Proverbial Perversities of Debt

Proverbs 22:7, ‘The borrower is servant to the lender,’ has resonated in the background of my financial upbringing.

Akin to other proverbs and parables (Proverbs 1:6), there’s much more beneath the surface worth pondering.

Debt is slavery

Initially, I interpreted ‘The borrower is servant to the lender’ simply within the confines of debt servicing and contract terms.

At first glance, it makes sense that borrowers are essentially “slaves” to their debt. They need to commit a percentage of future cash flows to repay debts, aptly named ‘debt servicing.’ The debtor is enslaved to servicing their debts (Unsurprisingly, many millennials and Gen Zers want out of this and advocate for debt forgiveness).

On the contractual front, a form of enslavement also exists. The lender has the authority in some cases to modify debt terms. The lender has the power. If one misses payments, the lender can take action – take mortgages, for example, where the bank can seize one’s home if payments aren’t timely.

While committing to debt payments and being subject to the terms of the contract may appear to be the obvious outcomes of debt… there is a bit more at stake.

Getting into long-term debt isn’t just about committing specific cashflows to the lender; it’s a substantially speculative financial position.

Taking on debt is a financial position

When one borrows dollars and accumulates debt, they’re taking a short position on the dollar and a long position on interest rates.

This is the last thing anyone needs when managing long-term debt. Whether it’s a business securing a loan or an individual buying a house, isn’t it enough to just focus on being productive and making timely monthly or quarterly payments?

Unfortunately, no. Involuntarily, the debtor is married to a speculative position in the Federal Reserve’s macro monetary policy casino. This poses significant risks and challenges.

In simpler terms, whether borrowers are aware of it or not, they are exposing themselves to the volatility of the USD and centrally planned interest rates.

Two recent events underscore the strange unintended consequences of debt

First, the March 2023 bank failures. Much of this was triggered by a 24-hour $42 billion withdrawal from Silicon Valley Bank based on a few concerning tweets. Banks are slaves to the money borrowed from their depositors. They borrow short to lend long. When depositors withdraw funds en masse, banks must liquidate assets to meet their obligations.

This is the concept of ‘duration mismatch’—further detailed in our white paper, ‘Why Buy Gold Now’, highlighting the repercussions of inadequate debt management and interest rate exposure.

The second example involves mortgage lock-ins, where homeowners, having borrowed money at lower interest rates, face a financial bind, discouraging home sales. Many prime retail home borrowers, who locked in rates between 2-3 percent, recognize their financial position is linked to the mortgage itself.

This ‘lock in’ concept was explained by Peter Schiff on the Sachs Realty podcast, which hinders home sales due to the Fed’s monetary tightening.

“Today, since the most valuable asset that the homeowner has, really more than his home, is his mortgage. A lot of people are going to want to stay in those homes. Even if the home price goes down, their mortgage is so low that it still might be cheaper to stay.”

This situation casts a shadow over what would otherwise be a free market, where price discovery and organic supply/demand would naturally guide home prices.

The unfortunate reality 

Given the systemic high debt, the unfortunate reality is that a looming crisis is on the horizon. The ‘antidote’ to this crisis will involve the Federal Reserve stepping in and lowering interest rates again to zero. Lower rates will inevitably entice and allure more new or additional participants (businesses, governments, and individual consumers) to borrow more and delve further into debt. Perpetuating the cycle and exacerbating the situation.

Just as a casino expands with more tables, lights, shows, and entertaining games due to an increased player base, the Federal Reserve casino of debt experiences the same effect as more debtors join the game.

In essence, the old proverb “The borrower is servant to the lender” goes beyond mere cash flows and terms of a debt contract. It invites us to delve into the intricate dynamics of poor systemic financial choices, exposing debt as a speculative Fed monetary game where winners are scarce, and losers abound.

Recent events, like the March 2023 bank failures and mortgage lock-ins, illustrate just some of the vulnerabilities of the dollar debt system.

At some point, the debt system will reach a terminal point, and the wise individual will take heed and exit before it’s too late. Physical precious metals provide a solution as they involve no counterparty; there are no borrowers or lenders; it’s not an asset tied up in the involuntary Fed game.

Gold and silver are financial assets owned outright, providing a safe harbor—an alternative to the uncertainties of the centrally planned monetary circus.