One financial institution began the trend, and every institution
that had a legitimate say in the matter or no legitimacy at all, joined the
chorus and rang the alarm bell about the serious level of debt that's incurred
by the governments, the corporations and the individuals around the globe. And
so, it is fair to ask: What's real and what's exaggerated in this furor?
First of all, let's begin with the reasons as to why someone would
want to borrow money. There are three basic reasons. First, someone cannot make
ends meet, and he needs money to pay for his overhead expenses as well as feed
his family, till such time he'll have an income stream that will allow him to
resume his normal life, and also pay back the debt he incurred.
Second, the borrower's current income is such that he is left with
a surplus at the end of every month. So he wants to buy a big-ticket item such
as a car or a house, and pay back the debt over a prolonged period of time with
the surplus he’s enjoying every month. Third, someone has an idea to start a
business or expand the one he has now, hoping to increase his revenue stream,
but he doesn’t have the capital to do it with, and so he wants to borrow.
It is obvious that in all three cases, the borrowers as well as
the lenders are taking a risk in that they depend on things going fairly well
for the borrower in the future. The expectation is that he'll have the ability
to pay back the principal and the interest as they come due.
What the institutions that sounded the alarm are saying, is that
compared to the income level of the entire planet, which comes to about 80
trillion dollars of GDP, the sum total of the debt levels is two and a half to
three times that much. This would be like someone that owns a small business
earning just enough to pay for the daily expenses of his family, but has an
idea. He wants to borrow 250,000 to 300,000 dollars to expand the business
after which he estimates that his income will rise to 100,000 dollars a year.
He reckons that this will allow him to have a higher standard of living, pay
back the monthly portion of the principal, also pay the interest. So the
question we ask: Is this too big a dream to be realistic? Or are the financial
institutions sounding the alarm needlessly?
Well, the assumption here has been that the borrower will borrow
once, expand the business and start covering all his obligations. But what if
he discovers after a time that his income does not pay for his style of life
and his debt too? Instead, he finds himself obliged to borrow and add to his
debt month after month just to meet his obligations. Is this what's worrying
the financial institutions that sounded the alarm?
Yes, that's what worries the financial institutions, except that
their message is getting polluted by a torrent of noise which comes in at such
levels, it is difficult to make sense of what’s being said.
To overcome that noise, let's try to inject some clarity in what
the financial institutions have said. They pointed the finger at the emerging
economies as well as the two big ones: China and America. Well, let's put it
this way: The emerging economies being mostly in Africa, we should rest easy
because most of them are doing the right thing. They borrow and put the money
into income producing projects that will be run by a young population that's
also increasing in numbers. This population is eager to learn, and eager to put
its knowledge toward building a more prosperous future. Such young men and
women are the ideal people to whom any lender would want to lend.
In fact, most of those who lend to these African borrowers, be
they individuals, corporations or the government, are their own central banks
and the Chinese government. The latter comes in with some cash and a whole lot
of blueprints for infrastructure projects that make it possible to build wealth
producing businesses of the kind that these countries need the most.
So the question: Where does China find the money to lend to these
countries? It borrows from its own central bank. Because the money is going to
safe places, the central bank of China does not worry about losing it. And this
brings out another point that has to do with the way that some financial
institutions tabulate the debt level of the world. When China borrows a
trillion dollars from its central bank and lends it to the African nations,
this is only one trillion dollars-worth of borrowing. What some institutions do
wrong is that they count it as one trillion borrowed by China and one trillion
borrowed by Africa for a total of two-trillion dollars. This is redundant and
false.
We now look at the United States of America. It borrows from
itself a great deal, but also borrows much from foreigners. It uses the money,
not to shore-up a badly crumbling infrastructure or build income producing
enterprises; it spends the money on activities such as the military and a
prison system that yield no return.
Moreover, year after year, America finds itself borrowing still
more money to pay the interest on a national debt that keeps ballooning. This
is why America is seen as courting disaster.