Bottom Line for the Global Economic Crisis: Too Much Debt

Several commentaries on the global economic crisis point to one fundamental feature of the crisis i.e. that there was too much debt in the global economy and when the payments came due and the tipping point was reached, the entire global economy almost crashed. To explain this further, if a person is borrowing heavily and living beyond his or her means, he or she has to remember that one day the bills would come due and that he or she has to pay back the debt to the creditor.

After all, the financial reckoning day cannot be postponed forever and hence, the debts would come due one day or the other. And to repay the existing debts, if we take on more debt, we are adding to the problem instead of solving it. And this is what happened in the West as people kept on refinancing their mortgages and drawing more and money from their credit cards to the point that they had to face the heat once the music stopped.

And if this scenario is replicated across all the sectors in the economy with businesses, corporations and even banks that are supposed to lend more than they borrow being indebted, the stage was set for a crisis of mammoth proportions which resulted in the credit crunch of 2008. Worse, in the Eurozone, the governments themselves were heavily indebted which added to the very survivability of the Euro since no amount of bailouts were going to solve the problem of too much debt at all levels of the economy. Even the United States is putting off the eventual time when it would have to balance its books and the looming fight over the debt ceiling is an indication of the worst to come.

The other aspect of the global financial crisis is that the whole system was based on an endless supply of cheap money and cheap goods thank to China and cheap services thanks to India. Further, cheap oil and gas from the Middle East stoked the consumer boom to unprecedented proportions. Once the resources started running out and China thinking twice before buying US bonds along with Russia, the crisis escalated to the point where successive bailouts were needed to just keep the system afloat. This is the bottom line conclusion from the crisis and it is indeed something that the present generation has to learn and live within their means.

Only when we practice sustainable living and only when businesses do not drown themselves in debt can we hope for recovery since the era of plentiful money, endless consumer choice and limitless oil and gas is coming to an end. To plan for the future, one has to take into account all the liabilities and tally them with assets to see whether they balance and only when they do should one consider his or her position financially sound. In conclusion, debt comes due someday or the other and hence all sectors and all level of the economy must be prepared for the financial reckoning ahead.


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Globalization