As if declining investment returns in today’s markets aren’t enough for you to worry about, there’s another issue I want to highlight in this ongoing discussion on the economy. There is every possibility that your personal debt will become the biggest financial issue you will deal with if you do not quickly get it under control.

The book of Proverbs has many things to say about money. One verse that appears to speak about debt is Proverbs 22:7: "The rich rules over the poor, and the borrower is the slave of the lender." If you feel like a slave to the banks and the credit card companies today, imagine what you will feel like when interest rates increase from their current 3 or 4 per cent to 15 or perhaps even 24 per cent!

Bond bubble burst

Perhaps you think I’m exaggerating to make a point. I sincerely hope that I am wrong on this, but the greatest fear for all today should be the astronomical debt taken on by governments worldwide. If supply and demand is one of the reasons the free market moves as it does, then the astronomical supply of government-debt bonds will ensure that the bond market will be the next bubble to burst, just as surely as the tech sector collapsed in 2000 and the housing bubble burst in 2008.

Now the tech bubble only hurt a small segment of the economy – here in Canada it only impacted investment portfolios (though it left many of those decimated). The housing bubble hurt more – not only were many investment portfolios halved in value, many people lost their jobs as well. But when the bond bubble bursts, it will hurt every person who has any amount of debt at all. Just try to imagine what will happen if the interest rate charged on your home mortgage increases from its current level to 20 per cent. For that matter, just look at what will happen to your payments if it goes up to a modest 12 per cent.

The payments on a 25-year $250,000 mortgage at 5 per cent amounts to about $1,454 per month, but at 12 per cent, those monthly payments will increase to $2,579. Hike the rate to 18 per cent, and the payment becomes a mind-numbing $3,665 per month. I am afraid to even calculate the payments if the rates go higher, and I believe they will go higher than 18 per cent.

If you believe the government will step in to cushion you from those higher rates, you might also want to ask yourself what the government has done to shield investors from the massive drop in the stock market values. The answer, of course, is "nothing."

Sensible steps

But there are solutions to this impending crisis. I won’t offer any fixes for the economy at large, but there are things that you can do for your personal financial well being. First of all, you should eliminate all credit card and consumer debt, and do so quickly. By consumer debt I mean the debt that you took on to buy a car, a stereo system, or that new big-screen TV you had to have. Sell the TV if that’s what it takes to pay the loan. And do not buy anything else on credit for at least the next three years. As for the mortgage on your home, lock in the interest rate for ten years. If your mortgage is up for renewal soon, insist on a ten-year locked in rate. And if your mortgage isn’t coming up for renewal anytime soon, go to your bank or mortgage company and ask that they give you a blended rate (an average between what you’re currently paying and the low rates that are available right now), and then tell the banker or mortgage broker you want to lock in that blended rate for the next ten years. And yes, I am aware that the current five year rate is around 3.9% and the 10 year rate is around 5.2%. The difference in payments is about 200 dollars per month on that $250,000 mortgage, but remember, you’re locking in that rate for ten years.

I am also equally aware that some economists are of the opinion that deflation is a much larger risk than inflation. However, if inflation and the corresponding high interest rates do not occur, then all you have done is lock the interest rates in at 5% for the next ten years.

To wrap up, I’m convinced that personal debt will be the next big problem for all of us. So run, don’t walk, and get that debt under control. And debt that is good debt, like a mortgage on your house, your farm, or your business should have the interest rate locked in for the next ten years. That should allow you to weather the next storm. Let me conclude with another verse from Proverbs, (this time verse 3 of chapter 22), which seems completely apropos to this discussion. "The prudent sees danger and hides himself, but the simple go on and suffer for it."