The stock market has been rocked this past week after Chinese property giant Evergrande announced they were on the brink of a total collapse and were likely to default on over 300 billion in debt. While this announcement has certainly impacted its shareholders and creditors, it is also having serious ramifications for the Chinese and world markets as well.
Similar to once highly successful US companies like JC Penny, Sears or Toys R Us, who became so buried in debt that they could no longer operate, the sheer weight of Evergrande’s debt, paired with a lack of liquidity, may soon be too much for them to overcome. Only time will tell if the potential collapse of this corporate behemoth is the start of a dangerous trend or a one-off, but clearly the market is concerned by what they see.
What I find most interesting about this story, is even in the extremely risk averse world we seem to find ourselves in right now, the obvious threat heavy debt poses to both companies and individuals is more often than not, unseen or unacknowledged until it’s too late.
On my morning commute I am always amazed to see how many young, presumably healthy people are out jogging or walking their dogs with a mask on because of the risk they think Covid poses to them. Yet these same people are likely to have little concern about the amount of debt that exists in their financial statement. According to Experian the average millennial has just under $80,000 of debt, and that number jumps to over 135,000 for the average Gen X individual. This is what should keep them up at night, not being one of the .000025% of vaccinated individuals under the age of 65 that have died from Covid, as of Aug 10, 2021.
This misplaced fear of real risk versus perceived risk is, in my view, driven by a media narrative that convinces people to redirect their fear. Our entire society tells us debt is normal, debt is safe, debt can actually be beneficial. I disagree. In my opinion, debt is dangerous. While it is sometimes necessary, it is not something you should welcome into your life with open arms.
The American perspective on debt has certainly changed over the past several generations. My grandparents viewed debt as something to be avoided like the plague, they were the generation that said “if I don’t have the money I don’t buy it.” Generally speaking, the boomer generation has viewed debt more as a necessary evil, while Gen X and millennials simply view it as a way of life.
This perspective on debt isn’t limited to individuals or corporations however. As we speak Washington is debating several infrastructure bills with price tags approaching 5 trillion dollars which we don’t have. This additional proposed spending comes even after our national debt has already increased by roughly 5.2 trillion since the beginning of 2020 according to the Heritage Foundation.
As someone who has had a substantial amount of debt in the past, but is now totally debt free, I feel I can speak on this topic better than most. The world is a dangerous place. None of us can avoid every catastrophe, but what we can do is set ourselves up to have the best chance at surviving when tragedy strikes. I would argue eliminating debt is one of the best ways for individuals to prepare for a potential financial crisis. Instead, too many of us seem to believe we can borrow our way out of the messes we have created. And that belief is the true danger we face.