Money X Finance 6/3

Soviet_Poland posted.....

I'm going to explain how debt can generate growth that otherwise wouldn't exist using pb&j's as an example.

Your allowance is enough to buy 1 pb&j per day, or enough bread to make 5 per day. You choose the bread, but now you don't have peanut butter or jam. Billy has peanut butter, and he'll give you a jar today if you give him 1 pb&j for every day the next week. Sally has jam and is willing to make the same deal.

Now you have all the ingredients and can make 5 sandwiches a day. Your little brother needs a distraction so you give him a job making 2 sandwiches a day and he gets to keep one, and you make 3 a day. Then you give your friend Alex a sandwich every day because his family can't give him an allowance to afford it.

On Monday, you owe 10 sandwiches, but can only afford the bread to make 5. But that's okay, because you can carry the debt through the week. Each day you slowly pay off the debt using pb&j's earned through proper management.

In the first method (TC's advice), you can buy 1 sandwich a day and if you need another you have to work to pay it off. In this second method (carrying functional debt) you created a commodity market (Billy and Sally), employment (little brother), and paid for welfare (Alex), while maintaining the 1 sandwich you need a day to function.

I.e., the adult answer. Investment in growth generates income that can fuel further growth.

If we followed TC's advice, we'd still all be living in wooden cabins without electricity, without nearly as many of the advancements as we'd have, without nearly the wealth many nations enjoy.

Basically we'd all be in relative poverty.

I'll level with TC in that on a personal level, a lot of people are personally irresponsible with their lifestyle. People working menial jobs in sales/retail without a lot of earning potential or "career status" spend their money on the latest flagship smart phone, a daily Starbucks frappucino, and other "luxuries" that contribute to their standing in life.

This happens, but is often a caricature of people's lives.

You may hear a story of someone going to an expensive, private university and graduating with $50,000 in debt, but their degree doesn't necessarily qualify them for a specific job in mind. Instead, they're loomed with creating their own potential when most aren't exactly entrepreneurial. That's a bad case of debt.

In my case, I'll graduate with $300,000 in debt from medical school. But the average anesthesiologist salary after residency varies between $250,000-$350,000/yr (and 0.8% unemployment rate = one of the highest job securities; I'm much more likely to lose a job working "whatever job it takes" to save enough due to factors outside my control).

I won't have trouble paying off my debt and my earning potential will FAR exceed the time it would have taken me to work some menial job to save enough to buy my education outright. By then, I'd already be in my 40s or 50s, and then to undertake an extra 8 years of opportunity cost before I started earning as a doctor, it just wouldn't make sense. I'd be retiring 10 years after anyway.

To make less at the end of the day to satisfy this arbitrary desire to be "debt-free" is inane.