First, let’s just go with the part where I’m going to be on the irregular blogging schedule indefinitely. Things with dad are still wobbly, it is what it is.
But I want to talk about debt. Now, I’m sure I’m late to the game. I can’t be the first person to come to some realizations. Some of this comes from recent career events that have me working in and around financial stuff. (I wanted to be a paid author – I write, and I get paid. It’s kinda worked out, just not how I expected.) Some of it comes from trying to get my own checkbook in order. Some of it comes from reading random financial books and blog posts, and watching random videos.
Here’s the deal with debt.
The banking industry doesn’t care about the principle. Let’s take your mortgage. Say you owe $100,000 on your house, and you’re paying 5% interest. The lender doesn’t care that much about getting the $100k back. That’s chump change to them. What they want is that 5%. You go to corner bank, put in your loan application, and then their people look at all your paperwork. What they want to know is if they’re going to get that little 5% over the next 30 years. Because that little 5% is going to add up to hundreds of thousands of dollars. Once they’ve given you that mortgage, they turn around and sell it. Because there are a LOT of people who want to buy the right to collect that 5% over the next 30 years. Fannie and Freddie do a lot of the buying. They take all of the little loans that they buy and package them up and sell those to wall street, so investors can buy into a piece of the action.
They aren’t buying and selling the $100,000 that you owe, they are buying and selling the 5%.
If you can’t make your payments anymore and your loan becomes a “non-performing loan,” it becomes toxic to the balance sheet of whoever holds that loan. So they sell it to companies who buy the loan. It’s now called a note. Companies will happily sell that note for much less than the balance, and another company will happily buy it, because even if they come to an arrangement with you where your principal is reduced, they can still make money because they’re still collecting interest on whatever agreement you come to.
Seriously. Say you know you owe that $100,000 to the bank, but you aren’t making your payments for whatever reason. The bank might sell the right to collect that debt to a new company for $50,000. That new company now can come to you, negotiate your balance down to $75,000 with a reduced payment. You’re feeling good because you now owe $25k less and your payment has gone down. The company is feeling good because you’re back on track to pay them $25k more than they paid for your debt, plus the interest terms you’ve just agreed to.
It’s the interest that matters. And here’s why.
When you buy something with cash, it is an even exchange. The dollar is more or less equal to the item you’ve just purchased. If I go to Marshall’s and buy makeup brushes, I’m paying for the goods, the convenience of the store front, and the cost of the employees. The margins aren’t particularly great on any one item. There’s enough that it keeps them in business, but Marshall’s has to put a lot of energy into it. They have to spend most of that $1.00 just to have the thing I want in place at the time I want it. Not a whole lot of new wealth is generated that way.
Debt, on the other hand, is lucrative. Really lucrative. Your debt, specifically.
In the past 20/30 years, in real terms wages haven’t gone up all that much. But we keep thinking things will get better, so to keep up with the Jones’s, we whip out the credit cards… Those mofos should be ashamed of themselves.
The systems designed by the people with money are designed to keep funneling money upwards towards those same people. They do it by reducing taxes on the kinds of incomes that generally only the super wealthy get (capital gains and the like) such that Mitt Romney only pays something like 15% in tax and the rest of us pay something like 30%. And if they aren’t getting enough by moving money up the wealth hierarchy through ridiculous tax systems, the entire apparatus is geared towards driving your debt.
The 24 hour news cycle? Intended to up your anxiety because anxious people find security in trading money, which is intangible on some deep, prehistoric level, for things. Commercials. Intended to drive your spending. It’s all designed to drive your spending, because the small cog of your spending moves goods around the world, and the big cog of your debt moves wealth out of your pocket and into the pockets of the already wealthy.
This is one of the reasons why the powers that be are so vehemently against some of the regulations put in place by the U.S. Government – because that gets in the way of their ability to generate more debt by raising the credit standards for issuing debt, for a start. The whole mortgage crisis had more to do with the inability to collect the interest payments than it did the outlay of initial cash that went into the purchase of all of those homes. That initial money is more or less solid, because it goes back to the 1 for 1 exchange of cash for a real thing. $100,000 in initial purchase price is land and sticks and bricks. It’s not that different than the purchase of a pair of shoes at Marshalls. That dollar is a real thing, represented by leather and buckles and the like.
My argument isn’t that everyone should avoid debt… That isn’t a practical stance. But I would propose that understanding what’s going on is important. One book I’ve read suggests that the only debt you should have is the kind of debt that has an asset attached to it. At least a home has the hope of appreciating.
The argument also isn’t that all bankers are evil. Most people most of the time are just looking after what they understand as their own best interest. That’s true of me, it’s true of bankers, it’s true of pretty much everyone you meet. It isn’t personal, it isn’t evil. But. From a stance of neutrality, I can not be mad at them for their desire to generate more wealth for themselves, and still recognize that it is a system that is designed to suck my resources out of my pocket and into the pocket of someone who already has plenty ‘nough.
Just something to think about.