Financial Experts Warn of Debt Risks as Economic Volatility Grows

Reports announced last week that the Treasury has recently drawn its cash balance down by another $72 billion, putting our nation over $275 billion in the red. Unfortunately, this isn't a one time situation because the U.S. debt is currently growing at a rate of $1 trillion dollars roughly every hundred days, and now stands at nearly $35.8 trillion as of last week’s announcement.

It's not just the government that's living beyond its means though. Corporate and consumer debt is also at historic highs, and that doesn't even take into account the phantom debt that's out there essentially untracked. This includes "Buy Now, Pay Later" programs and the use of payment-in-kind loans which are growing as companies struggle with heavy leverage and high interest rates. Things aren't any better on the consumer side, with households carrying a staggering $1.4 trillion in credit card debt in this country today. 

The entire U.S. economy is a house of cards, and someone is just about to slam a door. 

Financial experts warn that while debt can be a powerful tool, both to scale a business and to survive an economic downturn, it's important to make sure you're making the right financial choices because it's easy to become over leveraged and destroy your finances. This requires a high degree of financial literacy, which most people simply don't possess today. 

Dr. David Phelps, noted financial expert, says, "For a lot of people, we seem to be entering unprecedented times, but some of us have been through a few boom and bust cycles, so we've seen this before. There are a lot of similarities between today and the early stages of the 1970s stagflation period."

He says there's definitely a role for debt even in the worst of economies, but the key is to use it strategically. He says that borrowed capital should only be invested into things that are as sure of a bet as possible. 

"I look at proven systems or mathematical formulas. For example, if I have a particular marketing channel that's working really well, I might leverage borrowed capital there, or if I find a building that I can acquire for less than its value, I might leverage borrowed capital there. But I would not use it in a speculative opportunity, like an untested marketing channel or a new construction development," he explained. 

Entrepreneurs need to plan ahead though, because it's not just about how you use the capital, but where you get it. When most people think about business funding, they think about going down to their local bank to apply for a loan, but that's only scratching the surface. There are numerous types of financing available, including traditional loans, micro lending, venture capital and other private loans, and even credit cards, according to business funding expert and COO of Fund&Grow, Amanda Webster. And she says each type comes with pros and cons. 

"People have access to a lot more options for credit than they realize, and that's because Americans are not financially literate. The reality is most small business owners absolutely can get funding for their business if they know where to look. For example, a bank will typically require collateral before making a loan, and the underwriting guidelines are usually more stringent, but you can get approved for a business credit card far easier and faster, and you can use it to buy almost anything except crypto or anything for the cannabis industry. The key is to seek credit strategically, based on your situation and goals," she explained. 

The problem is that as our economy further weakens, it forces more businesses and individuals into bankruptcy, which means fewer consumers to buy goods and services. This reduced demand eventually forces more layoffs, creating a dangerous snowball effect where the economy stagnates. Often, this leads to government "stimulus" programs, which further exacerbate the situation by driving more inflation. It also causes defaults on debt, which tanks people's credit, but the bigger problem is that it becomes a drain on the economy because those lenders now take a loss too. 

That's where entrepreneurs get into trouble. When things slow down, they lean on credit to stay afloat, but that can put them into a hole they can't dig out of when their debt payments exceed their revenue. And because the economy is weak, it's difficult to increase revenue, so they end up in a catch 22. 

It's basically the perfect storm, and once we hit a certain point, experts agree that recovering becomes an incredibly difficult, painful, and drawn out process. It can be done, as we've recently seen in Argentina following the election of President Javier Milei. He essentially took a country facing double digit inflation, massive debt, and signs of impending collapse, and turned it around to a strong and vibrant economy.

"Debt is a tool. Nothing more. If you don't know how to use it properly, it will likely hurt you, but if you do know how to use it properly and you make decisions carefully and strategically, it can give you a tremendous advantage," Webster says.

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