A Taste for Debt
As most of us know, in 1492 Columbus sailed the ocean blue. Financed by King Ferdinand and Queen Isabella of Spain, Columbus not only discovered the new world, he helped Spain become one of the richest empires of its time.
Soon after Columbus' voyage, Spanish galleons traveled the world to loot and plunder. It wasn't long before Spain's vaults were filled with gold stolen from the New World. While the Spanish conquistadors did spread their religion and civilization to much of the new world, they did so with a potent mix of greed, cruelty, and violence.
Apparently, it was contagious. In 1557, Spain became the first sovereign nation in history to declare bankruptcy. Phillip II, Spain's ruler, had such a hunger for warfare and conquest that he continually borrowed money from Genoese lenders so that Spain could continue to fight and steal. His greed bankrupted the country a second, third, and fourth time.
Money Doesn't Make the Man
My rich dad often reminded me that money doesn't make a person who he or she is (or isn't). Applying this logic, money also doesn't make a person greedy. Rich dad's point was that money has the power only to reveal a person's true nature.
For example, if a person is a fool with money, more money may turn the fool into a financial idiot. We've all heard stories of lottery winners, rock stars, heirs and heiresses, and professional athletes becoming millionaire morons who wake up rich but are broke by nightfall.
Money has other effects. John D. Rockefeller apparently became more of a tightwad the richer he got. I don't know if it is true, but one story I read was about one of his sons having to wear his older sister's clothes in order to save money.
Generous people can become more generous as they become richer, giving away vast fortunes to worthwhile causes as Bill Gates and Warren Buffett are doing. And many people, upon achieving financial freedom, use their freedom to dedicate their lives to what they believe to be their spiritual calling. That freedom is why I teach and encourage people to acquire wealth.
Global Greed
Like Spain's multiple 16th-century bankruptcies and Rockefeller's apocryphal cheapness, a great deal of greedy foolishness is going on in many countries today. The big difference is that nowadays countries don't have to travel to other countries and steal their gold. Instead, they just print money.
That is, instead of needing expensive military forces to attack weaker nations, they just buy another country's wealth with debt, or funny money. It's the same as a bank robber giving up armed thievery as a way of earning money and turning to counterfeiting. America may be the biggest counterfeiter in the world today.
One of the ways rich countries like the United States gain an economic advantage over weaker countries is by lending them money on the condition that the weaker country buy the rich country's products. Hot money, as it is sometimes called, enters the poorer economy and the economy booms, but then it later collapses when the country can't repay its debt.
On a more personal scale, many individuals fall prey to the lure of easy credit with credit cards, school loans, and mortgage debt. Once the lenders have you hooked on debt, they're assured of a steady stream of income for years, hoping you never pay it off. And if you default, they may force you into liquidating your assets.
When the Bubble Bursts
The world is currently in the grip of a major lending spree. But this time the target is companies, not countries or homeowners looking to refinance their credit card debt. And much of the lending is not through public share or bond markets or traditional banks. Today, private lenders such as hedge funds are lending trillions of dollars to businesses at very attractive rates.
The obvious problem with so much lending by private institutions is that this activity is in the shadows, out of sight of government agencies and regulators. In this shadowy word, the brave can make -- and lose -- a lot of money, as the hedge fund Amaranth Advisors recently did.
So what do these private firms silently lending billions of dollars mean to people like you and me? It can mean good things and bad things. One benefit is that all this hot money floating around all over the world gives people a sense of prosperity.
What's bad is that if the bubble of debt bursts, which many insiders believe it will (and just as Spain kept going bust), the result could be a global recession and possibly even a depression. As you know, if the global economy contracts jobs will be lost, people will spend less, and asset prices may drop.
That said, this excessive debt has kept the world economy pretty stable through some challenging times, including Y2K, 9/11, high oil prices, wars, Hurricane Katrina, and so on. And this lending spree has increased asset prices in real estate, commodities, and the stock market. In fact, I've personally benefited from all this debt and funny money -- my businesses have done well, and so have my investments. Yet I worry.
Flipping the Economy
Most of us know that a real estate flipper is someone who buys a house, may or may not fix it up, and then puts back on the market at a higher price. Well, in this environment of easy money to businesses, many private lenders are buying up public companies' stock in order to take them private.
This has pushed the prices on the stock market to new highs. The acquiring company may then flip the companies by selling parts of them or by taking them public again, not unlike a real estate flipper. This is happening worldwide.
For instance, a friend of mine just pocketed $24 million for his company. A private equity firm couldn't wait to give him the money. Another friend spends his days calling little mom-and-pop operators who specialize in teaching children with learning disabilities, offering them several million dollars for their business (which many of them take), and pocketing a 20 percent finders commission.
The End Is Near
Maybe I'm too old or not hip enough, but when I look at these businesses and the prices they're commanding, I really don't know how it all makes sense.
The problem I see is that the businesses aren't being acquired with money or equity -- they're being acquired with debt. And as far as I know, somebody will have to pay that money back someday.
The Spanish Empire eventually collapsed because of its expensive taste for warfare and conquest. I'm concerned that the modern world will itself be conquered because it's developed an expensive taste for debt. So what do I recommend? For now, enjoy the party, don't drink too much, and stay close to the exits.
Robert Kiyosaki
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posted by UncommonBusiness @ 2:10 AM
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