress nor of debt and of risk.
 
As I look at this story, I came to the conclusion that whilst my friend had learnt his lesson, his debts were based on greed and taking risks which had been his primary objective. ‘Looking to have a bigger share of the pie.’ He had been living a combined toxic culture of both debt and of greed, growth or no growth it made no difference.  He only had himself to blame for his own weakness and character failings. It was a recipe to disaster.

Now the reason why I am telling you this small story is because I look at the wider picture today and I see this basic serious problem of what was once my friend’s attitude, at a governmental and society level.  The debt and greed culture seems to be endemic.  It is astonishing to read, that the lessons are not being learnt. The US and Europe have piled up an immense amount of debt. Sadly looking back, even whilst we were in a growth period, various governments spent more than they earned and not saved a dime. Whether it was growth or recession, their debts grew. Brown and Blair piled on 700 Billion pounds in UK national debt after the biggest boom period in history (fuelled by debt). Cameron in the UK has increased borrowing even with austerity measures and will reach perhaps 10 times our GDP in the not too distant future. If you include personal debt, financial debt and corporate debt, the UK total debt rivals that of the Weimar Republic. We know what happened next. Is this because interest rates are low? What if they rise; then what? Will they be able to afford to pay the interest? What type of example does this set upon our citizens? If interest rates rise the value of gvt debt falls (bonds), the banks will suffer in their capital balance sheet as they hold the biggest part of government debt. Can banks withstand more hits? The individuals also could suffer as they default on their mortgage payments. The figures are beyond any man’s comprehension and understanding.  In my view, this is reckless, totally stupid, putting every citizen at risk and not living in the real world. For your information in 2012 the UK government spent GBP120 Billion more than it got in taxes.

The Keynesian model; to spend oneself out of a recession, does not work. It is totally misguided and I hope will never ever be done again, in neither our, nor our children’s existence. In essence governments felt they had to save the private sector from their own mistakes with money they did not have.

What we need to do, is to change our attitudes. Debt is something that is considered normal in recent decades but have no qualms about it; debt is in fact a nightmare at individual, corporate and governmental level. The concept of borrowing is wrong unless it involves some form of exchange for goods or lending as a last resort for people in real need. Financial speculation serves no purpose except ones own. Constant pressure on growth with our sole concern of making money is wrong and puts people quickly into the ‘takers mentality’ and under increased duress. Enormous pressure on banks to lend is wrong at the individual, corporate and governmental level. For retailers to offer credit to entice consumers to spend is also wrong. And printing money is just silly. Note no job nowadays whether private or public is considered secure and therefore no salary slip or turnover figure can be a guarantee for any form of repayment so how can we be encouraging lending under these circumstances? When things go wrong, having a wolf pack onto you cannot be helpful to ones already existing fractured emotional stability.

The debt ridden governments should certainly cut spending now or better perhaps for the first time in their history base their figures on negative growth. When I say cut spending, I mean cut spending and not increase borrowing! This means reducing the costs of each responsible government. We are entering into the abyss. When we had the financial crisis which started as a result of the toxic culture in the banking sector and many other sectors, all we did was pass on the burden to the tax payer and delayed the inevitable. We are living a period that requires decisive, courageous leadership for the long term for our planet and for our children.   Sadly I don’t see any of this. The EU public sector is completely overbloated, with so many of us who have no sense of the wider picture. Politician after politician in the EU patches up things here and there, with no idea what they got themselves into with so many short term decisions….afraid. Afraid like my friend once was that the real decisions will affect our living standards and expectations. This continued pressure of constantly making money and growth, is simply exasperating our problem and making us all live in cloud cukoo land.  We are living in a world, that is too fast for our own good, no time for each other, and losing ourselves in the middle of it. So many as usual escaping from themselves pretending there is nothing to worry about, burying their heads in the sand or not willing to accept responsibility. Worst of all so many left behind, the young lacking opportunity and becoming resentful, lost… bitter…

This crisis is a result of a western world of human failings and weakness with little or no remorse for our past mistakes. The bad news is; it is going to get worse.

Yes; unless, we change our attitudes and pull out of our combined disastrous culture of debt and of greed together. The answer to each individual where you feel your career is at stake or simply not working. Well you start to think, make the sacrifice and change. You change direction, and utilise your talents elsewhere or in a more beneficial form. There is one very positive element about our human nature. We are known to be very adaptable and highly resilient. Furthermore we need to slow the pace of our lives down, concentrate on our families where there is an enormous social problem and in addition our communities which are so fragmented and dispersed; each other, and ourselves. Let us get back into the idea of living simply as well as bringing back proper good values, helping others and making a real contribution to our world. Each individual citizen in the western world if things are going to get worse; start by not taking everything for granted.

Governments, cut down on your spending, everywhere, start by reducing or aligning everyone’s salary from the top down including getting rid of needless expenses in order to safeguard a good part of the public sector positions. Help people in obsolete jobs to find different and more meaningful positions where they can make a better contribution. Stop spending ridiculous amounts on the military and on health and welfare. Do you really intend to blow this earth into oblivion? Or prescribe so much medicine onto everyone? Are we all that sick and so codependent? Or make decisions simply to satisfy corporate pressure or interests? Concentrate on the essentials. Governments should be there, for the needy, the vulnerable, and improving our environment we live in, and protecting our citizens. Ultimately to make long term decisions for the good of our planet, our societies and for the future of our children.
 
That is what I would pay my taxes for and what I voted for. Instead it seems to me that we have learnt nothing from the worst financial crisis ever. It all seems to be getting worse and out of hand. I fear this is just the beginning and the very survival and purpose of our institutions, banks and businesses are being tested to its very limits with a social crisis looming of unquestionable consequences. Perhaps like my friend who learnt his lesson; it will take a catastrophe of such nature and only then we may be forced to change. Nothing lasts forever and change is always inevitable; it is just a question of when as time is ticking.

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