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Is Debt Always Bad?

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March 14, 2014 – Comments (0) | RELATED TICKERS: BRK-A

Board: Berkshire Hathaway

Author: Goofyhoofy

But you still have the underlying fiscal problem which is the cost of doing business and the inability to fund it. Whether we loan the money to our corporation or somebody else loans it, there comes a point in which the enterprise will fail if we keep having to lend it money that it cannot pay back. Just as the corporation is 'us' in the sense that we own it, it can still fail for fiscal reasons - not enough paying clients, too much rent, oversized salaries, etc.

Yes, that's true. And if you think the government of the United States will not have the ability to raise revenue in the years ahead, then you certainly should panic.

Look, Walmart has debt. Coca Cola has debt. Even the lauded Berkshire Hathaway has debt, and many major corporations, flush with profits, have more debt than they have carried in a long time. Is this a reason to panic too? (Debt is different than "future obligations", I point out, although most corporations have those, too.)

And to some extent we as a nation are printing more and more money and lending it to ourselves for obligations that seem to be growing out of proportion to our production

Well, that's true. It was also true in 1944, and it was true in 1981, and it was true at many other times in our history. Get the economy functioning again and the the tax receipts will positively pour in. Adjust the tax rake to what it was, say, in 1981 and we will be flush, double. Or run around with your hair on fire, condemn debt as a morality play instead of a financial tool, and you will ensure the kind of result Europe and Japan saw with their prolonged flirtation with austerity.

Here's a simple fact, largely, it seems, unknown. The annual deficit is less than half of what it was in 2009. It's going in the right direction, and faster than at any time in recent history. If it continues we will actually have a surplus, and perhaps this time we can restrain ourselves from giving ourselves even more tax cuts and possibly pay our bills, withdraw some of the funny-money from circulation and, dare I say it, put some money in the bank for the future. Faint dream, I know.

To those yelling at every opportunity "There's going to be a crash!" I say "You're right. Someday." John Hussman has been calling for it since 2009, and someday he will be right, if only because there is always another crash somewhere. That's simple history, extended forward. If that's how you choose to live your life, running for cover and yelling at strangers on the streetcorner, well, OK, but most of us (including one fellow named Warren Buffett) keep putting our money into good old American business, and expecting it to continue growing.

Maybe there's a lesson there.

The New Deal at least had extensive infrastructure spending as opposed to massive money creation that is supposed to be trickling down at the discretion of banks. And the New Deal fell short of ending the depression. WWII spending and inventions really dragged us out of the Depression.

There were no WWI "inventions" that dragged us out of the Depression. It was massive deficits, gigantic leaps in government mandated employment and production of war materiel that did it. Oh, and after the fact analysis of the Depression demonstrated that without exception, the sooner a country went off the gold standard and began running deficits and/or modest inflation, their economy began growing again.

Yes, there was cleanup to be done post WWII, I'm not saying it was all pretty, but I'm amazed that the lessons so clearly demonstrated then can be so easily forgotten now. Debt is not, in and of itself, a bad thing. Inflation is not, in and of itself, a bad thing. They are useful tools when applied timely and judiciously. They are a bad thing in the hands of fools. I don't think we're there, and not by a longshot. 

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