Part 2 of a two part series on debt and freedom.
Is all debt bad? Should you never buy things?
I’m not arguing that you don’t buy things, but flip this around.
Instead of saying,’how can I borrow to buy this now?’ instead ask, ‘how can I increase my income to buy this sooner’.
If you can’t increase income, then wait.
Are there exceptions to this?
Yes. If you follow business school logic, then you should borrow money to finance asset purchases to increase income. I’d agree to a point. For me, it is about the level of the investment vs. the loss of freedom. Prudent borrowing for significant increases in income make sense. Large unproven investments don’t. This is common sense. Betting a company using borrowed money (we often call these mergers) is dumb. Most mergers fail, most don’t deliver promised value, so again, minimise risk and buy smaller assets at a pace you can assimilate them. This worked for Cisco, and hundreds of other leading companies. Big takeovers are painful, risky and divert attention from being a great company.
Personal finance writers say that mortgage debt is good debt. I agree to a point. It is debt, but you need somewhere to live, but the basic rules of evaluating debt vs. freedom still apply. Be prudent. Big debt reduces freedom. Very big debt is stupid. House prices may rise, but not for a while. You may see the price rise, but we are more likely to see inflation rise and you lose the house. Better have a smaller house and be confident you can keep it, then a large one that you risk losing (big houses cost more to run, so the total cost of ownership is much higher).
For me though, there is one other type of debt that is OK. One type that individuals, companies and countries should borrow for:
It doesn’t matter whether you are an individual or a country, investing in your capability to be better at what you do, to raise the level of what you do is a great thing. The benefits for you personally, for society and ultimately for humanity are all positive. The challenge here is not the absolute value (education is rarely a wasted investment), it is the timescale of the payback period. Longer is better, it gives you time to earn and pay back without risking freedom. Shorter payback periods risk freedom (which is bad), so the right decision can be to not invest. This means that the decision needs to favour the decision to invest, but at a level where the loss of freedom is managable.
When I see application levels in 2012 for Universities in the UK falling, then we have the mechanism wrong. People are making the decision that the debt is not worth the loss of freedom (in many cases they are correct). What we should see in times of economic austerity (and by the way, this is here for a generation), is the foresight from politicians in particular to take the long view and change this equation so that investing in yourself, in raising the bar for the individual, for society is a good thing. The introduce mechanisms and payment models (business models in the commercial world that incentivise this). Today, they don’t.
Why does this matter?
Because this is how you increase income and total value. Whether as an individual, a company or a country. If we want to fix the finance problems personally and as a country, we need to be able to increase our income. This requires investment. For people this means education. We still need to cut expenditure, so most of the cuts are right, but NOT in education. It is education which raises our ability to generate income. There are a host of other factors too such as removing red tape, reducing the cost of running businesses, and these are also correct, but they are essentially the same thing – increasing freedom. Don’t focus on micro-policies, look to bigger ideas which shift the equation.
Reducing costs for businesses, reducing red tape all increases freedom. This is good. If debt and freedom are linked, then changing one side impacts the other.
Should we prioritise education over health spending, over defence, over social security, over any other demand on government?
My view is simple, yes.
All of the others are costs. Costs should be cut, the only thing you should invest in is assets, that is things that grow in value – and people are the ultimate asset.
Investing in education is the best way to grow personal and national income. Cutting spending reduces outgoing (debt), but has a number of other consequences, namely a reduction in demand and a reduction in confidence. Not just consumer confidence, but ambition. It is the loss of ambition and confidence that is the problem. People can live with cuts and austerity and falling service if they can see the long term end goal is better, and worth it. We put up with house renovations, painful exams, visits to gym, diets and all other personal sacrifices because we focus on the end goal.
Once we lose ambition, we don’t seek to grow, we seek to minimise our losses. We accept where we are and we make this best of it.
This is the complete opposite of what is needed.
The same principles apply to people as they do to a country.
The problem this time is that if we don’t have the long term positive vision, it is hard to see the benefit of the cuts, and this is why cutting without a vision of a long term positive goal is wrong. Reducing debt is good, no doubt about it, but this should be to meet a long term benefit. Simply cutting without defining the benefits, or making any investment will make our problems much worse. It should have balance in this. We are not saying cut this to protect that. We cut everything, we cut across the board. The result as I said is a loss in confidence and opposition to the cuts. This worsens the effect of the cuts as the loss of confidence at a consumer and business level amplifies the impact. At a human level, for the poorest and least educated in society (the most vulnerable) the impact is crushing. Not painful, not challenging, but crushing.
It destroys people. It destroys their ambition; it destroys their confidence in themselves and it destroys their health.
And this is where politicians are failing us.
Cutting is easy. You see where the expenditure is going and cut it. Simple as that.
It really is that simple. Start with the big numbers, cut these.
Find lots of smaller ones that are less visible and cut these harder.
For contentious cuts, simply promote those as policy changes over the longer term. They are still cuts.
The skill is not cutting, but reducing expenditure whilst not harming our future, and in this we are failing. Falling growth rates (second recession is predicted), plummeting consumer and business confidence and a loss in applications to University (and a host of other indicators) show this.
Cutting is one side of the equation. The other side is being completely missed.
We are not defining our end goal, we are not defining what we are cutting for. We are not investing in our ability to grow income and get out of this position.
If confidence remains low, then continued cuts will not only reduce expenditure, but will impact our ability to generate revenue. This decreases income – the very opposite of what is needed. For companies, it commits them to a slow and painful decline. For people it locks them into poverty and low-wage incomes.
Take any job, any field and think about this:
Doctor, mechanic, designer, teacher, driver, builder, telephone sales, writer, engineer …
- Don’t invest, don’t learn, don’t grow = static income, then falling income. Ultimate end goal can be unemployability.
- Invest in yourself, be better at what you do, produce better goods, deliver better services, increase quality = sustained, then growing income
This is the same for businesses.
It is the same for countries.
So don’t simply argue against the cuts. They are needed, but challenge politicians to do their job and lead. To show how we will prosper over the long term, how we will increase personal and national income and attain a sustainable, then secure position. Cuts alone will not work.
If the politician is devoid of ideas, then share yours. Contribute. Share ideas at online forums, policy groups, consultations, surgeries, anywhere your voice can be heard. Challenge them not to cut, but to grow. Challenge the logic and challenge the vision.
And if none of this works, stand against them. Nothing is as effective in getting the attention of a politician than the prospect of an informed candidate with ideas and popular support standing against them.