DEBT is a powerful drug as alcohol and nicotine. In boom times Western consumers used it to enhance their lifestyles, companies borrowed to expand their businesses and investors employed debt to enhance their returns. For as long as the boom lasted, Mr Micawber's famous injunction appeared to be wrong: when annual expenditure exceeded income, the result was happiness, not misery.
For a long time debt in the rich world has grown faster than incomes. In America private-sector debt alone rose from around 50% of GDP in 1950 to nearly 300% at its recent peak. The origins of the boom go even further back, reflecting huge changes in social attitudes. In the 19th century defaulting borrowers were sent to prison. The generation that lived through the Great Depression learned to scrimp and save. But wider take-up of credit cards in the 1960's created a " buy now, pay later" society. Default became just a lifestyle choice. The reckless lender, rather than the imprudent debtor, was likely to get the blame.
As consumers leveraged up, so did companies. The average bond rating fell from A in 1981 to BBB- today, just one notch above junk status. Firms that held cash on their balance-sheets were criticized for their timidity, while bankruptcy laws, such as America's Chapter 11, prevented creditors from foreclosing on companies. That forgiving regime encouraged entrepreneurs, but also allowed too many zombie companies to survive(look at the airlines). and no industry was more addicted to leverage than finance. Banks ran balance-sheets with ever lower levels of equity capital; private equity and hedge funds, which use debt aggressively, churned out billionaires. The road to riches was simple: buy an asset with borrowed money, then sit back and watch its price rise.
All this was encouraged by the authorities. Any time a debt crisis threatened the economy, central banks slashed interest rates. The prospect of such rescues reduced the risk of taking on more debt. Bubbles were created , first in equities, then in housing. It was a monetary ratchet, in which each cycle ended with much higher debt and much lower interest rates. The end-game was reached in 2007-08 when investors realized a lot of this debt would not be repaid. As the credit crunch tightened, central banks had to cut short-term rates to 1% or below.
I'm only 24 year old and I should have listened to my father:
"Houses are build for a place to live, not vehicles for speculation".
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