Debt

Credit and Debt – Two Sides of the Same Coin?

Ray Dalio teaches us that credit is money. Money is “cash plus credit”. Credit is spent just like cash is. Ray is primarily looking at a macro level of the entire economy. If people spend money (cash or credit) the economy “booms” (grows), more or less everyone is happy with the delusion that life is getting better.

At a personal level, we can easily see debt as bad. Going into debt is taking on an obligation to repay that debt. At best when someone defaults on their debt the rest of the world may simply not be willing to give them credit again. At worst being heavily in debt leads to effective slavery as the person struggles to repay it. Somewhere in the middle is the typical person working hard to make someone else wealthy.

Why is it desirable to have (and spend) credit?

Well, we can argue that buying something on credit allows us to use and enjoy that item during the time span it takes to pay for it. Let’s use a concrete example.

Buying a house when you are in your twenties seems like a good use of credit. It provides you a home to live in, and if taken care of it doesn’t lose market value. You might be surprised when you adjust for inflation that the $200,000 home you bought in 1999, now selling for $400,000, is actually worth the exact same amount due to inflation (hopefully your income doubled too!). However don’t overlook the staggering amount of interest you pay on that home loan. While repaying that loan you will typically pay more than the initial amount of the loan. Thus for a $200,000 home (loan) you will pay back $200,000 in principal plus about $225,000 in interest for a total cost of $425,000.

The US government funds a lot of things: the military, healthcare, education, etc. Unlike a young adult though, the government has a large budget and should not need to trade long term wealth for short term benefits.

There is a huge difference between borrowing money to get a long term benefit (home) vs borrowing for short term expenses (groceries).

Some government expenditures might be excused as yielding long term benefits (the highway system), but almost all government expenditures are short term expenses yielding no long term benefit. Thus, in my opinion, the government should almost never borrow money. The government should not be in debt.

Global debt is now $307 trillion dollars. Who profits from this debt? The “rich”. Wealthy people are the ones buying (most) government bonds (aka loaning the government money). If you don’t want to contribute to making the rich, richer, then don’t go into debt. That applies at a personal level and at a national (and international) level.

It’s not the poor nations that are borrowing either. 80% of the borrowing this year has been by the wealthier economies!

If you think I’m wrong, and believe that most government bonds are bought by average people, then heck, let’s keep increasing government spending (debt) because it’s making the people wealthy. Correct?

Keep in mind that using credit is making someone else wealthier.

What are your thoughts? Are you getting wealthier by loaning the government money? Or is someone else getting wealthy by loaning the government money?

Perhaps we should consider that credit and debt are not inherently evil or good. But rather, how we use them determines if they are bad or good.