Debt has got a really bad reputation right now. It’s being blamed for tearing Europe apart, crippling the American economy, cheapening the US dollar and eroding its standing as the global reserve currency. And that’s just for starters.
But don’t be too quick to join the chorus of voices lashing out at leverage and damning debt to hell and back. Debt is not necessarily an instrument of the devil.
…just because some people overdid it doesn’t mean that all borrowing is bad. Have you ever heard the phrase “His ship came in”? It refers to someone who gets a windfall or cashes in on an investment. This adage dates to the fifteenth century, when an investor would finance a trading voyage to India or beyond. Some investors risked their own money, but others borrowed heavily, hoping the ship would return stuffed with spices, silks, and precious stones that would fetch a huge profit. Many of these ships disappeared on the high seas without a trace, but if the ship did eventually come in to its home port, the investor would rejoice, sell the cargo—and pay off his debt.
Indeed, borrowing money is one of the oldest engines of economic growth. If business owners hadn’t been able to borrow, the great trading fleets of Britain, China, Portugal, Arabia, and Spain, to name but a few, would never have been launched, the engineers of the industrial revolution would never have been financed, and the medicines and surgical technology that save so many lives today would never have been created.
Most of us learn how to go into debt before we can even walk. If you doubt this, take a close look at children playing in a schoolyard. The kids having the most fun are doing what every good parent encourages her child to do more than anything else: share. When children share with each other, they make friends, socialize, and mature as human beings. The child that refuses to share risks ending up friendless, isolated, antisocial, and emotionally stunted.
No parent would argue that sharing is a bad thing. And yet sharing is nothing more than borrowing and lending. Fiona learns quickly that she can’t simply take Jimmy’s toy truck if she likes the look of it. Jimmy has to agree to hand it over, and Fiona has to agree to give it back.
Children learn very quickly what an obligation is: Jimmy agrees to share his truck with the understanding that Angela is obliged to return it. Angela is also aware of her obligation. It’s a contract, the breach of which is likely to end in tears—and often does.
Excerpt from Man vs Markets Economics Explained, Plain and Simple, by Paddy Hirsch.
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