The Debt Effects: The Invisible Hand of Debt

Good Debt, Bad Debt: Knowing the Difference Can Save Your Financial Life
by Jon Hanson

(Page 4 of 7)

The ten-second lesson: "The past is the past - unless, of course, you still owe for it."
— Jon Hanson

Consumer debt since 1999 has grown an average of 14.6 percent per year.
— ABC News

Liberty or Debt?

"Give me liberty or give me death!" cried Patrick Henry, admonishing his fellow legislators to take up arms against the British for American sovereignty. That was in 1775. In today's culture of excessive spending, perhaps Henry's cry would be "Give me liberty or give me debt!" The British have retreated, but millions of Americans, by their own choice, allow credit card companies, mortgage lenders, and every known form of debt or monthly obligation to carry on the work of enslavement. Patrick Henry's famous speech could apply as easily to debt as to death.

It is natural to indulge in illusions of hope - to think that our path is unique, that it cannot lead us to the same end as it has led others. We hear the siren song of popular culture and we are seduced by it, transforming into the typical consumer. Avoiding responsibility, we are given over to our emotions until finally we collapse under the weight of our own desires.

In America you will not be singled out or made fun of for wasting your resources. In fact, you will have many cheerleaders, although most of the cheerleaders will be people who profit by selling you trinkets and assorted junk. Just because millions of others share this same practice of spending everything they earn does not make it a right or proper path to follow.

The culture of spend, spend, SPEND is necessarily created by merchants to keep their coffers overflowing. It has been said that more than 60 percent of the economy is based on consumer spending, in part financed by consumer credit. For those who collect the money, this spending culture is rewarding. For those doing the spending, it is enslaving.

Many speak the language of free men and women, yet daily proceed in the opposite direction.

So What?

The stigma of debt seems nonexistent today. Not so long ago, many Americans regarded debt as a sign that something was morally wrong. Perhaps the availability of credit cards and revolving debt has made us more adventurous and greedy. Also, credit has become abstract and anonymous. Instead of owing the corner grocer and feeling a moral obligation to him, you pay (or don't pay) your credit card bill to a faraway faceless company. The grocer and dry cleaner will still smile and wave hello.

But the "debt effects" linger. Look around - you needn't look far to find someone suffering from the effects of debt. Those not yet suffering may very well be on the road to perdition without even knowing it. Many speak the language of free men and women, yet daily proceed in the opposite direction. Henry Taylor, in Notes from Life (1847), wrote, "A right measure and manner in getting, saving, spending, giving, taking, lending, borrowing, and bequeathing would almost argue a perfect man." Today Taylor would change nothing in this sentence other than ending it with "a perfect man or woman."

Not everyone has the moral or intellectual stamina to set into action a purposeful plan for the future. Yet only those who develop a plan and follow it will succeed.

Those who live in a constant state of "want" become slaves to their own passions. Many go further - voluntarily putting on the shackles of debt - not only spending all they earn but also borrowing into their future for today's excesses. When we use debt to acquire products or services, it is not really a payment for the product or service, but a claim on future earnings.

In its early stages, debt causes no pain. On the contrary, the insidiousness of debt lies in the very fact that the use of debt gives its victims temporary pleasure. A large majority of Americans will risk financial leprosy to have the temporary pleasure afforded by spending in advance of earning.

Debt - the Equal Opportunity Enabler

Credit to the untrained appetite distorts reality. It provides the emotions with vast avenues to explore. Credit allows emotions to trump math - stretching our purchases far into the future and reducing the "right-now cost" to a few dollars a month. Soon the emotion subsides and you are left with the reality of the math. For some people it's like the directions on a shampoo bottle: apply, lather, rinse, and repeat. Apply credit, lather up your emotions, and rinse away your monthly cash flow. Repeat.

Most consumer credit advertising uses the "bump and pick" method I discuss in Chapter 2 ("Emotional Hostage"). If you have been part of the buy-now/think-later crowd, take a deep breath and think, Now is the time to begin serious change.

Debt Takes More Than Just Your Money

Adam Smith is famous for his theory of the invisible hand of capitalism. He said that laissez-faire (left-alone) markets naturally adjust because of the self-interest of consumers and the owners of capital. I don't dispute the Scotsman's theory. The sentence above is less than a thumbnail sketch of the whole. I bring it up to propose an antithetical theory: the invisible hand of debt. Many of us look fine and probably are as long as we can make the payments for our excesses. But are we really making any financial progress?

Credit to the untrained appetite distorts reality.

What holds us back from financial success? The most evident of my four debt effects, loss of cash flow, is easy to see; the others may operate invisibly. In Smith's invisible hand theory, capital seeks opportunity to expand and grow, as it is good for the individual owner of the capital and the consumer. In my invisible hand of debt theory, Consumerati individuals suffer from the invisible or nearly imperceptible loss of both time and opportunity. On one hand, consumer debt (bad debt) fuels capitalist ventures because it creates sales and moves the economy. On the other hand, if too much consumer debt is used, the invisible hand of capitalism metaphorically reaches out to slap the consumer as it morphs into the invisible hand of debt. Once we reach the tipping point with consumer debt (100 percent burn rate), we lose the opportunity to participate in a capitalist society. We are on the road to serfdom.

The Four Debt Effects: The Four Thieves,
or How the Invisible Hand Operates

Always remember that debt takes more from you than just money. It is easy to think of debt simply in terms of bills to be paid, but it is so much more. There are four major debt effects:

Loss of freedom
Loss of cash flow
Loss of time
Loss of opportunities

Certainly debt may cause problems beyond these four, but most difficulties come in some form of them.

Loss of Freedom. Debt will eventually keep you from doing what you want to do. When you are loaded with debt, your options narrow considerably. I have often said, "Working while carrying a load of debt is like a prison work-release program. You are released each day to work, but the balance of your time is spent in a mental prison."

Do you work for joy or to avoid the pain of losing your possessions? With a high enough debt-to-income ratio, you may cross a threshold or amount of debt that simply renders earning money a way of avoiding pain. Real progress or joy seems a distant memory.

In ancient Babylon, a slave was able to earn a few extra shekels on his own time, after completing his master's work, to save toward buying his way out of slavery. He could actually redeem (repurchase) himself. We, too, may redeem ourselves from the bondage of bad debt. Perhaps you do not feel like you are in bondage, but if you stop paying your bills, what happens? You find out who your master is. The more bad debt you have stacked up, the more severe your master will be in collecting her due.

Think. When you live and work from week to week, just scratching out a living, are you really any more than an indentured servant? Perhaps you feel like a prisoner who gets weekends off for good behavior. I spent seven years feeling like part of a prison work-release program while I owed a large sum to the IRS. With a high burn rate, are we really any more than a pipeline delivering the fruits of our effort to our creditors?

Is your routine to get up, go to work, come home, eat, sleep, get up, go to work, come home, and eat, only to do it all again the next day? Many people never realize the drudgery of their lives! If we can agree that entry into this cycle is voluntary, then it would follow that leading this lifestyle is also voluntary.

Did you say you are free? Where do you have to be tomorrow? Can you relocate your residence to wherever you want - right now? Or do debts and obligations have a large say in what you do? In Chapter 6 ("What If You Live?"), I discuss wealth metrics; there you find Dr. Buckminster Fuller's simple formula to calculate "useful wealth."

One wit said, "Having a job is like taking a mortgage out on your life." Unless you are born wealthy, you must arrange your escape from drudgery at an early age. Born without wealth, you are at least a part-time servant and are unable to do whatever you want. It is up to you whether you remain in this voluntary servitude or arrange your affairs to carry yourself to financial freedom.

Copyright © 2004 Jon Hanson. All rights reserved. This excerpt, or any parts thereof, may not be reproduced without permission.

About the Author

Jon Hanson lectures to audiences of all sizes on personal finance topics. A twenty-four-year veteran of the real estate business, he is now a full-time writer and public speaker.