Distinguishing the Three Flavors of the Debt Crisis

Ice Cream 3 Flavors

Not all debt has the same economic effect, for like ice cream, there are at least three basic flavors:

  1. If someone borrows to create a business, this is the most productive form of debt, which expands the economy producing real jobs.
  2. Next we have the “bring it forward” debt scheme. This is a mortgage that brings future spending into the present, and actually reduces future economic expansion by transferring that spending to the present. Ongoing payments go toward interest – not economic expansion – reducing economic growth going forward. Job creation is minimal and can only be found in new home/business construction that is temporary and very brief.
  3. Then we have government debt. This is in a category all by itself, for it is deflationary since it is never actually paid off. To service this debt, taxes must be enforced and raised over time, reducing disposable income for the taxpayers. This is more of a destructive economic influence than a constructive one. Even spending on infrastructure robs the future income for the present, which also has a long-term negative impact. Because government jobs are public servant, they produce no positive creation of GDP since they neither produce a product adding to the wealth of a nature. Government consumes the wealth of a nation the same as hiring a maid for home who does not add to the household income.

Those who rant and rave about debt as a whole fail to grasp that debt is not always destructive. It depends entirely upon the purpose of the debt, as well as how/if the debt is repaid.