A virtual "debt bomb" is ready to explode worldwide, and it'll be difficult to avoid the shrapnel if it detonates. After all, just about every country on Earth has amassed enormous debt.
Governments around the world have sapped the wealth of future generations, all because it's easy to do. Worldwide debt continues to grow at an alarming rate -- but at some point, there will be a day of reckoning.
Hopefully, it won't be the train wreck that so many are expecting. But as Wendell Phillips once wrote: "Debt is the fatal disease of republics, the first thing and the mightiest to undermine governments and corrupt the people."
I've just finished reading an excellent book called House of Debt: How They (and You) Caused the Great Recession, and How We Can Prevent It from Happening Again. Written by Atif Mian and Amir Sufi, the book is a sobering reminder of how many Americans drowned themselves in debt in the years leading up to the 2008-09 financial crisis. Extreme debt was a crushing blow to many who overstepped their bounds, and the result was a financial calamity that could have been on par with the Great Depression.
Now, up until the 19th century, many Western European countries had so-called "debtors' prisons" -- workhouses where citizens who couldn't pay their debts had to go until they paid off their obligations.
Debtors were often sent there without due process, and being in prison obviously made it nearly impossible to repay the debt owed. So, debtors were likely there for life, unless a rich relative came to the rescue or a creditor forgave the debt (a rare occasion). Furthermore, debts were often handed down to heirs for repayment when you died, and those who failed to cover your obligations might face the same fate that you did.
Even America had debtors prisons until we abolished them at the federal level in the early 1830s. Today's answer is bankruptcy, but can you imagine if debtors' prisons existed today? Some 48 million Americans, or roughly 15% of the our population, would be there. Where on Earth would we put them all?
When it comes to governments, burgeoning debt and out-of-control spending have always led to a financial crisis of some magnitude. Fortunately, the Federal Reserve under Ben Bernanke made sure we avoided a total disaster in 2009, buying all of the debt it could find and keeping interest rates so low that borrowing could continue.
Today, the Fed holds $4 trillion of debt, and while it's not accumulating more, the central bank finds itself in the tough spot of trying to unload it without doing much harm or substantially boosting interest rates. The ideal situation would be for the U.S. Treasury to buy back the Fed's Treasury holdings. But as we can see from this debt clock, Uncle Sam isn't collecting enough taxes to do so. Politicians would have to "just say no" to spending, and we know that almost certainly won't happen in any of our lifetimes.
In fact, debt has become the world's answer to global economic problems. Check out the video Crazy: A Story of Debt, by Grant Williams. Unfortunately, we've never in history seen debt solve problems. But this world debt clock shows that global obligations continue to pile up, apparently with no stopping their growth.
Debt ratios are enormous worldwide and just keep getting bigger by the minute. How and when will anyone ever repay this money? Have we even heard any politician around the world talk about a debt-repayment plan? How do we blunt this problem?
Simply put, countries have to grow their way out of it -- expand gross domestic product, create jobs, boost tax collections and pay off their debts the way responsible individuals do. That's a mighty big task now that the "debt genie" is out of the bottle, but it's something that time, intelligence, strategy and discipline could solve.
Of course, finding politicians with those attributes is like finding a needle in a haystack. And like a recovering alcoholic who walks by a bar, there are just too many temptations to fail vs. taking the difficult road of just saying "no."
Frankly, we need leaders to stand up and say: "Enough! Stop the deficits and let's grow our economies and pay our debts back." It sounds simple enough, but the political problems involved with doing so are far too complex to cover in a single column.
This problem has mushroomed out of control, and the solutions required to solve it are politically unpopular. So, most politicians just "kick the can" down the road. I hope they solve it eventually, but that day might be far from now -- and not before this ticking time bomb explodes.