Kuta Beach

Kuta Beach

Sunday, 6 June 2010

Why Debt is Bad

"The rich rule over the poor, and the borrower is slave to the lender." Proverbs 22:7

Whenever I exercise, I like to listen to podcasts, and one podcast I love to listen to is The Survival Podcast (TSP). TSP teaches about survivalism, but don't think this guy is a psycho right-wing racist who is accumulating guns and ammo to prepare for a war with the government. He (Jack Spirko) gives very useful and practical advice to teach us all how to live our lives and to increase our chances of survival if times get tough--or even if they don't!
One tenet TSP hammers home is that debt is bad. In Episode 193 - Debt Elimination is Survivalism 101, Jack explains how you cannot expect to be focused on survival and have the shadow of debt hanging over your shoulder. In Episode 438 - What Debt Freedom Means, Jack gets more personal, giving us a story about how he struggled with debt fifteen years ago--how the debt start out small but eventually grew like a cancer. He made a stand to fight the debt and how he is free of debt, and as an old man he is appealing to the younger generation to stay away from something that had a profoundly negative impact on his life. Both these podcasts are very insightful and it's incredible to see the sinister side of debt exposed by one of its victims, especially now in Australian during a period in time when many people seem to be so desperate to buy a home that they are throwing themselves at the banks because they want more and more debt to fund their dream homes.

Spirko claims that the cost of debt is not just the money (that is, the interest). Debt wastes money but it also wastes time and life. I would add that the cost of debt is definitely not just the money (although debt on, say, a standard home loan can be massive) but debt also comes at the cost of freedom. When you take out a loan, you lose not only money that you must pay back to the bank but you also force your future self to work, which reduces how much freedom you have. Quite literally, as the bible explains, debt is slavery. The people with mortgages, credit card debt, and car loans work like slaves. The banks and their shareholders are the slaveowners.

Mortgage debt in Australia is even worse than mortgage debt in America because in Australia banks have the right to sieze all others assets if you are unable to pay your mortgage. If you default on your home loan, the banks can sieze not only your house but your car, your savings, and all your belongings--and you're broke. In America if you cannot pay your home loan you can walk away and all your other belongings are safe. This means that in Australia those in debt have it tougher. They must focus on paying the mortgage and not consider anything else.

The Good Side of Debt

I'm not saying that you should never ever go into debt at all. I do believe that there are some times when debt is a good idea. I think that you should go into debt if you really need to go into debt. For example, if you are starving and you need to borrow money to buy food, then it's probably a good idea to go into debt. If you are living with your parents and your parents are sexually abusing you and you don't like it, you may go into debt to buy a home for yourself.

There are times when debt can be profitable. For example, if you borrow $100 and use that $100 to buy an asset that appreciated by 10 per cent to $110 and you pay back the bank $105, you make a $5 profit. You can use the borrowings to buy stocks, property, or even to start your own business. It is possible to make debt profitable. However, it is difficult. If there is such an asset that is guaranteed to go up in value more than the cost of borrowing, you can be certain the banks would rather buy that asset themselves rather then hand you the money to buy the asset. By handing you the money to buy that asset, the banks have determined that that asset is too risky for them to hold, so they give you to the money and you bear all the risk.

If you have great skill, you can borrow money to start your own business and make a lot of money, but this is highly risky. If you borrow thousands of dollars and your business fails, you not only have the disappointment of a failed business but also the stress of debt that still remains even after your business fails.

Don't think that debt is costless, that you can just borrow and there will be no consequence to your borrowings. By going into debt you are making a bold prediction about the future. When you borrow money to invest in shares, you are predicting that shares will go up in value. When you borrow money to start your own business, you are predicting your business will be profitable. You may be right, but you are more likely to be wrong. You need to be either very lucky or you need to work very hard.

The bible says that borrowers are slaves and lenders are slave owners. A bank's primary function is to coordinate the interests of borrowers and lenders. Hence the bank's primary function is to bring together slaves and slaveowners. The bank is a slave market. Instead of whips and chains used to inflict pain and limit freedom, instead the threat of default and seizure of assets are used to instill fear.

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