Jun 202014

All the money in your bank account right now was created from debt in one form or another.

philosoraptor.money_The government creates money by issuing debt (bonds.) It then pays this money to public service employees, and the money eventually gets spent into the economy. The money from private sector jobs comes from debt as well. Small businesses often go into debt (business loans or re-mortgaged homes) to start up a company so they can pay their workers. More established companies pay their employees with revenue from selling products or services :) But in order to have sales in the first place, they need customers. And most consumers spend money by either using debt (credit cards, and other consumer debt) or by using cash from their wages, which as explained earlier, eventually leads back to a source of more debt. When people sell their homes, usually most of the money would be paid by using debt (mortgage.)


Whenever people get a loan from a bank, such as a mortgage, the overall money supply in the country grows, which translates into more economic growth. But that also means more people will be in debt. Even central banks acknowledge this to be true.

whenever a bank makes a loan, it creates a deposit in the borrower’s bank account, thereby creating new money.

~Bank of England

That “deposit,” is just a digital balance that appears in one’s bank account. It can be withdrawn as cash and spent. But the debt will remain until the money is paid back. We can’t introduce new money into the economy without also creating the same amount of debt. Similarly every time someone pays back a loan, money is destroyed along with that debt.

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Mar 272014

Time again to learn about you, the readers :D Last year I ran a poll asking about people’s household debt levels. Thanks to everyone who voted (^_^) Results below.


Wow, about a third of readers are debt free :) Congrats!

About 1 in 20 owe a million dollars or more :? That’s probably not hard to believe since a typical two story house in Vancouver can cost over $1 million ;)

Canadian individuals in total have about $1.36 trillion of debt, and this number has been consistently rising due to sustained low interest rates. This means that on average each man, woman, and child, owes about $39K each if split evenly. So good job if you have less debt than this :)

I’m in the $500,000 to $1,000,000 debt group which is good because why be “average”  when we can be extraordinary? :D I think people go into debt in order to solve a problem, or make life better. And almost always taking on debt will lead to a positive outcome, enhancing our livelihoods :D I’m not even talking about investments. The 3 largest forms of debt (most of the $1.36 trillion) are mortgages, student loans, and car loans.

Who has mortgages? Home owners! :) and studies show that on average people who own their homes over time have a higher net worth than renters. Who has student loan debt? People with higher education! and studies show an investment in human capital is one of the best ways to open up doors to new opportunities :) Who has car loans? Drivers! And anecdotally I can say that switching from public transit to driving my own car for commuting to work and grocery shopping is one of the best lifestyle decisions I’ve ever made :) Maybe debt is just a necessary evil that we need in order to make society a better place ;)

Random Useless Fact: The colours of the Canadian bank notes resemble the international LGBT pride flag (rainbow flag.)



Sep 212013

Over the course of our careers we are expected to make more money as we become more skilled and experienced in our field :) But with everything from food to housing becoming so expensive some people may be led to believe that we will always be losing real purchasing power because our pay raises will never grow as fast as the cost of living.  These people aren’t wrong. Here’s a graphic I put together 3 years ago that shows how prices and incomes have changed in Vancouver in the 20 years between 1990 and 2010.


Notice how the growth for expenses vs incomes are way out of whack? 8-O Are we slowly becoming poorer without even realizing it? But hold on a tick :-| The math doesn’t quite work out. Today we can still afford to buy the same amount of food, the same sized homes, the same means of transportation, etc, as we used to. So how can Canadians put up with the substantial increase in living expenses if we don’t have the same income growth to support it? The answer lies in the chart below.

9-13-cdn-debttoincomeAh, now it makes sense 8-) Our increased cost of living is mainly due to excess credit in the economy that wasn’t there before. If pineapples were the currency on an isolated island then the more pineapple trees there are, the less value each fruit will have to the local residents. Similarly this extra debt load (or credit) that we’ve been living on puts upward pressure on prices all around us because each unit of currency itself ($CDN) is worth less, which means we need more of it to buy anything. This is why we have inflation :)

So what can we do to limit our exposure to debt, while protecting ourselves against inflation at the same time? First, we must pay off all our high interest debts ASAP, like those 19% credit card balances. Next, we should slowly accumulate some precious metals like gold or silver, up to around 5% of our net worth. Finally we must reassess our finances from a long term perspective. For example, some people have a $12,000 emergency fund so they can sleep well at night. But from 1990 until now I haven’t ran into a single financial emergency yet. *knocks on wood* Over that 23 years an emergency fund would have lost more than half it’s original value. Meanwhile, if the money were put into a mixed bag of investments like stocks, real estate, gold, and oil, it would be worth twice as much today after calculating for inflation.  Continue reading »

Sep 092013

The Dilemma

A lot of people across the country including a few of my acquaintances like Cait, Jess, and Brian, are going back to school this fall. But with the unfavorable employment prospects for younger workers some people may be hesitant to take out student loans and get back into debt. Is improving your human capital through further education a good reason to take on debt? Since the cost of education, even just for textbooks, is growing every year if anyone is thinking about going to school it’s probably better to take those courses sooner rather than later.


The Changing Times

In 2002 there was $300 billion Federal student loans outstanding in the US. Today it’s more than $900 billion. Sacré bleu ( ゚д゚)!! Part of this dramatic increase is due to the extended period of low interest rates which creates incentives for people to take on more credit (loans.) The other reason is that the western world feels more entitled to creature comforts and luxuries than ever before. Of course I’m generalizing but when our parents went to college their dorms were cheap and dirty. They drank cheap beers. They ate cheap pizza and baloney sandwiches. They saved more of their own money to pay for things instead of using credit cards, or relied on the government for financial aid. If they didn’t have enough cash to buy a TV, they simply wouldn’t buy it. Period. But today young people like myself live in nice apartments. We eat steak, sushi, only drink quality beers, and enjoy posting photos of our Bloody Caesar on Facebook for the world to see. Some people even purchase gym memberships on their credit cards, which puts them further into debt. But it’s okay, because they have to impress their friends right? ;) 13-09-gymyolo

There’s a cost to everything. The older generation funded their lifestyles by saving and producing real goods and services. But today most of our lifestyles are funded by debt. The whole world is changing. Debt isn’t seen as a bad thing anymore. It’s actually necessary if we want a normal life. As long as we go into debt for the right reasons and not waste it on frivolous spending then every dollar we borrow today will be an investment in our future. Corporations WANT us to keep spending. Universities WANT more enrollment. Financial institutions make their profits via interest on our debts. Even our governments (despite what they tell us) WANT us to continue carrying debt because if too many people stopped borrowing the economy would slow down.


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Mar 242013

Jérôme Kerviel worked for the second largest bank in France, Société Générale, until he went rogue and made a lot of fraudulent trades. He cleverly execute trades by sending fake emails from hacked computers. If his trades were to have been successful he would have became very rich today. But with great opportunity comes great risk and unfortunately for him his unauthorized trades costed the bank €50 billion and made him nothing :( Not only has Mr. Kerviel been sentenced to 3 years in prison, but when he gets out in 2015 he has to pay back $6.3 billion to his former employer (O_o) He is now the most indebted person in the world.  Not even winning the lottery can save this man now. I owe some money to the bank too, but not nearly as much as him.


We often hear about the ultra rich like Mexico’s telecom businessman Carlos Slim, currently the wealthiest person in the world who’s worth $73 billion USD. But we never hear about the people on the opposite end of the net worth spectrum.  Obviously the 35 year old Mr. Kerviel isn’t expected to pay back all $6.3 billion in his lifetime, and the debt will probably be forgotten once he passes. So what will most likely happen is a percentage of any income he makes from now on will be paid towards a fund to cover his $6.3 billion fine.

I think what we can take away from this story is to be careful with how much risk we take on as it could leave us in a whole lot of debt and tarnish our credibility, and even future earning potential.  And on a side note maybe the whole idea of net worth isn’t a reliable barometer to define how financially well off someone is. A homeless person with no savings or financial assets is literally over 6 billion dollars richer than Mr. Kerviel, at least on paper. But because of Kerviel’s connections, education, and work experience, I don’t think he’ll be living on the streets any time soon. Maybe the idea of quantitizing wealth, (AKA net worth,) isn’t to compare how rich or poor everyone is relative to each other, but is only meant to gauge how each individual is progressing with their own personal finances :D