The following was cross-posted. Since it was on-topic for MIFP and we had a few minutes, here is the post.
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Subject: Question: Do you worry about debt? From: snipped-for-privacy@gmail.com (James C)
The context for all of this is, I am tempted to advise my family and close friends to cash in existing risky investments (mostly mutual funds) and I am tempted to stay away from stocks and corp bonds myself.
I need someone to help me feel better. You see, I can accept that I might be overly pessimistic about the economy. Perhaps I've been wrong for months, maybe things are in much better shape than I think. The #1 thing I worry about is DEBT. I keep thinking about consumer debt, and corporate debt.
Consumer debt -- the household debt load has been steadily rising. Last year I recall total household debt was over 100% of disposable income. People have been able to borrow money for cheap to afford consumer goods, cars, whatever. A big factor is that the strength of housing (high asset value) has kept consumers afloat, letting them borrow more. I keep getting the spam emails every day -- free money if you own a house.
Corporate debt -- financing opportunities have been insane after 2001. Companies are highly leveraged, making use of borrowed money to do just about everything. The financial/credit sector specifically makes my hairs stand on end. There is more debt and less cash on the balance sheets every year. Share capital is nothing compared to the borrowed money.
Let's not enough touch the issue of government debt!
Now when I look at the situation, it makes me nervous. I say to myself, if consumers have already just about gone broke borrowing money to afford their lifestyles, how can they keep buying consumer goods? And for companies, if money becomes more difficult to borrow, how are they going to pay their executives and satisfy their debt obligations? Where will they find the cash?
So what's the other side of this, the optimistic side? Am I saying things that are misleading? Have I made poor assumptions about consequences? I'm willing to discuss this if anyone is game.
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-HW "Skip" Weldon Columbia, SC