The Borrower Becomes The Lender’s Slave

Several months ago I listed my Five Biblical Principles about Borrowing and Debt. The piece I'm going to share with you today is similar to that one in that it quotes one of the Bible's key verses regarding debt. While not a specific Bible-related article, the principles in it are solid and in agreement with what the Bible has to say about debt. Here it is courtesy of Marotta Asset Management:

They say that as long as Americans keep spending, the economy will be strong and unemployment will remain low. Some make the case that "Spend now and pay later" is good national economic policy. Regardless, it is certainly poor personal policy.

Debt is bad. Debt is good only when accompanied by a positive income stream that more than offsets your interest payments. If you, like many, have been spending your mortgage refinance money to meet monthly expenses you are stewing in bad debt.

Household debt currently totals $8.2 trillion (of which home loans account for $5.8 trillion) and that is up from less than $3 trillion in 1991. Consumers tapping surging home prices through wave after wave of cash-out mortgage refinancing have turned their homes into veritable "borrow and spend" ATM machines. Refinancing has totaled $2.5 trillion over the past two years; and home equity loans now stand at about $800 billion.

Today, the average household personal debt is $84,454. The household debt service ratio (DSR) has risen to 13.32% of disposable personal income vs. 10.96% just a decade ago. DSR is an estimate of the ratio of debt payments on outstanding mortgage and consumer debt to disposable personal income. The average American credit card user carries more than $8,000 debt today versus $3,000 in 1990. As a result of all this debt, bankruptcies hit a new record last year with 1.6 million personal filings.

The 2.36% difference in debt service makes a large difference in family wealth. Reducing your DSR by 2.36% over a 45 year working career invested in the stock market would produce almost six times your ending salary and fund one quarter of your retirement.

As a result of growing debt, the American Dream today is more leveraged than at any time over the past half-century. However, consumers continue to spend. Consumption by Americans as a percentage of Gross Domestic Product has reached 70%, which is the highest of any nation. This spending has been largely fueled by equity extraction from real estate and mortgage refinancing and not by wage growth.

It would be nice if the United States could really cure our economic problems by spending our way to prosperity. It almost seems possible as a country. It would certainly be easier than tightening our belts and living within our means.

During the past few years, frugality has almost been equated with being unpatriotic. Nothing could be further from the truth. Spending beyond your means brings misery, poverty and bankruptcy. The truly rich person is anyone whose income is greater than his or her expenses and whose expenses are sufficient to their desires.

Perhaps what we need is more traditional moral philosophy and less Keynesian economics! The wisdom of Solomon is given us in Proverbs 22:7, "The rich rules over the poor, And the borrower becomes the lender's slave."

You are in financial slavery if any of the follow symptoms describes you:

• Couldn't pay cash for your bills and expenses when they are due.
• Have put off the payment of one bill in order to pay another.
• Have looked for quick fixes or quick ways out of your debt.
• Worry about paying large one-time bills.
• Don’t have money left over each month for savings.

Debt leads to the emotional turmoil of anxiety, worry, and frustration. It stresses family relationships and causes you to blame and resent others for your problems. And it preoccupies your soul with the means of life rather than life itself.

You were not meant to live in bondage to debt. You were meant to live a life of financial freedom.

The only two ways out of debt are bankruptcy and frugality. Frugality is preferable. As Thomas Jefferson said before he went bankrupt, "I place economy among the first and most important virtues, and debt as the greatest of dangers to be feared."

Comments

It drives me nuts that Keynesian economics is misunderstood in this way. Keynes (and JK Galbraith) would NOT have stood for deficit spending as it currently stands, either on the governmental level or on the personal level. Their deficit spending was based on a some tenants which seem to have been forgotten:
- mainly: it's possible to get to full employment without deficit spending, but it can take quite a long time; deficit spending quickens recoveries, but also
- only use deficit spending on constructive projects that will provide return; consumer debt would be considered poor debt
- deficit spending is like using a turbocharger in a car, it might be required at times, but it's inefficient. Don't use it during the boom times or you'll overheat the economy and cause inflation/recession cycles.

Indeed, Galbraith wrote a handful of books about how Americans' spending was getting out of hand wrt the benefits. This was back in the 60's.

As is obvious in modern times, fiscal responsibility doesn't seem to be related to political party affiliation, but to intelligent forethought - both on the governmental and personal level.

[John Wilks]

I agree with all the points except: Worry about paying large one-time bills. Even though I can easily make my largest payment, I still worry about it and would much rather not pay it.

-John

[William Tanksley]

I think the one-time bill problem can be overcome without worry by planning for it. Of course we'd all rather not pay a large bill :-), but you wouldn't have to worry about it either if you stocked up some savings. Suppose you know that next year you're going to need a total of $3000 to pay a group of one-time bills. Well, start setting aside $250/month now. No worry -- just clean, clear action.

And sorry to the Keynesian guy -- I also think Keynes missed the boat. He was right that you can buy your way out of a tight spot, but he was wrong to think that an institution that's once given power can ever simply renounce it.

I also don't like his use of analogical reasoning. A little more a-priori would have helped a lot.

[Steve]

I am from Australia and we are facing similar issue. the quote from Proverbs 22:7 is brilliant and very true.

Surely there must be a balance of spending and frugality?

Steve