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February 9, 2015

The causes of the world's current economic woes are manifold and it would be folly to oversimplify them. A graver mistake, however, would be for the public to ignore those causes as technical matters to be taken care of by experts without any moral guidance.

One factor in the economic slowdown is that production capacity in advanced economies exceeds demand for products by about 2.5 per cent. Over-capacity depresses the need for workers, increasing unemployment and reducing pressure to increase wages. Thus over-capacity suppresses consumer demand and creates hardship for millions of families.

Meanwhile, total world debt rose to 212 per cent of gross domestic product at the end of 2013. Five years earlier, when the global economy was going into the tank, world debt was "only" 174 per cent of a year's gross product. (Figures taken from a Jan. 24 report in The Globe and Mail, "The seven-year slump.")

The nature of debt varies among nations – in some countries, it is mainly government debt; in others, business debt. In Canada, the largest proportion is consumer debt. We have been convinced to buy what we don't need with money we have not yet earned.

Consumer debt itself needs to be broken into different categories. There are mortgages, today a necessity for almost anyone buying a home. There are consumer loans to buy products which in simpler times one would buy by saving first and buying later. Then, there are loans to people in desperate need.

Moral questions arise for each form of loan. While mortgages are a necessity, sprawling 3,000-square-foot (or larger) homes for families of four are not. Too often, our reach exceeds our grasp.

The purchase of non-essential, discretionary items with money one does not yet have is surely a matter of moral concern. Typically, such items are bought with credit cards with interest rates that far outstrip any notion of fair return.

The third category involves loans which are morally justified – a parent borrowing money to buy food or to pay for calamitous, unexpected events which need immediate attention. Too often, however, people who need such loans are forced to turn to usurious moneylenders.

The whole process is exacerbated by what is euphemistically called "quantitative easing" – printing money to stimulate borrowing and spending.

An economy built on debt is inherently unstable. It also invests inordinate power in moneylenders, ranging from banks to neighbourhood loan-sharking outlets. When debt becomes a nation's or the world's main form of financing, a house of cards has been built that will collapse unless it is carefully dismantled.

Powerful financial organizations, aided by governments, play a major role in creating this instability. But individuals do as well. Every time we fail to pay of our entire credit card debt we contribute to global financial instability. Whenever we buy a home larger than we need or for which the repayment period is inordinately long, we add to an economic problem which has ramifications for other people.

Financial institutions need to be under tight control in order to reduce debt. Individuals need to exert self-control. Old virtues such as thrift and not buying what you cannot afford play a role in maintaining a good society.