The Implications of the Global Debt Trap for Countries, Businesses, and Individuals

The Free Market Capitalist Economy is Built on Debt

Debt is as basic and central to our lives as eating and breathing. Indeed, who among us have not been in debt at some point or the other? Whether it is a personal loan to tide over the emergencies or credit card debt, or mortgages on our homes, all of us would have had to deal with debt in some form or the other.

Moreover, without debt, economies and businesses cannot function as they thrive on it and depend on it for their normal everyday activities. For instance, it is common for businesspersons to borrow money to fund their capital expansions and for governments to fund their spending sprees.

Thus, it is clear that without debt, we simply cannot function and carry on our daily lives.

Having said that, while debt in manageable forms is necessary, the problems start when it becomes too much to bear as can be seen from the events of the last decade ever since the Global Financial Crisis of 2008 struck and where entire nations were on the verge of bankruptcy and reputed and established businesses were similarly at the risk of shutting down.

The Implications for the Volcano of Global Debt

Worldwide, experts reckon that countries, businesses, and individuals are now sitting on a Volcano of debt wherein the term has been used deliberately to indicate how the mountain of debt that has been accumulated can explode at any time.

Already Southern European Countries have to deal with their toxic and odious debt as are businesses and corporates across the Asian continent. In addition, world over, personal debt is at an all time high which has severe implications for the way in which countries and economies are run.

For instance, when your entire salary or at least a significant part of it goes towards paying interest and the staggered principal amounts on your debt, how much do you have left over to consume and save?

In other words, when governments, businesses, and individuals spend a major part of their revenues or earnings or tax receipts on repaying existing debt, how much do they have left to allocate to productive and gainful activities such as investing in new projects, announcing new schemes, and setting aside some money as savings for the future.

Thus, the main implication of too much debt is that it constrains future prospects and makes us prisoners to the past and slaves to the present.

Swimming in an Ocean of Debt and the Solutions that are Practical and Realistic

Whether it is Indian Corporates who went on a debt binge during the boom years, Chinese municipal and local governments who likewise indulged in massive infrastructure capacity addition by borrowing heavily, or individuals who took on mortgages to finance their luxurious homes, or students who accumulated much debt on their education, it is clear that the world is swimming in an ocean of debt for which piecemeal solutions such as allocating some money to fund the repayments are no longer enough.

Instead, their needs to be a radical approach wherein collectively, we decide that enough is enough and take a decision to write off debt and start on a new page.

However, such Utopian solutions such as Debt Jubilees are rarely implemented since it involves restructuring and reordering our lives in radically different ways.

For instance, modern economies are built on the premise of debt and hence, banking and finance are all predicted on the ability of such institutions to lend and borrow at the same time. Moreover, debt is intrinsic to capitalism and central to free market democracies which mean that one has to be completely socialistic or communist to advocate Debt Jubilees.

Responsible Lending and Fiscally Prudent Borrowing

Thus, it is clear that we need a middle path to deal with the problems of debt without either drowning completely or draining the entire ocean looking for the shore.

This is the reason some economists have suggested steps such as responsible lending and socially conscious lending wherein all stakeholders restrain themselves from gorging on debt when the times are good and then throwing up their hands in despair when the debts accumulate and the day of reckoning draws near.

Further, proposals such as limiting debt to a certain percentage of our incomes, whether for countries, businesses, or individuals is another time tested tactic employed to ensure that such entities do not go bankrupt.

For instance, it is common for governments across the world to set limits on their deficits. In India, this is known as the Fiscal Responsibility Debt Management wherein central and state governments are mandated to stick to 3.5 percent of the Total GDP or Gross Domestic Product as the Deficit that is allowed.

Indeed, unless governments and businesses get their act together, chances are that they would behave like Junkies when the times are good and become imbeciles when they have to pay the same.

Conclusion

Lastly, it is clear that what is needed is responsible borrowing from all entities and for those of you who are students pursuing your graduate or undergraduate education, our suggestion is that you must be realistic about your chances to repay the debt and hence, lead balanced lives without gorging on debt and spending your loans for fruitless purposes.

After all, you would be able to repay the debt only after you land a job and moreover, you might need your salary for purposes other than paying off the educational loan.

To conclude, debt is like an addiction that is healthy when pursued in moderation and toxic and injurious to health when done in excess.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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