From Greece To You: Debt Is Not An Imaginary Thing

Well, I suppose philosophically one can surmise that it is indeed an imaginary concept. After all, how to quantify exactly the worth of a means of exchange?

Without getting too specific about things, I choose to keep in this post a basic view on debt as I've come (and many like me) to learn and understand it be it through my time in a bank or personal experience dealing with personal and commercial debt.

Debt will be defined as: The decision or undertaking to borrow money on credit from a borrower with a specific contract stipulating an agreed amount (capital plus interest) owed. For example, you the borrower freely choose to borrow $20 000 for a student loan. Having read the contract details, agree to pay $400 plus interest per month until your debt obligation has been fulfilled.

Defaulting on this has little if anything to do with the lender. That your plans fell through is not an excuse to justify you defaulting by blaming others.

That makes you a deadbeat no different than a thief.

You don't want to end up being like Lee Stiegel of the New York Times justifying your irresponsible behavior largely of your own doing.

If there's one piece I will keep to remind my daughter on how not to act in life, it will be Siegel's article.

With that in mind, as far as I can tell, there's a general ignorance about what debt is or how it works. It wouldn't surprise me if the majority of people defaulting simply did not take the time to consider it's ramifications including ruining a credit score. They just want the money and hope it will all work out.

Just like in your business plan you have to determine if your business will be able to cover debts, you should do the same with your income as well whether you can really afford a student loan. Will your journalism degree provide you with stable income to cover your debts? Another factor that plays into default is students who do earn high income tend to spend their discretionary income on material goods forgetting the number one adage in financial philosophy - pay your debts. If you don't, debt becomes slavery. Before you know it, as you max out, you find yourself unable to cover the interest let alone the principal amounts.

The thing is it can all be avoided.

It all comes down to managing expectations and personal wants. Yeah, we all want that fancy TV or go on that trip of a lifetime or study sex education but it's not always wise to borrow for such things. What are you getting back in return for it exactly?

Commercial loans are even trickier because an economy's grease is its entrepreneurial class willing to take risks. They literally can lose it all.

How banks or governments get their money back is another matter. They may foreclose, restructure, come after specific assets (liquidating assets in business) and so on. Either way, your only option may be to declare personal bankruptcy depending on your particular circumstances. There are companies that help people work out deals with creditors. But that comes at a price: the lowering or ruining of your credit score. Your 'credit worthy' score.

That's problematic because it becomes difficult to get access to even simple credit like a Home Depot card or buy a car. You will find yourself needing to have co-signers.

A quick word on people who borrow and drag others into it. If you borrow and default leaving a co-signer in trouble, then you're a careless, self-centered individual with little dignity. Sure, co-signers should always size up the character of a borrower but when it comes to your kids, it gets a little trickier.

Just like individuals need to manage expectations, so should countries. Greece is the latest example of a society wanting 'free shit' and not wanting to pay for it. That's the base root of their problem; not to mention the corruption of squandering and pocketing bail-out funds.

Worse, Greece seems to be demanding others (the top creditors are Germany, France and Italy in that order) prop up their addiction to welfare using specious claims to the past.

At some point, lenders will stop lending and no amount of appeals to emotions will change the decision. Enabling countries is just as unproductive - if not evil - as it is enabling people through a generous welfare state.

Someone has to pay for all the perks. This can't be stressed enough.

There is not such thing as 'free health' or 'free education.' That's just bureaucrat lingo for someone else will pay for it. One can quibble about the need for such things for the 'greater good' but don't call it free.

Bailouts can’t fix this problem. If you're swimming in debt not able to cover the interest, a new line of credit isn't going to solve your long-term bind.

Look at it as having a terminal disease. You can prolong it with certain medicines or dietary adjustments, but it's terminal. You won't change the fact you will pass on. Same with debt. Debt stalks you and sometimes your children. You can get that short-term loan but it will be as the notices in the mails start up again.

Look at government debt this way. If you make $80 000 a year and owe $100 000 (the Canadian average) in debt - excluding your mortgage - in credit cards, car payments or a line of credit, the

Don't philosophize debt. Government does that all the time but they have the coercive power to defer and pretend through powers of printing money, redistribution policies,and flat out seizing funds in a dire scenario.

You can't do that.

If you think you're in a bind, let us put government debt in perspective. Government debt is the equivalent of spending 100 times your salary. So if you earn $50 000 a year the government spends 100x (rates vary from country to country) that.

Crazy huh?

You'd better hope they have the cash flow to keep creditors happy; or at least not uneasy.

The best way is to accept debt to be as real as getting a job and the income that comes with it. Be aggressive in your belief you want to pay down the debt because it's right thing to do. Take a second job if possible. Believe me, it will have a positive impact. It may annoy you but don't be a self-entitled prick.


Canada's debt ratio isn't healthy.

In general, North Americans are poor net savers. Although, they've seem to slow down on debt borrowing. For example, household debt in the USA has been on the decline.

Some household debt figures.

Stats Can discusses financial literacy:

"A large proportion of total household debt is held by people who are in the accumulation stages of their life cycle and/or who have higher-than-average incomes. Although their borrowing accords with life-cycle smoothing and has passed institutional lending standards, the extent to which borrowers account for the risk of interest rate increases, housing price declines, income interruptions or other such factors in their borrowing decisions is not known. To some extent, such risks may be mitigated by the financial literacy of borrowers since those who are more financially capable would be expected to better understand the risks associated with borrowing and how to best mitigate these risks."

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