Why debt has us worried
There’s a boom in going broke. Record bankruptcy rates bedevil both sides of the Atlantic. But what was worrying us here at MoneyWeek was that we were the only ones worrying. Now, it looks like others are beginning to take note of the problem too.
In this week's cover story, How to profit from bankruptcy, Brian Durrant tells us how big a mess UK consumers are in. He also sees opportunity in the shares of one company that specialises in helping people go broke. But how did we get in such a mess?
When Alan Greenspan took over at the Fed in 1987, he must have felt like a sailor who had sneaked into the sultan’s harem. Whether he looked to the left or the right, he was bound to like what he saw: falling rates of inflation, falling interest rates and rising prices for stocks and bonds.
Almost unbelievably, the price of gold was in decline (and he thinks it’s terrorism’s fault it’s going up now), while his own puissant currency – the nothing-but-paper dollar – was going up!
As long as the dollar held up, the maestro could enjoy himself. He could print as much new money as he wanted. The rest of the world had to follow his lead. Other central banks either had to match it, or their own currencies would become expensive and their export industries suffer. Soon the world was flooded with money and credit.
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But as the quantity of money – including sterling – increased, its quality decreased. Compared to gold, the pound has lost 99% of its value in the last three decades. No wonder people are rushing out to spend. Savings rates have declined from 14% of disposable income to barely 5%.
Investors found they were better off buying a house, or antiques, or art – anything that was likely to hold its value. Consumers found they would get more for their money if they spent it sooner rather than later. Then, as the credit boom developed, everyone discovered how to live better: rather than save money just in case, they borrowed it – just in time to pay the bills.
With a full employment economy and new offers of credit available everyday, there seemed no need to save money at all. Let someone else do the saving; we’ll do the spending! And so what if we run out of money, we’ll just borrow more! But can debt continue to build up forever? What will happen if it doesn’t? You can find my own answers to some of these questions here: There's no such thing as money heaven.
By Bill Bonner, founder of The Daily Reckoning and author of US bestseller Empire of Debt
