WHAT'S WRONG WITH DEBT?

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joe2baba's picture
joe2baba
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WHAT'S WRONG WITH DEBT?

as most of you are aware we had a public showing of the crash course here in ar.

after watching chapters 1-12 and 15 one woman asked "well what really are the consequences of having too much debt. is it really such a bad thing and how will it affect me?"

i tried to explain to her some of the reasons our current level and growing level of debt was a big problem but she did not get it.

so i ask you all if you can give your reasons why it is a bad idea. maybe she will get at least one of them.

please keep it simple as she has a tough time with it obviously

 

TimesAwasting's picture
TimesAwasting
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Re: WHAT'S WRONG WITH DEBT?

Excessive "public" debt has great adverse affects on all of us.

A larger potion of our tax dollars goes to supporting just the interest on our debt, instead of where is might be more useful, like rebuilding our infrastructure. Less debt would give US more choices...like maybe creating a more sustainable and greener energy future.

Or how about this one. What if we had no debt? Would we then need an "income tax"?

What a revolutionary idea... you keep all the money you earn! I'm certain the USA could survive on a national sales tax alone if we "the people" would just collectively decide that are gov't is doing "way too many things".

Lemonyellowschwin's picture
Lemonyellowschwin
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Re: WHAT'S WRONG WITH DEBT?

I used to wonder this too, then I came to this very simple conclusion:

With regard to United States Government debt, understand first that a huge part of it is owed to foreigners.  Understanding that, the answer for why it is so bad is this:  Either, (1) it must be paid off; or (2) it must be defaulted on.  Either has very serious consequences.  Paying it off means that we and our children and our grandchildren have to work our fannies off to generate the tax revenue that goes to pay off debt to the exclusion of the long list of other things we should be doing with the money.  It's the same as if an individual were in debt.  He/she ends up treading water instead of going places in life.  That is the best case scenario.  Defaulting on the debt (either through an actual default or printing the money to pay it off) means the dollar goes in the toilet and we get hyperinflation and economic calamity of the highest order.

With regard to all other debt -- personal, corporate and municipal -- the macro answer for why it is so bad is that it keeps us from paying down the national debt.

Personally, I see the United States Government debt as sort of a gigantic black hole.  Everything can be dealt with and papered over so long as the United States Governement can keep going deeper and deeper into debt.  Unless something highly unexpected happens (like the economy spontaneously recovers on its own) I would think that the debt will simply continue to accellerate.  When that can't happen anymore . . . . then the gig is up in a blaze of smoke.

Damnthematrix's picture
Damnthematrix
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Re: WHAT'S WRONG WITH DEBT?

I don't know why Americans seem so hung up on Government debts.  Debts are debts, and they are ALL bad.  WHY?  Simple.....  it works like this:

You borrow.  The money does not exist.  Money is created out of thin air, comes out the Bank Manager's pen when he signs you a check.  IF you borrow to (say) build ahouse, then the wealth represented by the loan exists in the form your house.  IF, however, you borrow to buy gas with your credit card, which totally disappears forever when you've drained the tank, then that wealth is gone.  Forever.  Even if you borrow to buy a car, that car is eventually worthless, and the wealth here also disappears.

WORSE, the money to pay off the INTEREST on your borrowing (or the state's) does not exist either.  Where does it come from?  ECONOMIC GROWTH.  Build more houses, make more cars, more airplanes, more.... and more..  and more.... using ENERGY no less.  Energy sources which are now fast disappearing, or at the very least peaking in supply meaning demand can no longer be met.

With less energy available, economic growth MUST falter.

With faltering economic growth, the interest on all the debts cannot be repaid.

Bankruptcy

The Party's Over.

This, BTW, is why we have this overwhelming mantra of ECONOMIC GROWTH at any cost.  The Powers That Be know no other way, it's like a religion.

I thought the Crash Course explains this very well.  Maybe you need to watch it more than once, because I know that when you are first confronted with the idiocy of the Matrix we live in, it just doesn't compute..... how could ANYONE come up with such a stoopid system? 

barrt's picture
barrt
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Re: WHAT'S WRONG WITH DEBT?

 

"Debt has to be paid back.... and we all owe more than we can repay, baby"

that might do it joe?

Damnthematrix's picture
Damnthematrix
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Re: WHAT'S WRONG WITH DEBT?
barrt wrote:

"Debt has to be paid back.... and we all owe more than we can repay, baby"

that might do it joe?

But Barrt... it's much worse than that.... the debts can NEVER be repaid. We no longer have the resources to grow the economy enough, EVEN if we wanted to. THEN, if we somehow managed this, the economy would have grown, with debt, EXPONENTIALLY, meaning we would then need maybe twice as much more growth, all unsustainable...

You DID do the whole crash course, right? Sometimes I think posters here haven't REALLY taken the time to run the whole crash course (yeah I know it's really long) otherwise you would know that humanity's greatest weakness is its inability to understand the exponential function......

http://www.peakprosperity.com/crashcourse/chapter-3-exponential-growth GO ON. Do it AGAIN!

Lemonyellowschwin's picture
Lemonyellowschwin
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Re: WHAT'S WRONG WITH DEBT?

What Damnthematrix just said.

barrt's picture
barrt
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Re: WHAT'S WRONG WITH DEBT?

that was meant as a bit of fun gentlemen

ok to make my silly little joke a bit more fiscally sound, how about

"Debt has to be paid back.... and we all owe more than we can repay, baby, ever!"

do i pass this time guys? please dont make me do the course again and go to the bottom of the class :(

Aura's picture
Aura
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Re: WHAT'S WRONG WITH DEBT?
joe2baba wrote:

please keep it simple as she has a tough time with it obviously

LOL! If this poor woman actually came to read this, her eyes would glaze over at most of your answers!

barrt wrote:

"Debt has to be paid back.... and we all owe more than we can repay, baby"

For this woman, this is probably much more understandable, even if it is way too simple an explanation. I would suggest the following explanation, as one I gave my 9 & 11 year old kids.

When you borrow money, you eventually have to pay it back. When you pay it back, you always pay more than you borrowed (interest). If you borrow more than you can pay back, you lose whatever you have that is most valuable--but you don't get to choose what you lose when people come asking for their money back. To keep that from happening, you start cutting back on the things you can choose to do without.

The same is true of the government. When they owe more than they can pay, they will start cutting back on what they consider less important. For the government, that means no animal control, no new roads, no new water/sewer systems, etc. Except that the government needs these things to make money. Without these things, people lose job. No jobs means no tax money going to the government. That means the government has LESS money to pay back what they borrow.

So that brings us to the really big question. What happens when someone has borrowed so much that it is impossible to pay it back? You lose what is most valuable. For a person, it could mean they lose their house, their car...or their business. If they lose their business, they no longer have a job and whoever was working for them doesn't have a job, either.

For the government, it's like losing a business. The people who were working for the government no longer have jobs. This means everyone taking care of roads (de-icing in the winter, taking care of the traffic lights, etc.), police, judges, food stamps, WIC, Medicare/Medicaid, social security, prisons, etc. no longer have jobs. These things will no longer get done, or someone else besides the government will have to pay for it. Who will pay for it? Private individuals? Private companies? Another government? Right now, the U.S. is "in debt" to China more than any other country. How would you like China running your local police station?

Now, do you see why debt is bad?

I realize that this explanation is too simplified and not even entirely accurate, but you would not explain all the nuances of national debt to a 9-year-old and expect them to understand, and I believe this woman needs this level of an explanation. If she then has a desire and capability of understanding more, then you could elaborate...very slowly, of course.

KKPSTEIN's picture
KKPSTEIN
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Re: WHAT'S WRONG WITH DEBT?

"...the borrower is a slave to the lender" (Proverbs 22:7)  Debt creates slavery.  Debt also cancels out all savings.  You can't have both.  If you have debt, you have no savings.  People don't realize how vulnerable they become in an economic downturn with no savings. 

pir8don's picture
pir8don
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Re: WHAT'S WRONG WITH DEBT?

We need people to ask the obvious questions. If we can't answer the question in a single short sentence then who is the more inadequate?

Don

________________________________________________

Diversity is our greatest strength, complacency our greatest weakness.

krogoth's picture
krogoth
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I have no problem with Debt

I have no problem with Debt- I don't have any.

 

 

 

pir8don's picture
pir8don
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Re: I have no problem with Debt

Just finished reading The Black Swan so it is fresh in my head. If our community intention is to spread the word then the best place to put our attention is to where the word is heard but not understood. These people are a goldmine of feedback to help us get better at communicating with our audience. From the ground up not from the top down. I guess that means attending to the most unwilling or unable to get the message. These would be grey swans and if some pop up in a small group then fractal modelling will suggest that a larger group has a family resemblence or afinity. The possibility of many more.

Don

krogoth - thats ok you can have mine anytime you want - just ask

joe2baba's picture
joe2baba
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Re: WHAT'S WRONG WITH DEBT?

I don't know why Americans seem so hung up on Government debts.  Debts are debts, and they are ALL bad.  WHY?  Simple.....  it works like this: /quote]

well i don't know why aussies have such issues with americans but that is another forum topic.

we have issues with debt because we have more of it than anyone on the planet .........more than anyone has ever had ...............ever. because 25% of what we pay in taxes is going to pay just the interest on the debt not the principle. because it is costing us in terms of our ability to invest.  because we are special.............we are for the time being the worlds reserve currency . the land of oz does not have that distinction so i understand why you do not why we are HUNG up on government debts. we are hung and not you.

the person did not get some of the stuff in the crash course and did not get my clarification, i apologize on her behalf to you.

i hope that clears up your confusion.

 

krogoth's picture
krogoth
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Thanks but no thanks

Thanks but no thanks-

It took me a long time to become debt free, and remove my mouth from the bank tit

I have been bank tit free for a long time now

 

 

 

FactFool's picture
FactFool
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Debt is not inherently bad

Debt is not inherently bad (as the crash course states.)  It depends what you use it for (as the crash course states.) Use a household metaphor here: if you take out debt for a house and a student loan, that's a good thing.  If you go out for pizza night on your credit card, that's a bad thing.  So it is with governments:  if you borrow money (from whoever, it doesn't matter if it's the Chinese) to build roads and pay teachers, that's a good thing.  But if you borrow money to go to war with people who never attacked us then rebuild their nation for decades afterwards, that's a very bad thing. The whole debt debate is muddied in the United States as this is the only country in the world that does not produce a national balance sheet, i.e. a list of assets and liabilities, from which we could determine whether the level of debt is acceptable, i.e. balanced by the assets purchased with that debt.

The crash course warns of the danger of compound interest, but only later and quite mildly reminds us that the interest rate must be set off against the inflation rate.  So, if you're paying 4% interest pa and the inflation rate is 2% pa you are paying an effective, or "real", rate of 2%.  That's a simple example, but the reality is even better: The US Treasury is currently issuing bonds at almost 0% interest while inflation is 3.6%, so we are currently borrowing at a real interest rate of about -3.6%. That's a pretty good deal, and I say we should take much more of this free money from whoever will lend it to us - provided we use it for investment (and for retiring old bonds issued at a higher rate, exactly as you do when refinancing your house.)

The crash course also warns that we won't necessarily grow and/or consume sufficiently in the future to repay or even service the national debt.  That is neither valid economics nor accurate human behavior.  We will always spend money, roughly everything we have.  Even countries with a very high savings rate such as Italy at 20% still spend the rest, i.e. 80%.  Consumption is not going away. A 10% savings rate is more typical, with the US at 7.3%.  Roughly speaking, that leaves about 90% of world disposable income for spending - and the BRICs have barely yet begun to spend!  As to economic validity, we have historically always borrowed, grown and consumed despite massive shocks (war, Depression, inflation, the Dark Ages [Sarah Palin, anyone?]) and there are no grounds to presume that will not continue. Grounds to assume that we will continue to grow are population growth (ok, that doesn't affect per capita growth) and the ability of humans to create efficiencies and invent things combined with our inherent human nature to achieve things in our lives, fulfill ourselves, be productive and accumulate wealth.  There, I said it: greed is good.

As to repaying the debt, we don't have to.  Unlike households, the US doesn't die at age 80, so we can simply keep recirculating debt as long as we want to (provided that we spend it on investment, not agricultural subsidies to giant, profitable corporations.)  Many folks have commented here that the problem with debt is that it has to be repaid.  It doesn't.  Unless the bond holder calls the note (assuming they're callable, which T-bills are not,) and there are willing lenders (which there are an endless number of - a US Treasury Bill is infinitely more secure than any bank account,) we can just keep issuing new or replacement T-bills.

We would have less need to borrow for any purpose if we had higher revenues, of course.  The “have you ever worked for a poor boss” fallacy is wrong, and the “money in boss’s pockets will lead to hiring and investment” is also wrong. Just ask Warren Buffet. Businesses will purchase equipment and materials and hire workers - and gladly borrow at interest to fund these purchases - when they perceive there is a market for the products and services these investments and expenses will buy.  Right now, businesses are doing extremely well (check the stock market, business profits and cash-on-hand,) yet hiring is low (actually, there is very large demand for certain skills, indicating a failure of investment in education - there are 13 million unemployed, but 3 million open positions still unfilled) simply because businesses don’t think they will gain more profits or increase their stock price buy producing more stuff.  The issue is not that there isn’t enough money, it is that there isn’t enough of a market. 

One point I would [qualified] agree with the crash course and many commentators on is that money we spend on debt service (and repayment) could be better used elsewhere.  That is true, but the qualification is one of trade-offs.  Use the household metaphor again: if you borrow $100,000 for a house and repay $1,000 per month, it is true that you then cannot afford a new kitchen.  But if you later sell the house for $200,000, then it was a good trade-off to forfeit the kitchen.  Clearly, if you take a home equity loan to go on vacation but later can’t afford to fix your car so that you can get to work, that would be a very bad trade-off.  So it is with government finances. Indeed, that gives a teeny peek into the whole question of government activity in the economy and the problem of crowding out of private activity.  But enough for now…

Swish's picture
Swish
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Can I just ask the

Can I just ask the following...now we are talking about debt and if it matters or not. I am very debt free, live my life simple and have everything I need. I rent an apartment, all very modest. So...actually I am fine with that.

But then I think...say you have a very nice house, on a very nice (safe) location with a very nice car and all the things you need (and perhaps not need) to have a very comfy live. You don´t know about the crash course so you are almost buried in debt but since you can pay the interest everybody is fine. That´s how most people live..right? Now at a given moment the whole (world) economy comes crashing down (I think that is a very likely outcome).....nobody knows how this plays out but I can see a scenario in which it really doesn´t  matter anymore how much debt you have. All debt simply cease to exist. In that case it pays off to be in debt. I mean...they can not arrest all people or evict all people simply because they cannot pay there debt because there is no longer a functioning economy. And I can´t see people being that stupid to replace the old economy with a new old economy......just a thought.... Smile

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