"Debt is bad" - A refutation


Essay, 2006

4 Pages, Grade: 1,0


Excerpt

„Debt is bad“ – A refutation

Throughout all the times since humans started to exchange goods for trade, there has been the common opinion that debt is a bad, sometimes even shameful thing to have. Thus it is not astonishing that in Shakespeares’ Hamlet Lord Polonius advises his son Laertes: “Neither a borrower nor a lender be” (William Shakespeare, 1598-1602, Act 1 Scene 3), for this clearly expresses the point of view people had and many still adopt. However this would mean a generalization of the term “debt”, which cannot be made that easily: “To say that all debt is bad is to say that all debt is alike – which is simply not true” (Tim Cestnick, 2005, p.16).

If one explains debt as “just borrowing money, which gives us greater opportunities and enhances our quality of life” (Lucy Robinson, 2006) it may not be the entire truth, but it sounds far more convenient. Moreover, this quote implies that there is something other than bad debt: good debt.

Now the question occurs, what actually is good debt?

It is the idea of borrowing money to invest, which means using other peoples’ money to create wealth. From the view of businesses and private households alike, good debt provides long-term financial payoff.

From the economical point of view, borrowing money means that there is cash available at hand, cash that will be used to buy something or invest in something. This in turn is an injection in the circular flow model and will create profit somewhere.

There are three main indicators to look at when differentiating between good and bad debt. The first is the purpose of borrowing, the second the rate of interest and the third is the possibility to deduct interest from tax. This is best explained with some examples, whereat it does not matter if the examples are taken from the business world or from the world of private households, because the principle stays the same.

A common example of debt is the credit card. A credit card is used to buy something and pay for it later, so one could say that it is a form of investment. Alas, usually things bought with credit card are for consumption, therefore perishable and lose value from the very moment they are bought. Consequently financial payoff is not possible. Moreover the interest rate on credit cards is very high and cannot be deducted from tax. Summarising, according to the three main indicators listed above, credit cards are a way of going into debt, which indeed suits to the statement “debt is bad”.

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Details

Title
"Debt is bad" - A refutation
College
University of Applied Sciences Bremerhaven
Course
Financial Management
Grade
1,0
Author
Year
2006
Pages
4
Catalog Number
V77311
ISBN (eBook)
9783638821490
ISBN (Book)
9783656468431
File size
337 KB
Language
English
Keywords
Debt, Financial, Management
Quote paper
Jens Kaulbars (Author), 2006, "Debt is bad" - A refutation, Munich, GRIN Verlag, https://www.grin.com/document/77311

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