In my daily blog reading I came across an interesting discussion on the government debt. There's only so much you can write in a comment, so I figured I'd blog about it myself.
Most personal finance bloggers will proclaim the benefits of being debt free, living below your means, and saving for various reasons. I agree with the sentiment, but I think we need to be careful that we don't over generalize the point here. For example, we save to meet goals, not because we like to stare at money. If you don't set your goals, saving money isn't bad, but it's not really serving its true purpose. Believe it or not, debt can serve a purpose too.
When I was reading in Economics about the government spending and government debt, I found what was not said much more interesting than what was said. There was no talk over whether debt was good or bad, or if the government would be better off in a surplus or not. Reading the textbook, I realized people would be better off running their own finances much more like the government. I know that's probably contrary to everything you've ever heard.
Debt has really developed a bad name over the years. I've had panic attacks in the past, worrying about how I was going to manage to pay my Visa bill or mortgage, so I understand why some people feel that way. Not only that, but while many of us received no real financial advice from our parents, I'm sure most of us heard again and again that debt was horrible. However, I believe this is an over-generalization. Debt can be horrible, but just because it can be, doesn't mean it always is. After all, I'm sure most of you heard the contradiction from your parents that the mortgage was a "necessary evil." I know I did.
The problem is that the word "debt" is being used too broadly. I would agree that consumer debt, which is a form of debt, IS a terrible idea. Consumer debt is debt used to fund the consumption of goods and services for personal or family use. This is what most of us are referring to when we say that all debt is bad. Examples: Any over due credit card balance, car loans, buy-now-pay later loans (appliances, flooring, etc), lines of credit for household items, etc.
On the flip side though, debt can also be a great tool to allow you to invest in opportunities you wouldn't be able to do by your own means. For example, educating yourself with student loans in order to provide your family with a greater income than you're currently receiving. Buying a real estate investment property that translates into higher cash flow. A working capital loan that allows you to start or grow your own business. Of course there are risks involved, but what in life doesn't have risks. There is no guarantee you'll have your job next month, or your so called safe investments will pay off either.
Governments work the same way. They borrow (or should) to expand our future income potential and to improve our economic state. Whereas consumption spending such as health care, schooling, etc. needs to come from our revenue sources. Borrowing for these items (as badly needed as they are) is just a bad idea. Funds for these items can only come by reducing our expenditure in these areas or moving funds from other areas of consumption. Just like we do with our own personal budgets.
Borrowing for the Olympics makes sense because it brings in more tax revenue, future tourism, and greater immigration. Borrowing to house the poor doesn't have that same return unless this leads to increased employment and lowered use of government services.
Have you been lumping all debt together? What are your thoughts on this "great evil"?