A real life explanation of the global debt crisis
By Rodney Ballance
The Financial Leadership Academy
In basic terms, here’s what’s happening in Europe, and an explanation of why we need to be very interested in the situation.
Relating this to family, let’s say that my son Greg (Greece) has spent all his savings. He also lost his ability to earn an income, but continues to spend as if he’s still working.
Greg asks me for a loan to help him pay his debts and promises to cut back on his spending. I can’t come up with all the money Greg needs, so I turn to my brothers and sisters (the European Union) so we can pool our money together to bail out Greg. Greg promises to pay us all back after he gets another job and assures us that he’s going to stop spending.
Later, while reviewing Greg’s finances, we find he’s still spending like a drunken sailor. Of course Greg hasn’t paid any of us back the first dollar yet.
Greg says he’s sorry that he’s not been able to cut back on his spending. He explains that he still has contracts with his tailor, personal chef and his staff of gardeners and maintenance people to pay them for another 50 years. He can’t stop paying them because they’ll burn his house down out of anger if he tries.
Because of Greg’s situation, we agree to extend the time limit for him to pay us back. As we’re telling Greg that we’ll extend his loan and reminding him he still needs to make cuts somewhere, he says, "Oh by the way, I forgot to tell you about more expenses that also need to be paid. Can you loan me some more money and let me pay it back with the original loan?"
My brother Gary (Germany in the European Union) is furious. I explain to Gary that if we don’t give Greg what he needs, we’ll all lose everything we loaned him. We have to give him more if we ever want to get our money back.
We all look at our resources and realize we don’t have enough to help Greg this time. Together, we decide to call our father (the International Monetary Fund) to see if he can help us bail out Greg and help him turn the corner. Our dad looks at the situation and says that he doesn’t have the funds either, but will talk to his neighbor Amy (America) and see if she is willing to help out.
By now, my brothers and sisters have to float smaller loans to one another to stay afloat because we loaned our money to Greg. He is still going deeper in the hole every day, with no turnaround in sight. My dad comes back and says that he’s secured a loan from his wealthier neighbor, Amy, to help us all out, but emphasizes the importance of reducing Greg’s expensive lifestyle. Amy has an open line of credit at her bank (China) that allows her to borrow huge amounts of money with her family property as collateral. She knows that if she fails to pay back her loan, she loses the family farm, but wants to appear wealthy, so she borrows the money from her bank to give to dad.
Greg once again says thank you and goes on his merry way, assuring all of us that he’s making the necessary changes. My father tells his neighbor that her money is safe because he has faith in his grandson.
While we’re all trying to help Greg, my sister Iris (Ireland) finds herself in a tight spot and asks to borrow money from all of us. We all want to help Iris, but we don’t have the money because we loaned it all to Greg.
We once again turn to our dad and ask him to go back to his neighbor who was so helpful with Greg. Because he is somewhat removed from the day-to-day activities of his grandson, he believes that everything is going according to plan and goes to his neighbor.
Amy, who has complete confidence in my dad, freely loans her borrowed money to help Iris. Unlike Greg, Iris makes difficult spending cuts and begins turning her financial situation around. She isn’t able to pay her loan back yet, but is making obvious strides in the right direction. So after review, we all agree to extend Iris’ loan.
Now our brothers Peter (Portugal) and Steven (Spain) begin to have financial difficulties because they aren’t making the money they need to sustain their lifestyle either. They let us know they might eventually need a bailout too. Now my brother Gary, who is working hard to provide for his family, is really irritated because he is also barely scraping by due to the money he’s given to everyone else.
Eventually, Greg will go bankrupt, pulling the rest of us with him. My dad will be OK because he didn’t have any of his money involved to begin with. Amy will lose the family farm, which will be foreclosed on by her bank. All who used to depend on her will find life very difficult in the near future.
This is a clear example of why we should sometimes allow failure. Thomas Edison once said, “I didn’t fail 2,000 times to make a light bulb, I found 2,000 ways not to make one.”
Failure is just part of the journey to realizing success. Sometimes, we need to allow our kids to experience difficult situations and deal with them, even if they eventually fail. The European debt crisis will eventually lead to the collapse of the European Union and bring economic disaster to the entire world. Are you personally prepared for that scenario?
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