Skip to main content
The Daily Paradox

The Daily Paradox: Debt: asset or liability?

I agree with everything in Vikram Khanna’s excellent Straits Times article of 29Apr24 on debt – except the title. “The silent debt crisis that threatens a lost decade” makes it sound rather as though world debt is a temporary hiccup, a bit troublesome for the developing world but not something the rest of us have to be concerned about. The article’s contents soon put that notion in its place. Debt – yours and mine, Sri Lanka’s, Evergrande’s, the South Pacific Islands’ – is a complex of gifts deferred, political seduction, military engagement and ideological clout. It is linked to subsidised trade, commercial sanctions and personal wealth. Debt is a deferral of worth, sometimes a denial of it.

For most of us debt is a liability, perhaps less so when we are paying off a mortgage on property that we reasonably expect to appreciate in value. Not all property does this but rocket science isn’t needed to forecast that expanding populations need more housing. Personal debt and international debt are different things, of course, but debt is debt as all those in it discover. Massive borrowings for commercial developments incur enormous risk. Growth, the aim of commerce for the last two centuries, demands risk, and investment of all sorts is a form of lending anyway.  If a company goes bankrupt the money you paid for your shares in it turns out to have been a bad loan.

The world is overloaded with debt. Such borrowing has been very successful in helping to lift millions of people out of poverty and millions more into relative wealth. Because of population growth and war costs, that has not freed us of hardship, hunger and illness. We are more than ever aware how poorly we share tolerable lifestyles. Borrowing, originally used to finance relatively stable fixed assets (houses, land), has extended to many goods and services whose continuity and value appreciation are less certain and whose benefits are fleeting and transient. Gifts should be given directly, not pretended as debt.

A wise and financially savvy friend told me that he wasn’t too worried about the world’s burgeoning debt as long as the US$ was the reserve currency.  The US could, he thought, continue piling debt as it chose since the liability of it was almost all other countries and not America’s. It is a comforting thought until you realise that the planet is inexorably becoming rather less a series of competing geographical countries than a single unit. Communications are so swift that terristerially and intergalactically we know how the other half is reacting second by second. Current intercountry disagreements won’t stop that. Good for keeping in touch with the family but worrying when you see Presidents’ fingers poised above nuclear buttons.

Another very savvy source of thought on the subject is Gillian Tett.  Her intelligent article “China needs to learn lessons from 1990s Japan” (Financial Times 02Feb24) is a sobering reminder that both ideological obsession and verbal obfuscation can get in the way of truth. Transparency is the main solution to better understood financing and more equitable investing. There are, alas, substantial and powerful forces interested in retaining the present systems. The role of education is underestimated, too. No good hoping that people can mentally add up quicker unless they learn how to subtract as well. Marketing finance is now a subject requiring more attention than the correct description of sardines on a tin.

With increasing longevity and higher standards of living people are going to have to provide for their old age earlier than they presently do and more prudently than they have been taught to so far. We find people need help of a very different sort than was expected even five years ago to equip them to deal with tomorrow’s future financial needs. Those needs include a better understanding of debt and risk.

Life is more than a simple ‘earn and save’. Everyone needs to borrow from time to time. Key to doing so successfully is marshalled common sense, bold exploratory research and transparently disciplined management.

For those who achieve that their debt remains an asset, not a liability.

Good morning

John Bittleston

06 May 2024