Debt is Freedom
I once read in a book, “the borrower is slave to the lender” Proverb 22:7. But I don’t see it that way. I think debt is simply a loan between a borrower and a lender which usually involves a contract to pay back the loan over time. Nobody is a slave to anyone in this voluntary transaction. If I have a car loan and continue to make my payments on time, then the lender can’t tell me what to do with my life. It can even be said that I’m less of a slave now because I’ve gained more personal freedom by having a reliable vehicle, which wouldn’t have been possible without going into debt in the first place. 🙂 So hooray for convenient transportation. I’d like to give a big shout out to my car, for giving me the drive I needed to succeed.
Illusion of Debt
It’s often assumed that more debt is bad and leads to more financial risk. But debt is a funny concept. Japan has a debt to GDP ratio of 230%. This means Japan owes 2.3 times more than its annual economic output. Holy frankfurter! On the other hand, Canada’s debt to GDP ratio is a much more manageable 86%. Naturally we would expect Canada to be in a better financial position to take on additional debt. However, as of this post global lenders are demanding 5 times higher interest rate when Canada borrows money than when Japan does.
Part of this disconnect between risk vs return is due to central bank manipulation. But debt itself is not always what it seems. Consider the following comic strip I found on the internet awhile ago.
Wow, that German traveler sure took his sweet time inspecting that hotel room. I wouldn’t be surprised if he secretly took a nap in there. Anyway, the moral of the story is that the stress of financial debt exists more in our imaginations than in reality. This illusion of debt prevents us from seeing what’s really important.
The little Greek village went from having loads of personal debt to a debt free status! even though no economic activities happened. That’s because one person’s debt is another person’s asset. And everyone has assets. Even human capital is an asset because it can produce income, lol. The average consumer needn’t worry about living on credit. Just like in the comic, most of us have more assets than debts. So getting out of debt doesn’t objectively improve our quality of life. But many people still think it does.
Another great point the comic demonstrates is how important liquidity is to an economy. All it took for everyone in the village to get out of debt was to infuse temporary cash into the the system. This is essentially how bail outs work. 🙂
Random Useless Fact: