How much debt is the right amount? My guess is that everyone reading this column will have a slightly different answer. Some might say, 'Neither a borrower nor a lender be,' or words to that effect, suggesting that their level of debt is zero. Some will no doubt have too much debt - where the repayments are not affordable. Most readers will have some level of debt (on a mortgage, car payments, credit cards etc) and will find that the level of repayments is currently affordable. Hopefully no readers are subject to the depradations of usury: the practice of making unethical or immoral monetary loans that unfairly enrich the lender1.
As individuals, we each need to balance our own personal economy of income, borrowing, interest and expenditure, at least in the longer term. If we don't, we'll end up like daredevil Evel Knievel: "I had a good life: I made fifty million dollars. Only problem was, I spent fifty one." When borrowing becomes unaffordable, then we're in trouble. For example, at the moment, economists are worried that house prices are once again becoming dangerously overheated in a number of countries2 - and this coupled with likely future interest rates could bring trouble to borrowers who are 'in too deep.' Home owners in the UK were mentally scarred for life after interest rates surged beyond 15% in the 1980s - meaning that debt repayments rose to levels that were above take-home pay.
Building material companies, meanwhile, have their own economies that they need to balance. They can control the output costs to a certain degree - by slashing their costs to as low as is practical and sustainable (and below this level, for some, by stinting on maintenance). They can control the input revenue to a small degree by trying to put their prices up: Depending on the market conditions and the level of competition they may be more or less successful in increasing their income. These companies can also borrow money on the markets, through the issuance of bonds or through creating and selling shares. The larger the company, in general, then the lower will be its borrowing costs. However, if a company is not seen as a good financial risk (for example because it already has a very high level of borrowing, or if its business is in negative- or low-growth countries) then its finance cost will be that much higher. In these cases, it makes sense for a company to reduce its borrowing level (for example by decreasing dividends, by cutting costs further, and/or by paying off debts using funds raised through a divestment programme), or to re-negotiate its financing - for example to allow debt repayment over a longer period or by reducing the effective interest rate paid on the debt. Such actions will hopefully allow its debt repayments to be reduced to an affordable level.
Governments, however, are different. They essentially hold us to ransom. They can levy taxes upon us citizens, and if we don't pay them, then they can send us to jail. A government is in a very difficult position if it cannot raise taxes to cover its debt repayments (at which point it will default). Of course, raising taxes is not popular with the voters and so governments will play all sorts of tricks to 'kick the can down the road.' Foremost among the tricks is to steal from the future.
For example, in any country with a pension system, the workers pay into the state pension system on the basis that they will be paid the money back out in a weekly pension payment when they retire. However, governments are increasingly using today's pension income to pay today's pensioners: Future pensioners will have to rely on future tax payers to fund their pensions - these future pension liabilities are unfunded. When not enough money is left in the future pot, either taxes will have to increase or benefits will have to decrease (or both). Individual US states face this problem to a greater or lesser extent3 as do various countries around the world - a recent report4 suggests that un- or underfunded pension liabilities in 20 OECD countries amounts to around US$78trillion.
Beer, pies and smoking might be some people's idea of a great night out, but there will be a hard payback in the future for our indulgence today. Living beyond our means in the past means present expense: Interest on the US government's US$20trillion debt currently runs at around US233bn/year5 - money that could be better put to use elsewhere. Living beyond our means today means future expense - for us or our children. We are truly stealing from the future.
It's the same for all of us: for governments, companies and families. Perhaps we should all try to be kinder to our future selves.