Everyone knows that racking up credit card bills (at high compound interest rates) for fast-depreciating consumer purchases like luxury handbags and big screen TVs, is silly. Nobody is debating that.
That said, the voices of ‘concensus reality’ will confidently inform you that there are many reasons why ‘smart’ debt – used responsibly – is actually a good idea, and you should totally use it. In fact, you’d be kind of stupid not to.
‘Good’ debt
The idea of ‘good’ debt is that by paying a premium (ie. interest) you are able to take advantage of an available ‘investment’ of some kind now and ultimately profit more than whatever it ends up costing you in interest.
For example:
Student debt
Education debt we are told is okay, because it’s an investment in yourself, and your future earning potential. The average student loan debt in the US in 2021 was $37,338 for federal loans, or $54,931 for private. Of course these numbers are much higher for certain career paths.
As of 2023, the average law student graduates with $165,000 in student loan debt, with the average medical school graduate owing $250,990.
I mean in just a few years you’ll be raking it in and chewing through those debts up in no time, right?
Mortgages
As with educational debt, you will be told (coincidentally by real estate agents) that buying a house with a mortgage is really an investment in your future. It is your home, it’s where you live, it’s something you can leave to your kids and so on.
Blatant appeals to emotion aside, they will say that you need somewhere to live anyway, right? You might as well have somewhere stable, that you can decorate the way you like and improve your overall quality of life throughout your working days.
Also, with the housing market continuing to boom, down the track this cosy little place will be worth megabucks.
“Thanks real estate agent”, that all seems to make a lot of sense.
Business loans
So you’ve got a great business idea – but to execute it properly you need time off from your job and capital to set it up properly. If you sit around for five years saving up you’ll miss the market and lose your chance. Likewise, if you don’t have the capital to grow quick enough you may find competitors overtake you, dominate the market and leave you by the wayside.
If you borrow wisely and manage your business well, the interest you paid will be a pittance in comparison to the money generated by your new commercial mega-empire. A few short years later you buy a super yacht and live happily ever after…
Now I’d be remiss here if I didn’t address some of the potential downsides of debt, that you may or may not have considered.
Leverage: a double-edged sword
Of course “this is how rich people get rich” is the prevailing wisdom: they borrow to invest in something, then use the equity in that to borrow for another thing and so on and so on.
Sounds good in theory – if a house (for example) is expected to rise in value from 1m to 2m over 10 years, why not own two of them? Why not ten?
This is all fine if housing prices keep going up and interest rates don’t, but as soon as those numbers drift out of your favour, you’re in big trouble. Instead of owing a million dollars, you may find yourself owing an order of magnitude more, and now you can’t even service the interest payments let alone make a dent in the principals. Even if you try to sell everything and cut your losses, you might be so ‘upside-down’ on these properties that you end up way in the red.
This is when ‘rich guys’ end up begging and pleading with banks for extensions – which funnily enough banks don’t want to provide – since they would rather collect the hard assets, even at a massive discount. Some deeper research into the true nature of mortgages will reveal why that is the case.
So sure, you can use debt to ‘leverage’ your ability to make a bunch of quick money – or you might find yourself owing more than you can pay back in many lifetimes, and climbing over the 10th floor railing of a shopping center to hurl yourself down onto the food court. It’s no coincidence that many of those atriums have nets now.
You spend more
One aspect of using debt is that – generally speaking – people tend to spend more.
Even if you know consciously you’re on the hook to pay the money back later (with interest) somehow it just feels ‘easier’ to spend when the money is magically transmitting from a swipe or tap of a card, rather than as crisp cash in your wallet transmuting into a wad of receipts.
But it isn’t just credit cards, there are other psychological factors at play:
Layaway
We’re all familiar with the idea of white goods and furniture stores offering items on ‘layaway’ or ‘financing’. Obviously they don’t do this for fun, and these options (which they push heavily) translate into increased sales, not to mention additional profit on the financing component.
Likewise there are more and more ‘layaway’ type brokers popping up in recent years – such as ‘Pay in 4’ from Paypal and ‘Afterpay’ – which are allowing this approach to be used on smaller ticket items. Participating retail stores will sell you a $100 dress in 4x $25 payments a month apart, often with no interest – as long as you make the payments on time. Again, the stores participate in this because it results in substantially more sales – ie. people buying stuff that they would otherwise not have bought.
Add-on pricing
This is the principle whereby you are naturally less judicious about additional costs when they are viewed in comparison to a large price. For example – you are more likely to pay $1000 for a cupholder upgrade on a $50,000 new car, than you would if you were to go and buy that cupholder setup as some third party item in a separate transaction. In the context of the bigger transaction (the car), that cupholder is only a measly 2% of the total and so it is naturally minimised in your mind.
Likewise you might decide to take a bus instead of a taxi to save $20, but would you put that effort into negotiating for a $20 discount on buying a new television? Probably not.
Adding ‘time’
Similarly, once you have committed to a substantial mortgage, you start to look at spending a little differently.
Psychologically, if you’re already going to be paying this thing off for the next 30 years, why not just throw a new car on it and do an extra year or two of payments? By then you’ll be 60 anyway – might as well enjoy yourself a bit more now, right?
Of course, if you had to save and pay hard cash for that vehicle you’d probably think pretty carefully about whether you really needed it, whether there were cheaper options and so on, but since it’s just being slapped into the bill of your future self – who cares?
Interest gets crazy
To keep this brief I’ll throw around some basic numbers for a mortgage in 2023.
The current median housing price in Sydney, Australia (as of July 2023) is $1.46 million Australian dollars. The average variable mortgage interest rate is 6.74%.
Now that current rate may go up or may go down, but since we saw 17% interest rates in 1990 I’m not going to rule out that it could go higher from here.
Anyway, for argument’s sake let’s say the interest rate stays steady, over a 30 year mortgage the monthly repayments are $9,460, resulting in a total repayment of $3,405,539 – ie. more than double the principal.
That means over the course of the mortgage the total interest paid will be $1,945,539. Ie. 57% of the payments will be paying off interest only.
And that’s assuming that interest rates don’t go up from here. What if they do?
What if the economy ‘slows down‘?
What if the government starts raising taxes?
What if utility companies start bumping rates?
What if the job market tightens up?
What if your boss starts demanding you give him daily massages during your lunch break? How much negotiating power do you have, realistically?
It’s almost like the mortgage system is a near perfect financial trap whereby people pour years of their working life into their ‘investment’ of a house – which they feel like they own – and so will put up with almost any level of financial abuse to keep possession of it, rather than walk away.
If only someone could have warned us…
The ancient key to slavery
“The rich rules over the poor, and the borrower is the slave of the lender.”
Proverbs 22:7
“Debt is the slavery of the free.”
Publilius Syrus, 85–43 BC
“Think what you do when you run in debt: You give to another power over your liberty.”
Benjamin Franklin, 1705-1790
“There are two ways to conquer and enslave a nation. One is by the sword. The other is by debt.”
John Adams, 1735-1826
I’m not sure about you, but I don’t see a whole lot of swords around here, and I feel kind of enslaved.
What were these guys all talking about? Doesn’t debt help us take advantage of opportunities and get rich?
Perhaps what they were talking was debt slavery or ‘peonage’. That sounds like an old fashioned word though, I’m sure that wouldn’t occur today…
‘Human trafficking’
Have you ever noticed that – when you delve in a little – the stories of people who have been ‘human trafficked’ are often very similar?
They aren’t bopped over the back of the head only to wake up on a farm and handed a shovel.
What almost always happens, is something like this:
- They are offered a (comparatively) good job in a far away place.
- They are offered flights/transportation/sometimes accomodation en route to the work location.
- They arrive, and hand over their passport so paperwork can be drawn up.
- They are told that the job is not what they expected. You’re not a masseur, you’re a prostitute. You’re not a project manager, you’re an online scammer, and so on.
- They aren’t happy about it, and want to leave.
- They are told that in order to leave they need to repay the debts incurred in transporting them out there.
- They don’t have the money and don’t want the shame/embarrassment of asking family/friends for it.
- They are then told the alternative is to do the job-they-don’t-want for X months to pay their debt.
- They sign a contract to do said work.
- At some point they realise this job really sucks, and either try to escape, or decide to contact an NGO to ask for help in negotiating (ie. financially) their release. And yes, nowadays these people usually have their cellphone and access to communication with family/the outside world the whole time.
So what just happened here? Do you notice a familiar pattern?
I’m not writing this to blame the victims of these schemes – they usually (but not always) come from extreme poverty and are desperate. I’m also not talking about kids. What I am doing is breaking down the primary mechanism that is being used to enslave adults.
Why would these human traffickers go to so much trouble to embroil their targets in debt, when they could just grab any random person off the street and threaten them with a stick?
Because the prison works far better when the walls are inside the slave’s mind. The victim’s own natural sense of duty and obligation compels them to stay, and even if they feel angry about being tricked, more than anything else – they blame themselves.
Sure the traffickers may often use the threat of violence and even sometimes employ it, but if it was their primary tool of leverage they would have to use it constantly. What would be the point? These operations usually operate in plain sight, dealing with NGOs on a daily basis and letting in government inspectors to check their foreign workers’ contracts. Their business is making money, not killing people and burying them in the back garden.
The penalty box
So to recap: rather than just grabbing a woman off the street and sticking her in a shipping container, they offer women an opportunity, then extend them services on credit, then unless they can settle the debt (they can’t) are told they need to work to pay back what they owe.
Not so fast though – there’s more. The debt slavery victim needs to pay rent for the pleasure of living in her work-prison. She needs to pay for her food. Oh and she didn’t make her bed? That’s another 50 bucks. She didn’t arrive to the client ‘showing’ on time? Another 50. She refused to go with a customer? 200 more. And so on.
Just a never-ending stream of expenses and penalties, to keep the victim permanently indebted and effectively enslaved. Sound familiar?
It calls to mind how mortgage lenders never seem to be worried about you increasing or extending your mortgage. Of course there are massive penalties for trying to pay it off sooner, but apparently they don’t mind if you keep throwing more items on the tab. Don’t they want their ‘money’ back?
The housing-price problem
So when you get a mortgage, what happens? I’ll give the sanitised version here, which will be sufficient for present purposes.
- You apply for a mortgage and sign a promise to pay (aka a ‘promissory’ note).
- The bank manager types numbers into a computer and hits enter.
- The funds ‘appear’ in the seller’s account.
- You move into your house and start paying the bank as per the agreement.
These days most of us know that all know that all currency is debt, nothing is connected to gold or silver, it’s all just made out of thin air at will by those with the power. So what’s the problem?
If you bought a house for a million dollars, by getting a mortgage, you effectively just added a million dollars to the money pool. No extra houses were created, no extra productivity was generated in the economy. All that happened was one guy took possession of another guy’s pile of bricks, and another million dollars is now floating around.
Okay okay so by getting a mortgage I’m directly contributing to inflation and making housing prices more and more expensive in general. But what am I gonna do, not get my own house now?
That sounds pretty boring…
Usury is sexy
Even using the word ‘usury’ makes you sound like some sort of puritanical Christian. Or a Muslim. They’re not supposed to charge or receive any interest on loans – although like Orthodox Jews who aren’t supposed to use electronic devices on Shabbat – some seem to be finding some ‘clever’ ways around it. Somehow these Muslim states too seem to be getting seduced by the wiles of Western ‘free money’ banking systems and abandoning their quaint, old-fashioned ways.
If Muslims who pray 5 times a day can’t resist the allure of immediate financial gratification, how am I supposed to?
So I’m supposed to not have any debt? That’s like never drinking alcohol, never jerking off, never watching porn, or never having abortions. How am I supposed to have any fun?
I guess ultimately, it comes down to personal preference.
You will notice that the 14th amendment (to the United States Constitution) is quite specific:
“Neither slavery nor involuntary servitude, except as a punishment for crime whereof the party shall have been duly convicted, shall exist within the United States, or any place subject to their jurisdiction.”
14th Amendment to the United States Constitution
The constitution outlawed slavery and INvoluntary servitude. Nothing is said about voluntary servitude.
That is a decision you will need to make for yourself.
