Debt, The biggest drug

[Stephen Masek]

The Orange County Register ran this article by me on 11/6/2011, and I though you-all might like it.

Debt is the worst drug in America, because it directly harms the most people.

The debt pushers have enlisted builders, retailers and real estate agents to sing their siren songs of “buy now, pay later” and “buy more and bigger with credit.” Despite the current economic disaster, some still push the dangerous idea of creating wealth by using other people’s money. We’ll be happier and stronger when we finally shun the debt-pushers and move to a wealth-centered culture.

Buy a $500 washing machine on a credit card and make minimum payments, and it turns into a $1,000 washing machine. It can make someone who should be a happy real estate investor, homeowner or car owner into a worried mess, barely able to make payments and hoping nothing goes wrong. Just as with illegal drugs, the temporal happiness it promises is a fleeting illusion, quickly replaced by a grim reality. Economic downturns should be buying opportunities which help build wealth, but for those who are in debt they are times when their dreams and wealth are destroyed.

Our debt-centered culture has even caused us to corrupt our language. Someone with less than 100 percent equity in a car, house, apartment building, or office tower is not simply an owner. They are a co-owner. If a person has less than 50 percent equity, he or she is a minority co-owner. In a wealth-centered culture, we’d use the right words, and strive to be owners, not minority co-owners.

It is sad that so many of us have yet to know the joy and freedom of being debt-free. Buying new cars with cash is great fun, as the dealer personnel just do not believe it until you hand them the check. Paying-off a home is cause for celebration. Buying investment properties with cash is still more fun.

There is no caste system, royalty or other impediment in the United States to prevent anyone from building wealth by studying hard, working hard, working smart, saving and investing.

Many people who fancy themselves as sophisticated, real estate investors are really just rent collectors for banks, stuck with almost all of the risk and little of the reward. If a tenant sues an apartment “owner” because their child was poisoned by lead-based paint, the bank has almost zero risk, but the “owner” can lose everything. A commercial property “owner” who needs cash at a time when prices are down may lose the equity when the property is sold, yet the bank loan may be paid in full.

Using other people’s money is still touted by some as wise and the way to true wealth, but it is really just gambling. Another word for using borrowed money is “leverage.” Like any lever, it can exert force in two directions, upending the investor/gambler’s best-laid schemes. A vacancy in a rental property owned outright is nothing more than an inconvenience. A vacancy of a highly leveraged property often causes great distress and collapse of an economic house of cards.

Anticipating appreciation, some argue that now is an excellent time to use loans to buy four times as much investment property as could be purchased with cash (25 percent down on each). The overall net rent might be about the same, yet the appreciation would be four times as great. As with anything which sounds too good to be true, the risks are many. A vacancy means negative cash flow. Four times as many properties mean four times the liability. Maintenance expenses are four times as much. Using loans is actually a gamble that nothing will go wrong and that there will be significant appreciation.

Easy credit has prompted homebuilders to make ever larger and fancier houses, and carmakers to make larger and fancier vehicles. Both promise an increase in happiness commensurate with the increase in size and features. But, who is inside? A happy owner with no worries about payments or a debtor struggling to make payments?

Excessive houses and cars waste energy and materials, and require more maintenance. Waste is not virtuous. An oversize house often leads to more debt, as “owners” overheat credit cards in efforts to fill all the space. Drastic reductions in sales of cars and houses mean we have reached the point where even sellers and lenders no longer benefit from the excesses.

Despite the class-warfare rhetoric of leftist politicians and the garish lifestyles of some celebrities, most wealthy people in the United States are not showoffs. They do not need or want extravagant cars, wristwatches, houses, clothing and so forth.

The bestseller book, The Millionaire Next Door, by Thomas J. Stanley and William D. Danko, and Stanley’s subsequent books, are entertaining to read as they demolish leftist myths about those who are wealthy. They should be used as textbooks in every high school, and every school should have personal financial management classes.

We’ve got to stop putting the debt-pushers at the center of our economy and lives. Debt-slavery destroys dreams and opportunities, impoverishing our nation and our society. It is no wonder that politicians wildly overspend, as they are part of a nation which has been wildly overspending.

Rejecting the culture of debt and embracing a culture of wealth will return us to the happiness and freedom, which are our birthright.