BY RUSSELL TURNER
THE ULTIMATE TRAIN WRECK
Every now and then you will see footage on the nightly news where a car gets stranded on a railroad track and is struck by a train. The end result is never pretty. The automobile never fares well in that situation; if anyone is inside of the car their chance of surviving is very slim. The lucky driver is the one who has the sense to get out of the car and get as far away as possible. Most of us can understand the consequences of a train wreck, especially when we can see the speeding train getting closer by the second, but few people can ever conceive the financial train wreck that could seriously affect the quality of life that all of us will live.
The ultimate train wreck is when excess debt and deflation collides, when they do happen it causes a thing called a depression. Our nation suffered along with the rest of the world during the great depression of the 1930’s. I can remember my grandparents telling about the hardships and rough times that they had to endure. That generation was molded by those hardships, most of them would never throw away an old tire or other things my generation would consider junk. My grandparent’s generation understood the seriousness of being in debt and then having their products or services become worthless. If you’re mostly debt-free, you can probably get by even in deflationary times. Sure, you may suffer a decline in income. But if prices are being discounted on virtually everything you buy — gas, food, airfares, even rent — then the enhanced purchasing power of the money you do earn can help offset the pain quite a bit. The big killer is debt. If you think your bank is going to give you a discount on your monthly payments for mortgages, car loans, student loans and credit card balances, forget it. With rare exceptions, your debts are fixed and set in stone.
We Americans got a taste of it in 2007 — the year American households had piled up a record $10.6 trillion in home mortgages. And you also know what happened next: as soon as real estate deflation knocked on our doors, mortgage defaults and personal bankruptcies soon followed. The housing bust just about collapsed our economy, but sadly we Americans didn’t learn our lesson. Since the 2008 debt crisis, we’ve plunged headlong into debt with the same lust for cheap credit as we saw in the housing boom. Before the housing boom peaked, U.S. nonfinancial corporations had a total of $5.7 trillion in debts. Now, as of the last reckoning (Sept. 30, 2015), they’ve got over $8 trillion. As long as the companies can command a decent price for their products and services, it’s not a big problem. But as soon as prices start falling, sales and profits follow. And suddenly, meeting debt payments looms as a huge hurdle each and every quarter.
While all of us are enjoying the low price for gasoline, the oil companies are currently experiencing the ultimate train wreck. Many of them borrowed heavily while relying upon the price of oil to remain at a profitable level. The effects of that low price can have a huge trickle effect on many other parts of our economy; deflation is like a disease, it can spread and cause many train wrecks.
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