Leveraging debt
Now, middle-income consumers—the $30-100K income bracket that most of us fall into in the Virgin Islands—use debt for a mortgage, or a car. However, for food, drink, clothing, and lower-priced items that are essential, such as rent, electricity, and water, middle-income consumers use cash that is available and not borrowed.
OK. There are two main types in the economics tale, producers and consumers, and then there are further sub-divisions: savers and spenders, employed and self-employed, high income, middle income, low income, and even homeowners and renters.
The rich – the 1-10%, are high-income consumers, savers, and investors with net pay of 250K and above. The rich tend to be frugal: savers. The rich also appear to adopt a culture of savings and investment as modus vivendi. The rich are supply-siders: production oriented. They further adopt devices such as using debt in creative ways such as using other people’s money in various ventures. A blogger to this writer’s column stated that ‘’ the rich leverage debt to get richer while debt makes the middle class and poor, poorer.’’ There is substance to that assertion.
The 90%, that is the middle-income and poor, spend on liabilities that are not tax-deductible using debt. The rich on the other hand use debt for investment in assets that are tax deductible and that earn revenue. The rich use debt for assets that put money in their pockets. The rest use debt for liabilities that depreciate and lose money like cars and credit card spending on vacations and the like. Bear in mind that both types need each other. Investors and producers could not exist without consumers, and consumers need the products produced by businesses, corporations, and investment.
OK. Modern governments also spend other peoples’ money, and leverage debt. Bear in mind government is a different economic beast from a private individual. Government is a vast organization- employing hundreds of thousands in some nations- that rules through the acquisition of power by various means.
Most governments operate on deficits and depend on debt. Governments tend to spend more than they earn; they operate on fiscal deficits. That shortfall is debt, provided by banks through investors.
Investors and banks consider lending to government a safe place to keep their money. Albeit, interest rates returns to investors from government lending is lower than interest rates from private businesses and individuals.
Financial capital- investor cash-derives safety and security by lending to government. Governments use bonds, treasury notes, and various instruments as a means of deficit spending, and raising cash when there is need. However, only governments with a history of transparency and accountability have the credibility to raise cash in the preceding manner.
It is safe to assert that the majority of middle-income consumers live paycheck to paycheck. In the USA credit-debt is a way of life and nearly half of all residents are $500 away from broke. Debt keeps millions of consumers in the game, so debt is far from a bad word. Debt keeps capitalism going; debt makes the world go round. The diligent use of debt by individuals, organizations and government, can lead to El Dorado.
On the other hand, debt is a factor in growing inequality as the returns on debt capital make the wealthy, wealthier still.
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10 Responses to “Leveraging debt”
Nonetheless, today, borrowing is commonplace in both the pubic and private sectors. Debt is incurred to build single and multi-family housing, to start businesses, to buy vehicles, boats, appliances, to pay for education and training, electronics, etc. Government also borrows to fund capital projects and other needs. .
Debt is money. Borrowing creates money in the economy and boosts the economy. The rich and poor uses debts differently. The poor and middle class tend mostly to borrow to spend on liabilities, ie, cars, electronics, etc. Spending on liabilities takes money out of consumers pockets. The rich on the other hand, borrow Other Peoples Money (OPM) to invest on assets which are tax deductible, ie, Multi-family homes, etc. Investing on assets put money in investors pockets. Through the golden rule, ie, he who has the gold makes the rule. The rich uses tax and debt to get wealthy. Though the tax rules are for everyone, the rich is better positioned to exploit and use tax and debt to get richer through portfolio income, passive income, phantom income, etc. The rich uses all situations to get richer, ie, crises, wars, crashes, bull markets, etc. On the other hand, debt and taxes make the poor and middle class poorer.