The debt conundrum

The car is starting to squeak a lot more than it used to, the suspension may be shot soon, and it’s overdue for a transmission flush — but I have to make the monthly payments first. I should be saving up to buy the car that will replace this one — and the computer that will replace this one — and the lawn tractor that will replace the one I bought five years ago — but instead I am spending hundreds of dollars a month to pay the balances on the car loan and the credit cards that I haven’t used in more than a year.

And that’s the problem with debt. A debt is a trade — you exchange your future income for the money to buy what you want NOW.

The cost of having it now is a little thing called interest. So the $10,000 used car costs you $12,500. Is it worth it to have it NOW? That depends on whether you could have used the other $2,500.

Essentially you are gambling that nothing goes wrong for the life of the obligation.

Actually, for it to work perfectly, you are gambling that your income will increase and you will get $12,500 worth of value from the vehicle, so that you don’t miss the extra $2,500.

It all works more or less acceptably until something goes wrong with your income. Suddenly you lose your job and you can’t make good on the exchange — you don’t have money coming in, so it can’t go out. They take the car and alert other businesses that you’re a bad credit risk. Now you have no car and no ability to buy another one — at least if you want to buy on credit.

People are starting to see through the scam. That’s one reason why home sales are down and the economic recovery is anemic — people are starting to save for what they need instead of going further into debt than is wise. They’re also tired of paying hundreds of dollars a month to pay credit cards that they haven’t been able to use for years because they’re maxed out, and the monthly payment is only slightly more than the obscene interest charge.

As they pay off these loans and save enough money, they’ll start to spend again, with bigger down payments or buying with cash — but in the meantime sellers of goods, especially big-ticket items, are hurting.

About half of the country seems to understand this when it comes to spending by government. A national debt of $14,500 billion is not seen as wise. But the other half seems to believe that constant borrowing combined with steady or increased government spending is sustainable.

Paying off the national debt will hurt, but it won’t hurt as much as carrying ongoing obligation to the owners of the government’s debt.

You can balance the budget and cause a lot of temporary hurt, or you can maintain the status quo until it all collapses — in which case the hurt will be deeper and, if not permanent, at least lengthy. Either choice hurts. No wonder so many politicians are paralyzed.

Originally posted July 19, 2011. The national debt is now nearly $29,000 billion. At least my credit cards are now paid off, although it took four or five more years.

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