Don’t look to our government as a model in understanding good vs. bad debt. Every day the media highlights another case of the government’s ignorance in the way money should be used. One side of the aisle says it is a revenue problem and we need to raise taxes on the rich. The other side says it is an expense problem and we need to cut government spending. They both miss the point; the real answer is it is a debt problem.
To be more specific, it’s about understanding the difference between good and bad debt. While Washington bureaucrats may not know the difference (or they know the difference and purposely try to ignore the difference between good and bad debt as a way to get re-elected), successful business owners understand good and bad debt are not the same. Although I’ve written about it before, and at the risk of repeating myself, good debt comes in the form of investments. The dictionary defines investments as “Money or capital used to gain profitable returns, as interest, income, or appreciation in value.” In essence, good debt represents a sacrifice made today, in terms of money paid out now to repay the invested debt, against a brighter future for tomorrow.
The framers of the Constitution understood the difference between good and bad debt and envisioned that our government could incur debt to build infrastructure or to pay for wars, which would benefit future generations.
Bad debt, by contrast, is essentially borrowing money from the future to fund consumption today. Bad debt represents a promise to sacrifice in the future to pay for a bright today. As a consumer, debt generally falls into the bad debt category. I’ll get that new T.V. today and will agree to make payments on my credit card into the future. Washington has seized Joe consumer’s ignorant view of debt and removed the distinction our constitution’s framers had in mind when they authorized the government to establish good debt.
Businesses can’t survive if they undertake bad debt at the expense of good debt any more than our government can survive by burdening our future generations at the expense of a better today.
