Debt: Life's Biggest Luxury?
Hello everyone, I’m Ray, and today I want to discuss a somewhat controversial idea: debt is life's biggest luxury. This isn't just a metaphor; it's a realization that has grown stronger for me over time. Three years ago, I cautioned against the dangers of debt, and some felt I portrayed it negatively. However, considering recent events, I believe this perspective is more relevant than ever.
The Changing Landscape of Debt
Back when the market was thriving, with low interest rates and booming stocks, many embraced leverage. The allure of quick profits led to an increased justification for accumulating debt. Some argued that successful individuals are rarely debt-free, and that only the brave take it on. Others pointed to strategies like mortgaging homes to invest in stocks, claiming these tactics were foolproof.
However, the past three years have brought significant changes. Rate hikes, inflation, stock market volatility, rising unemployment, and real estate declines have awakened many to the true risks of debt. It's no longer as manageable as it once seemed. This isn't about saying "I told you so," but rather understanding the fundamental limitations that debt imposes.
Debt vs. Opportunity: The Gap Year Analogy
Recently, I discussed the concept of a gap year, suggesting it could be a valuable experience. However, some argued that a gap year is a luxury only the wealthy can afford, impossible without savings, and not suited for everyone. While I understand these concerns, I believe the true barrier to self-exploration isn't necessarily a lack of income, but the burden of debt. Therefore, I want to explain three crucial truths about debt, revealing why it might be the ultimate luxury.
Three Truths About Debt
Here are the three reasons to think about debt differently:
Debt Limits Action
Debt restricts your ability to do what's right. This concept has historical roots. For example, the South's reliance on slavery during the Civil War was fueled by the immense debt incurred to purchase slaves. These slaves represented both labor and status, similar to luxury goods today. The high cost of slaves created a bubble, and freeing them would have been financially devastating for slaveholders and the entire Southern financial system. Thus, debt prevented them from taking the morally correct action.
Another example from U.S. history involves dairy farmers during the Great Depression. While often criticized for dumping milk into rivers instead of feeding the poor, many of these farmers were drowning in debt. Excess milk led to price crashes, making it impossible for them to repay their loans. Debt left them with no viable options.
In modern times, consider someone trapped in a toxic job due to overwhelming debt. Quitting, the "right thing" to do for their health and family, becomes impossible. This limitation extends beyond personal situations, impacting societal and governmental decisions. Politicians may promise tax cuts but cannot deliver due to government debt. During financial crises, governments may bail out institutions that are "too big to fail" due to the interconnected web of debt. An indebted middle class may prioritize self-preservation over principles in policies and elections.
Debt can even distort perceptions of right and wrong. While being debt-free doesn't guarantee ethical behavior, it is essential to acknowledge how debt subtly controls and restricts your actions, potentially leading to difficult circumstances.
Debt Limits Options
Debt significantly reduces your choices and possibilities. Consider the increasing number of people "walking the line" by taking extreme measures, a phenomenon often attributed to politics, ideology, or economic despair. However, the role of personal debt in these situations is often overlooked. It's reasonable to hypothesize that many "line walkers" are burdened by substantial debt. History demonstrates that unbearable debt can drive individuals to desperate measures, stripping away all other options and hope.
The concept of options is crucial for navigating uncertainty. As Nassim Taleb explains in his Incerto series, the world is inherently chaotic and unpredictable. Black swan events, which are impactful but unforeseen, shape our lives. To cope with these events, we must become antifragile, embracing randomness and creating opportunities for positive black swans.
For individuals, generating positive black swans requires taking calculated risks, learning from failures, and having diverse paths to choose from. Options provide this asymmetry. If the cost of failure is manageable, even a single success can yield significant rewards. Savings and cash provide a crucial safety buffer, while debt erodes this buffer, turning choices into a luxury.
Growing up poor, my family had little savings. I recall once taking the savings we had to chase a dream abroad and now reflect that I had two cushions: My youth and my family's lack of debt. Many overestimate the savings needed for opportunities like a gap year, especially when young. Exploration doesn't require a complete career break; utilizing free time can still foster growth. However, debt complicates these decisions, making it difficult to even consider alternatives. Many struggle to save not due to low income, but due to debt draining their resources. They lack the freedom to change jobs or explore new paths because the perceived risk is too high.
Debt Makes You Fragile
Debt increases your vulnerability to unexpected events. While risks, opportunities, and black swans are difficult to predict, fragility is readily identifiable. A highly indebted person or system is inherently fragile, unable to withstand shocks and disruptions. Taleb argues that savings and options contribute to antifragility, while debt leads to fragility.
Leverage, the appeal of achieving significant results with less capital, is often emphasized. However, maintaining leverage requires a confluence of favorable conditions, such as low interest rates, rising asset prices, stable income, and a strong economy. The absence of even one of these conditions can cause the entire structure to collapse. The past few years have demonstrated this domino effect, with rising rates, declining assets, and economic uncertainty creating widespread financial strain.
Furthermore, leverage tends to accumulate, creating increasing instability. Individuals may need to dedicate more time and energy to generating income to service their debt, leading to potential burnout. Similarly, governments cannot perpetually print money, raise taxes, or borrow to sustain debt, eventually leading to inflation, currency depreciation, or a credit crisis. This fragility is why debt can be so dangerous.
While success stories involving debt exist, it's essential to focus on the potential downsides. Society often encourages borrowing, making it the default option. However, it's crucial to understand the fine print, particularly the risks associated with debt.
Conclusion
Debt limits action, restricts options, and increases fragility. These factors combined make debt the ultimate luxury in our lives. Thank you for watching, and I hope this has given you a fresh perspective on debt.
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