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Nicholas Kitonyi
Nicholas Kitonyi
Articles (204)  | Author's Website |

How Much of the US Debt Is Good?

Debt is only good if used for the right reasons

May 30, 2017

Debt – a word often associated with being broke and one to which most people do not like being tied has often been the livelihood of many Americans. It has virtually become their way of life; paying their way through just about anything using borrowed money.

When you want to buy a new car and you apply for an auto loan, you are using debt; when you apply for mortgage for a new home – that is more debt. When you swipe for futons, gasoline or even buy a stick of gum using your credit card again, you are using debt.

By the look of things, we use debt to finance our day-to-day activities, the one thing of which we are most afraid and with which we do not want to be associated keeps virtually every American afloat. So, essentially then, debt is good – it must be because we use it across everything. But is it really?

What is debt really, and is there anything like 'good debt'?

Indebtedness does not necessarily translate to one being broke. As a matter of fact, the two are miles apart, but at times too much debt like is the case of UK consumers could be dangerous. For years, households, businesses and governments have borrowed money. They borrow money for short-term needs when they want to meet their liquidity purposes and also when they are looking to cover unbudgeted shortfalls. Businesses and governments also borrow to finance long-term projects, such as infrastructure.

Take the U.S. for instance. The Federal Reserve’s debt is already at $19.9 trillion and is “guesstimated” to breach the $20 trillion mark by the close of the fiscal year a staggering figure by any imagination and still, the U.S. national debt is a necessary element of the economy. The corporate bonds; federal, state and local bonds; lines of credit; credit cards; and many other forms of debt are essential to the functioning of the modern economy.

National debt, in this case, the U.S. debt, is what economists call the automatic stabilizers of the economy. Debt helps cushion a country’s economy against impending crash. Without it, recessions are usually deeper and longer. That’s why the U.S. government will continue to borrow and spend in efforts to stimulate businesses to sell their products easily, thereby creating new jobs and increasing income. However, Bridgewater’s Ray Dalio (Trades, Portfolio) cautions against the current debt situation.

Last year, the hedge fund manager said that the debt market was in a "dangerous situation" as central banks around the world lose their ability to stimulate growth. With the world facing more than $11 trillion in negative yielding debt, Dalio says that there isn't much the world can squeeze out of the current debt cycle and given the current levels, the situation could be about to flip over.

What makes a good debt for U.S. households?

It definitely takes money to make money! And people who are shrewd enough know you have to spend money in order to make more money.

Good debt helps these people generate more income thereby increasing their net worth. For example, if you take a student loan to further your studies, that alone is a positive investment in yourself because education has a positive correlation with the ability to find employment opportunities and a better-paying job.

Mortgage loan is also another good form of debt. When you take a mortgage for a new home or take a refinanced mortgage with low interest rates, then you’re using debt to your advantage. Here you can buy a house, live in it for about a decade and then sell it for profit. Alternatively, you can rent out the entire residence for a good monthly retainer. All in all, you will be making money.

Besides mortgage, other people take loans from banks and other financial institutions to finance their small businesses they use this money to either expand or finance a whole new business. Please keep in mind that debt is only good if it is bringing in some money in return.

For some time now, Americans have been using debt to exploit different forms of investment. Many have found safe haven in taking loans from banks and other financial institutions and then investing in stocks, bonds, commodities, futures and precious metals. With good strategies in place, this is especially a lucrative affair.

Bad debt

Americans usually swipe their credit cards when they are paying for virtually anything. Unknowingly, they are doing so at a cost. It is said that if you are going to buy something that doesn’t appreciate in value and you cannot afford to pay cash, then you can’t afford it. The same applies to household appliances and other consumer products. And according to several credit advisers, one of the leading causes of bad debts among Americans is the swiping culture we have going on. It has led some people deep into debts worth hundreds of thousands of dollars – all spiraling around consumables and luxury items.

For Instance, if you take a car loan and end up buying that Mercedes you have always longed for, you are digging yourself into a bad debt. Also, when you swipe for clothes, consumables and other goods and services and, when you use your credit card on vacations, you are not doing yourself any favors but digging yourself into more trouble.

Credit cards are often misconstrued to be “OK” when in reality, they are the worst form of debt given the amount of interest rate charged.

Conclusion

It is difficult to avoid indebtedness because the entire world revolves around debt. And besides, very few people can afford to pay cash for everything they purchase. Having said that, being able to manage debt at agreeable levels allows households, businesses, and governments to grow an economy.

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About the author:

Nicholas Kitonyi
Nicholas is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on research sites like Seeking Alpha and Benzinga.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. As a trader, Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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