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Friday, February 25, 2011

Unfortunate Debt Scenario

Imagine a new company with a great idea and a vigorous man at the helm. Soon the company is making money and growing and impressing everyone.
So they go public.
They raise a lot of money selling stock. This enables even faster growth and gives the appearance of tremendous profitability. To be sure, free money from investors is a great thing to get.
Now they go the next step.
They issue bonds and borrow a lot of money from banks.
And then they cross the line.
Management rewards itself with enormous salaries, benefits, bonuses and perks of all kinds.
This goes on for a few years.
Then the company starts to fail.
Investors in the stock and bonds end up losing. The company finally goes bankrupt and the banks also lose big time.
But the management got very rich in this process. They are all set for life.

The question in my mind is regarding the ethics of this scenario. I would not conduct myself in this way. I would not rob my creditors. I just wouldn't do it.

Now there is a larger game being played with debt.
Government debt.
There are similarities to the story of this unethical company.
Government has borrowed money to pay salaries and give perks. But the crisis is now at hand. Governments are proving to be insolvent.
Will anyone give back what they made in the past? Will they be reasonable and stay in the game and take less?
NO!
The managers of government seem to be intending three things to get out of the debt hole.
Keep borrowing
Raise taxes
Debase the currency
And even the impossible is on the table now, bankruptcy of state governments such as California and Nevada.

Ethics 101 anyone?

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