Primer on Debt

Some years ago a campaign slogan for a candidate was, “It’s the economy, stupid.” The obvious connotation being that only a dolt would miss the major theme on which to campaign and that theme was worsening economic conditions. For years the originators of silly slogans like that one have won the hearts and seats at the tables of the seldom watched cable TV shows featuring talking at you heads. Now they are being replaced by the clever fellows who bemoaned the accumulation of deficits and debt by GWBush but quickly justify the exponentially larger debt buildup by their current leader as being necessary for the times. A really silly justification of this position can be found in a recent essay in the New Yorker magazine written by one of these cleveristas by name of HHertzberger.

So, what’s wrong with debt? Is it safe to say today, “It’s the debt, stupid?” Or is it OK to disregard deficits and debt in the words of RCheney (just think HHertzberger what a bedfellow you have chosen) and pile it up to keep the citizens happy.

We are told that debt did in the Roman empire along with other forms of over-extension. de Tocqueville said in 1830 that debt would do the US in. We know that bankruptcy courts would tell us that debt is the cause of most bankruptcies. We hear tell of people piling up credit card debt and mortgage debt and medical bills and automobile debt and boat debt and so on until they are unable to meet the required periodic payments. So, they “drown in debt.” Not good.

But we also know that with debt we are able to buy a house long before we could buy a house with cash. We know that we can buy an education with debt and earn much more over the years and pay the debt off with the additional earnings.

So, is debt good or bad or what? Ask yourself, "Is fire good or bad?" Not bad when it cooks your steak on the grill. Not good when it burns down your house. Same with debt.

TheFundamentals has long been a student of debt service and cash flow and levels of debt. Debt service is simply the ability to use cash flow to repay debt per contractual terms plus the interest cost of the debt assuming you are not working in the world of Islamic law. (TheFundamentals will address America's apparent gravitation to this latter concept in a later essay.)

So, what makes debt good or bad? Well, if your are the debtor and you intend to repay the debt, the principal criterion of a good debt would be the debtors ability to repay per the contractual terms. If you are the lender that would also be a good definition. Ability to repay per the terms of the debt contract.

Now TheFundamentals has been concerned with the level of debt in the US of A at all levels – local, state and national. Can these debts be repaid per the contractual terms? In a word, NO. They cannot be repaid per the contractual terms unless they can be refinanced - pay off old debt with new debt. Ergo, Ponzi arrives on the scene.

What’s wrong with constantly issuing new debt to pay off old debt? One major problem. The debtor is subject to the whims of the lender. Whims are described as terms of renewed debt or availability of renewed debt. So, the ever borrowing debtor transfers control to the lender.

Well, the debtor could just not repay. Or repay with diluted dollars. Now that's a clever idea. Say the heck with you Mr. Lender. If those possibilities seem likely watch the costs of borrowing rise. Then how do you service the debt? How do you refinance the debt?

You live in a country where the debt you owe cannot be repaid. You have lost control of your future. You will continue to borrow as long as fools continue to lend. Then what?