Debt

Good Morning Ladies and Gentlemen

”I wasn’t worth a cent two years ago, and now I owe two million dollars.”

Mark Twain

I have long been interested in debt and have observed a prevalent misperception of its nature among the general populace. I would like to clarify that not all forms of debt are equivalent; rather, debt encompasses a spectrum of financial obligations that can vary significantly in terms of their implications, costs, and benefits.

Debt and Productivity

In principle, taking on debt is not inherently harmful; it can stimulate an economy. However, the underlying reasons for incurring debt are crucial, particularly for many countries around the world that are facing increased borrowing. When the borrowed funds are invested in infrastructure or projects designed to enhance productivity and stimulate future economic growth, such borrowing can be reasonably justified. A similar rationale applies when private households take a mortgage to finance their homes. Conversely, suppose the purpose of lending is merely to cover the ongoing operational costs of a government, as is often the case in countries like the USA, France, and Germany. In that case, it cannot be assumed that such expenditures will contribute to future productivity. Instead, this approach tends to exacerbate the existing debt burden, ultimately reducing productivity and potentially leading to increased government spending, higher taxes and increasing inflation.

Debt and Debt Servicing

Yes, Ladies and Gentlemen, the persistent accumulation of government debt is associated with increased government expenditure, primarily driven by the necessity of debt servicing. Over time, this dynamic exerts upward inflation pressure, resulting in a higher government spending-to-GDP ratio. While low interest rates may temporarily relieve these fiscal pressures, an eventual adjustment of interest rates is imperative in response to the prevailing levels of debt and inflation. Failure to do so may lead to difficulties in attracting creditors in the open market who are willing to accommodate such debts in exchange for interest payments. However, it is essential to note that the imposition of higher interest rates can dampen economic growth, which would be critically needed to address the rising burden of public debt.

Debt and GDP

In any sensible family, maintaining a household budget is essential. While, for example, it may be reasonable to invest in a home through a mortgage, the family’s primary objective is typically to reduce or ultimately pay off that debt over time. This approach makes perfect sense to me. Unlike in political systems, where leaders must be elected by their constituents every four or five years, parents do not face such pressures. They can make financially prudent decisions that might be unpopular with their children at times yet are crucial for the family’s long-term budget and well-being. Moreover, parents are responsible for generating the family’s household income.
In politics, however, leaders who introduce unpopular spending cuts, despite their rationale, often face the likelihood of not being reelected. Voters avoid confronting unwelcome truths; instead, they frequently cast their ballots for enticing promises, regardless of the financial implications. Since politicians do not directly earn the money they spend, they feel little pressure to avoid making unrealistic commitments that may seem appealing to secure their re-election.

I know

I’m generalising and simplifying things. However, my perspective is not entirely inaccurate. Genuinely, we need to re-claim certain responsibilities or absorb the costs for tasks that we have outsourced to the government over the past few years or even decades. This is primarily because we, as a collective society, can no longer manage these rising costs.

Ladies and Gentlemen

As always, please share your opinion with me. Feel free to send your messages to smk@incrementum.li.

Many thanks, indeed!

I wish you an excellent start to the day and weekend!

Yours truly,

Stefan M. Kremeth
CEO & Head of Wealth Management
Incrementum AG – we love managing assets

Tel.: +423 237 26 60
Cell: +41 79 303 48 39
Im alten Riet 153
9494 Schaan/Liechtenstein
Mail: smk@incrementum.li