Economies Based On Debt

One of the things I’ve come to realize over the last year is that in most cases, debt is horrible thing. Granted, many businesses look towards debt as a way to fund capital purchases in their beginning stages, and I have no problem with small business loans. But all the other debt that people are addicted to is ultimately bad for the economy in general.

There are many people who believe that the reason housing prices are skyrocketing in North America, as well as education costs, is due to the availability of cheap credit. I’m one of those people. Stated another way, housing and education costs would be forced to come down if people couldn’t take out massive loans in order to fund them. It seems almost self-evident if you think about it – a product or a service that people can’t afford to pay for must eventually come down in cost.

I’ve read a lot of books that talk about debt, but one stated the net effect of debt in a very elegant way.

Debt means you have to work a lot harder to obtain the same things in life.

A Canadian mortgage is a good example. Let’s say you took out a 35 year, $300,000 mortgage. By the time you’ve finished paying it off, you’ve probably paid close to a million dollars in combined principal and interest payments. So while you now own a $300,000 asset (let’s assume it hasn’t significantly appreciated just for the sake of simplicity), you’ve spent an extra $700,000 to acquire it. That basically means you had to work 3.3 times as hard for that asset – stated another way, it’s almost like for every day of your life you worked and got paid for it, you put in an extra 2.3 days and worked for free. Doesn’t sound like a good deal, does it?

That extra money doesn’t really help the economy – it simply helps bank profits. It would be far better if that money were invested, or saved, or handed down to the next generation.

I want to contrast that hypothetical (but relevant example) with the situation in Buenos Aires. A typical 1 bedroom apartment here costs around $50,000 USD. Granted, the city isn’t as luxurious as it once was, but it’s still called the Paris of South America, and it’s still one of the top ten destinations to visit in the world (as ranked by Time this last year). So why does a one bedroom apartment in a city of approximately ten million people only cost $50,000?

Simple, there are no mortgages. That means everyone has to pay with cash.

That changes things, obviously. For example, many people have to save most of their lives to afford a house. But when they do have the money, they pay for the house in cash and own it outright. Most kids tend to live with their parents until they are in their early thirties, which helps them save money, get an education, and help out around the house.

I’ve been thinking more and more over the last few years that if I buy a house, I’d like to ultimately buy it outright. I don’t know the future, so who knows, maybe in the next few years I’ll have a mortgage like everyone else. But I’m quite content to continue renting until the point in the future, obviously years and years away, when I can simply buy a house without a mortgage. It doesn’t happen very often, but saving hundreds of thousands of dollars simply by waiting doesn’t seem like such a huge sacrifice, especially if that’s money I can use to help my future family out with.

While I may end up back in Vancouver next year, it’s not lost on me that I can just continue traveling, bouncing from place to place for a few months at a time, leveraging the fact that the Canadian dollar simply buys more things in different parts of the world. By renting an apartment in Serbia for a few months, I can save almost $800 a month in rent compared to back in Canada. Even if I factor in the flight, I’m still saving $1400 or so. In fact, other than the expensive side-trips I’m going to take here and there (for example, Machu Piccu), I suspect in the end that I’ll have saved money on my traveling adventures, at least to living the same lifestyle back home.