Gambling future wealth via debt
Debt is borrowing from the future.
There's an idea that you need money to make money. So if I have money, I can invest it along with hard work and come out with enough money to pay off the debt AND have money left over to spend on my living.
There was a fun game on the old Apple II+ computer in the 1980's called Taipan, where you could trade between 7 cities on different items from "General", to Arms, and Silk, and up to Opium which was worth the most per unit weight. The game you can begin with a small ship and no debt, or a larger ship with guns WITH a debt.
The debt interest was horrible, like 10% per month, with one month being the time to go between cities. However a good trade could still make more money. A strange thing in the game, you could borrow up to twice as much cash-on-hand as you had. So basically everytime you can into HongKong port, you borrowed a maximum amount of money, tripling cash on hand, which allows more cash for buying cargo and making more money. Because the initial debt was much higher than cash-on-hand, borrowing MORE was better because it increased operating money for getting rich.
Another game, a gambling paradox is double or nothing. Usually it is considered a question for the winner, but think from the point of view of the loser. If I bet $10 and lose, then I'll bet $20, and if I lose, I'll bet $40. All I need is to win once, and I win back ALL my original loses and double that in the positive.
You can play the same game with lottery tickets. Buy one, then buy two, then buy four, and keep doubling until you win the lottery.
What's the FAILING of the doubling theory? Exponential betting would seem to beat any odds. However it only works if you have an unlimited ability to borrow or spend to bet.
All that works if you have known odds, while in the economy the game is not so predictable in the future. There WILL be near "sure things", like buying cheap land in an expanding landscape and selling high, but it only works as long as the city keeps expanding.
Imagine you borrowed $100k to buy property, and sell it 10 years later for $1 million, more than covering your loan and interest. Then you invest the $1 million, and borrow another $1 million, in more cheap land, and then sell it 10 years later for $20 million. Well, all well and good, but suddenly a economic depression happens and you lose 10 years and need 20 years to get back your investment value. Well, if you're unable to pay the interest to wait out your investment, you'll have to sell early. AND worse, if your borrowing margin gets to be too high, your sale price might not even make up the selling value.
Well, I just wanted to state these stories to give some perspective on debt. When times are good, and the economy is expanding, taking on debt can be a good deal. HOWEVER when things turn down, you have to have the resources to pass through the down-times without selling your assets. Too much debt can means too much interest.
I'm a financial conservative, rather have NO debt at all, even as I acknowledge prosperous times debt can create wealth.
My BIGGEST concern in this "What if our wealth comes from an unsustainable source?" What if the future will have LESS energy available than the present? What if the debt will NEVER be repayable, no matter HOW good I do?
I believe we're heading into an unknown future of declining resources and that the "easy wealth" of the past will no longer be as easy. Blind investors at least should get out sooner than later, and that includes me. Even my 401(k) seems like a bad deal, needing to TRUST someone else to invest MY money.
I don't know WHEN our collective debt will catch up to us, but I'm convinced our "keeping just ahead of our debt", and running things on credit is foolish and we WILL pay sooner or later.
SOME day our credit lines will max out, and we'll see what hits the fan then. I'm ANGRY by this conclusion, and worried for others more than me, but I don't have an answer. I've been very fortunate, and so many others have too. We are spoiled, and we CAN be making better investments now that will sustain us in the future.
There's an idea that you need money to make money. So if I have money, I can invest it along with hard work and come out with enough money to pay off the debt AND have money left over to spend on my living.
There was a fun game on the old Apple II+ computer in the 1980's called Taipan, where you could trade between 7 cities on different items from "General", to Arms, and Silk, and up to Opium which was worth the most per unit weight. The game you can begin with a small ship and no debt, or a larger ship with guns WITH a debt.
The debt interest was horrible, like 10% per month, with one month being the time to go between cities. However a good trade could still make more money. A strange thing in the game, you could borrow up to twice as much cash-on-hand as you had. So basically everytime you can into HongKong port, you borrowed a maximum amount of money, tripling cash on hand, which allows more cash for buying cargo and making more money. Because the initial debt was much higher than cash-on-hand, borrowing MORE was better because it increased operating money for getting rich.
Another game, a gambling paradox is double or nothing. Usually it is considered a question for the winner, but think from the point of view of the loser. If I bet $10 and lose, then I'll bet $20, and if I lose, I'll bet $40. All I need is to win once, and I win back ALL my original loses and double that in the positive.
You can play the same game with lottery tickets. Buy one, then buy two, then buy four, and keep doubling until you win the lottery.
What's the FAILING of the doubling theory? Exponential betting would seem to beat any odds. However it only works if you have an unlimited ability to borrow or spend to bet.
All that works if you have known odds, while in the economy the game is not so predictable in the future. There WILL be near "sure things", like buying cheap land in an expanding landscape and selling high, but it only works as long as the city keeps expanding.
Imagine you borrowed $100k to buy property, and sell it 10 years later for $1 million, more than covering your loan and interest. Then you invest the $1 million, and borrow another $1 million, in more cheap land, and then sell it 10 years later for $20 million. Well, all well and good, but suddenly a economic depression happens and you lose 10 years and need 20 years to get back your investment value. Well, if you're unable to pay the interest to wait out your investment, you'll have to sell early. AND worse, if your borrowing margin gets to be too high, your sale price might not even make up the selling value.
Well, I just wanted to state these stories to give some perspective on debt. When times are good, and the economy is expanding, taking on debt can be a good deal. HOWEVER when things turn down, you have to have the resources to pass through the down-times without selling your assets. Too much debt can means too much interest.
I'm a financial conservative, rather have NO debt at all, even as I acknowledge prosperous times debt can create wealth.
My BIGGEST concern in this "What if our wealth comes from an unsustainable source?" What if the future will have LESS energy available than the present? What if the debt will NEVER be repayable, no matter HOW good I do?
I believe we're heading into an unknown future of declining resources and that the "easy wealth" of the past will no longer be as easy. Blind investors at least should get out sooner than later, and that includes me. Even my 401(k) seems like a bad deal, needing to TRUST someone else to invest MY money.
I don't know WHEN our collective debt will catch up to us, but I'm convinced our "keeping just ahead of our debt", and running things on credit is foolish and we WILL pay sooner or later.
SOME day our credit lines will max out, and we'll see what hits the fan then. I'm ANGRY by this conclusion, and worried for others more than me, but I don't have an answer. I've been very fortunate, and so many others have too. We are spoiled, and we CAN be making better investments now that will sustain us in the future.
posted by Ares Olympus at 11:49 PM
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