Tuesday, July 19, 2011

The Fallacies of Debt and Economic Growth

I am amazed and appalled at the mainstream thinking about economics these days.  I do not pretend to be an expert, but I do have a blog of my own, so I suppose it is all right for me to completely bash and criticize those who disagree with me.  What do I mean by being both amazed and appalled is this: that people still seem to think that getting banks to issue out credit will get our economy growing.

It is a funny thing when people believe that the very thing which creates these booms and busts, that is bank credit, is relied upon for supposed economic growth.  Our entire economic system seems to be addicted to getting loans whether they are corporate, private, or government.  Economic growth seems to be indicated by how much money can be lent out to successful businesses, where failed businesses will inevitably cause another collapse should they borrow too much.

Frankly, I flatly reject that whole line of thinking because I do not believe that credit is necessary or important for economic livelihood or creating a wealthy nation.  I believe that economic growth is not a concept that can be measured and that I do not believe that it is even necessary for a nation to become wealthy, as mainstream economists define it.

Debt is not necessary for a company to grow and expand.  There are many companies out there which operate without debt and instead have simplified their accounting to income, expenses, and assets.  Debt is always called a “Liability” when it is recorded in the books, after all.  If you did your own personal financing, you would find that all your debts would be regarded as liabilities and not as anything beneficial to you.  When you consider how the United States Federal government treats student loans that it owns, I think the term liability is not harsh enough.

From a practical standpoint, I understand how debt can quicken the pace through which a company grows and expands.  But consider for a minute, what a loan actually is.  A loan to the lender is merely a investment in the debtors future production.  Such an investment is risky, which is why interest rates vary from debtor to debtor.  Generally though, the lender wants to make a decent return on the investment made, so there is usually an interest rate which reflects that.  The average inflation rate usually reflects this as well.

So when a company takes out a loan, the lender, usually a banker, will be keenly interested in what the company plans on doing with that money.  But things tend to go awry more often than not.  Dave Ramsey has said that roughly 10% of his ideas ever worked for him when running his business.  This is largely why he never recommends that small businesses take out loans because most of their ideas will fail.  He does not discourage becoming an entrepreneur, just a different way of doing things based on his own experience.

The trouble I find is that the banking system is not a productive system, as it stands today.  It merely piggybacks on the hard work of others while convincing them that they are needed.  Think about it.  If there was no banking system, would the market be a wreck?  Sure, wealth and prosperity would come at a slower pace, but at the same time the returns would be more reliable and the business cycle almost non-existent.

The fact is, most rich people have no personal loans themselves.  In fact, I doubt the banking executives at most top level positions have any loans themselves either.  Given that this is case,  why should the average man take a loan of any kind?  Why should we subject ourselves to slavery, which is what debt really is, all because we want something now rather than later?

With the recent crashes of the banking system and problems inherent in our system of credit, I think it is high time we all get out of debt, cut up our credit cards, and start buying things when we can pay for it.  Fortunately, it appears that most personal debt is on the decline.  With less debt, that means that we all can breath easier and focus on more important things.  Because the more financial stability you have, the better you are able to pursue your real dreams and not be tied to a job you do not like or a profession that you have grown tired of.