We live in a complex world and so the decisions we make can have long-term consequences for us and our familial [see photo]. Debt is perhaps one of the more important and urgent decision for adults today. To reduce or to increase debt is a core decision but there are many attendant considerations for you that are not directly related to interest rates or financial risk.
Inflationary expectations are high today. This is the case primarily because there are signs of price rises right across the family budget. And there is a mass of data which indicates that price rises are becoming locked into the 2021 supply chains that move goods around the globe. For instance, tanker costs are rising and these increases are being locked into future contracts for coming months or even years. Thus the inflationary pressures locked inside the supply line of goods coming at you could prove to be an important cost-push factor [it is true that you might be able to mitigate the real impact of these price rises through careful substitution of goods or by creating new sourcing or purchasing patterns]. But there are many other cost-push factors building as well. Spending by governments [those running modern fiscal policies], all around the world, are inducing price rises and lessening the purchasing power of your currency. Of course the related issue is the currency exchange rate that you live with at your local store [fiscal and monetary policies can lead to lower exchange rates which, in turn, raises the costs of imported goods and services]. As these inflationary pressures build it is likely you will see your Central Bank raise interest rates. Rising interest rates are a tax on anyone who holds long-term debt or has outstanding credit card or business loans. The offset to that impact is the fact that inflationary pressures reduce the value of money and thus lessen the "real costs" of all debt and loans. Thus the real issue for those holding debt inside an inflationary cycle is what do these borrowings fund. If your borrowings fund your ownership [full or partial] of assets [houses, farms, commercial ventures, etc] that are assessed as rising in money terms [due to inflation] then maintaining [or extending] such loans based on solid cashflow can be a "risk appropriate strategy" for individuals, families, and entities. And so on and so on....
Deflationary expectations are also high today. Deflation has been common over the past two decades due to improvements in technology. These technologies [automation] have lowered costs in many industries to a point where the cost of items [computers, etc] have actually fallen or stayed the same for goods and services that offer much more to the consumer. The availability of mobile phones, internet services, and large TVs in some of the poorest countries in the world is testament to real impact of deflationary pressures since the Year 2000. The current case for deflation is made most forcibly by those who watch the lending patterns between commercial banks and their Central Bank controllers. These patterns determine the velocity of money within a community. If the velocity is kept in check to match the growth in the productivity effort [GNP, GDP, National Income, etc] then the inflationary pressures that are natural within a growing economy are squeezed to low levels. One key factor in this squeeze is that the propensity of commercial banks to lend to individuals and small businesses is low. Debt management is no longer a significant cost for families, small businesses, and local entities because the access to such funds is low to very low [recently Wells Fargo Bank in the US placed a "halt" on lending]. In such circumstances a prudent strategy for families, businesses, etc is to reduce, or to eliminate, all debts. Some wealthy families and corporates have recently adopted this posture to protect themselves should the world move towards a post-Covid deflationary cycle.
This missive is definitely not offered to you as financial advice so please take this as my disclaimer in that regard. However, I can tell you that I have no debt. I am concerned about my exposure to the prospects of rising, or falling, exchange rates. I am concerned about the monetary and fiscal strategies being pursued by some nation states during this Covid pandemic. However, today [30th August 2021] I do not expect either a 1970s style bout of cost-push [or cost-pull] inflation nor a Central Bank induced period of deflation [I guess I am trusting that these two competing forces will battle each other to a standstill and effectively create a state dynamic homeostasis. The truth is I have no idea if either beast is about to devour us. Then again... Beyond that simple binary choice a big monster we call Stagflation [high inflation and high unemployment] lurks in the shadows.
My hope and trust is that you will consider your short and long-term debt positions carefully over the next six months and take sensible remedial action wherever necessary.
Richard.
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