We all know that currency is debased over time. It's not a secret. Central bankers speak openly about their desire to destroy purchasing power by about 2% a year. It's their stated goal, their so called inflation target. Furthermore, most tax regimes allow for deductions related to debt and interest on debt, so the message is clear: They will destroy savings over time, and they will reward anyone willing to take on debt.
The system appears rigged in favour of debt. However, there's a snag that's conveniently under-communicated by most financial advisors. Debt amplifies all things financial. Small signals become louder. Moves become more extreme. The world itself becomes a loud and noisy place where the mere mention of a possibility of a change two years into the future can cause panic, and the ones least able to cope with this kind of noise is the little guy with his life savings put into some leveraged bet.
The bet itself may not be all that risky. Let's say someone decides to place a bet on the paper gold market. Gold will never go to zero, so the risk is limited. However, the return isn't all that great either, at least not for the impatient speculator who has seen Bitcoin double in a matter of weeks.
The speculator decides to leverage up with margin debt. For every dollar put into paper gold, he adds another dollar, borrowed from his broker. What used to be a 1% move is now 2%. That's still not all that bad because gold rarely moves more than 1% in a day. But more leverage will spice things up. Ten to one would turn a 1% move into a 10% move. Only problem, of course, is when we have a 6% move down in a week, as we have just seen, the ten to one leverage turns into a 60% loss. A 10% move down becomes a total wipe out. The speculator gets a margin call from his broker. He's forced to sell, and ends up broke.
This is what jitters in the financial markets do. They flush out weak hands; mainly little guys with too much debt. With every stomach churning whip lash in the markets, a whole bunch of these people are parked on the side-line, often for ever. They are told it's all their own fault, and this is true to a certain extent. However, they were presented with few options. Savings accounts yield a negative return when interest is adjusted for inflation. Taking on risk is the only way to get ahead, it seems, and if risk is required in order to build savings, why not add to that risk to enhance the returns? Once we're in the casino, we're gamblers, and the only thing distinguishing us from others is to what degree we're gambling.
By the look of it, there's no escaping the system. We cannot save to buy a house because the return on our savings are negative. Many cannot even save up to a new car. Debt is the only way to get anything more expensive than a pair of shoes. But debt is an amplifier. It makes everything loud and precarious. We get bills to pay that we wouldn't have without it. We are constantly stressed. The thought of losing our job keeps us up at night. We gamble out of sheer desperation. But that serves only to make everything even louder and more precarious.
The stress related to debt can get so bad that many prefer to be poor. Every penny earned is immediately consumed. Life becomes a hustle where all that matters is next month's pay check. However, a nagging feeling of injustice sets in. This is not what life was supposed to be. Frustrated and angry, some turn to violent protests while others engage in petty crimes and fraud.
Social decay and unrest can in this way be linked to the debt based system we live in, and it may seem that we're hopelessly tied to it. We must either play along, and accept the stress that comes with it, or we must forever remain poor. However, there's a way out of this mess that anyone can follow.
We must live within our means, and whatever surplus we manage to scrape together must be put into something tangible of lasting value like physical gold or real-estate. Debt must be kept to a minimum, or be avoided altogether. Never must debt be taken on to enhance savings. A modest mortgage on a house, when house prices favour ownership as opposed to rent, is the only reasonable use of debt for most of us. Only other times when debt is warranted is in the event of starting a business with high capital requirements. In all other cases, we must first save and then consume.
Having followed this recipe myself, I find that the benefits are far greater than the mere financial. All aspects of life improve when money matters are handled this way. There's less stress, and therefore more time and energy to enjoy life. This in turn affects the children in the house. They see that life can be good, and that material things are relatively unimportant. The pace of things are relaxed, and there's trust in our ability to obtain long term goals. Nothing has to happen overnight. Everything is done according to a vision. Time and energy is put into matters that interest us. We're not jumping from one thing to another in a desperate attempt at staying one step ahead of bankruptcy.
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| Trapeze Artists |
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