Tuesday, September 18, 2012

Why you borrow matters

Borrowing for investment may be a good idea.  Debt is not a bad thing.  It can be a good thing.  It depends upon what you are borrowing for.

Borrowing to finance a new business or to expand an old one is a good idea.  Borrowing for investment purposes is generally a good idea.

Borrowing is generally a bad idea if you simply borrow to finance consumption that you cannot otherwise afford.  Eventually 'consumption borrowing' will lead to disaster since nothing is taking place that can pay off the debt that is being created.  This is the type of borrowing that is taking place in western economies today.

As much as politicians talk about 'investing in our future,' what they invariably mean in practice is financing consumption for a favored part of the electorate.  Rarely if ever is modern government spending intended to finance investment of any kind.  Paying more money to your favorite public employee, including teachers, is not a form of investment -- it is a form of consumption for your favorite public employee unless they choose to save some part of it.  Transferring wealth from rich to poor and supplementing that with more debt is simply an expansion of debt and consumption.

Borrowing to consume at the expense of private and public investment activity is a ticket to disaster.  We see that disaster unfolding in the western economies today.  In short order, the current euphoria in the US and in Europe over the virtues of printing money as a substitute for capitalism will turn to despair as their economies are crushed with the weight of too much debt. and too little economic activity.

You can only live off false promises for a limited period of time.  Sooner or later, crushing the private economy, expanding the government sector, letting sovereign debt increase without limit only results in disaster.

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