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Debt
By John | June 16, 2011
Greeks are rioting. Banks, nations, governments at all levels are in trouble. Debt is stifling economic growth and threatening to plunge the world economy into chaos.
In my book, I advocate the judicial use of debt. If debt can be used safely to leverage reliable returns, debt can be beneficial to the investor. But that means that the debt incurred must be used to generate returns greater than the cost of the capital employed. Debt to support consumption is discouraged, as that debt does not generate a return, and only increases the cost of whatever is being consumed.
Now this may seem obvious. I know it seems obvious to me. However, it apparently is not obvious to government officials who advocate that government debt be used to support government expenditures (i.e., consumption) that cannot, or will not, be supported by government revenues.
Governments do not create wealth. They do not generate a return on invested capital. Therefore, in my opinion, governments should never borrow money.
Greece, Portugal, Spain, Ireland, California, Illinois, New York, the U.S. Government, etc. have incurred debt beyond what any reasonable person would expect to be repaid. Rather than recognize reality, all governments who find themselves in this position try to postpone the inevitable by borrowing even more to pay back old debts.
These governments are bankrupt, and the sooner that is officially recognized, the sooner we can return to a rational economy.
Greeks are rioting against austerity. To the extent that Greeks are objecting to the reduction in their “entitlements” (i.e., the money they did not earn), their objections are not legitimate. In a free market economy – one that respects private property rights – no one has the right to claim the fruits of another’s labor.
However, to the extent that Greeks are objecting to the failure to recognize that the Greek Government is bankrupt and needs to repudiate its debt, they are correct. Is it reasonable that the Greek population should experience a drastic reduction in standards of living in order to support debt owed to foreign banks? Isn’t that a form of involuntary servitude?
Greece will not recover until it is reorganized economically. That means defaulting on Greek Government debt. That means recognizing that Greek citizens must support themselves, and not rely on government handouts.
I know what you’re thinking. How is that going to happen? Probably not voluntarily. Probably not without a lot of further social unrest and economic upheaval.
Unfortunately, this outcome will not be confined to Greece, as most of the governments of the world are in the same situation. They have incurred debt inappropriately – debt they cannot possibly pay off. Their citizens, having become reliant upon government handouts, will resist the termination of their “entitlements.”
As we take this “big picture” look at the world, let’s not forget what those pieces of paper we carry around with us in our wallets truly represent. The entire world uses fiat currencies. Those currencies represent the debt of the issuing governments. This debt, too, will be defaulted upon.
What to do? Put your savings in true stores of value. Don’t trust governments to honor debts. They can’t, even if they wanted to.
I advocate gold, silver and land. As stores of value, these are not investments. They do not yield a return, in a true economic sense. So, do not borrow to purchase them. Own them free and clear of any encumbrances. If you will owe property taxes on land, make sure it is minimal, and make sure you have the funds to pay them.
Government defaults are coming. I just don’t know how long they can keep postponing the inevitable. I know that the longer the postponement, the more serious the outcome.
Be prepared. Mass amounts of wealth will be transferred as a consequence of massive debt defaults. Plan to come out of the debacle with a portfolio of solid assets. Gold and/or silver – coins or bullion – not paper backed by gold or silver. Land – a solid piece of the earth’s surface. They will still be there when the dust settles.
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