The good, the bad and the difficult – How debts evolved

Steven Doyle By Steven Doyle, 3rd May 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/12jwnpqy/
Posted in Wikinut>Business>Accounting & Finance

This is a short article which discusses how public debt is on the rise and bearing down upon the economy harder each day. Here we discuss the myth of good and bad debts, how the idea was 'sold' to the populace and how the reality of debt is so much more different and disturbing.

The current scenario

The economic health of the nation has not been very assuring since the financial downturn of 2008. The tepid pace of recovery has not been able to do much to restore financial stability for the vast majority of citizens. Millions of Americans are neck deep in debt and facing foreclosure. The total amount of public debt is well over $15 trillion as of now. The statistical report prepared by the Social Security Administration states that the gross Federal debt will be somewhere around $20 trillion in the next 5 years. Additionally, the Social Security and Medicare liability is projected to be around $130,000 per American family.

The myth of good debts and bad debts

So how much debt does the average all American family bear? Given that a little more than 60% of the population owns a home, the typical family bears a debt load to the tune of $215,000 which includes but is not limited to $10,000 in credit card debts, $75,000 of mortgage, and another $25,000 for personal loans, car loans and student loans. The figures tell the tale of economic distress to the point where people are failing to recognize the nature of the debts they are assuming. The myth of ‘good debt’ is a myth, bad debts are financially damaging the economy and toxic debts are choking people to the point of bankruptcy.

Traditionally ‘Good Debts’ has been defined as a low interest loan with easy repayment terms which contribute towards building the borrowers wealth indirectly. The best example of such a debt is a mortgage. The interest rates are low as compared to credit cards. The loan is acquired in order to buy a house, the cost of which will tentatively increase over time and thereby increase the borrower’s wealth.

On the other hand, a ‘Bad Debt’ is said to include debts incurred through usage of short to medium term credit lines. These debts are not favorable simply because it involves pointless usage of credit on things, the cost of which could have easily been covered by the current cash reserve. Moreover, the value of the product purchased rarely appreciates and debt used to finance the buy instantly starts accumulating interest at a substantial rate. Although the definition is quiet simple, it is not entirely true.

The truth about debts

Good debts and bad debts are merely a work of financial fiction developed as a yardstick for the sake of over simplicity. The fact is that there are no good debts or bad debts. An entirely new classification has evolved out of the ashes of the financial meltdown. Today, there are only bad debts and difficult debts. The generic definition of the first class remains almost the same, that is, a debt incurred in the acquisition of an asset which appreciates in value but at a very slow pace and over a considerable period of time.

The new trend of creating debt through the usage of credit as a substitute for cash has given birth to difficult debts. Usually the debt is created in the acquisition of an asset, the value of which neither appreciates nor adds significantly to the current net worth of a person’s holdings. On the contrary, the value of the acquisition might depreciate rapidly (depending on the nature of the asset) over time. It is just a matter of interest rate and repayment term which differentiates bad debts from difficult debts.

The future

The nature of public debt has evolved over time keeping in tune with the growing complexity of the financial machinery which drives the economy. Bad borrowing habits, unethical lending practices, lax legislative regulation and the general cash crunch drove Americans by the millions into assuming debts which they would eventually find impossible to repay. Unemployment, foreclosure, bankruptcies aggravated the problem further till the point when the masses began to realize that they had walked into a money pit and with assistance from the Federal government, began to slowly repair the financial sector and nurse the economy back to health.

Tags

Debt, Debt Advice, Debt Consolidation, Debt Crisis, Debt Crisis For Dummies, Debt Management, Debt Problems, Debt Relief

Meet the author

author avatar Steven Doyle
I am a financial writer by profession and I specialize in writing on insurance and related fields. I have been solving insurance queries on a few public forums for a while now.

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