Delinquency rates are rising, and it’s not just individuals who can’t live within their means. Here’s the details…
Nearly 4,000 years ago in the mid 18th century BC, the King of Babylon passed away, leaving the throne to his 18-year old son Hammurabi.
Hammurabi was smart enough to know that his kingship would be incredibly short if he didn’t do something quickly to assert his power.
So as his first order of business, Hammurabi made a bold proclamation that won him incredible support from his people: he forgave ALL citizens’ debt that was owed to the government… including high-ranking government officials.
This proved to be enormously popular. Ancient Babylon had a highly advanced system of credit, and the average Babylonian was heavily indebted.
Interest rates were regulated by the government at between 20% to 33%, though these limits were often circumvented by clever lenders who knew how to bend the rules.
Babylonian laws were written in favor of the lender; no one was allowed to borrow a single shekel unless he agreed to be held personally and completely responsible to repay the loan.
Babylonian lenders could even seize a member of the debtor’s family, holding them for up to three years, to enforce repayment.
So you can just imagine what a relief Hammurabi’s proclamation was to the average guy.
It’s quite remarkable what a prominent role debt has played in the history of our species.
Going back another 2,000 years before Hammurabi to ancient Sumeria, a man was legally entitled to sell his wife into slavery, or hand her over to his creditors, in order to repay his debts.
The Book of Leviticus tells us that the Hebrews mandated debt forgiveness every 50 years, what was known as the Year of Jubilee.
Under the laws of debt in medieval Hindu culture, children and grandchildren were forced to assume the debts of their ancestors (which typically carried 20% interest), leading many people to vehemently attempt to disprove their blood relationship to a recently-departed parent.
Ancient Greece was also a heavily indebted culture, to the point that unsustainable debt burdens seemed to constantly put Athens at risk of popular revolution.
And Ancient Rome, even by modern standards, had a comprehensive, cutting-edge bankruptcy code, which included an orderly sale of a borrower’s property in order to satisfy his unpaid debts, while keeping his person and family in-tact.
We see this theme over and over again throughout our history; yet despite thousands of years of human progress, we have not lost our proclivity for debt.
It seems to be in our DNA to borrow from future prosperity in order to finance consumption today.
Case in point: according to a 2016 study by the Finra Investor Education Foundation, only 2 in 5 Americans is able to spend LESS than they earn.
In other words, 60% of the country is barely making ends meet.
Another report in 2016 from the Pew Research Center showed that, while incomes are essentially stagnant, typical household spending continues to rise.
And data from the Bureau of Labor Statistics released late last year similarly show that 50% of American households spend more than their income.
That’s tens of millions of households who have to make up the difference between their incomes and living expenses by taking on debt.
That’s why consumer debt in the United States has risen to an all-time high. Student loans are at an all-time high. Auto loans are at an all-time high. Credit card debt is at an all-time high.
And delinquency rates are once again on the rise for the first time since the end of the 2008-2009 financial crisis.
But it’s not just individuals who can’t live within their means.
Corporations have also taken on record levels of debt– now more than $6 trillion in the US, and $68 trillion worldwide.
This includes ‘safe’, stable companies like McDonalds who have ruined their once-pristine balance sheets with billions of dollars of debt, to companies who perennially lose money and burn through cash.
Tesla is a great example.
Over the past four years, the company has lost $9 BILLION in negative free cash flow.
Tesla has made up for these losses by taking on enormous amounts of debt, to the point that its interest payments in the 4th quarter of 2017 totaled a whopping 33% of gross profit (up from 15% a year prior).
[Bear in mind, this is just ‘gross profit’. Tesla’s NET income was resoundingly negative.]
This means that more and more of Tesla’s sales are being gobbled up by interest payments… making it doubtful that the company can survive.
Curiously, founder/CEO/cult leader Elon Musk just tweeted an April Fool’s joke yesterday that Tesla was declaring bankruptcy… making light of his company’s dire financial condition as if he either doesn’t understand or doesn’t care.
And in addition to giant corporations who are addicted to debt, there’s the government itself, which recently crossed the $21 TRILLION mark in total debt.
Last week alone, in fact, the US government auctioned off $300 BILLION in debt… in just one week.
The Treasury Department estimates $1 trillion in new debt this year, another $1 trillion the following year, and another $1 trillion the year after that.
And none of those projections accounts for the possibility of recession, crisis, war, etc. Those figures are based on ‘business as usual.’
They’re further projecting that, in a few years, interest payments on the national debt will comprise more than 20% of the federal budget… more than defense spending.
Nor do these figures even begin to consider the enormous obligations from bailing out Social Security, fixing the multi-trillion dollar infrastructure problem, or the huge burdens owed by state and local governments.
It’s pretty obvious what’s happening: Consumers. Businesses. Governments. Everyone is in debt up to their eyeballs.
It doesn’t take a rocket scientist to figure out that this is dangerous and unsustainable. No one knows when… but at some point, there WILL be serious consequences.
And there’s 5,000+ years of human history to prove it.