Debt is a serious issue facing our global and local society today. Debt is such a problem today that it deserves to be an ism. Debtism is the insistence on receiving benefits today that we do not pay for, and probably cannot afford, today. Certainly, not all debt is bad. If you have saved a meaningful amount for a down payment, and have a proven track record of steady income, then you would be wise to own your housing and take out a mortgage to do so. The general rule of thumb is that it is worth borrowing money to acquire an “appreciating” asset. What are appreciating assets? They are properties that, if we had to sell them, would likely fetch a higher price than what we paid. Corporations borrow money with the expectation that the company will be worth more for having done so. Homeowners buy houses that should appreciate in value (at least a little). College students borrow money with the expectation that such debt is transforming their future income-generating ability (how much they should borrow is the topic for a different column). What does not qualify as an appreciating asset? Automobiles, for one thing. There might be an argument for borrowing money to provide transportation that allows you to earn income. In general, though, cars do not increase in value, they decrease, no matter how well they are cared for. Mobile homes and trailers are also not appreciating assets. Again, there might be an argument that you need housing to provide for yourself, and borrowing is necessary to fulfill that need. Still, mobile homes are certain to decline in value. Almost everything you can buy with a credit card is not an appreciating asset. Big screen TVs, cell phones, firearms, restaurant meals, and anything else that you cannot resell for a higher value should be paid for in full each month.
Some of you may have had the sickening feeling that comes with spiraling debt. You maintain a credit card balance and pay the minimum amount or more each month, but you also charge more each month than you pay. Over time this balance increases higher and higher and a larger percentage of what you earn goes to pay the interest, or debt service. Debt service is one of the two main components of Debtism and it is a problem for households, towns, states, and the federal government. Let’s consider the federal government. You have probably heard that the federal deficit has now exceeded $16 trillion. That amounts to over $52,000 for each man, woman, and child alive today. In the fiscal year that ended September 30th, the U.S. government paid $432 billion in interest. This amount was actually slightly lower than the previous year when the debt was lower. How can this be? The average interest rate the U.S. government paid was extremely low, nearly the lowest of all time. If you own a certificate of deposit (CD) you know how low rates are now. The government is benefiting from the low rates by not having to commit as much money to interest payments. However, there have been times in recent history when the government paid four times the rate of interest that it is currently paying. If that happens again, based on the current debt, the annual interest payment could rise to $1.5 trillion, adding over $1 trillion to the annual debt service. That is quite a bit of money! Whatever we pay in interest expense is money we cannot use for health, education, defense, courts, roads, or any other services we expect from government.
On a day-to-day business, none of us probably has a sickening feeling about this debt, in the way that some of us have had about our personal debt. However, it is every bit as real and the consequences will be unimaginably severe when the day of reckoning arrives.
This column is the first of a monthly series that will focus on management, leadership, finance, and business written by Dr. Eric B. Dent, a Lumberton resident and business professor at Fayetteville State University. Next month he will discuss the second big problem with Debtism – unfunded liabilities.