Going into Debt​—A Way of Life Now

HAVE you ever gone into debt? Did you ever borrow money, or buy something on credit and promise to pay for it later?

If so, you have plenty of company these days. Never before in the entire history of the world have so many people gone into debt.

The same thing is happening to companies, cities and to entire nations. They are all far more heavily in debt than ever before. As a result, the world’s present load of all types of debt comes to, not just billions of dollars, but to trillions of dollars!

Different Way

Thus, going into debt has become an accepted, “normal” way of life. And more and more millions of people are doing it. But this present attitude toward debt is in sharp contrast to the attitude that past generations had.

Back then, most families felt that going into debt was almost shameful, something to be avoided if at all possible. People usually did without many things rather than go into debt.

Of course, in times past the way of life was not as complicated as it is today. And for most people throughout the world, an agricultural way of life prevailed.

For example, homes were far simpler in those days. In many countries forests were plentiful; so wood houses could be built rather inexpensively. In some nations, mud or clay was mixed with straw and used to build simple homes. In tropical countries, palm leaves or straw did the job. No great cost was involved with such homes.

For transportation, walking often was all that was needed. If faster means of transport was desired, a horse or a donkey might be used, or even a camel. Heavy loads were pulled in a wagon by an ox, a mule or a horse. Few families had to borrow any large sum of money to buy such items.

Dramatic Changes

Today, all of that has changed dramatically in the industrial societies, and even in the cities of the agricultural lands. Pursuing the former simple, inexpensive way of life is all but impossible now.

In such places today, homes are far more complicated and expensive. Transportation is by costly automobiles, trains or airplanes. Trucks and railroad cars carry huge loads, but are expensive. So are office buildings, machinery and other equipment used by business concerns.

Nations arm themselves with highly sophisticated weapons of modern warfare. Why, a new type of submarine can now cost about a billion dollars! And governments provide many services for their people: police forces, fire departments, garbage collections, sewage disposal, street maintenance, water supplies, welfare and social-security payments, and many others. All of that takes a huge amount of money in modern society.

Few people, few companies, few cities or countries can save the money in advance to pay for all those things. So they borrow, thus going into debt.

Another Reason

Where individual debt is concerned, the loss of a job or other economic reverse can result in a person’s having to go into debt. Also, it is understandable that most people will not be able to pay cash for large items such as houses or automobiles.

But a vast and ever-growing number of people are going into debt for nonessential things. For example, just a few decades ago a television set, expensive radio equipment, a wide variety of appliances and other products did not exist. But now these are considered almost necessities.

To get these things right now, more and more people are willing to go into debt, hoping to pay for them later. The person who saves money first to pay cash is becoming a rarity.

But can the world’s free spending and heavy borrowing continue? Can debt be piled on top of debt without someday causing harsh consequences? Indeed, has the world’s debt load already reached the danger point?

Is Debt Reaching the Danger Point?

WHAT happens when a person borrows too much money and then cannot pay it back? He goes bankrupt. His possessions can be taken away by those to whom he owes the money​—his creditors.

When a business cannot pay its debts and goes bankrupt, it usually ceases to exist. Its assets may be sold off by the creditors. And the company’s employees are thrown out of work.

A similar thing can happen to an entire country too. In the Great Depression of the 1930’s, the standard of living of entire countries was reduced drastically. Tens of millions of people were forced into poverty as unemployment skyrocketed.

Could that happen again to entire nations? Has the debt load reached such a danger point?

Government Debt

Perhaps the most dangerous type of debt, one that could affect the largest number of people, is the debt incurred at the government level. If a government goes bankrupt, then many of its people will suffer.

How are the governments of this world doing in regard to debt? The answer is: very badly. They are deeply in debt. And those already large debts are increasing rapidly.

Those debts come about in two ways: (1) those incurred in their transactions with other countries, and (2) those incurred within their own country.

How does a government go into debt with another country? In much the same way that you could go into debt: by spending more money than you make.

For instance, France must import most of its oil. Oil is costly. So France pays a great deal of money to the oil-exporting nations. Also, France buys other products from various countries. Now, in recent times France has purchased more from other nations than it has sold to them. This has resulted in a deficit, a debt to those other countries. To pay that debt, France has to borrow money from other nations or from various banks.

Many other countries are in the same condition. They are spending more money with other lands than they are making. And among the reasons for their growing international debts is, as with France, the purchase of oil. They do not produce enough oil, or any at all, and thus must import it. So the relatively few oil-surplus nations grow wealthy, while most of the other nations go deeper and deeper into debt.

Of course, other factors besides oil are involved in building external debts. Nations also import machinery, finished goods, food, armaments and a wide variety of other products. And when not enough is exported, debt results.

Alarming Debt

Late in 1976 the New York Times carried an article with this headline: “The Problem of Enormous Buildup of International Debt.” The article stated the following:

“The biggest single worry in financial markets these days is over the enormous buildup of international debt​—much of it owed to private commercial banks. There is no way to conceal the danger that some heavy borrowers from abroad may be unable to meet their obligations.”

At the head of the external debt “list” is Britain. It has international debts of about $45 billion, a staggering amount for a nation with limited natural resources. Brazil and Mexico each have over $20 billion in external debts. Finland and Indonesia have nearly $10 billion each. The Soviet Union and its Eastern European allies have about $40 billion altogether.

France has external debts of about $10 billion, and these are growing. A Paris press headline declared: “Flashing Red for the French Economy.” The publication referred to unemployment of more than a million, triple the level of the early 1970’s; to inflation that was in double figures; and to a recent one-month foreign trade deficit of about $1 billion, triple what it was a year ago.

The debt situation in Italy is even worse, about $20 billion. There, the retired head of the Bank of Italy said: “The deficits in Italy have now expanded beyond the capacity of the economy to absorb them.”

Poor Nations in Trouble

Almost all the developing nations are struggling with a mountain of debt, especially those who import oil. Their external debts are about $170 billion now, and are growing swiftly. They owe twice as much as they did just a few years ago.

Business Week stated that the debt of these nations “far exceeds their capacity by any normal standard to repay.” Regarding their plight, Baxter, an economic counseling service, reports: “They have already strained their debt servicing capacity, but must come up with new huge sums this year and every year hereafter. Where is the money going to come from? Their task seems hopeless.”

The degree of their trouble can be seen in this further comment by Baxter: “Money they are presently borrowing is being used, not for desperately needed capital improvements, but to pay off currently maturing debts. The Euro-bankers are playing this game and are continuing to extend loans. But, some day, someone is going to get stuck, and stuck good. It is only a matter of time.”

The world money system is closely tied together. Thus, some economists fear that if only a few countries were to go bankrupt, the entire system could go under.

No Improvement Foreseen

At the end of 1976, outgoing American Secretary of the Treasury William E. Simon told more than a hundred oil-importing nations that they faced another huge deficit for the year 1977. He estimated that it would be an additional $50 billion, on top of the existing huge deficits.

Simon also warned that the situation has changed for the worse since 1973, when the price of oil rose sharply. At that time some of the nations had surplus money and could pay for the higher-priced oil. But few have surpluses today.

Summing up the world economic situation, the New York Times said: “In the business and financial centers of Europe an air of gloom is spreading over prospects for the world economy and its capacity to tackle the mounting problems of debt management, sluggish growth and rising unemployment. The highly publicized difficulties of Britain and Italy have diverted attention from the fact that at least a third of the industrialized countries are in some serious financial trouble. . . . The poor nations of the developing world are in even worse shape, struggling under a mountain of . . . debts.”

Added to all these external debts are the internal debts that governments have. These come about when they spend more than their incomes within their own nations. And often these internal debts are much larger than their external debts.

As many nations go deeper into debt, the question arises: Who will rescue them? One country often looked to for help is the United States. But in what condition are her finances?

[Graph on page 5]

(For fully formatted text, see publication)

International Debt

Total External Debt, Public and Private

Billions of dollars

45

40

35

30

25

20

15

10

5

Yugoslavia

Spain

Indonesia

Finland

France

Italy

Mexico

Brazil

East Europea

Britain

[Footnotes]

How Sound Is the Wealthiest Nation?

MEASURED by the value of goods and services produced, the United States is the world’s wealthiest nation. It also has one of the highest living standards.

In Vital Speeches of the Day, an economist observed: “It is true that the United States’ economy has raised our standard of living to an unprecedented level of affluence. But it is no less true that in the space of one generation we have imposed on our economy the greatest debt structure in human history.”

Yes, much of the current high standard of living has been attained on borrowed money.

Enormous Debts

As a result, the United States has an enormous debt load, with more debts piling up each year. Externally, the country often runs deficits. Internally, its debts are enormous.

Robert Swinarton, vice-chairman of Dean Witter & Co., states: “As a nation, we’ve been afflicted with a wild impulse to go into hock, or as a recent editorial in Barron’s put it: ‘Virtually the entire nation, from bureaucrat to breadwinner, has evinced a kind of rage to borrow. This rather universal propensity to burn up the future remains, we’re convinced, one of the excesses for which there has yet to be a day of reckoning.’”

The total debt in the United States is now well over three trillion (three thousand billion) dollars! That is about twice as much as the value of all the goods and services it produces in an entire year.

Regarding this vast debt, U.S. News & World Report asks: “Is It Out of Control?” it answers: “The mountain of debt has become far too heavy for a good many borrowers.”

Of the gigantic debt total, the federal government owes about $650 billion, corporations about $1,500 billion, individuals about $1,000 billion, and city and state governments about $230 billion.

Federal Debt

The federal government has had huge deficits in the past few years. These have come about, of course, by spending far more money than it has been making in taxes.

In each of the last two years, the deficits have been enormous. In fiscal 1975, the deficit was $43.6 billion, larger than at any time since World War II. In fiscal 1976, it was $65.6 billion, the largest in U.S. history! Why, the interest alone on the federal debt is now about $40 billion a year! In 1939 it was $1 billion.

Nor would it be easy to cut costs. The government’s “built-in” obligations continue to grow. For instance, the cost of modern armaments continues to rise, now being well over $100 billion a year. The cost of pensions for government employees is six times as high as it was ten years ago, and is expected to double or triple in ten more years. The Civil Service Retirement Fund is paying out more than it is taking in. So is Social Security.

The Wall Street Journal claims that the government’s obligations for just the Social Security System’s payments to the elderly, retired and disabled will mean a future deficit of about 2.5 trillion (2.5 thousand billion) dollars. The newspaper says: “As liberals like to argue, the nation owes this debt to itself, and it will be paid off by raising taxes in the future. Of course this is nonsense. Increasing future taxes by these magnitudes can only disintegrate the tax base.”

Financing Debts

When the government runs a deficit during the year, it must borrow money to pay its expenses. One way in which it does this is to sell securities, such as government bonds, to individuals, banks and corporations.

But the government finances its borrowing in another way too. It can ‘create money out of thin air.’ On this, the New York Times comments: “Only one thing is entirely agreed, accepted and understood about the somewhat mysterious and often controversial subject of the Government’s monetary policy, which is conducted by the semi-independent Federal Reserve Board. This is that the Fed, as it is commonly known, can create money out of thin air by writing a check on itself without any deposits to back that check. It can do so in unlimited amounts.” True, Congress must continually approve new and higher debt limits, but it nearly always does.

Of course, the government hopes to make enough money in future taxes to pay back the value of the securities it has issued, in effect canceling the debt. But in the past sixteen years, the United States has had only one small surplus, having deficits the other fifteen years. And the deficits have grown much larger recently.

Fueling Inflation

Many economists feel that government debt is one of the main reasons for inflation. So much excess money pumped into the economy causes the prices of goods and services to go up.

One result of all this excess spending is that in the past four decades the American dollar has lost about 75 percent of its purchasing power. But this has happened elsewhere in the world too.

The American Institute for Economic Research states: “All currencies have been and are being degraded steadily. All now have lost about three-fourths, at least, of their pre-World War II buying power, and all seem destined to depreciate much more in the next several years . . . before they become practically worthless.”

The Institute places the main responsibility for this degrading of money on the “inflationary purchasing media created to finance government deficits.”

“Bitter Lessons” Ahead

Somberly, this report also states: “We see little possibility that there will be a return to sound money-credit procedures until after some bitter lessons have been learned during a future depression.”

Similarly, Baxter says: “The inflationary impact of large and persistent budget deficits is destroying the financial foundation underlying the U.S. economy.”

Gilbert M. Haas, head of an investment counseling firm, also observes: “Constant overextension of debt has caused a steady deterioration of financial liquidity [cash or assets easily converted into cash]. Ultimately this will lead to an international money panic, followed by a worldwide depression.”

Could the government simply cut expenses, bringing its budget into balance? Yes, but that could mean higher unemployment. The economic system is so structured that if the government now stopped pumping “created” money into the economy, many people could lose their jobs. And there are already too many unemployed. Also, taxes are already high, so that raising them to try to balance the budget could meet severe resistance, perhaps even a ‘tax revolt.’

Thus, the world’s wealthiest country has its own serious money troubles. It is awash in debt, and is in a poor position to help other nations that are drowning in debt.

[Picture on page 8]

‘All currencies have lost about three fourths of their pre-World War II buying power’

Debt Pressures Build on Others

THE plight of national governments in regard to debt is being duplicated by others. Corporations, city and local governments, and individuals also are facing serious pressures because of too much debt.

It is getting more difficult to come out from under these debts. This is a main reason why the recession of the past few years proved to be so difficult for many. Loans could not be paid back; so bankruptcies soared.

Corporate Difficulties

As an example, Industry Week reported: “West German business failures reached a record high . . . Failures involving losses and debtor demands exceeding $400,000 jumped by 30%.”

In December 1976 The Wall Street Journal noted that Japanese corporate failures reached a record the previous month, adding: “Corporate collapses for all 1976 will total a record 15,000, up from the prior record of 12,600 set last year.”

In England, the Daily Mail reported that bankruptcies in Britain have soared to the highest level in sixty years “with nothing approaching it even in the depths of the depression of the 1930s.”

In the United States a number of large corporations failed, as did others. More banks went out of business than at any time since the country’s entry into World War II. Yet, the Institute for Economic Research warned that these “are just tips of bankrupt icebergs floating in a vast sea of debt.”

Cities in Trouble

Much the same thing is happening to a number of city, state and local governments. Perhaps the most publicized of all of these has been New York city. Its debts have mounted to about $13 billion. Last year the city was forced to halt payments on short-term debt, although the courts later declared such a move illegal.

But Business Week said in an editorial: “Actually, New York City’s troubles are harbingers of a broader problem. Every major city in the U.S. is going to have serious financial distress in the next three to five years.”

City after city is indeed going deeper into debt. Their tax revenues simply are not enough to pay for things they do. For instance, in the nation’s capital, Washington, D.C., expenditures since the 1960’s have increased about 15 percent each year, but tax revenues have increased only about 6 percent.

Japan reported that 39 of the country’s 47 prefectures, or states, would show deficits. Two cities already have declared bankruptcy. U.S. News & World Report estimated that “about 100 of Japan’s 643 cities will be in the red, up from 53 two years ago.” Many cities in other countries are finding similar debt pressures building.

Consumer Pressures

The average consumer in many lands is increasingly feeling debt pressures. In the United States, much of what the typical American has left after expenses goes toward paying off debts.

Hence, when the recent recession struck, many could not pay off these accumulated debts. That is why bankruptcies reached an all-time high.

Yet, consumer debts continue to mount. The Los Angeles Herald-Examiner reports: “The typical wage earner in Los Angeles is spending almost everything he earns. He lives near the limits of his income. Even a minor emergency could be disastrous.”

The newspaper noted that the “typical person” with debt problems had an income of $800-900 a month, but owed “about $10,000, usually to the bank, credit card companies, retail shops, and gas companies. And he is a nervous wreck.”

The Milwaukee Journal told of a ring of prostitutes that included housewives who “used their earnings to supplement family income.” The Tokyo Daily Yomiuri reported the suicide of a housewife “because she was hard pressed to pay back a loan made to build a house.”

True, some having difficulties today are not spending their money unwisely. It is simply that prices are so high that their incomes do not meet expenses. But on the other hand, many have spent unwisely on things that they have not really needed. They have gone over their heads in debt, and have had to pay the consequences.

Questionable “Security”

Even persons who have money in the bank have begun to feel somewhat uneasy in recent years. This is due to the fact that large bank failures have occurred.

In the United States, the Franklin National, one of the nation’s twenty largest banks, collapsed. In Germany, the large Bankhause Herstatt failed. A number of other banks also have failed. And so overextended are others that Martin Mayer, in a comprehensive survey entitled “The Bankers,” stated: “There are billions of dollars of potential loan losses in the system, and the clock ticks toward the moment of their detonation. The banking structure that is now building can collapse.”

But would that not be impossible in the United States? Are not deposits up to $40,000 “secure,” guaranteed by such agencies as the Federal Deposit Insurance Corporation?

True, but of interest is what Alvin Toffler says in his book The Eco-Spasm Report: “FDIC officials know what most of the public doesn’t: that the agency has only enough money on hand to cover about 1 percent of deposits. It cannot possibly meet a wild, runaway demand by hundreds of thousands of terrified bank customers.”

It is such a runaway that officials fear. This could take place if only a few countries went bankrupt, or if, due to a series of corporate or city failures, a large number of banks began to go under.

However, during 1976 was there not some economic recovery from the previous recession? Yes, there was, and more is hoped for. That is the pattern of recent decades. But recessions get more severe, and recoveries more moderate with higher permanent unemployment.

Regarding this, Baxter said last year: “The economy is rebounding now to be sure. But it is being supported by only a thin layer of liquidity [cash, or assets easily converted into cash] on one hand, and massive budget deficits on the other. History has proven that the latter destroys liquidity in the long run.”

But where does this leave you? What can the average person do to protect himself?

[Blurb on page 10]

‘The typical wage earner is spending almost everything he earns. He lives near the limits of his income. Even a minor emergency could be disastrous.’

[Blurb on page 11]

“FDIC officials know what most of the public doesn’t: that the agency has only enough money on hand to cover about 1 percent of deposits.”

What Can You Do About It?

REALLY, there is little that you can do to influence today’s troublesome world economic conditions. You did not cause them, but, instead, you are a victim of them.

Yet, there are things that you can do to help ease the burden of making a living today. Often, this revolves around self-control. How so?

Exercising Self-Control

One of the greatest problems regarding debt today is that many people cannot exercise self-control when it comes to buying things. Before they fully realize it, they have spent too much and must borrow money needlessly.

But in difficult economic times, stern measures should be taken. A family’s needs should be carefully reassessed. Is the family living within its income?

If not, then nonessentials can be cut out, or at least reduced. True, one’s neighbor may have, say, an expensive color television set. But if this is going to put the family deeper in debt, why not wait until it can be afforded?

Expensive entertainment and luxury foods, as well as costly liquors, can be curtailed with no loss. Smoking should be eliminated; this not only will save a great deal of money over the course of a year, but may save one’s very life!

For those who gamble, it would be well to ask themselves how gambling establishments, such as racetracks and betting “parlors,” exist. They can exist only because gambling is a losing proposition for the overwhelming majority of people. If it was not, then the gambling establishments could not make their huge profits. So self-control here could save large sums of money that could be better spent, or saved for future purchases.

The key to saving money is to lower one’s desires and expectations so that they realistically conform to income. It does no good to dwell constantly on what would be nice to have. Instead, consider what you can afford without going into debt.

Pay Cash

There is great encouragement to borrow money these days. Money lenders are everywhere. But why? Because money lenders make a good profit.

True, the cost of 6 or 7 or 8 percent for borrowing money may not seem high. But in actuality that comes to about double or triple over the life of the loan. Why? Because you do not have the use of all the money all that time, but must begin paying it back almost immediately.

For instance, in a recent year average car loans in the United States cost $860 in interest charges. This is above the actual cost of the car. Now, while it usually is not possible for most people to save in advance for such a large-item, it does demonstrate how much loans can cost. The same principle is true of smaller loans. So, buying on credit is indeed costly. Pay cash (or by check) whenever you can.

A major problem is the use of credit cards. More and more people use them for purchases, including food. But credit cards should be used as if they were dangerous weapons. It is easy to purchase things when you do not have to pay cash. But trying to pay for hasty, unnecessary credit-card purchases can cause money hardships later.

If at all possible, save money in advance for purchases instead of borrowing. This not only prevents debt and large interest payments, but, if put in a bank, would collect interest.

On the Way Out

There are some things, then, that you can do to protect yourself financially at present. But there is nothing you can do to help the present economic system to survive. Why not? Because any recovery it makes in the near future will only be temporary.

God’s unerring prophetic Word tells us that all of today’s systems, including its economic ones, are “passing away.” (1 John 2:17) They cannot last long, because it is God’s purpose to intervene soon in man’s affairs and to bring this unsatisfactory system to its finish.​—Dan. 2:44.

That is why God’s Word cautions: “Do not be loving either the world or the things in the world.” (1 John 2:15) It will do no good to try to hold on to this system, or perpetuate it. Soon, as Jesus Christ foretold, “there will be great tribulation such as has not occurred since the world’s beginning until now, no, nor will occur again.” (Matt. 24:21) During that “great tribulation,” today’s money system undoubtedly will collapse.

Viewing the mountains of debt now building up everywhere, one can appreciate how swiftly such an economic collapse could occur. Indeed, the Bible shows that, as has happened before, “into the streets they will throw their very silver, and an abhorrent thing their own gold will become.”​—Ezek. 7:19.

Nor is that “farfetched.” Even many observers of the world scene feel that something drastic must happen. For example, in The Eco-Spasm Report, author Alvin Toffler states: “What we are seeing today is not simply an economic upheaval, but something far deeper, something that cannot be understood within the framework of conventional economics. This is why increasingly mystified economists complain that ‘the old rules don’t work any longer.’ What we are seeing is the general crisis of industrialism . . . What is happening, no more, no less, is the breakdown of industrial civilization on the planet.”

Toffler observed that pessimistic predictions about the world economy were once dismissed as “lunatic.” But, he notes, they “are now being taken seriously.”

Because of what is certain to come in the future, you would do well not to put undue trust in material things. Money is necessary to daily living, true. But putting one’s confidence in it is bound to result in disappointment.

What we all need to learn more about, and put our confidence in, is what will replace this old system. That will be God’s new order, under his heavenly Kingdom government. (Matt. 6:10) Here, on earth, under a righteous administration, all of mankind’s distressing problems will be solved. This includes the economic ones. And they will be solved to our total satisfaction, since the Bible says of the Almighty Creator of the new order: “You are opening your hand and satisfying the desire of every living thing.”​—Ps. 145:16.