USA Africa Dialogue Series - "The National Debt" - economystified.blogspot.com

View full post at: http://economystified.blogspot.com/2011/05/national-debt.html

Getting into debt, in of itself, is not always a good or bad
thing. You can end up $100,000 in the hole by going to med school and
becoming a doctor. You can end up $100,000 in the hole by gambling at
the horse track. So how can we tell a "good" debt from a "bad" one?

In mathematical economics, the symbol for "interest" is: "r." This is
because for economists, interest is considered "rent on capital" or
for this discussion: "rent on money."

If you borrow $1000 from me for a year, with 10% interest, 12 months
from now you will owe me $1100. That extra $100 you pay back is the
"rent" I've charged you for the right to use my money for one year.

Lenders (banks, creditors, etc.) charge rent for their money for all
the same reasons that landlords charge rent on apartments. They have
some cash lying around, abandoned; offering no additional value beyond
just its nominal worth. They have no use for it themselves, so they
rent it out.

The lender is actually losing money – or rather the opportunity to
make money – every day that they aren't collecting interest payments
on that pile of bills wadded up on top of their dresser, just like a
landlord with an empty apartment is losing money every day he has no
tenant.

And what about the lender who is a bit timid to make a loan,
frightened by the very real possibility of never seeing their money
again? For them rent serves as an incentive, a reward for trusting
their money in the hands of a stranger.

Borrowers are willing to pay interest for all the same reasons tenants
are willing to pay rent. They need to make a purchase now, but in the
short-term can't put together enough funds to do so. I can't write a
$75,000 check for a house in this very instant. But I can come up
with $500 every month to exchange with the owner for the right to make
that house my home.

Keep this analogy in mind, and let's turn to the National Debt.

Continued at: http://economystified.blogspot.com/2011/05/national-debt.html

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