On Unsustainable levels of Debt: another perspective

johnralstonsaul6There are many, many types of debt.

  • Financial debt is really only a bit player in the rich theatre of human history. A necessary evil; a loutish relative sent to help us develop our patience and forbearance.

The recent obsession with financial debt overshadows and distorts culturally much more significant types of debt such as: ethical, debt to yourself, moral, educational, spiritual.

  • Financial debt is a simple matter that is simply a child of contract law.
  • This type carries NO moral or ethical weight, whatsoever.

Many franchise contracts carry into them a severe imbalance of economic and information power.

Some contracts are entered into with fraudulent intent.

Fusing imagination with a historical perspective may mean a different understanding of debt obligations. Some or all franchisee debt may prove to be:

  1. repaid $1.00 for $1.00,
  2. re-negotiated (certain % of claim),
  3. unenforceable (a Court will not oblige repayment),
  4. void (a conditions were not present for a valid contract to be formed), or
  5. commercially forgivable (0 to 100%, it makes economic and career sense for the creditor not to pursue the debt).

Dr. John Ralston Saul [Wikipedia, quotes] pursues a number of topics in an extremely lively and interesting way in his book, A Doubter’s Companion: A Dictionary of Aggressive Common Sense, One Review: B+.

  • Dr. Saul is a very accomplished and expansive Canadian author and philosopher. I had the great pleasure of meeting him in December 2008.
  • I told him his writings (along with Galbraith and McLuhan) had ruined my perfectly good Ivey MBA. He seemed pleased.

Unsustainable Levels of Debt is one of Saul’s more delightful entries. By substituting the words “groups of franchisees” for the word “nation, countries or civilization”, you may find it an apt franchising analogy.

I will be returning to The Doubter’s Companion and taking the liberty of free riding on Dr. Saul’s approach and insights.

Selected Excerpt

National debts are treated today as if they were unforgiving gods with the power to control, alter and if necessary destroy a country. This financial trap is usually presented as if it were peculiar to our time, as well as being a profound comment on the profligate [adj 1 shamelessly immoral 2 recklessly extravagant] habits of the population. The reality may be less disturbing.

1. The building up of unsustainable debt loads is a commonplace in history. There are several standard means of resolving he problem: execute the lenders, exile them, default outright or simply renegotiate to achieve partial default and low interest rates.

2. There is no example of  nation become rich by paying its debts.

3. There are dozens of examples of nations becoming rich by defaulting or renegotiating.

This begins formally in the sixth century BC with Solon taking power in debt-crippled Athens. His organization of general default – “the shaking off of the burdens” – set the city-state on its road to democracy and prosperity. The Athens which is still remembered as the central inspiration of WESTERN CIVILIZATION was the direct product of a national default. One way or another most Western countries, including the United States, have done the same thing at some point. Most national defaults lead to sustained periods of prosperity.

4. The non-payment of debts carried no moral weight. The only moral standards recognized in Western society as being relevant to lending are those which identify profit made from loans as a sin. Loans themselves are mere contracts and therefore cannot carry moral value.

5. As all businessman know, contracts are to be respected whenever possible. When not possible, regulations exist to aid default or renegotiation. Businessmen regularly do both and happily walk away…

8. Debts – both public and private – become unsustainable when the borrower’s cash flow no longer handily carries the interest payments. Once a national economy has lost that rate of cash flow, it is unlikely to get it back. The weight of the debt on the economy makes it impossible.

11. Civilizations which become obsessed by sustaining unsustainable debt-loads have forgotten the basic nature of money. Money is not real. It is a conscious agreement on measuring abstract value. Unhealthy societies often become mesmerized by money and treat it as if it were something concrete. The effect is to destroy the currency’s practical value.

13. Does all of this mean that governments should default on their national debt? Not exactly.

What it does mean is that we are imprisoned in a linear and managerial approach which denies reality, to say nothing of experience. Money is first a matter of imagination and second of fixed agreements on the willing suspension of disbelief.

In other words, it is possible to approach the debt problem in quite different ways.

14. There have been changes which limit our actions in comparison to those of Solon or Henry IV, who negotiated his way out of an impossible debt situation in the early seventeenth century and re-established prosperity..[discussion not relevant to franchising but he takes a shot at money market managers]

— [my definitions and emphasis]

A franchisee frequently owes the following entities:

  1. themselves,
  2. relatives (near and far),
  3. employees,
  4. government (federal, state, municipal),
  5. franchisor,
  6. financial institution,
  7. suppliers, and
  8. professionals and others (lawyers, accountants, consultants).

Both the lender and the creditor took a risk in advancing funds, or goods and services on credit. Most of the creditors have much more experience in business than the franchisee.

If, as Saul mentions, that loans are mere contracts and carry no moral weight, why should most franchisees pay themselves last?

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