Greetings and good afternoon, morning and/or evening depending on which time zone your are reading these words….
My recent wordings have been focused on the unbelievably lame decision making of various regulatory authorities (particularly US-led Retardlican power base) and the unfettered use of the unregulated environment by those people in charge of various pension funds around the world.
This time I want to talk about debt.
According to a website called Investopedia® (whose words I have no reason to mistrust due to the fact that they have the byline “a Forbes digital company” within their logo and one of those little ‘r’s inside a circle next to it) talk about the Total Debt Service Ratio. You can stop yawning now because I’m not going to bore you with screes of useless economic formulae coupled with hours of unnecessary bleating on and on and on about jobs, housing and government intervention in the market place. It should only take 10 mins. If you want to work out your TDS, then click on the link and there is a lovely little formula to put numbers in to.
Good old Investopedia – they know the score. And why shouldn’t they? They are powered by those highly skilled people who can make lists of billionaires with a simple click on the ‘sort’ button on their excel spreadsheet…
The TDS ratio means that there is an acceptance by the money nerds of an acceptable level of debt for a household. The same goes for companies. Economists, whose grasp on the realities of living in this world is akin to Obama’s grasp on the efforts put in by competing special Olympians, say that every company or household can run up a certain level of debt.
The arguments for a company or household existing with ‘servicable’ debt cows in any economic climate have been delivered to the financial abattoir. If your company/household has levels of debt that are too high and the market has am extremely quick ‘correction’ (this is a wonderful word dreamed up by the nerds. It sounds much better than ‘crash’), you may be unable to service your loan(s). We have seen this in the United States from owners of houses bought with a ‘sub-prime’ mortgage through to that wonderful company GM whose decision to make cars nobody wants to buy might turn out to haunt them at some point in the future.
I guarantee you this. If there was no such thing as an acceptable level of debt, then this current financial crisis would have been a ‘blip’ (another wonderful piece of phrasing – this is actually a short term crash). Long term debt is the issue here. People and companies do need overdrafts – particularly companies. Sometimes we don’t pay our bills on time and there is a need for ‘bridging’ cash to tide people over. Long term debt is completely unnecessary though.
I can here the collective grunts and moans of those financial money spreaders right now. You can’t say that Boon, they will be saying, debt is needed for growth. If a company can’t borrow vast sums of money it can’t grow, and thusly Boon you may have just talked thousands of people out of their jobs. Live with that you communist.
Well, certainly, I can live with that. I live with that because the current model where a company can run up hundreds of millions of dollars of debt so it can purchase competitors or move manufacturing to China or wherever, does actually put MILLIONS of people out of work. Millions of people have lost their jobs around the world in the last year as a direct result of companies having a very high Debt/Equity Ratio and collapsing.
And the economists are moaning again. But Boon! You don’t understand! Those companies were bad. They didn’t run themselves effectively. They made poor business decisions and paid the price. I suppose that’s true to an extent, but when the decision to borrow against assets to expand your company is the accepted norm, you’re going to do it – particularly when you see competitors around you doing the same thing. OK then Boon, where’s your solution? What can you offer the world of economics that Keynes, Smith, Hume, and Friedman haven’t already.
Well, here’s my solution. No long-term debt. Companies and households should not get themselves into any form of debt at all – except maybe for the odd short term carry over debt like an overdraft or, for individuals, a credit card that they pay off the full amount on each month.
If you can’t afford to buy something because you don’t have the available cash, you shouldn’t get it. Ultimately, if you buy something with debt you don’t own it. Somebody else does.
This would be a revolutionary way of thinking. But Boon… economies would never be able to grow. Things would move too slowly. Well, who said they had to move quickly? If you want something, you should save up for it. Surely it’s simple logic. If you borrow the money to buy something you will always pay far more than the original ticket price – be that thing and house or 73% of GM (and isn’t that inflationary??) It would take us years to do that Boon. Yes, you’re right, it would. But then if the world were to collapse overnight (as it did last October – technically it took about a year I suppose…), then you wouldn’t be lumbered with a debt for something that wasn’t worth anything (like GM, AIG, Citigroup, Zimbabwe etc, etc, etc).
So, save up for things and buy them for cash. Who knows, you might even get a discount. After all, who uses cash these days. Money is just numbers on a computer somewhere. Does it even exist??? I have no idea.
Until next time, happy saving.