The Need For Debt
What is debt and how does it fit into the broader financial markets? And more importantly, why would someone want to get into debt?
In our latest episode on YAP Cast, we turn our attention to the need for debt. To help us answer this, we’re joined by Sidney Powell, co-founder of Maple Finance, a decentralized institutional marketplace, which enables trusted institutions to borrow and lend money. Below are a few areas covered in our latest episode.
What is Debt?
Debt is often seen as something negative. After all, it’s not ideal to owe someone money and if you do, the process of paying that debt off is a freeing act. In essence, debt is to receive something now that has to be repaid at a later stage. For many, debt is a tool that can be used well or poorly.
The History of Debt
The story of debt is as old as the Bible, and historically, debt has always been viewed quite badly. If someone had debt, it usually carried the obligation to pay interest, which meant interest was at the loss of the borrower and at the gain of the lender.
This mindset, however, changed around the time of the Renaissance when people started to think positively about the future. Because of this, they believed they could have a bigger pie in the future and viewed debt as a good thing. This enabled a baker to expand their business, for instance, afford the interest, and pay off the debt at a later stage. People’s mindsets changed from being fixed to one of growth.
How do People Shift Their Perspective?
Whether debt is good or bad depends on what it’s being used for. For instance, if you have someone who is an impulse buyer then debt wouldn’t be a good tool for them as it would just be used for consumptive purposes. Gambling is another example of a poor use of debt as it is going toward unproductive purposes.
Productive purposes of debt would be if someone was buying a house or paying toward their education or expanding their business. This is because they are all going toward investment in something where the individual expects a greater return in the future.
Finding the Right Balance
Having no debt is having less obligations and it means being in a state of lower risk, but having debts doesn’t mean someone is insolvent. Elon Musk, for instance, took out margin loans, which were backed by his equity holdings in Tesla and SpaceX, to buy houses. He made this decision because he knew that his equity in Tesla and SpaceX were growing at a faster rate than the interest on his debt. For Musk, it made sense to take that debt rather than sell his productive assets.
However, the problem facing a lot of Millennials and Gen Z today is that the cost of education has increasingly expanded, which means students are no longer getting value for money when they pay for a degree. As a result, student loans are needed to finance that degree. Consequently, by taking out the debt, we’re paying for something that may not necessarily be increasing our human capital or earning potential.
Another problem to consider is that house prices have appreciated because zoning laws are poorly managed and the supply of housing has not kept up with the increase in demand. Arguably, two of the biggest expenditures that Millennials and Gen Z will pay for in their lifetimes are their education and purchasing a house. Yet, both of these are costing more and delivering less value, and are increasingly needing to be financed with larger amounts of debt.
For many, though, they are exiting on both fronts by choosing more entrepreneurism or alternatives to a university degree. People of today’s generation are also turning to Bitcoin or Ethereum or some other cryptocurrency as they believe that this will deliver a greater return of value rather than a house.
We hope you enjoy the Story of Money by YAP Cast.
The eighth episode launched here.
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