Wednesday, July 23, 2008

I'll gladly pay you tuesday ...

I've been reading a bit of pop-economics lately. It's probably "a sign of my declining mind" and shriveling soul. But since money does make the world go round, it might be worth taking a crack at understanding it.

Thanks to the reportage on NPR, a few articles in the NYTimes, conversations with friends, and reading Charles Wheelan's book "Naked Economics," I've been thinking about credit.

Credit is about the future. You borrow money now for things that you can't afford at this moment but believe that you will be able to afford in the future.

1. You may believe this to be true because you are planning to spend the money on something that will help you be more productive and earn more money. Like money to go to college, or to train in a new profession, or buy a new interview suit that will help you make the right impression, or buy a new tool or machine that will increase your productivity - say, a new laptop or another hard drive.

2. You may believe this is true because you have a steady source of income and know that you can, over time, pay off the thing that you are currently purchasing. You could wait and save the money to buy or you could borrow now and have it.

3. You may have hit some tough times and you borrow to tide you over now knowing that these times will pass and you will recover and then thrive.

These are all the forward thinking reasons to borrow.

4. You might also borrow because people keep offering you loans. The money is there, so why not spend it. In the end you pay the piper, but maybe you'll have a little fun while it lasts. If you end up in deep debt, the bank might take away your things. Your house, your car, your boat, whatever it can get its hands on. The bank might garnish your wages, hound you and your loved ones on the phone and through the mail, endlessly which may or may not cause you stress.

Back in 18th century Britain, they might have thrown you in jail for being unable to pay off your debts. I did not know until I read the Australia chapter of Jared Diamond's book "Collapse" that a portion of the convicts were sent to Australia for being in debt. I somehow always imagined that all the convicts sent to Australia were murderers, pirates, highwaymen and seditionists. It's the romantic in me.

But I digress.

The irony of all of this, is that of the motivations that I have listed here for borrowing money, the one that I am least familiar with, the one that has only recently occurred to me is the first.

The greater irony of this is that the first motivation is pretty much what makes many aspects of the economy keep on trucking. Borrowing money on the premise that the loan will enable you to get wealthy and make the lender wealthy as well.

Why is growth so important? It's important for a lot of reasons. But among them, as an individual or entity in debt, you need to keep growing and making more money so that you can pay the people who work for you, pay the people who supply you, pay the people who invest in you, maintaining your business, invest towards the future, pay your debts, and attract more loans.

Credit in itself is not a bad thing. It can be destructive, it can also be a powerfully good thing. The whole microfinance movement is built around the idea that small small amounts of credit can do enormous good for some of the poorest people in this world. Having access to credit is a powerful means by which they can improve their living situation and their livelihood.

And so I sit here after all of this and ponder what debts are worth taking on. Which ones lead to the creation of wealth and which ones lead to greater consumption and future deprivation.

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