Tag Archives: debt

On going list of the costs of Debt.

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This is an ongoing list of the costs of Debt which I shall add to as time goes on. Many items will seem to be repeats or the same thing in different words and some are just subtly different. They are so just forgive me. This is more of a brainstorm than anything else. If you have anything to add than add it in the comments and I will add it to the list when I get around to it.

Interest

Fines

Fees

Reputation Risk/Loss

Over inter-connectivity

Non-intuitive nature of Compound Interest

Greater Debt than necessary in society due to Debt Chains and Debt Loops

Puts people financially in the Red

Puts Businesses Financially in the Red

Budget Stress

Human Stress

Increased investment in non-performing Assets

increased investment in non-performing Businesses

Increased investment in non-performing Ideas

Amplifies Business cycles

Amplifies budget swings in non-fixed expenditures

Contributes to Divorce and broken Families

Contributes to stress related health problems

Contributes increased death resulting from health problems and suicide

Contributes to financial related health problems

Contributes to stress related relationship problems in people’s personal lives

Contributes to stress related relationship problems in people’s professional lives

Psychological costs of debt

Appearance of financial weakness

Fails to directly promote wealth creation

Ties up money

Lost opportunity costs

Investments made by shortsighted borrowers less likely to be as good as an investment as those by farsighted investors

Allows overly easy access to capital resulting increased poor usage and subsequent problems

Government “investments” via debt are less responsive to the Market feedback loops that keep good investments and eliminate bad investments resulting in less real wealth creation per dollar invested(if any).

Fails to align the interest of the Banks with that of their clients

Fails to maximize the profits of Banks

Fails to help banks build the wealth of their clients while at the same time building theirs

Fails to have unlimited profit potential

Remains overly dependent upon conditions of the economy as a whole and interest rate rather than the economy of a banks clients

Fails as a product to significantly differentiate itself from other credit products creating a commodity, increased competition, and less profit for banks.

Subjects Nations to more difficult financial choices than need be

Increase the Gap between Rich and Poor

Contributes to National financial instability

Contributes to Business financial instability

Contributes to Personal financial instability

Slows economic growth

Divides the interest of the Fed between creating enough flowing currency for people to meet their debt obligations and creating enough currency for  economic growth. Unless they happen to be the same they cannot do both.

Lending with the fractional reserves system leave part of currency creation in the hands of the Fed and part of it in the whims of the banks leading to instability and improper currency management.

Enslaves the Borrower to the Lender

Increases risks to Borrowers

Does not adjust well to fluctuating revenues

Inflexible

Puts people in difficult to recover from financial conditions

Places the burden of responsibility on the least responsible party…the borrower for repayment

The hidden costs of debt are indeed a cost of debt making for poor decisions

In the light of alternatives (joint investment and other non-lending forms of financing) credit financing has the greatest problems and the least benefits.

Costs of Bankruptcy(lawyers, courts, etc)

Costs of Foreclosure(lawyers, courts, etc)

Costs of Collection(lawyers, courts, etc)

Contributes to crime

Slows the flow of Assets through the economy

Invests based on collateral and (current) ability to make payment rather than on the quality of the underlying investment.

Leads a large percentage of financing to be in non-performing assets, businesses, people, and ideas which leads to slow economic growth.

Comes at the expense of focused real wealth creating joint investment

Expands the gap between rich and poor leading to french revolution style reforms (off with their heads)

Wiping out the National Debt Part 2

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In part one I presented the best of ideas that would eliminate debt without raising taxes or cutting spending. Ideas like moving from a fraction reserve system to a full reserve system, eliminating intragovernmental debt, handing the debt back to the tax-payers many of which also own the debt, and increasing the value of the currency so that everyone becomes wealthier. Now lets talk about cutting spending and raising taxes. In order to cut spending to it’s max we need to have a discussion as to what the minimal role of government should be. What does a bare bones government look like? A minimal government has someone to govern and a people to be governed. The act of governing is one of laws and law enforcement/security. In short; leaders, law, law enforcement/security.  All else is extraneous and not a primary function of government. With respect to US Federal law a minimalist approach would be to limit Federal government and law to only that which is explicitly addressed in the constitution rather than to that which is not expressed. While a bare bones government may not be popular, it is an essential mental exercise necessary for determining spending priorities and the limits of scaling a government down. What is the minimal amount of leadership that we need? What is the minimal amount of law that we need? What is the minimal amount of law enforcement/security that we need? With respect to leaders in a representative government we need enough leaders to be represented well. We need enough leaders to oversee the government and keep it in check. The minimal amount of law enforcement/security is dependent upon the law that need enforcing, how they are enforced, the level of societal morality, and the external threat level. Determining the right amount of government is difficult and is a battle  that is waged everyday. Because of the controversy that surrounds it, it remains the most difficult way to pay off the debt as the country would have to run surpluses for a long time. For taxes Revenues to consistently be greater Government expenditure is nearly impossible with the interest of Politicians being as short-term as the next election cycle. Never the less it can be done and with a goal in mind it is important to work every angle.

The Consequences of Debt “Reputation”

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“Your only worth what someone will lend you” This is an old quote and is foolishly evil. A human beings worth is better stated in terms of their reputation and even better stated in terms of who they are as a person in private as well as public. Someone’s lending reputation is just a small part of their greater reputation and even a good reputation can fully overcome the current financial situation of an individual if it is bad. With debt we start view the value of individual in terms of debt and it devalues many. In our society credit reports are pulled for job interviews someone with a lot of debt may be a job risk as they be tempted to steal or betray, someone with too little debt may not be a good employee because they can walk at anytime unenslaved by debt. The United State sent gunships to Ecuador to enforce debt payments and Ecuadorians have a reputation of borrowing and not paying debt back. I had this Ecuadorian roommate once…. Investors are wary to lend money to countries that are a credit risk and their enemies view them as weak. Countries use debt risk of money they lent as an excuse to invade. In a nation with a fractional reserve system where the fed only has partial control over the money supply a citizen could be stuck with debt he is unable to pay because there is not enough currency flowing in the system for everyone to meet their debt obligation. Drawing the short straw or being a little vulnerable at that moment could mean the destruction of his reputation, his investments, and his life for being only a little at fault when most of the blame lies with the immorality of the system. Yeah that’s me. It sucks.

The Consequences of Debt “The Ease”

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Debt can be a convenient and easy way to finance anything you like. The money comes easy and cheap and little work has to be done to attain it. However this is also a problem with Debt. Because Debt is so easy to attain it isn’t always invested wisely leaving people with debt remorse. Suppose that you borrowed money to buy a boat. You bought the boat to get to work because you happen to live on an island. This boat would be a good investment as it provides you a return which is the ability to live on the island and provide for yourself. Now suppose you bought the same boat on credit for the purpose of water skiing one week a summer and the rest of the time it rots in your suburban driveway. While memories are great, this may not provide that great of a return for the cost. Boats require a lot in maintenance making them an ongoing expense unless they are providing a return it may be better to borrow or rent. Borrowing for memories is living beyond your means and is made possible by the lack of oversight that lending provides. This is a consequence of Debt that dampens lasting real wealth creation.