Debt, The American Resource

Debt: something owed

That is the second definition of debt according to Merriam-Webster. I'll get to the first later. How can debt be considered an asset or export. I don't have an answer for that but it has. America's greatest export is now debt. Economists will tell you that debt is a very good thing. Especially cheap debt. I will discuss how it is not. Debt although sometimes essential should never be considered a good thing. This is something our greatest generation who lived through the depression will gladly tell you.

The fundamentals of banking are very simple. You have many people who put money into the bank in exchange for a certain interest rate, let's say 5%. The bank then loans the money to somebody else who it sees fit to repay the loan at a higher debt, say 8%. The decent rate for the savings gives individuals reason to loan their money to the bank. The reasonable loan rate gives an opportunity for somebody truly in need to barrow money. It is a very good system and allows for good circulation of the money supply. The banks in exchange make a fair profit.

This is how it used to work. Then we through a federal reserve bank into the mix. Now the FED lends money to the banks at an interest rate much lower then what you would expect to get for your hard earned money. Since the FED is able to create as much as it's fearless leader Uncle Ben Bernanke sees fit. Because of this competition to your savings, banks drop the interest they are willing to pay you to below the FED's rate. This also results in the loans rates that banks give out being cheaper. This is also a bad thing.

You ask how this could be? Why would lower rates on loans be a bad thing? The answer is simple. (The whole point of this blog is to prove that these ideas are simple to understand.)  The public now has access to loans at a very unusually low rate. This gives the people an incentive to barrow more. You now have people with larger budgets for things like their homes. This caused the prices of houses rise. The more aggressive the FED got with its cheap credit, the higher housing prices went. Then in the 2000s when the FED just started dumping dollars on the banks, housing prices sky-rocketed. 200 thousand dollar houses were now 300 and so forth. Of course until it collapsed. Housing prices fell apart and many people lost more hundreds of thousands of dollars of money that wasn't even theirs.

People are now left being having debts more than they could ever afford, with the collateral being worthless. This leads to the first definition of debt according to Webster:

Debt: sin, tresspass