Debt, what is it good for...?
Absolutely nothing. Debt is a terrible vulnerability, especially in the bad times. Mostly because it saps future earnings and spending when we need it the most.
Credit however (purchasing power), the productive use of it, is good. But, once that credit becomes debt, it becomes a liability and we have to pay it back (sapping future earnings). That is why we have to use credit productively, because the income generated from that "credit purchase" has to exceed the debt service payments, so we can pay off the debt principle and increase our income or net worth.
Unfortunately, most credit is not used productively. One of the big reasons why is people don’t consider credit as valuable as money (earned from income).
Credit is cheap, easy and fast...
We all know, whatever is cheap, easy and fast, we don't value as much, like credit. Income however, is hard to obtain. Just ask my asshole boss who didn’t give me a raise...just joking Bob :) Since my income is harder to obtain, I place more value on it, because what is more scarce, demand being equal, is more valuable.
If it takes me 4 months to save up $1000, I am going to be very very careful how I spend that money. Because it's going to take me another 4 months to save up again if I blow my money on stupid stuff. Money earned from income is valuable in time and energy.
Credit however is easy. It doesn’t take any time or energy to obtain. If I have access to thousands of dollars of credit right now, I don't have to wait. And if I blow the money that I got from credit, there's more credit where that came from. Plus, I don't have to pay it back right away, I can have $10,000 of debt on a credit card, and only have to pay $25/month. This encourages impulse buying. But that unproductive credit turns into unsustainable debt. And eventually, those lenders come to collect!
Consumer spending accounts for 70% of US GDP.
Consumer spending is mostly run on credit. Politicians, corporations and even your neighbors (either directly or indirectly) encourage consumption through credit saying this is the surest path to the American dream. Even going as far as saying that “consumption” is actually an “investment,” to justify the debt for a house, car, education and/or a business. Even though you should never borrow for an investment.
World economies grow and run on credit and debt. That is why governments encourage corporations to use credit...and corporations encourage the people to do the same. It is ingrained in all of us. But when a recession or depression does happen, because we deleverage unsustainable debt, the people that make-out the best are the ones that have little or no debt, and a healthy emergency fund. The pandemic reminded us of that.
The bottom line, use credit sparingly and productively. Even though credit could potentially get a person to their destination faster (student or business loans), unsustainable debt (credit used unproductively) could lead to financial hardship or bankruptcy if debt service payments exceed their income, which is likely to happen in a bad economy.
Stay frosty people.