There are two kinds of toxic debt this piece will cover:
•This occurs when expenditures on credit cards and loan obligations are beyond your income limits.
• Finance denoting or relating to debt which has a high risk of default:toxic debts denoting securities
which are based on toxic debt and for which there is not a healthy or functioning market: the financial
system has become clogged with toxic assets
My Philosophy on Consumer Debt
Beginning with the depression years when the majority of the people were without any savings or liquid assets most people were afraid of debt, and therefore shunned it. That is the attitude my father had for most of his life. My mom didn't work, so she had no view of debt, and besides her dad was a millionaire. What followed in my life was to be cautious with any borrowing, and I had decided that I would never borrow more than 25% of my annual income early on in life. That mindset proved to be very helpful in my whole life. I shied away from credit cards except for identification and emergencies. And, fortunately, my current wife of thirty-one years has had pretty much the same philosophy; so, we never bickered about it.
However, the rest of the world became addicted to profligate spending while charging all their wants and wishes on not one but several credit cards, since they were so freely offered by multiple lenders, at usurious lending rates, sometimes, especially when the borrower had less than stellar credit ratings. Usury was the penalty for poor credit, even though there were plenty of laws against usury, it flourished.
My Philosophy on Investing in Toxic Debt
Although taking chances for a big profit is quite common among investors who do it for a living, or are trying to amass big amounts of profit quickly, this always remains a temptation like going to Vegas and betting on long odds. Gamblers, like investors, often lose big.
Here is an early derivatives story that will put things in simple perspective when the State of California lost trillions:
The Money Casino
"You may not realize it but there is a money casino where the stakes are in the trillions! The world GDP is somewhere around 38 trillion dollars, but there are some high rollers out there gambling with our future. These are known as derivatives--a $248 trillion-dollar market! Warren Buffett, the second richest man in the world believes that "Derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal."
What are derivatives? A derivative is like a bet. A derivative “derives its value” from another asset. It is like covering a $1000 bet with only $10! If you lose, you have to come up with the collateral to cover the bet. Or better yet, you put up a few thousand dollars to make a billion dollar wager. This is a high stakes game and during the 1990’s there were some notable losses from derivatives" (Source: Derivatives, Fascism and the Almighty Dollar, By Dene McGriff ) Read the rest of the story at the tag.
When you are out shopping for Mutual Funds and other investments that appear to offer higher returns than normal it will be wise to inquire whether the portfolio has "derivatives in it and what percent it contains," because you can be sure it is a very high risk percentage. If you are risk averse you need to stay away from them.
At this point in time the nation is swimming in house mortgages that are under water for the first time since WWII. In the past year the national consumer debt is down a small percentage, and it will be healthy for the country if that trend continues. We might call this the "new era of spending prudence," if the economy and the unemployment stays at its current levels. I read lots of positive predictions about these things, but the average consumer better keep hunkered down until the U.S. shows some real and steady GDP growth, like 4-6% per annum for a couple of years in a row.