Debt Does Matter

I’d ignore all the people saying debt doesn’t matter.  It matters.

In your own life, debt can be totally limiting.  It can make it so you can’t take a risk you’d like to take.  It alters your perceptions.  One of the reasons we invested in Holberg Financial is because it can help employees with the stress that comes with having a lot of debt.  HR managers are realizing that employees are entering the workforce ill equipped to manage their personal finances, even though they are college grads.  Holberg is unbiased unlike a lot of services.

For companies, adding on debt is a double edged sword.  If you can’t pay the debt service, the bankers come like vampires and suck the life out of the company.  Debt is cheaper than venture capital.  But, it has to be collateralized and it has to be paid.

For governments, debt represents the future claims on the income of tax payers.  If it’s a city or a state, the only way out of a deep debt hole is default or radical budget maneuvers which will be painful to tax payers.

If you are a country, you can default or you can print money.  That’s the danger of the debt the US has accumulated.  There is a printing press, and they can use it if they want.  Inflation is very harmful to citizens.  You might have heard about what happened in Germany post WW2, but just look at Venezuela or Zimbabwe today.  President Trump certainly hasn’t cut the budget but none of his predecessors did either.  They all pay lip service to it.

If you want to learn a little bit more about the corrosiveness of a large government debt, look here and here.

Having a massive amount of debt changes a lot of decisions that could be made.  My friend Yra Harris illustrated some in this blog post.  One very interesting thing to watch is going to be the insurance industry.  They were forced to accept very low rates of interest rates from 2008-2018.  That’s impacted their returns.  Remember, they need to invest their float and earn a high enough return to pay their policy holders off.  Traditionally, they have been able to target rates of 6-8% and earn a safe return but that option was gone.   Big insurance potentially could have some difficulty.

US government pensions are in total trouble.  If you look at my home state of Illinois which is the worst in the entire country, pensions are underfunded.  Not one politician is talking about slashing budget expenditures.  I was at an aldermanic meet up the other evening and our alderman never mentioned it.  The politicians also won’t do what corporate America did back in the 1980’s, change to a 401(k) style pension system.  Illinois isn’t the only state where this is true.

I don’t know when the comeuppance happens, but the math is clear.