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Mounting Debt Overseas and What It Means to You

by on July 12, 2015 6:00 AM

Officials in Greece continue to kick the can down the road, hoping someone will come and save them from their own stupidity.

Financially, the country is a mess and has problems of lax tax collection coupled with expansive welfare payments.

Despite staving off default on July 1st, Puerto Rico still has too much debt that it cannot repay.

In both of these cases too much was borrowed from lenders who lacked the ability to see a default on the horizon. The borrowers displayed little responsibility for future interest and principal payments.

Of course, there are differences. Puerto Rico doesn't have its own banking system. It can't shut down banks. Banks in Puerto Rico are not loaded up on Puerto Rico debt, so depositors are not in danger if the state government defaults.

The same cannot be said of Greece. Be that as it may, politicians should not be permitted to put their people in debt and then retire from office and say "it's not my problem."

Neither Greece nor Puerto Rico is financially sustainable and no one will take responsibility. (I know parents who have kids like this.)

On a grander scale, China is finally experiencing financial problems as its stock market tanks despite efforts by the central government to prop up stock prices. Most governments fail to realize that they shouldn't fiddle with markets. Economist Joseph Schumpeter called for markets to repeatedly clear themselves by allowing things to fail at the micro level (occasional bear markets).

Politicians are hesitant to let the markets perform this function and move heaven and earth to help foolish investors (read: voters) avoid the consequences of their follies. This increases the likelihood of a much bigger systematic financial failure. Remember 2007-2008?

So what is an investor to do? As my business partner, Judy Loy, said in her last article, start by saving money as soon as you can.

Be sure to create an emergency account holding liquid assets (cash, savings accounts and the like) as soon as possible after college. Avoid borrowing money to go to college. No matter what your age, build your cash reserves.

As the world gets scarier, make sure your finances are rock solid and very liquid. If nothing else this will provide you with financial peace of mind. After you have at least six months of liquid reserves, then you can consider investing in other stuff, like stocks, real estate and the like. If you run a business, do the same for the business. Many businesses fail for lack of sufficient financial reserves.

I don't know exactly what the financial future is going to bring and neither does anyone else.

But you certainly can avoid being a Greece or a Puerto Rico -- don't over-extend yourself, prepare for the worst and enjoy the silver lining when things don't turn out as badly as they could have.


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Dan Nestlerode was previously the Director of Research and Portfolio Management at Nestlerode & Loy Investment Advisors in State College. He retired in 2015 after 50 years in the investment business. A graduate of Penn State University, Nestlerode became an investment advisor in 1965. He can be reached at [email protected]
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