The debt trap

Posted | 03/10/2014 / Views | 2186
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Never a truer word spoken by a politician than the famous quote of Barnaby Joyce who back in 2010 as the world was still digesting what caused the GFC yet responded by adding more debt producing stimulus said simply:

“If you do not manage debt, debt manages you”

Anyone who listens to our weekly wrap radio gets a week by week account of how most other politicians have ignored that wise adage.  We have spoken at length of the US’s $17.8 trillion (official - go to www.usdebtclock.org for a complete picture) debt, Japan’s debt being over 220% of its GDP, etc and now this week France breaching the magic EUR2 trillion mark or 95% of its GDP (in flagrant disregard for the EU’s 60% limit rule).  Governments everywhere are running deficits as outlays (Government spending) are greater than income (taxes).  Whilst some groups rejoiced yesterday at our Government being defeated on some of the budget cuts, the reality is it just keeps us on a path of increasing debt and ultimate default.  Author Jim Rickards puts it simply:

“Think of nominal GDP [before inflation] as one's personal income and the primary deficit as what gets charged on a credit card. Borrowing costs are interest on the credit card. If personal income increases fast enough to pay the interest on the credit card with money left over to pay down the balance, this is a manageable situation. However, if one's income is not going up and new debt is piled on after paying the old interest, the bankruptcy is just a matter of time.”