DEBT – Good Idea or Bad Idea?
One topic EVERYONE has an opinion on is the Global Financial Crisis. People from America to Ireland to Europe to Asia, everyone has an opinion and I am sure you have heard them all before – Bad banking, Greedy Capitalists, Corruption, lack of Government oversight but one I read everywhere is that people got carried away and incurred high levels of personal debt, debt they would never pay off, and that they were extremely irresponsible. Some people think borrowing is bad regardless of the situation and that the best way to exist is to pay cash for everything. So in the words of William Shakespeare – To borrow or not to borrow, that is the question. This is not a yes or no question and the question needs to be divided up into sections:
Government Debt: There is a liberal theory that says government debt is a good thing and suggests that it is the best way of getting value for your money. The argument is based on the fact that $10 does not buy today what it bought last year or 10 years ago. Hence the argument is, borrowing and spends today and it becomes cheaper to repay in the future. While on merit is a logical argument it always omits 2 very important points: Firstly that it is immoral to buy something today and have someone else to pay for it – with government debt we are burdening our kids and grandkids with an obligation to pay off OUR debt. Secondly it’s placing a bet – a bet that the currency will devalue in the long term but also devalue enough to cover the costs of borrowing. No-one wins with this continued devaluation of currency but it will have the worst impact on the most vulnerable in society.
The other aspect about currency devaluation is once you’re on this path, it is virtually impossible to get off it. America is fully aware of one of the policies to help this devaluation – Quantitative Easing- the printing off of vast amounts of money to flood the economy and help it grow. The destination of this road is Hyper Inflation where prices rise out of control, currency is worthless and GDP and the economy shrink. It is a total disaster for everyone, especially when you have a national debt of over $16 Trillion.
I hope you agree that a balanced budget is crucial and moral for the government to maintain a strong economy. So should the government ever run a deficit? It is acceptable but only on very rare occasions like a national crisis where emergency funding is needed but they should be paid off in full as quickly as possible and not take any longer than 5 years. The only other occasion is a recession or depression and the consensus is a stimulus is needed – however a stimulus should be a straight tax cut across the board to increase disposable income and get the economy moving again. There should be no increase in spending (unless if benefit claims go up due to unemployment etc.), but a stimulus is not an excuse to increase the power of the Federal Government like previous stimulus have done. Again any deficit from a shortfall in taxes should be paid off as quickly as possible and in no longer than 5 years.
I also think Congress should adopt a Thomas Jefferson amendment on budgets and taxes – for the emergencies I mention above, a straight majority vote is not good enough and would require a 2/3 vote in BOTH the house and the Senate.
Personal Finances: As a Conservative I believe this power always belongs in one spot – the hands of the individual. No-one has a right to say you cannot or should not borrow if credit is available to you. However we again need to break personal finance down – finance for a house and a business should be treated separately. Very few people are in a position to buy a house with straight cash leaving many with little choice but to get a mortgage and wasting money on renting is not always a smart option. However we need to explain to people who get a mortgage and a family home that the idea is for a life- long investment and not something for a couple of years. Today it is popular to speak about people living in negative equity houses but regardless of the price you buy at, history shows the chances are extremely good by the time your mortgage is paid, you house will have increased in value.
Likewise with your business, if you are prepared to take a chance and be responsible for your actions regardless of success, then you should consider borrowing to start or expand your business. America has a great history of people who borrowed and became successful, and without borrowing some of the things we take for granted today might not exist. None are greater than the story of JP Morgan and Thomas Edison and the creation of the light bulb but also stories of people expanding to settle out west at America’s founding and even the Continental Rail road. These great projects would not have happened with borrowing or debt.
Other Personal Debt: Here is where I think parents need to play a key role and where most critics have a point – most people and mostly the younger generation (myself included) enjoyed the decade where credit was freely available. You could get anything you wanted, when you wanted and how you wanted all with the help of a little card and usually around a 20% interest rate. You needed the newest phone, fancy holiday, or new clothes – our credit card was our best friend and while we made repayments, we rarely cleared it before the next purchase. I believe parents have a role to teach – self-sufficiency and responsibility along with common sense because the simple fact is you could do a lot more if you saved and then went on holiday than pay by credit card or a personal loan. After all why pay more for a holiday on credit card when you can just save and buy it with cash?
Closing point: While some will always be for or against debt, there are two points with debt that are rarely discussed on both sides. Firstly is the jobs the credit card and banking industry provide and the taxes they contribute to society. Secondly the people who benefit from providing personal and government debt – it is not only millionaires and billionaires but also investors of all sizes and even people who have a private retirement plan. If you take credit away, you limit the opportunities for everyone and no one will win.