Jan 142015
 

The basic concept of debt is simple. It’s when someone borrows money from another person. But once we start looking at different forms of debt such as sovereign debt, treasury bonds, mortgage-backed securities, demand loans, etc, it can start to sound like a different language to many of us. 😕

Even the money in your wallet right now is just another form of debt. It may not be your debt but if you trace back that money to its initial point of creation you’d discover who’s debt it belongs to. 😉

Year of the Debt

It has come to my attention that there is a lot of misinformation and confusion about the topic of debt on the internet. That’s why I’m making the proclamation that 2015 will be the year of the debt. I dedicate this year to write more about debt and its impact on our lives. I have even created a new section on the blog that’s all about debt.

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Most consumers are told that being in debt will hold them back from spending, investing, and living the life they want. But this is not entirely true.

Canadians now have more debt than ever before yet our average household net worth continues to reach record highs. So debt and wealth doesn’t have to be contradictory. In fact, often times debt can increase our financial well-being.Alberta has the highest household debt of any province, but they also have the highest household incomes. 🙂

Last year the Government of Canada issued $1.5 Billion of debt in the form of a 50 year bond. The Finance Minister says they are continuing to deliver on their “commitment to reduce refinancing risk and lock in low-cost funding for Canadian taxpayers.

Investor and entrepreneur Kevin O’Leary from Dragons’ Den publicly announced that most of his personal portfolio is invested in debt securities. The man is in his early 60s and he loves debt! Only a portion of his own money is in the stock markets.

The Debt Market

Debt can be traded between investors just like stocks. In fact, the debt market is much larger than the stock market. Small time investors often talk about buying stocks, but the millionaires and billionaires usually trade debts. Data from the bond and treasury markets help set monetary policies. And private banks like Wells Fargo and Royal Bank calculate their mortgage rates based on corporate debt yields. In other words, the public debt market is what really determines our mortgage interest rates, not the government or central banks.

Local communities use debt all the time to buy services and programs they can’t afford, but still want. Susan Myers, a city councillor from Sault Ste. Marie, Ontario states that “cities without debt and poor infrastructure are worse off than cities with debt and good infrastructure. We will always have debt if we are going to continue to improve facilities.

In its 2012 budget, Mississauga, ON used debt for the first time to fund city projects. It borrowed $21 million to retrofit street lights with more energy efficient LEDs which will result in long-term savings based on reduced electricity and maintenance costs, with full payback expected in 6 years.

South of the border, the largest wireless operator in the country borrowed $49 Billion in 2013, the most debt ever issued to a company. American oil and gas companies have also ventured deeper into debt in recent years, increasing their borrowings by 55% since 2010, to almost $200 billion today. 😯

So rather than it becoming a liability, the Minister of Finance, Joe Oliver, literally explained that going into $1.5 billion of long term debt is actually a way to “reduce” the risk for Canadians. The investor class uses debt to invest and become even richer. Politicians admit they will “always have debt.” Businesses of all sizes are borrowing records amount of money to stay competitive. Even conservative Republicans in the U.S. are expected to vote in favor of raising the debt ceiling so America can borrow more money.
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And yet somehow when it comes to personal finance for the 99%, all we seem to hear are suggestions of how to get out of debt, ways to be debt free, and why debt is bad. 😐 Hmm, but let’s see. The average consumer who eschews debt is no further ahead than where he was 5 years ago. Meanwhile those who actually use debt as part of their financial strategy in one way or another like millionaires, politicians, big time investors, governments, and businesses, have all done fairly well, for the most part. 🙂

Not just a four letter word

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The truth is debt isn’t evil. It’s just a part of life. And ignoring it doesn’t make it go away. The significance of debt goes far beyond just the car payments and credit cards that consumers see in their immediate lives. Even if you are debt free, other people’s debts can still affect you. If home owners can’t pay their mortgages the tax payers are on the hook. The only way to truly beat debt is to understand it.
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Understanding removes uncertainty which leads to confidence and a sense of control. Once we can see debt’s true potential we can use it as a financial tool, just like how the rich and powerful do. 😀 Borrowing money to invest is one way to use debt, but besides financial leverage there are many other ways for debt to enrich our lives. 🙂 Instead of blindly paying off debt as quickly as possible, the smarter thing we should do is to manage and control our debts by learning from others who already understand how to play the debt game.
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So join me this year as we dive into the fascinating world of debt and explore all its secrets. 😀

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Random Useless Fact:
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8 Comments on "Year of the Debt"

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My Road to Wealth and Freedom
Guest

Hey Liquid, I like that you’ve proclaimed 2015 as the “Year of Debt”! You make some interesting points about how the elites in our society use debt to their advantage by buying appreciating or income producing assets. The problem for the other 99% seems to be that they tend to use debt to finance depreciating assets like vehicles etc.

JR
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JR

To add to your interesting factoid about the world debt markets being larger than the world equity markets:

I read once somewhere that Common Law structured countries have a significant proportion more equity markets (vs. debt markets) than Civil Law structured countries. Example: England vs. France

Asset Grinder
Guest

Whats your long term plan with debt? Do you always plan to cary some a long as you can make a higher return with some?

RICARDO
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RICARDO

Running a HELOC for investment purposes @ 3% interest. So the interest is tax dedcutible but my gains are taxable. I haven’t bothered to figure out exactly how much i am making, but as long as the divs cover the interest AND pay down some of the principle I am happy. Also the principle has to be more than the loan. Kind of obvious if you are covering the interest and some principle with the divs. As long as the interest is covered and the principle is being reduced I won’t complain. Hoping for low interest rates for as long as possible to lower that HELOC.
Approx $3K interest last year, approx $14K divs. So Imade approx $11K taxable which paid down the HELOC

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