Debt – Good or Bad? It Depends…

A recent story in the Wall Street Journal brought to mind – once again – the two-edged sword which is debt: it can cut for you and it can cut against you. It all depends.

An inability to borrow to bring future income into the present and use it wisely is a curse of being poor. Lack of credit keeps people from accessing capital with which to take risks and create wealth.

Hernando de Soto wrote about the “mystery” of capital as a magical force which could propel the poor into prosperity – if only they had assets against which they could borrow. We have seen the growth in income made possible by microcredit loans.

At the same time, too much debt brings too much risk and often leads to financial failure. Poor people who borrow against paltry income just entrench themselves in poverty, losing their few assets to the money lenders and falling into wage slavery.

As has been said many times, asset bubbles get bigger and bigger through debt. Irrational exuberance is never so enticing as when you are speculating with other people’s money, borrowing and betting that market prices will just keep on rising.

Debt is necessary for wealth creation and growth, but excess of debt leads to loss of wealth and recession. Too much of a good thing turns good into bad. One drink of wine may be tasty and even healthy, but too many drinks make for an alcoholic.

As the Greeks and the Buddha advised, keep to the middle path of moderation.

The Wall Street Journal also reported that for the American middle class, the majority of American voters, incomes have largely been stagnant for two decades while cars, college education, houses and medical care have steadily become more costly. Debt has made up the difference between income and consumption expenditure.

U.S. consumer debt is now $4 trillion, the highest ever.

But thanks to low interest rates, courtesy of government provision of credit, households spend only 9.9% of income on debt service.