Jack TenneyExtra Point

by Jack Tenney, Publisher

November 2012

So, is debt bad?

Actually, debt is usually very good except when incurred out of time sequence.

Let me explain.

Alexander Hamilton, long in economic skill but open to sucker punches in a duel, insured the longevity of our new nation by insisting on the issuance of national debt. By financing a war of independence with bonds, the resources adequate to accomplish the task were marshaled and the benefits of the victory were paid for by the benefited. Imagine the likelihood of winning the War of Independence without incurring debt.

Hamilton argued for the consolidation of the various war debts of the former colonies into a federal debt. It would not only drop the interest rate but solidify the support for national honor by having the debt paid down. The national revenue sources in those days was from the custom houses — kind of like a value-added tax.

A similar strategy is being tailored in Europe where sovereign debt may be converted to Eurodebt.

Here’s an example of bad debt: IOUs won playing Texas Hold’em with a minor. If you lose, you pay; if you win, you receive an unenforceable promise to pay.

Here are some examples of good debt.

Leveraged secured debt: stock margin accounts; mortgages; revolving collateralized debt. These debts give creditors comfort and debtors enhanced profit opportunities. Of course, should the collateral deflate, a margin call will ensue making the creditor whole and the debtor the poorer.

Bonded debt of states and municipalities. Based on the full faith and credit of the issuing party, creditors will grant low interest rates (because of income tax–free status and the credit rating of the issuer). The issuer is able to pursue capital projects with long-range benefits, which future taxpayers will pay for as the benefit accrues.

Trade debt: credit terms, offered by suppliers to dealers, which encourage sales and subsequent resales from which the trade debt is paid. Trade debtors earn the creditor’s terms by paying the debt.

Without these good debts, economy on every level slows and declines.

There are a few caveats regarding debt of every kind — personal, business, or governmental.

Do not borrow long to invest short. This means you shouldn’t mortgage the farm to bet on the Red Sox or even the Patriots, Bruins, or Catamounts.

Do not borrow short to invest long. This means you should not buy land with a credit card.