Why is the World in debt, how do we pay it off, and why should we care?
In: 69
This is a massively generalized summation, of which I’m sure a lot of people will disagree, but here we go.
Consumer debt, on a macro/societal level, means different things to different classes of people. For low to middle class people, consumer debt widens the wealth gap by allowing for the ability to add assets at a higher cost than their value because the cost grows over time through interest while the asset’s value generally decreases over time and with usage. (What is often referred to as living beyond one’s means.) In the long run, this eventually creates a cumulative weight on the spending power of the lower and middle class, which is bad in a consumer spending driven economy. This is infinitely more the case when the debt is used to purchase services or perishables which generally add no long-term value to a person’s wealth and may even decrease wealth through unintended consequences (e.g. fast food = bad for your health, bad health = expensive). Real estate and luxury goods are the only real exceptions to this available to the lower and middle classes, but the level of purchasing power necessary to buy substantial amounts of these types of assets to grow wealth is generally out of reach for the majority of people, gains are also usually unpredictable and slow to realize beyond simple inflation.
There are only three culturally acceptable ways to offset this:
1. Increases in income, which is not feasible as a strategy as wages have been largely stagnant compared to inflation.
2. Moderation, responsible spending, and repaying old debt before acquiring new debt. This is what we tell ourselves we’re going to do, but rarely ever do because we’re playing a losing game of psychological and economic warfare with capitalism. It’s what the wealthy tell us to do and why they blame us when we don’t have traditional success in life. On a micro-individual scale, they’re not wrong.
3. Or, what the wealthy do, have assets that are accumulating value at a higher rate than the interest cost of obtaining new assets through debt. This is why the wealthy are able to use debt to supply liquidity when their assets’ values are unrealized or exist solely on paper. In short, if you have enough money, you can put it to use by growing itself without active intervention. Money makes money, which outstrips out the cost of debt.
Non culturally acceptable solutions are things like bankruptcy and politically unfeasible fiscal policy like consumer stimulus or basic income.
In summary, consumer debt reduces the buying power of the vast majority of consumers in the long run. Less buying power means less input into the consumer driven economy, and therefore less growth over time. The one caveat to this is population growth, which more or less turns the entire consumer debt sector of the economy into one giant ponzi scheme which will eventually collapse, taking us all with it when it does.
Latest Answers