What is Cost of Equity? – Meaning, Concept and Formula
Theoretical Concept The cost of equity concept is very important when it comes to valuing shares on the stock market. Equity, like all other investment classes expects a compensation to be paid to its investors. The problem however is that unlike debt and other classes the cost of equity is never really straightforward. You can…
Cross Border Credit Reporting
The geographical boundaries drawn by nation states are blurring in the 21st century. In many parts of the world, free movement of goods, services, and even personnel have become a norm. However, strangely, the concept of credit and loans is still dependent upon national boundaries. The H1B visa system of America is a testimony to…
The Consequences of Negative Interest Rates
Warren Buffet once told that interest rates are like gravity. If there is no gravitational pull on asset values, then values can be infinite. Little did Warren Buffet know that the world is heading towards a strange phenomenon called negative interest rates. This strange new world is both confusing and counter-intuitive. The common man is…
The world is in crisis and one of the reasons for that is the excessive debt held by people, companies, and countries. The west is especially hit hard because of the profligacy of the last three decades starting from the 1970s, which have resulted in a consumerist lifestyle, and an accumulation of debt at all levels of society. The acceleration of this trend during the 1990s and the 2000s with the inevitable implosion happening in 2008 meant that the world and particularly the west are sitting on a time bomb that can explode anytime. As people, companies, and countries in the west pay down the debt, they are faced with a choice of either curbing the present consumption and paying down the debt accumulated so far or taking on more debt to pay off the existing debt and bankrupting future generations.
In other words, as all levels of society take on more debt to continue the present consumption, the situation is such that this debt has to be paid off sometime in the future and most likely, the future generations would be saddled with this debt. Like a head of the family who accumulates, debts and leaves to the future to pay it back, all levels of society in the west are continuing the present unsustainable way of living.
For instance, the United States is embarking on increasing its present debt and taking on more debt to pay off in the future.
Further, as there are many social welfare oriented schemes like Medicaid, Medicare, and Social Security that are entitled to be for the cause of social justice, the country has to budget for these entitlements as well so that the fabric of society is not ruptured. However, there are many experts in the United States who believe that the government must not honor its commitments to the elderly and the sick and instead, must give tax breaks for the rich and subsidies for the giant corporations. Coupled with the line of thinking that advocates more spending and more consumption, this line of action is a surefire recipe for disaster.
The point here is that the accumulated debt would be passed on to future generations who would find that they have to do without subsidized education, less spending on social schemes, and have to pay more taxes to repay the debt that has been accumulated so far.
The situation in Europe is slightly different, as the policymakers there have embarked on a debt reduction program by focusing on austerity. Of course, the existing debt is also being carried forward which means that in addition to cutbacks on social schemes and a general sense of lack of basic spending, they would also have to repay the debt.
The point here is that the situation in Europe is more severe than in the United States, which for the moment is postponing the problem. However, there are many experts who believe that the US would face this “Tsunami of Debt” and the “Debt Bomb” pretty soon and that the day of reckoning cannot be postponed forever. The clear implication of this is that eventually the world would have to wake up and face the reality of low growth, more austerity, and more taxes along with sacrificing comforts to just get along. This means that there are tough choices ahead for the present generation and the generations to come and therefore, it is better for those who are graduating now or are taking up jobs to be aware of these facts.
Finally, the present generation can limit the damage done so far by living sustainably and trying to innovate and ensure that growth returns through inventive and creative solutions. The other alternative is to live through an economic depression that would impact their lives drastically.
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