DURING the last few years, discussions about both national and personal debt have taken on a quality of almost religious passion. Anytime now there may be a man coming down from a mountain, speaking of a burning bush and holding stone tablets inscribed with the “Debt Commandments”.
Apparently, debt is like nuclear energy that can be used for “good or evil”. To a certain extent that is valid. Borrowing money to make more money, such as for opening a soon-to-be profitable business, does make sense. But the financial advisors say that borrowing money to buy the latest Smartphone is foolish.
Actually, in one sense, there is no difference between the two ideas except that the business gives off a financial reward and the smartphone gives back a personal reward. In both cases, a person is borrowing today against future income for a particular benefit. Maybe buying that new smartphone is really patriotic, since the government is spending billions of pesos on free Wi-fi in public places, and you need that phone to access it.
If the government borrows P75 billion to build an industrial park and leases it to private firms, that is “good” debt that reaps a financial reward. If that P75 billion is used to give government Wi-fi in “public hospitals, plazas and transport terminals” so that “families can now frequently contact their loved ones”, that is also “good” debt that offers a personal reward.
The problem with debt is that most people and government—especially government—believe that debt is not a problem, as long as the “minimum monthly amortization payment” can be made. But here is the reality.
Using the US data—which is the most reliable, if not the most available—the approximate annual GDP is $16 trillion. Assuming a 3.5-percent yearly growth, the annual increase would be $560 billion. But with an annual interest payment totaling $3 trillion, the debt holders are getting five times more than the increase in gross economic activity—$3 trillion versus $560 billion.
Is your personal annual interest charges and payments on your debt less or more than your annual increase in income?
Any borrowing for a personal or public project, must first include a specific purpose and a specific objective of reward. The “benefits” must fit a common sense definition and, unfortunately, government does not receive many awards for acting with common sense.
Constant monitoring of the progress toward that objective must be made. The financial considerations for borrowing money must be projected, through both the term of the loan and, at least a substantial portion of the life of the project.
But this fact for both corporate and government—particularly for government—borrowing must always be remembered; everyone pays for the debt. For example, whenever a person buys a product, the final product price includes the interest cost. The purchase of that product includes the interest cost paid by the seller and that is paid for by the purchaser.
Government seems to think that it is borrowing money today to be paid from its income in the future. Wrong. Government is borrowing money today that will be paid from your future income.