The recent post on who owns the Federal Reserve caused all the standard responses:
- I am an idiot.
- I am a shill for the Fed.
- The Fed is owned entirely by the banks.
- The banks are all evil.
And then, one of my favorites:
- Debt is always bad.
First off, I am an idiot some times. So let’s just get that out there. Second, I don’t work for the Fed. Third, the Fed issues shares, but those shares have no voting rights and are a claim on only a small slice of the Fed’s annual profits so if you want to call that “ownership” then that’s right, but it is wrong to imply that the Fed is entirely owned by the private banking system. Fourth, banks, like most capitalist entities, can sometimes do greedy and terrible things in the pursuit of profit. Welcome to capitalism. Enjoy your stay.
That last one is really misleading though. What is debt? Debt is issued because a loan is issued by a bank or some other entity. In the case of a standard bank loan the borrower is spending in excess of his/her current income. In other words, you’re pulling your future spending into the present. In return for this favor, the bank charges you an interest rate to cover their risk that you might not repay them the money you borrowed. That’s all basic enough.
But is this really a bad thing? It depends. When we talk about “debt” we need to also talk about the asset side of the balance sheet. You see, balance sheets balance and discussions about debt are often taken out of context by not discussing the asset side of the balance sheet. For instance, a new loan creates for accounting entries. The new loan is an asset for the bank and an asset for a deposit holder. But this deposit is also a liability for the bank and the loan is a liability for the debtor. There is no increase in net worth here. There is just an expansion of the bank’s balance sheet resulting in a loan that creates a deposit. Saying that this is good or bad, by necessity, does not place the use of this new financial asset/liability in the proper context.
If I want to buy the new iPhone 5C, a new Tesla, the biggest McMansion on the block and all the other gadgets and gizmos that modern Americans seem to obsess over then I might need to spend more than my current income. And the bank gives me access to funding by agreeing to let me pull my future spending into the present so I can enjoy a better living standard than I can afford on my current income. If I pay off the loan on time then I get to experience a better living standard and the bank gets rewarded with a profit. Everyone wins.
Some people, for some reason, act like banks FORCE us to borrow money from them at all times. Of course, you don’t HAVE to always live beyond your means. It’s something a lot of Americans just choose to do. I mean, we could probably afford to just live in tents, drink water and eat beans and rice all day every day. But that would be boring and miserable. Debt gives us access to something more than we could otherwise have. Debt is sort of like travelling into the future. Which is pretty amazing. The problems only arise when you get greedy and input false estimates into your Flux Capacitor and everything breaks down and you get sent to the wrong year.
Debt can be a very bad thing if it’s abused. But in a lot of ways debt is also an amazing thing. It all depends on how we use it. If you use it like a greedy fool then it will serve you poorly. If you use it prudently it can serve you well. So no, banks aren’t necessarily bad guys just for making debt available to us all. After all, if banks didn’t do it then someone else would because there will always be people who want to live beyond their means. And then when this person charged interest for this favor you’d see the same people complaining about how this person is a “rentier” or whatever. In the end, the people screaming about debt either don’t understand it entirely or have a political axe to grind. And neither are very useful for much of anything except creating a lot of traffic to useless internet sites.
NB – Feel free to use the comments section to complain about the evils of debt or theorize about which bank or central bank I am working with. If possible, try to turn on the caps lock and be as vulgar as possible. Thanks.
NB II – If you would like to experience a thorough demolition of all these Federal Reserve conspiracy theories from books like The Creature From Jekyll Island then please go here and spread it around so people stop referring to this perpetual nonsense.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.