Delusional thinking

In this era we have been mesmerized by delusional “thinking” – namely that taking on debt is always justified.

When carried to extremes as is the case nowadays, it is fraught with great peril. We tend to accept that we “deserve” almost anything. Otherwise, it is old-fashioned nonsense, ignoring Shakespeare’s Polonius who said “neither a borrower nor a lender be.”

It is a common belief that inflation will reduce the real strain of debt, and that in time our incomes will rise to lessen today’s burden.

Debt may be justified in some circumstances, such as student loans or some borrowing for legitimate investment, but not for buying common stocks on margins or mortgage debt, assuming the carrying charges are sustainable.

When in the working world, the overhang of excessive debt crimps one’s ability to take certain low-paying jobs that may have real potential. The borrower may take a job at a fast food establishment to meet obligations.

Inasmuch as interest on mortgage debt is a tax deduction in the United States, some are tempted to take on mortgage debt now when interest rates are so low, beyond what could be justified. That is done with the expectation that rising house prices will inflate the value of the house, making it virtually painless, with history as a guide when prices plummet, a distinct possibility.

In view of the spectacular rise in house prices recently, the “party” may be over, and although few believe it now, we very well may experience that, so caution is necessary.

Borrowing money to buy common stocks is exactly what took place in the late 1920s. Rising stock prices seemed destined to go on forever, but the collapses in 1929, 1937, 1945, 1957 and 2008 should be a warning light to dispel that idea; to be ignored at one’s peril.

Now stock prices adjusted for inflation are very over-priced, according to Yale economics professor Robert Shiller, who has an excellent track record. Those who take a more careful, long-term approach can ride out the inevitable bear markets and come out ahead.

With debts incurred against stock, one is too prone to panic at a market downturn. Also, if the value of the collateral falls below the debt incurred, the lender may compel selling out, which would take place at the bottom of the market.

U.S. personal debts have quadrupled over the past several decades, and the Bank of Canada has issued warnings about the debts of the Canadian population.

Too many learn nothing.

 

 

Bruce Whitestone

Comments