Paying Off Debt is Like Dying…

Yesterday, George Osborne, Britain’s Conservative Party finance minister-in-waiting, did something extraordinary. We can’t remember anything like it. He told the truth.

“We are sinking in a sea of debt,” he admitted. And on the very day when France’s president, Nicolas Sarkozy, said he would not raise taxes, Osborne said that he would not lower them. In order to lighten Britain’s debt, he’d leave Labor’s 50% maximum tax rate right where it is.

Voters don’t like hearing about debt. Politicians don’t like talking about it. And economists don’t want to think about it. And in a kind of collective suicide pact, they have all agreed not to worry about it. But debt is at the center of the world’s financial troubles.

Paying off debt is like dying. You try to put it off as long as you can. But nobody runs an open tab forever.

This week brought news that Maine-based luxury yacht maker Hinckley, which has been building boats since 1928, is sinking. The problem is neither technical nor operational. It is philosophical. No one complains about the quality of the boats. Or even the prices (if you have to ask, you can’t afford one). The company sailed along nicely until 1997. Then, the private equity hotshots from Boston took the helm. The old Hinckleys who ran the shop looked upon debt as though they were looking at a bottle of whiskey. A drink now and then did no harm. But watch out. Too much will sink you. In the 70 years they ran the place, they accumulated only $1 million of debt. But the new owners were dipsomaniacs; they multiplied Hinckley’s debt 20 to 40 times. (Exact figures are not available.)

For much of history, failing to repay debt was regarded as not merely a breach of contract, but a crime. People who failed to repay their debts in timely fashion were thought to have stolen from their lenders; they were put in prison. In the Middle Ages even a dead debtor’s children could be sent to prison.

Now, bankruptcy laws allow individuals and businesses to go to rehab. Then, they can stiff creditors again. Neither sin nor crime, debt is now just a cost of doing business.

But few creditors are as forgiving – or perhaps as forgetful – as those who lend to governments. That is the conclusion of a new book by Carmen Reinhart and Kenneth Rogoff, This Time It’s Different. The two professors document the history of eight centuries of “financial folly.” What we learn from it is what we already knew – that borrowers are often perfidious, crises are usually insidious, and bankers are morons.

Just five years ago, Ben Bernanke looked out on the calm seas of the Bubble Era. “The Great Moderation,” he called it. Bernanke took the credit. It was due to “improved macro-economic policies,” he said. In retrospect, he probably should have said it was just luck and left it at that. His macro-economic policies made things worse, encouraging all sectors of the economy to borrow. We know what this did to Hinckley. Riding low in the water, with too much debt heaped on its deck, the yacht maker struggles to stay afloat.

But what’s new, ask Reinhart and Rogoff? Always and everywhere, debt leads to trouble. Too much debt caused France to default on its sovereign debt eight times. Spain defaulted six times before 1800 and then another seven times later.

Latin America, as the authors point out, would have been safer for bankers if the printing press had never made its way across the Atlantic. Between hyperinflation, defaults and banking debacles – over two centuries – the banana republics scammed banks out of billions. In the ’80s, Nicholas Brady tried to rescue New York bankers with his US- backed “Brady bonds.” Readers of these back page columns can guess what happened next. Within a few years, seven of the 17 countries that had undertaken a Brady-type restructuring had as much or more debt than they had before. By 2003, four members of the Brady bunch had once again defaulted and by 2008 Ecuador had defaulted twice.

Even non-existent countries go broke. In 1822, “General Sir” Gregor MacGregor issued bonds from a fictitious country he called Poyais, whose capital city, Saint Joseph, was described by the offering prospectus as having “broad boulevards, colonnaded buildings and a splendid domed cathedral.” The bonds sold at lower yields than those of Chile. But it didn’t matter whether the country was real or imagined, all of them defaulted.

As for the present slump, the authors offer no predictions, but some guidelines. In the run-of-the-mill crisis, real housing prices generally go down 36% over a six-year period. GDP, in real terms, per capita typically goes down 9.3% while unemployment rates go up for five years, with a ‘normal’ increase of about 7 percentage points. But the closest parallel to the present circumstance, which they call ‘the Great Contraction,’ is the Great Depression of the 1930s – which was much worse. Unemployment in Germany and Denmark rose over 30%. Building activity fell 82% in the United States. Chile saw a 90% collapse in its exports.

Tax revenues fall in an economic slump. Government expenses increase (especially when the authorities are ready to do ‘whatever it takes’ to stir a recovery). Typically, say Reinhart and Rogoff, public debt increases 86% over a three-year period following a financial calamity. Then come more catastrophes, caused by too much debt in the public sector. Both Britain and America are now running deficits of more than 10% of GDP. Neither has a creditable plan for reducing debt or deficits. So stay tuned. Much more trouble lies ahead.

Until next time,

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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5 Comments on "Paying Off Debt is Like Dying…"

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Oh, by the way, thanks whoever gave me 5 stars the other day. I owe you one (charged at an average of 8% interest over a 30 year period, plus early repayment & exit fees).

It’s all turning to usury. Debt ought to be an exception and not the rule in our society. Difference is now because of fiat money, everything is fluid and could mean anything. It’s the ultimate in relativism.


Just wondering if anyone else received an “Invitation to Join the Secret Payroll.” in the mail? It appears to be written? by Kris Sayce with an endoursement by Dan Denning as well. It is a rather long pamphlet (12 double sided pages!!) and I have given it to the budgie but I don’t know if it is just co-incidence as I have never given my address to DR? I suspect they got on to my by some unscrupulous financial adviser who had the details of my SMSF but was just curious if it has assaulted anyone elses mailbox?


Hasn’t hit my mailbox, Don. But I don’t have a financial adviser.

DEBT = SLAVERY “Debt is the slavery of the free”. Publilius Syrus (1st century B.C.). In modern times we have become somewhat dismissive of such outlandish statements and indeed many people would struggle to buy a home were it not for debt. Of course those people who would struggle to buy without debt are the very people who become enslaved. Even with this new acceptance it does not mean it is not slavery. It just means we now accept our bondage as long as the semblence of freedom remains. back in supposed uncivilised times you could end up paying off… Read more »

Very interesting!!! I posted it on my facebook page…cheers

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