Monday, November 14, 2011

Underwater and Sinking: Debt is Drowning Us

Continuing on the 'water' theme from Friday, I thought I would comment on the average man and how he is faring in the debt crisis. How is Joe Sixpack getting on? Is he making headway with reducing his debt?

Let's look at people that begin their working lives by studying for that dream job. Students. In New Zealand student debt has now passed NZ$10 billion (US$ 8 billion). 14% of all New Zealanders have a student loan of around $17,000. These people are indebted to the New Zealand Government. Their lives are, too a large extent, restricted by this debt around their necks. This debt has huge consequences

And this not only applies to New Zealand. Student debt in the USA is approaching US$1 trillion. Moreover, as in NZ, wages for the middle classes have dropped in real terms over the past ten years. More debt, less money and jobs to pay means debt slavery for some time.

The years from 2000-2007 saw Governments encourage students into tertiary study. Money was easy to come by, it could be borrowed cheaply and lent out for profit. Tertiary education was a game worth playing for Governments. However, as in any interference in a market by Governments, this has caused massive distortions. Graduating with a student loan with an accounting or engineering degree, as opposed to graduating with a diploma in a skill that is almost useless to produce a future income, is poles apart in market usefulness.

The proliferation, in less than productive courses, has entrapped a generation of young people into debt. Even before they can produce anything. Now they find it difficult to buy houses or start a family. The very future of the West could be compromised. All because of this slavery to debt.

This has analogies to the easy money schemes dreamt up by US Banks in order to lend out easy cash to people who couldn't afford mortgages. The so-called sub-prime debacle.

Other figures on debt for Joe show that up to 40% of people 35 and younger hold no wealth or are in negative territory. That is, if lendors came to their door and asked for their money back, these people would need to sell everything they own, and most would still owe some. How is this good for society? For mental health and hope for the future? How does this produce a spirit of entrepreneurship and motivation to work harder?

The wealth gap between this generation and the baby boomers (50 years of age plus) is increasing. Over history, this sort of disparity in wealth has caused much friction and anger. How do we begin to solve such large issues?

Perhaps, the only way out is a forgiveness of debt and a reset of the economy which would include less Government and a monetary system that provides consistent value over time. If that includes gold, then great. To me, gold must be there in the mix and Governments must get out of the ability to influence monetary policy for poitical gain.

But don't hold your breath on that one.

Gold in New Zealand dollars: $2277.76 per oz
Previous all time high: $2284.16 per oz (19 Aug, 2011)

Silver in New Zealand dollars: $44.14 per oz
Previous all time high: $59.19
per oz (30 Apr, 2011)

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