Monday, October 4, 2010


Debt is neither good nor bad - it has no inherent morality. It's not a temptation. And it's not a free lunch. The crucial quality determining the goodness - or badness - of debt is simply on what you spend the money.

First the basics. It has been proven mathematically that under widely accepted assumptions about human behavior and values that the existence of debt INCREASES the total happiness of humanity. Debt is an intertemporal exchange of value. Debt permits people who need money to buy something useful they want or need to buy it now and pay for that item over time - perhaps the time they use the item. EXAMPLE: a car. You need a car to go to work & shop, etc. With a car LOAN, you get the car now and then use it to get work. The work generates income and you use a portion of that income to pay off the car loan. VoilĂ ! The income and expense are matched over time.

The same applies to business loans, to home mortgages, to student loans, etc. Debt to raise money to spend productively is GOOD for the borrower.

And it's good for the lender. The lender has money and needs income over time. And wants his money back, too. The loan with interest gives him that income and he gets paid back IF he has made a correct decision that the borrower can repay. Often that becomes a exercise in probability - debt does involves unknown risks. That's why the lender charges an interest rate higher than a risk-free rate (such as on US Treasury bills or bonds - the government can print the money to pay its loans back ... and does every week of the year).

Debt is not riskless for the lender and it's not riskless for the borrower. Maybe the borrower has a medical problem or loses a job (such as through outsourcing). The borrower did nothing wrong - nothing bad. This can just be bad luck. The debt is a senior claim on his income, though. The lender can foreclose on the collateral, or put liens on the borrower's bank account. And the borrower can go bankrupt. That's his constitutional right - yes, bankruptcy is part of the US Constitution; Congress has explicit powers to write bankruptcy laws and has done it. The US has no debtor's prisons.

Barring stupid decisions on spending money from debt, you can now see that debt is a good, useful instrument to increase human happiness ... overall.

BUT debt can cause problems - big problems - IF the borrower wastes the money. Borrowering and using your home as collateral to go to Vegas or take your girlfriend on a cruise is stupid and wasteful. Ditto to maintain an extravagant lifestyle. Ditto to spend the money to dig holes and fill them up. Ditto to pay people not to work. These last few examples are why the US Federal government, the States and municipalities now have debt problems: decades of stupid, unproductive SPENDING.

The question is not the debt: IT'S THE SPENDING, STUPID SPENDING.

Question all spending. Politicians are wasting your money on stupid spending policies. They lie and use sophistry to obscure how they waste billions. Vote against politicians who don't value your tax money and spend it wisely.


The Krypto Fund model wants me to sell some gold-silver & emerging market stocks. I will comply and put the money into cash. The model wants me to buy bonds, but until I can find some with good value (i. e., low prices), I will wait.

Word of the Day

"Finitude" - noun [$100]
Finitude means a finite state or quality.
Sentence: One must limit borrowings that rely on refinancing to repay a loan; finitude exists in lenders' willingness to extend credit.

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