Bet or Debt

The financial argument this weekend was about debt. Is debt healthy or not Of course this discussion morphed into politics and the state of debt in the USA. I contend that debt is a financial instrument of growth - it accelerates growth - when used for assets and leverage.

With debt comes risk - and risk is the currency of return. So greater returns can be achieved with debt. The key question is what is the proper amount of debt? This is a function of how much risk an individual wishes to take on. Clearly the maximum amount of debt someone can accept is when the income equals the interest payments. Few people can sleep at night with this much debt.

Factors affecting debt include the interest rate; expected payoff period; inflation; credit worthiness (e.g. stability of cash flows for payment); amount of equity/assets underlying the debt; history of credit; and others.

Debt to Equity ratio is an important financial measure in evaluating investments into companies. Likewise this can be applied personally and for entire countries. I just looked at the public debt as a percentage of GDP - 66%.

I'm happy with USA debt at this level when used to build our assets - intellectual or physical. It becomes an engine of growth. Since close to 30% of the public debt is owed to ourselves, it gives me confidence we are making a good bet.

I'll bet on debt.