When the machine crashes

by: Kenyatta Lewis Fri, Aug 19. 2011

Anyone who knows me in any capacity beyond a perfunctory hello and nod of the head knows that economics and finance are not my strong points. A few career and personality tests have confirmed the obvious. I should try as much as possible to stay as far away as possible from financial deliberations as I can imaginably can.{{more}} So this article is a great risk for me, yet one I feel had to be written, I do, however, welcome rebuttals and insights and gentle pats on the back with an encouraging “Stay where you are most comfortable”. Now that the disclaimers are out the way, let me try to shed some light on what the debt crisis in Greece, Europe, and the USA teaches us. It is not by far an exhaustible lesson, just a few scribbling for the ordinary plodder.

In the case of Greece, the simplistic answer to their debt crisis is that they spent more money than they made; they failed to see the warning signs on the horizon and make much needed adjustments and reforms when they needed to make them. The two main revenue earning industries in Greece, shipping and tourism, also fell, drastically aiding their dire situation. The Greek government did not help itself when it decided to lie (misrepresent the truth to be politically correct) about its true deficit, even going so far to pay millions to have its true financial situation hidden from others and put forward statistics that did not show a true picture of their economic situation. They borrowed on the back of the Euro dollar and when the time to repay those loans came, they could not make the payments. Not repaying these loans meant that their lenders themselves would be put in deep financial straits causing a domino effect throughout Europe and the rest of the world. Defaulting on their debt and the continued fiscal irresponsibility would also have had a telling effect on the stability of the Euro dollar. To deal with the issue at hand, they decided to slash spending, raise taxes, raise the retirement age, put in place measures to deal with tax evasions and cut salaries.

With help coming from a European financial aid package, Greece was able to avert defaulting on its debt, thus averting a greater crisis.

However, this crisis came on the back of strong economic growth in the 2000s on the back of falling bonds and a flood of foreign cash. With this the government embarked on increasing jobs, and paying more to social programs like the pension fund without the requisite reforms.

The USA is currently not in the same boat as Greece and some other European countries; however, many have argued that they are at the same dock. Recently they have sought to raise their debt ceiling. To put this in perspective: The American economy is spending more money than it is making. If it does not make provisions for more borrowing, it would have to adjust its economy to only spend what it makes. This would approximately cut the government’s spending power by 44%, which means that just under half of what they are spending money on now would have to stop. Raising the debt amount allows them to continue borrowing and not incur interest on the already outstanding debts it is servicing. To put this in perspective: Imagine that America is a family that earns a total of $50,000 per year,. However, they spend $78,000 per year. Now that is pretty bad, but when you dig deeper, you discover that they also have credit card debts of $330,000.

Both in Greece and the USA’s situation, those that lend them money have continued to do so. In the USA’s case it’s because they believe that the USA’s economy is robust enough to meet its debt payments and thus allow for more borrowing. These lenders are other countries, like China and Japan, and international banks.

Part of the USA’s problem, besides borrowing and spending too much as a government, is that average Americans have been borrowing and defaulting on their loans, some of whom have no reason borrowing money. Yet, creditors have been willing to lend them money and sell the debts to others. Indicators that suggest the scourge of unnecessary borrowing is endemic to the society. The US government has also failed to reform social programs that have increasingly taken more and more money to fund.

So what does all this mean for us in La Hairouna and in the Christian community?

1. Unrestrained borrowing is a quick path on financial enslavement; the borrower is always slave to the lenders. I may not want to declare that one should not borrow in any circumstance but in the end, manageable borrowing versus beyond-your-means borrowing is the decision you take on whether you prefer bondage to debtors or freedom to live a managed, simpler lifestyle.

2. Diligence and patience in acquiring wealth is not an impossible reality. Massive borrowing hides an unnecessary desire to appear wealthy in the short term while sacrificing long term security.

3. Dishonesty is the quickest way to ensure what ever store of wealth one has will be blown away like a leaf in a hurricane.

4. The importance and value of long term planning cannot be ever overstated.

l Continued from page 8

Planning should include the answer to whether or not a thing is possible now or later or not at all.

5. It is obvious and should not be a novel idea, but living within one’s means is not impossible, it is normal. In an era when living is more about style rather than substance, there are few who actually live like this.

6. When those who are vested with leadership (whether family or civil) do not adequately and properly manage resources that allow for those under their care to be provided for, they must be brought to accountability for their management or lack thereof.

7. Unrestrained borrowing suggests that one is not giving, not being generous, and since it is giving that is considered blessed, the borrower is not blessed. A person or country that borrows to its hurt is not giving and, therefore, is not in any position to request or expect blessings from God.

I hope we take heed, because the financial machine has crashed.