Debt - Criticisms

Criticisms

Some argue against debt as an instrument and institution, on a personal, family, social, corporate and governmental level. Islam forbids lending with interest even today, while the Catholic Church allowed it from 1822 onwards, and the Torah states that all debts should be erased every 7 years and every 50 years (in the Jubilee year, as described in the Book of Leviticus).

Debt will increase through time if it is not repaid faster than it grows through interest. This effect may be termed usury, while the term "usury" in other contexts refers only to an excessive rate of interest, in excess of a reasonable profit for the risk accepted.

In international legal thought, Odious debt is debt that is incurred by a regime for purposes that do not serve the interest of the state. Such debts are thus considered by this doctrine to be personal debts of the regime that incurred them and not debts of the state.

In an economy with high interest rates, debt will be more costly to a business than more flexible dividends on equity investment. It may be easier for a struggling business to be financed through equity investment as it may be possible to avoid paying a dividend if times are hard.

At the household level, debts can also have detrimental effects. In particular when households make spending decisions assuming income to increase, or remain stable, for the years to come. When households take on credit based on this assumption, life events can easily change indebtedness into over-indebtedness. Such life events include unexpected unemployment, relationship break-up, leaving the parental home, business failure, illness, or home repairs. Over-indebtedness has severe social consequences, such as, financial hardship, poor physical and mental health, family stress, stigma, difficulty obtaining employment, exclusion from basic financial services (European Commission, 2009), work accidents and industrial disease, a strain on social relations (Carpentier and Van den Bosch, 2008), absenteeism at work and lack of organisational commitment (Kim et al., 2003), feeling of insecurity, and relational tensions.