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October 14, 2007

Maxed Out

by Dan

I recently watched a documentary on the credit card industry that is terrifying. Words like “predatory” and “inhumane” just don’t seem to be enough. Imagine for a moment all of the injustice and hatred that Martin Luther King struggled against, that generations of Africans endured in this (and other) countries as slaves. That form of personal slavery is being replaced by economic slavery in the form of debt.

At about the one hour mark, they talk a bit about the national debt. One thing that caught my attention is that the entirety of the Social Security “trust fund” has been borrowed and spent by the federal government. All that’s left is IOUs from a government that can’t even balance its budget. Not a good sign for the future.

In May, I published an article I’d originally given in January as a talk in my church on emergency preparedness. I mentioned that the true national debt, as calculated by generally acceptable accounting principles, was about $50 trillion dollars — much more than the $9 trillion generally reported. In March, David Walker, head of the Government Accountability Office, reported that the national debt is on target to increase from $9 trillion to $59 trillion by 2027. That’s $440,000 per family. At 6% interest, you’d have to pay over $26,000 a year in taxes for the government to cover the interest payments. That’s in addition to taxes for anything useful, like roads or defense.

In my review of The Richest Man in Babylon, I mentioned a paragraph I re-read several times because it stretched my brain:

Wealth grows wherever men exert energy. If a rich man builds him a new palace, is the gold he pays out gone? No, the brickmaker has part of it and the laborer has part of it, and the artist has part of it. And everyone who labors on the house has part of it. Yet when the palace is completed is it not worth all it cost? And is ground upon which it stands not worth more because it is there? Wealth grows in magic ways. No man can prophesy the limit of it.

Wealth grows through human effort. It also appears to grow through debt. One of the reasons our economy has grown so much is because of the heavy use of debt. However, if the rich man in the story had borrowed the money to build his house the interest payments would have made the cost of house exceed what it was worth. How much more? About 2.5 times as much. A credit card would make it closer to 6 times as much.

If left unpaid for very long, debt becomes unhealthy. It enslaves the borrower to the lender in a very real way. Exponential growth, including amortization, is not intuitive to the human mind. We constantly underestimate how much it will cost us to borrow money. Debt is dangerous.

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