Sunday, August 23, 2009

Debt is Bad

By Ray Hoese

I thought about calling this piece "Nature Abhors a Debt" -- because that's what it comes down to. Disrupting the natural order of things, which is never good. I'll get into that later.

I stuck with the title "Debt is Bad" because it's a simple truth that has been brain-washed out of our culture. And we need to remember that debt is bad. No matter what kind, no matter where. We (our TMZ-watching, McDonalds-eating, global-warming-fearing culture) has been marketed to so heavily by banks and financial institutions, that although we say we "know" debt is bad -- our behavior says we like debt. And why not, we are told every day that "debt is good".

Commercials on television urge us to take a day off work and go to the aquarium with our kids -- with our Visa card. Or take our spouse on a long-deserved vacation to a Caribbean island. Or get that mattress now and PAY NO INTEREST TILL NEXT YEAR!

And now our president is telling us that debt is good. His words say "debt is bad." But his actions say otherwise. A lot of other politicians have been saying it too.

Debt is bad. Very bad. Because you are literally borrowing from your future paychecks to make payments. And when you do that, you typically double the price of the item being purchased. That's right. You double it. Anyone who has bought a house and taken 30 years to pay off their mortgage knows if the house was $100,000, by the time they paid it off, they had paid an additional $100,000 in interest. And that can be acceptable for something like shelter. You have to pay for it anyway, so there is something to be said for taking on that enormous interest load. But it is still bad.

Bankruptcies in the United States saw an incredible surge in the last 20 years, correlated directly to the increasing number of credit cards. And now, people do the same thing (double the price of goods) with credit cards, for things like clothing and food. Most of us know the math by now. Credit cards, thanks to huge interest rates, huge late penalties, huge over-limit penalties, means a pair of $50 shoes can easily cost you $100 if you use a credit card and don't pay it off within two weeks of buying those shoes.

In the last decade or so, well-meaning politicians and government regulators who wanted everyone to own a house, pushed the practices of the credit card companies over to the mortgage lenders. Give out mortgages like credit cards was the message. And guess what happened. They marketed mortgages just like they did credit cards. They preyed on us because they can and that's how they make money. With a drug-pusher like mentality. "Go ahead, try it... first one is on me..." And people, because they are... well, human, went for it just like they went for credit cards. But this wasn't $500 here and $1500 there. This was hundreds of thousands of dollars bundled into billions of dollars of debt.

And the house of debt collapsed. Why? Nature abhors a vacuum. Debt is a vacuum. An absence of something. A hole. Nature always fills in holes. Or spaces. Doesn't matter where. Nature don't care. That's how it works. If the holes are made by termites in the supports of a house, eventually the house collapses. The spaces made by the termites are structural vacuums. I hate to be repetitive, but debt is an absence, a vacuum. And a little can be tolerated here and there. But any more than a little, and poof -- collapse. It takes a while to build up to, but collapses are typically instantaneous. One big boom. The result of years of building to a critical threshold. Just like the recession we're now in. Years and years of housing bubble driven by all the buyers -- who should not have become buyers. But they did because loans were easy to get. Too easy.

Oxygen debt. We can all hold our breath for a minute. Some longer. But after a few minutes, well, nature closes up shop and moves on. Calorie debt. The strongest athletes in the world, like ultra-marathoners and riders in the Tour de France, show incredible stamina over great distances. But if they push it (and they do) eventually they run out of the chemicals that keep their bodies going and they collapse. We love watching it on TV. But it's no fun when it happens to us. And we watch our friends or ourselves spend, spend, spend -- using credit cards. And it's no surprise when bankruptcy is the result.

Debt is a bad idea. Acceptable-bad on small scales, and a really bad idea for anything more. Collapse is the inevitable result if you go overboard. The news that our 10-year debt forecast is now at $10 Trillion is overboard by any accountant's calculations.

Financially successful people share many common behaviors. One of them is that they hire good accountants, and then they listen to them. They do what they say. Too bad our government doesn't listen to their accountants.

And though the Democrats of late have taken to increasing debt like drug-addicts given a new Visa card by their dealer; plenty of Republicans were, are, and have been very bad debt-pushers for the last 20 years too. I've got no blinders on about that. That's why I have a very poor view of Congress. They are dishonest, negligent, and naive. Stealing from our future paychecks that pay taxes and fund this country.

There is a collapse coming. The collapse has two possible forms. The collapse of political power -- and the various politicians who are driving the debt. They could be driven from office by voters who realize the debt is bad and getting worse. The other option is that our financial structure as we know it will collapse into a true depression. Bread lines and all.

I'm hoping for the first one. And voting that way too.

Post Script to send to the uninformed: (Why debt is bad in 100 words.) There are two ways to buy something: pay for it now, or pay later. If you set money aside for 10 months and then purchase something with it, you then own it, free and clear. If you purchase the item first, then set money aside (giving it to the lender) over months, it typically takes twice as long and costs twice as much. It's that simple. Worse, you never really own it until that debt is paid. Until the vacuum is filled. You may think you own it becasue it sits at your house, but nature knows better. (And so does the repo man.) It is nearly impossible to financially collapse doing it the first way. It is very easy to financially collapse doing it the second way.

And yes, I am a Dave Ramesy student. Amen.