The Cycle of Debt Must Be Broken for
the Whole System to Correct Itself
The spot price of oil remains the daily benchmark for the trading action in the stock market. It’s recovered to the $80.00-per-barrel level and is seemingly stuck below the important $100.00-per-barrel mark, as the economy remains in the doldrums. As I’ve written in the past, financial markets need more certainty if they’re going to move forward in a positive fashion and it’s really incumbent on Europe to do the best it can to fix its debt crisis. Saying this, I acknowledge whole-heartedly that debt is something that is very difficult to get out of—for individuals and countries alike. The sovereign debt issue is very similar to an individual with mounting debt on credit cards. It’s a vicious circle of debt that becomes extremely difficult to get out of with mounting interest costs.
Making the debt crisis even worse in Greece is the fact that many taxpayers refuse to pay while the state continues to provide social services. This is obviously unsustainable and it’s also a reflection of policymakers’ unwillingness to accept and deal with the situation.
I actually think that a debt default in Greece would be the most useful strategy for that country in the medium and long terms. Sure, there would be turmoil in the short term, as financial markets figure out how to react to the situation. However, there is already a great degree of turmoil now and the fact of the matter is that, even with these bailouts (which are financed with debt anyway), the situation won’t improve until Greece dramatically changes the way it collects taxes and spends its money. Policymakers have to change over there and so does the view of the population in terms of the role of the state in their lives.
My favorite investment analyst is Jim Rogers, and for years he’s been advocating how wrong it is for countries and political policymakers to use central banks and debt to rescue already broken assets. He strongly advocates that the Federal Reserve’s bailout of Wall Street was an incorrect strategy. Instead, his view was that the weakest banks should have been allowed to fail, then the stronger financial institution would gobble up the leftovers and, in the long run, much healthier institutions would be created. This is what’s been happening at the consumer level with those who have mortgages that are now larger than the value of their home. Individuals can declare bankruptcy and are then able to walk away. Sure it’s painful, but the cycle of debt gets broken and people can move forward.
It is the age of austerity and this is going to be reflected in economic growth rates, incomes, spending, and corporate earnings. There is a big reckoning going on and it represents a return to living more closely to one’s means—both individually and at the country level. We’re lucky that interest rates are so low. If they were higher, the pain would be a lot worse.