Thursday, July 2, 2009

Finally! A Man More Pessimistic Than I

This man named Nassim Taleb is arguing on CNBC that the massive amount of debt relative to actual equity is going to create a massive financial crisis down the road for the U.S.

Mr. Taleb is the author of a somewhat famous book in certain quarters called "The Black Swan." I can't say that from a straightforward perspective he is entirely wrong. I have within the last year come to believe that from a personal standpoint, paying down my own debt is job number one. But I think he overstates and oversimplifies the problems. There is good and bad debt and there is a lifecycle over which you pay it down. If the owners of your debt called in the chips in too short a timeframe, he would be absolutely correct and I and millions of others would be basically in deep, deep trouble. The question is one of timing and of arbitrarily determing at what point does all this debt reach a critical mass in a national economy where so many people teeter into this position that it becomes a drain on everybody.

Debt is not inherently bad if it is incurred to acquire an asset that has a reasonable prospect of yielding a future return on the investment for which the debt was incurred. Going into debt to invest is not bad. It could be though if all the assets go bad and you lose your job and you can't keep up with the debt payments. In this scenario you still have to pay the debt and the assets you have will not cover it. For example, if you own a home where you owe more than you can sell it for because home prices have gone down by so much and plan to sell it to cover debt, you will find yourself with some serious problems. You'll still have the original debt you had plus the debt to pay off the balance on the home.

Nonetheless, it is hard for me to believe that lenders will call their debt because it is in their self interest that you pay it back according to the negotiated terms of the agreement. It's also hard to believe that this country will go so far down as to realize this doomsday scenario. As bad the unemployment numbers are, we're not at 20% to 40% of people not working. There are still far more people gainfully employed than unemployed. With respect to credit card debt though, I wholeheartedly agree with his premise. I also generally agree that Americans are in way too much debt and the government with all its spending, er... "stimulus" and future liabilities for spending is in even worse shape. Obama's even making that worse with all of the crazy policies. So while this is a bit too much gloom and doom even for me. It's worth keeping mind.

It also reinforces that if you are in debt right now, paying it down should be one of your absolutely highest priorities in life. The old proverb that debt is slavery should not be forgotten. Your debt builds your lenders wealth more often than your own.

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