<I see good vs bad.
Good is used to create future value/income in excess of what would otherwise be possible; Bad is used for consumption and actually reduces future value/income. >
I can see what you mean Mark, but whether the debt for consumption is good or bad is up to the borrower and lender.
Also, what's the definition of consumption? I guess you'd mean having a holiday, buying aircraft tickets, staying in motels, buying restaurant meals. How about buying a house, which isn't used to produce income, it might be just to live in.
Using me as an example, I've borrowed money [in the 1980s] to buy a house, because I didn't have enough to pay for the house I wanted and which I, and the lender, [a bank], thought my future income could sustain. I remain very happy that I bought that house. Renting, or buying a smaller house, would have been financially disadvantageous to us and we'd have missed out on the pleasures and security of ownership. We also made a capital gain and made improvements, which was good too [turning the debt into an earning loan, which you say is good, but that was just a fortuitous outcome].
Over the past few years, while owning QUALCOMM shares, I had no income, so borrowed money to indulge the hedonistic side of life - the purpose of my life isn't simply to be an earning machine to maximize my personal GDP and die rich. It's to sustain family, have fun, indulge curiosity, have a nice car, have meals at restaurants, go to movies and go to sunny places sometimes.
So, once again, I was spending money which I hadn't yet earned from QUALCOMM, which was in the development stages. The lenders weren't worried because they held the securities and earning money was up to me and QUALCOMM. QUALCOMM has proven that, as with my earning potential in the 1980s, they had really good earning potential too. So, the consumption and income rebalanced.
I also borrowed a big heap of dosh to help build Globalstar. That was good borrowing in your book, but it turned out to be the biggest and worst borrowing I will ever do. My judgement on future earning potential was way off beam [because the managers of the service didn't know how to market the service and didn't understand price elasticity, consumer surplus, deferred satisfaction = you can't extract profits from day1, you have to take losses to build customer numbers and THEN make profits].
So, my consumption borrowing was good, but my investment borrowing [for Globalstar] was bad.
Debt is about predicting the future. Those who are good at it do well. Those who are bad at it lose their shirt. Our big brains are specifically designed to predict the future, using our DNA, vast memories and abstract conceptualisation capacity as guidelines. We do a reasonable job of it and some people are much, much better than others [excluding luck, which is also a big component of any predictions - at any moment, the best predictor on earth can be blammed out of existence by an incoming space rock, so luck is always with us].
If I was unable to borrow to fund consumption, I would not have been able to fund QUALCOMM's development as much as I did and that would have slowed development by that little quantum. I'd have had to keep cash on the side, which is of course borrowing - cash is just a debt, being a promise by the community that I can swap the piece of paper or pixel in my bank account for goodies and services.
Borrowing is good if the borrower and lender have correctly predicted the future. It is bad if they fail. The future is always indeterminate, so there is always some luck involved. Cowering in fear of bad luck will mean no borrowing. No borrowing means less future prediction and that's a bad thing - investment, invention, creativity and expectation are all predictions about the future. Hope and the future are what we want, although it's the present which is what we get.
That's my theory [as just invented, so subject to change without notice].
Mqurice |
