Cancer begins with the change in the gene of a cell. Debt is a cancer. It’ll change your financial DNA. It grows while you work, while you play and while you sleep. It becomes immortal.
Debt has a place in the corporate capital mix. The tax and leverage advantages of debt within a predictable income structure can significantly enhance early growth and dramatically improve the overall return on capital.
That’s all very well in a limited liability structure where the damage is restricted to the encumbered asset only, where contamination is contained. The very purpose of the limited liability construct is to enable specific risk-taking in a contained way.
Debt is a cancer. It’ll change your financial DNA. It grows while you work, while you play and while you sleep.
Personal debt is a different animal altogether. Even in a mortgage bond, there is a disconnection between the yield of the asset (nothing but a lifestyle) and the income stream which is required to service the debt (your salary), but at most they can only take away the house.
Unsecured, consumption-driven, personal debt is the real cancer of finance. It’s not logical or defensible, but we do it anyway. We want things, and we must have them, now.
Personal over-indebtedness is now a worldwide phenomenon, and it will precipitate another global financial crisis, if not a series of revolutions. Everyone has borrowed a lifestyle beyond their means. Living in advance is the new way, and, ironically, most of us are going to live for longer.
Nobody is left out. In the US, personal debt has been growing practically exponentially for the past five years. In China, personal lifestyle finance debt has grown by over 40% in the past year. Argentina is in trouble. Greece is not out of trouble, and nor is the EU, for that matter. Capital is being withdrawn from emerging markets at an alarming rate. South African consumers haven’t escaped this mess.
There are new influences that will make matters worse than even the current statistics depict. Credit access is available to increasingly younger consumers. There are practically no barriers to entry. Sources of credit have multiplied. Unemployment is rising. Financial services now provide a significant proportion of retail revenue as stores are happy to finance their customers to drive up sales. The store figures look good in the short term
when you combine margin and finance revenue, but eventually, their customers suffocate and sales fall. Credit is everywhere – peer-to-peer is growing, and it’s here to stay.
Easy money was available for everyone in the post-2008 financial crisis stimulus years – happy hour in financial markets. Money was practically free. Of that base, though, a small percentage increase in interest rates had a massive impact on the cost of financing debt.
If interest rates move from 2% to 3% the cost of debt servicing goes up by 50%. At some point, this just becomes too large a slice of your take-home pay. Given that the unsecured debt interest rate is higher than the salary increases you’re likely to get, the prognosis becomes obvious. Lifestyle assets depreciate almost immediately you leave the store and they become worthless and out of fashion long before the loan is repaid. You simply must have the next gadget. You’ll need another loan.
As consumers default, the cost of funding for their financiers goes up. Before you know it, the acceptable ratio of household debt to national GDP (roughly 60%) has been breached, affecting the cost of sovereign funding.
Contagion is inevitable. Once the consumers start failing, a classic death spiral starts for business. As business starts cutting costs (people costs in particular) so the problem becomes exacerbated.
Eventually, the burden falls on governments, which by now also face borrowing limits, increasing required yields on debt and weakening currencies. More cost-cutting, more job losses, even in the public sector, are the last refuge. After that, there is no place to hide.
We will have to go outside the country to get capital. Foreign direct investment is the only way out, even if it means selling stakes in things we’d rather not. External confidence will determine the cost. Confidence founded on a credible growth plan and some quite extraordinary discipline.
The discipline will necessarily have to come from the top, initially, but the cure will only come from the bottom. From us, the parents, convincing our children of the virtue of deferred gratification, ourselves living within an earned lifestyle, not living in advance. We’ll have to ignore the Joneses for a while, who we may find are actually far less wealthy than their watches suggest.
Mark Barnes is CEO of the Post Office.