Lately, debt has been on my mind. America has been addicted to it as long as I’ve been alive. Our government is in debt, companies are in debt, individuals are in debt… even my local CDD is in debt. Credit is a dangerous tool, one that is easily turned on the wielder. Thus the comparison to opioids. What may have a use in certain cases, especially emergencies, may become addictive and deadly if not managed properly.
Recently, I rejoined an ancient computer hardware forum, and some of the folks there were discussing credit. As is normal for me these days, I expressed my general aversion to debt, and extolled the wisdom of living with your means. The hostility this engendered was, perhaps, worse than if I had declared myself a worshiper of Lucifer. It was like I had personally run up to their homes and kicked their dogs. Or, perhaps more appropriate to the title of this post, as if I had suggest that the opium user should quit his habit.
A few of the forum denizens explained that it was better to buy expensive things on credit, if the interest rates were low, and then invest the cash at a presumably higher rate. And sure, playing the spread between interest rates is an old trick. But here’s the kicker: how many of them were actually doing this? I hear this excuse all the time from folks I know have little to no liquid assets. It’s a lot like the addict saying “I can quit any time I want.” They claim they can sell the car, or furniture, or whatever they bought on credit whenever they want, and that debt can have beneficial effects too.
If it truly worked this way in practice, there’d be a lot less bankruptcies and delinquencies, I think.
Perhaps some folks do play the spread between investment returns and low loan rates successfully, and there is nothing wrong with such a strategy, if well executed. But they are surely outnumbered by folks who use this as a quick excuse to load up on things they want, and can’t afford. It is the same with folks who claim they are using their credit cards for the points, or the rewards. Some people do this successfully (my in-laws play this game very well). But a hefty fraction use this to excuse their credit addiction, and wind up carrying balances, easily wiping out any gains from rewards or airline miles.
Another excuse is that credit cards are more secure than debit cards, for a variety of reasons. It’s easier to cancel a charge than to reverse a debit transaction, and the credit card puts an extra layer of defense between your savings and checking accounts (or wads of cash that can be mugged from you) on the one hand, and the merchant on the other. Again, there is truth to this. I actually employ such a strategy myself. I exclusively use a credit card for most medium-to-major purchases (and all online purchases), and have the full balance paid each month automatically, so balances are never carried and I don’t get charged interest. But how many folks actually do this, and how many use it as an enabling excuse?
Some quick statistics on credit usage:
The average household with credit card debt pays a total of $1,292 in credit card interest per year.
That’s $1,300 flushed down the toilet every year. The average balance held by folks who had credit card debt was $16,748.
The average auto loan balance, again for folks who have auto loans, was $28,948.
Probably worst of all is the average student loan balance of $49,905.
Finally we have mortgage debt, which averages at $176,222.
Now a lot of folks will balk at the mortgage debt figure, but the fact remains, as I’ve said before, that mortgage debt isn’t “good” either, at least not personal mortgages. In a business situation, the optics are a little better, as business is, in essence, always a game of calculated risk and reward. But this is a game that can screw over the individual very quickly. The worst case from a business perspective is that the business fails. If you don’t have personal liability for the business, well, it still sucks, but you’ll be okay.
Some folks may talk about the mortgage interest exemption, and the low rates of mortgages these days, and the fact that houses are just so damned expensive. These things are all true. And in my case, I still do have a mortgage (though it is much less than the average, at least). I regard this as a personal failure, however, and I would not recommend that others do it. Indeed, eliminating the mortgage is my highest financial priority. I picked up a considerable amount of extra work solely to pay this down as quickly as possible. If my readers wonder why some days The Declination doesn’t get an update, there you have it. I’m probably pulling another 12-14 hour workday.
If I had it to do over again, I’d buy a travel trailer when I turned 18, park it on a piece of crappy land someplace, live on the cheap and stash my money for a decade. At the end of it, I’d have been able to buy a house, car, and anything I wanted in cash. And I absolutely mean that. The only reason I don’t now is that I have a family, and the place we are at is good for my family, and I’m pretty certain I can pay this off in a couple more years. Even then, this is no excuse. Getting a mortgage was a mistake, one I must mitigate as best I can.
Now, if you feel you can earn a better return on your money playing the spread between mortgage rates and investment returns, by all means, do so. But if you don’t have the liquid assets to pay it off at any time, it’s not a good idea.
Sometimes I suspect my grandfather’s generation, who lived during the Great Depression, was much wiser in this. They knew the dangers of debt, and the vagaries of banking. They didn’t trust the government or the banks, sometimes in almost comical fashion. One grandparent of mine was fond of stashing wads of cash in utterly bizarre places throughout the house, places no one would think to look. A family friend buried guns in a sealed box in the backyard, just in case the government ever decided to come for them. Another had stashes of gold he kept hidden. Folks from that era were far more suspicious and less trusting. And certainly, my grandparents were not fond of debt. Neither side of the family carried a mortgage, or ever financed a car.
We’ve come to the age when a smart man can rationalize away conventional wisdom in favor of his addictions. He can talk a good game, and tell himself it’s all okay, and what he is doing is supremely clever. But conventional wisdom survived some terrible times in history… and historically, spendthrifts often come to bad ends. And the rationalizations aren’t so different from the addict telling folks that he can handle his habit, and that he’s not really addicted. After all, he can quit any time he wants to, right?
If you’ve read the horror story on my old house, or experienced something similar yourself, you have some understanding how debt can go bad. You do not even have to be a spendthrift to fall into the trap. All that is required is to follow conventional “wisdom.” Ignore all of that. Forget interest rate comparisons, or whether or not some debt is okay. Instead, live by this:
If you can’t pay cash, you can’t afford it. No exceptions.
Now, just because you cannot afford something doesn’t mean it’s not necessary. If, for example, your family was going to starve and the only option was to put the food on a credit card, do it. But understand what this means: you don’t make enough money and you must reduce your standard of living immediately. If it isn’t a crucial need, the answer is simple: don’t buy it.
Mortgages are not an exception. The recent real estate disaster should be ample warning that real property is far more speculative than most people realized. Financing it is stupid. Conventional wisdom suggests that you shouldn’t piss money away on rent, but this fails to take into account the other disadvantages of buying a home on credit.
If your home goes underwater, you cannot move out of it. This means you may be stuck in neighborhood that is going downhill. You may be unable to move to pursue more lucrative job opportunities in other markets. Even if you are above water, moving is now far more difficult because the home must be sold first and the financing must be dealt with. As in my circumstances, a financed home can also by screwed by insurance providers, because the lender requires you to purchase that insurance, no matter what it costs.
A home that you own outright is far less of a burden. Insurance is optional. Renting it out is usually profitable even in the worst of circumstances. Selling it is easier, and you have no set number you must reach in order to make a deal.
Car loans are no exception. People will excuse their extravagance by claiming that older cars require expensive repairs. This is the rationalization hamster spinning in overtime to justify an emotional decision in favor of the new car.
I owned a 2002 Ford Explorer I bought in 2011 for $4500. It was a hunk of junk with nearly 200,000 miles on it. The tailgate was broken, the electrical system was a disaster and the motor was temperamental. In the worst year, expense wise, I paid about $1000 in repair bills. Sounds like a lot? Consider the average new car is in the $30,000 range and requires a payment of over $550 per month for 72 months at around 5% interest. In one year, you would have paid for the beater-mobile and its repair bills. You’d still have 5 more years of payments to go, too. And then, at the end of it, you’re still going to start paying repair bills anyway. When the Explorer became too obnoxious, I got rid of it for about what I paid for it. Crappy cars have minimal depreciation, because even their scrap value isn’t far off from what you paid for it.
That doesn’t mean you must drive a jalopy, mind you. If you have $30,000 in cash and you want that shiny new car, by all means, treat yourself to the luxury. You can afford it. Same thing with that modern home and its granite countertops. If you have the cash, go for it if you think it makes sense.
After driving the jalopy Explorer around for a few years, I financed a newer truck. This was a mistake. It wasn’t long before I regretted it. The tax bill from the deed-in-lieu on my rental property meant it had to go. At least I had put money down and bought a basic model, so escaping the loan wasn’t terribly difficult, but that was a matter of good fortune, nothing more. I am negotiating a deal on a vehicle I will own outright, should we reach terms. It is a modest 2011 with 70,000 miles on it. But it will be mine, and not the bank’s property. I will have some cash leftover to handle my tax bill.
What happens if you cannot afford a jalopy in cash? The answer to that is you cannot afford a car. When I was in my early 20s, I rode a bicycle 10 miles to work every morning. No insurance, gas, car payment or any of that. In America, we are accustomed to thinking of cars as a need when they are really a luxury item.
Credit cards and consumer good financing are the worst. I had a neighbor who financed most of his furniture, then financed his front yard. Then you have those rent-a-centers and, to top it all off, rent-to-own car rims. You should get a credit card or two for credit-building purposes, but not to obtain debt. Oddly enough, insurance companies and some HR departments use credit scores to evaluate you in ways that have nothing to do with debt (this should be illegal, but it isn’t, presently). So satisfy this by getting a few credit cards and never carrying a balance on them.
One of the few good decisions I ever made regarding debt was never running up balances on credit cards. I keep them for emergencies only.
My readers might ask: what if I’m already in debt? Get out, quickly. Sell high-dollar items that you don’t need. Trade down for a lower-end vehicle. Pay dispensable income toward the debt instead of vacations or new consumer goods you don’t need. Most people will find, as I did, that most debt can be dispensed with rapidly if you have self-discipline and live in a spartan fashion.
When bribing my old tenant to leave the property, she left dozens of bags full of consumer goods that were utterly worthless. Little signs that said something to the effect of “this is a happy home” painted on a piece of particle board by some factory worker in China. You see these things for $10 at Target. They aren’t worth $0.25 in a garage sale. There were pieces of worthless furniture, falling apart even thought they were only a few years old. Bags of full of clothes that she probably only wore once or twice were everywhere.
For her, they weren’t worth the effort to move them, yet if you tallied up the retail price of the items, there were thousands of dollars in knickknacks. What if you could spend that money on paying debt down, or creating savings and investments?
Dispensing with consumer crap feels good. All of that stuff you have carries a psychological weight. You have to store it, find places for it, deal with it when you move. That is in the back of your subconscious whenever you contemplate moving for that lucrative job, or leaving for the weekend and locking your door. Your possessions wind up owning you.
The modern economy is in terrible shape. If you are younger, as I am, you need to be lean, mean and prepared to follow the winds of the economy immediately when opportunity presents itself. You will fail, otherwise, unless you are well-connected to the ruling class.
And that ruling class wants you to fail. They want to destroy you. Debt is their weapon. Serfs were tied to the land, forced to work for their masters and give up the fruits of their harvests. They were in bondage. If you have debt, you are also in bondage. You are also a serf. The only difference is that you consented to become a serf. This is intentional. They are resurrecting serfdom and using debt to do it. At some point this may become involuntary, but for now it is still an opt-in process. Don’t turn on the TV and become enamored with beautiful cars. HGTV is bullshit; you don’t need granite countertops and hand-scraped wood floors. Certainly, you don’t need 5000 square feet of McMansion for a family of three. If you buy these things with debt, by assured that your descendants will till the land as slaves.
Government is in debt. Companies are in debt. Individuals are in debt and the lunacy has gone so far that our currency is, essentially, debt-money.
In the future, I have no doubt that modern America will be held up as a nation of fools, selling themselves voluntarily into the chains offered to enslave them.
I posted this little gem as a reply over at Bastion of Liberty, but it bears repeating.
Yesterday, heading back to work from lunch at a Tex-Mex chain, a friend of mine expressed incredulity at the notion that people still fly little single-engined Cessnas around. The things have a terrible safety record. Two of them crashed around here in the last few months.
I responded that the Wright Brothers took their leap into powered flight on a haphazardly constructed, untested airframe constructed from used bicycle parts.
Risk, today, has become a dirty word, a thing to be avoided at all cost. Nearly 50% of people in America are on some form of government assistance, because they cannot dream of standing on their own. They cannot imagine life without a safety net. It’s too risky. They might not make it on their own. The plane could crash down.
But all that dead weight is, itself, a risk. It is a much greater risk than that of mere individual failure.
If you haven’t already, give Nassiim Nicholas Taleb’s book, Antifragile: Things That Gain from Disorder, a try. I found it remarkably insightful about matters of risk.
Slavery exists. Right now. In America today. But it isn’t the sort peddled by the media. They will tell you about racism, or sexism, or whatever -ism is currently in vogue. A group will be called the oppressors, another the victims.
This isn’t the slavery I refer to. Debt is.
To understand slavery, we must go back to another multi-ethnic, hegemonic empire: Rome. The Romans were consummate slavers, and they had no care whatsoever for the race of the slaves or the slavers. It was entirely possible, for instance, for a Black man to become a Roman citizen and own White slaves.
They cared about money. Slavery was a debt that you worked off.
As expert slavers, the Romans knew that a relief valve had to be created. The carrot to go with the stick, as it were. For most of Roman history, it was possible, even common, for the slave to buy his own freedom. It was also common for free men to sell themselves into slavery, even for whole families to do this. This might seem like anathema to Americans today, but in those days a poor family might survive better under a master than on their own. And, indeed, selling yourself into slavery might provide the money needed to help your family prosper. A father might sell himself into slavery to provide a dowry and a good life for his daughter.
The relief valve was imperfect. Sometimes the impetus to slave was too strong and harsh, and a Spartacus-like figure would arise, desiring to free the slaves. Other times it was too weak, and the economy struggled for a source of cheap labor. This happened in the Western Empire in the fourth and fifth centuries, as Christianity excised the practice from the Empire.
Spartacus. Let us just say that if he were alive today, he wouldn’t care much for bankers either.
Anyway, slavery in Rome was a system of mutual obligation. The master had to care for the slave, provide food, housing and the like. The slave was required to work for the master. The master often gave the slave great discretion in this; many were trusted advisers, artisans, blacksmiths, etc… Many were educated at the master’s expense, in order to be more useful workers. The slave might simply walk away from the master’s residence a free man (unless caught later — but that was more difficult then). But they didn’t, because life as a slave was often preferable to the alternative: life as a poor free man. And a pleased former master was a good person to have on your side. Slavers were rich and well-connected, generally.
Is this starting to sound familiar? It should. This is exactly how banking works in modern America. The bank provides you with the means to obtain a home, education, transportation, financial cushion (credit cards, etc…). In return, the bank owns your labor over a specified period. Oh, it’s more humane today than it was for the Romans. The chains are invisible, the accommodations much better than before. You can choose which jobs you wish to do, so long as the payments are made. But this is more a function of technology than any kind of sociological progress. It is more efficient in a modern context to do it this way. Overseers, whips, chains and fences are expensive, after all.
Like the slaves of old, one could do a great deal of work on the side. Any time not spent in the pursuit of the master’s orders could be used to work for yourself and collect savings. Many slaves, born into slavery, obtained their freedom in this manner. They paid off the debt to the master and left free men, often carrying along substantial savings to start a new life somewhere.
When I was a child, my grandfather used to take me into church more than I liked. I found the blathering sermons profoundly boring, as most children did. But I remember one in particular.
The pastor quoted a passage from the Bible dealing with the obedience of the slave to his master. He stopped to explain to the audience that the Bible was using terms in a different manner than we used them today. The slave was an employee, he said, and the master an employer, or a man to whom obligation was owed. Whatever else the Bible might be, it is a window into the ancient Roman world and its ways. In this, the book and the pastor were right.
You are slaves. You have debt, you have obligation to labor for another. And only when that debt is discharged and gone will you have finally purchased your freedom. Consider this next time you sign on the dotted line.