Despite what most mainstream economists will tell you, there are actually three different types of debt and all three affect a nation’s economy in different ways. Usually when you hear reports about debts, at best they’ll break it down into two types: public and private sector. But that’s not a good enough breakdown in my view as I hope you will see as well.
The first kind of debt is government debt or public sector debt. This is the debt that is usually derived from government entities selling bonds on the market in order to fill in the revenue gaps they create due to reckless spending. This debt is expected to be paid off by the children of the taxpayer and is often referred to as the collective debt of the people.
This debt is often hard to get rid of. This is usually because most government officials aren’t really that responsible when it comes to budgeting and don’t really care about managing the money they’ve been entrusted through taxation well.
The problem with this kind of debt is that eventually, the bill does come due and sooner rather than later. More the likely, if a nation has a massive amount of debt that exceeds its production, defaulting on that debt is sure to follow along with bonds becoming worthless.
The second kind of debt is consumer debt. This is debt related to home mortgages, car loans, credit cards, and any other form of debt that is accessed directly by an individual for the purposes of meeting a consumable need.
While seen as a good thing by the vast majority of financial gurus and economists, this debt is really like masturbating now versus putting work in and attracting a wife. I know that’s a bit crude to say, but the long-term effects of this kind of debt can be highly damaging.
For one thing, whatever product is purchased using consumer loans will inevitably, and drastically, inflate in cost down the road. As the supply of said product remains constant, the demand will rise as more and more consumers will have access to that product.
Look at housing in the US. By all accounts, housing should probably cost one-third of what it is today but because people can get away with no down-payments (or practically none) and 30-year mortgages (or half your wasted life), housing prices have skyrocketed.
The same is true for college tuition. As student loans become more and more available, more students are attending and thus prices go up.
You see where this is going, right? With inflated prices, especially on products and services with very specific and easy-to-get loans, there has to be a default on those things eventually. Because eventually, consumers don’t bother signing their lives away.
The final type of debt is productive debt. This usually takes the form of business loans and are designed to give a business an edge in the market by providing a quick infusion of cash in order to make it happen. Corporate debts can get out of hand of course, but if kept to meet some business needs and are paid off with the profits gained from production, this usually isn’t a problem.
The banks in this country used to focus primarily on productive debt. They would “invest” in private companies in order to give them a chance to grow. But around the 1960s to early 1970s, they started to sell credit cards, buy and trade on people’s mortgages, and create longer and longer mortgage terms.
This has had a spiraling effect on the economy with consumer debt rising drastically over the past few decades. Sooner or later, something is going to break big time and when it does, deflation will occur. Your investments will be worthless and you might lose your job.
But on the flip side, you’ll be able to afford things again without going into debt. Of course, you won’t have much choice in the matter and there won’t be as much to buy.