Home' Trinidad and Tobago Guardian : July 27th 2017 Contents JULY 27 • 2017 guardian.co.tt BUSINESS GUARDIAN
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Economic slavery in the 21st century
Next week we observe Eman-
cipation Day and for the
occasion this column
serves to remind about
the consequences associ-
ated with the improper use
of debt. Let's stop and reflect on how much
control you have over "your life, liberty and
You may very well find that much of what
you have is encumbered by what you owe. In
other words, you have become a slave to your
One hundred and eighty one years ago former
US President Andrew Jackson is reported to
have said: "Live within your means, never be
in debt, and by husbanding your money you
can always lay it out well. But when you get
in debt you become a slave. Therefore I say to
you never involve yourself in debt, and become
no man's surety."
Of course, many have a different view of
debt. Throughout the ages, the plantation
owner, the land speculator and developer, the
businessman, the farmer the labourer all will
recount the positives around debt.
Access to credit (the ability to borrow mon-
ey) is considered the lifeblood of an economy
and as we saw in 2008 when it flounders crisis
emerges. So what makes debt and the access
to credit such a miracle for some but the bane
One distinction is the level of capital that
one can post as collateral. Pledging a portion
of what you own as collateral on a debt is less
risky if you own more assets. In other words,
the miracle of credit ostensibly works for those
who already have.
Another distinction can be found in the
quote from the famous economist John May-
nard Keynes: "If I owe you a pound, I have a
problem, but if I owe you a million, the problem
. The issue here is one of class and
status. Very often it is those at the upper strata
of society---both economically and politically
---who can find their debts forgiven.
In much of the developed world conversa-
tions are taking place about increasing levels
of income inequality. It is human nature for
the "have nots" to aspire to the lifestyle of the
. When such aspirations become unat-
tainable, history has shown that some amount
of social disorder ensues.
Despite the widening income divide, the
system is kept on a somewhat even footing by
the access to credit for the "have nots" and an
extremely low interest rate environment that
makes servicing debts reasonably affordable.
Sub-prime mortgages, car loans for seven
years, no money down are all examples of how
the system entices people into borrowing.
Our first foray into a self-imposed slavery
is to fall victim to the marketing techniques
of today and to desire that which we cannot
afford. We should all operate by a fundamental
rule that we should only incur debt in order
to generate an asset or an opportunity that
is likely to increase in value over time. That
means borrowing to buy a house or to fund
your education or something similar. It does
not mean purchasing a car, furniture, appliance
or worse still going on a vacation or enjoying
Carnival on credit.
The only time going into debt to acquire a
depreciating asset would make sense is if that
asset frees up your time so you can leverage
your knowledge or your labour to earn a return
that is greater than the interest cost associ-
ated with the debt. Anything else is a recipe
Yet many of us find it hard to resist. The pro-
ducers in today's world leveraging on innova-
tive marketing techniques and mass media have
been able to stimulate and encourage personal
consumption on a scale never before seen.
Now pause for a moment and reflect on the
fact that if someone had to resort to salesman-
ship in order to convince you to purchase a good
then clearly that good was not very urgent for
you to acquire. You do not have to persuade a
hungry man that he needs food.
Purchasing something on credit essentially
means bringing forward tomorrows demand
and consumption. Once that desire has been
created it is facilitated by financial institu-
tions that make consumer credit increasingly
more available. The risk is overconsumption,
reflecting a lack of self control on the part of
consumers and, essentially, mortgaging to-
morrow to consume today.
This process is often facilitated by the State.
Access to credit is an expedient way of allow-
ing the broader society to meet their person-
al goals and objectives. State-assisted credit
programmes are much easier to manage in the
short term and offers more of opportunities
for political advancement than, say, providing
constituents with educational support so they
can qualify for a higher paying job some time
in the future.
In the US up to 1986 it was possible for indi-
viduals to deduct the interest cost associated
with credit cards, car loans, educational loans
and the like from taxable income thus providing
an incentive to utilise credit in consumption
By providing an incentive to purchase items
on credit, the State is first of all making it easier
for the population to afford. Secondly, it pro-
vides a business opportunity for financial in-
stitutions. Thirdly, it creates a level of demand
all leading to more jobs, more consumption,
The emphasis eventually shifted to the tax
incentives associated with real estate and this
became the vehicle through which consump-
tion could be harnessed.
Owning a home was dubbed the "American
Dream" and incentives allowed for the pur-
chase of a home, which created a demand for
housing which, in turn, pushed home prices
steadily higher all other things being equal.
In true fashion the "dream" has been trans-
lated to all of us in T&T. The argument is always
that higher home prices built up equity for the
homeowner that could be refinanced to provide
funding for further consumption.
All these activities created jobs, increased
incomes and more tax revenues allowing the
State to provide more goods and services and,
overall, create a buoyant cycle of economic
growth. The use of credit---incentivised by
the State---seemed to have offered a foolproof
win-win situation for all constituents.
Regardless of the incentives on offer there
is a price to pay. Debts must be paid back and
if they are to be paid back with interest then
the future cash outflow associated with the
borrowing is greater than the current inflow.
As we saw in 2008, credit-driven consump-
tion growth is not sustainable because credit
expansion generally brings about conditions
that make further credit expansion impossible.
A debt contract is a legally enforceable claim
to future income.
As the stock of debt obligations expands, ce-
teris paribus, the proportion of future income
earmarked for debt servicing rises concom-
itantly. From a macroeconomic perspective,
consumer financing arrangements effectively
turn expected future income streams into cur-
rent consumption expenditure. But every new
loan contributes to a diminution of expected
income flows available for appropriation to
The point here is as the societal debt burden
becomes progressively larger, more of the cash
flows generated today are diverted towards ser-
vicing debt (which would have been incurred
previously) and less would be available for
For economic growth to continue it would
require more debt to fuel current consumption
but this can eventually lead to a tipping point.
This tipping point does not only exist for
households and for individuals but also for
the corporate sector and countries. Refer to
the start and recognise that those at the lower
end of the income ladder are more at risk at
this tipping point.
This is the point at which you realise that
what you owe is greater than what you own.
You are now a slave of the 21st century.
Ian Narine is an investment adviser registered
with the SEC and can be contacted at ian.
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