Debt, Debt, Debt & More Debt

In a BFO (Blinding Flash of the Obvious) it is now being reported that excessive debt is being blamed as a reason for the rise in personal bankruptcies. Well, duh.

During the later half of the Nineties people, myself included, were piling on huge, unsustainable, amounts of debt. To a point, it hasn't stopped and we're building a huge housing price bubble on the back of excessive lending. And now, as the recession is becoming protracted instead of being short, the chickens are coming home to roost.

When I worked as a broker, I saw people taking on huge debt loads, without ever realizing it. Think about how much debt you really have?

Got a mortgage? How about a car loan? Credit cards? Here's one that trips a lot of people up - do you own any investments on margin? Making payments on a boat, an RV, a Jet-Ski maybe? A business loan? Remember, not all debt, margin is a significant exception, has to be paid on each month.

I used to see folks that had accounts with $200,000 worth of stock and they were $125,000 on margin. They never thought of it as debt - the firm didn't hold them to a repayment schedule.

I used to talk to people who knew they had too much credit card debt. Many of them didn't care - they figured they would just declare bankruptcy if it got to be too much to handle.

I'd talk to people who were talking about taking out home equity loans so that they could invest the excess equity in Treasury Bonds.

Almost never would I talk to someone who understood that they were taking on too much debt by doing these things. They figured they always had an out - bankruptcy.

A few months back, I started the process of getting my financial life back together somewhat. It hasn't been easy, but it's working. Little by little, things are getting better.

But I'm watching people continuing to take on huge debt burdens with no real consideration for how they plan to repay those debts (my current employer does this). I watch people thinking that home equity loans or another credit card will be the route to their financial salvation.

If this recession deepens or even worse, turns into a deflationary recession, many of these people will find that they have no way to repay these debts. And then the burden will shift to the lenders, who in turn will shift it to the employees, which in turn will lead to more recessionary and/or deflationary pressures. The bursting of the credit bubble will not be a pleasant experience, to say the least.

Maybe I'm being overly pessimistic, but I think that over the next few years, the people who will do the best and will become the financial foundations for the next boom (yes, it will come - everything is cyclical) are the people who are currently living on a cash or close to cash basis.

It's going to be tough, but again, responsibility will be rewarded.