Debt is like medicine: useful to cure certain conditions but nothing to be burdened with your entire life. Once the condition is cured the medicine is no longer needed.
It is also like medicine in that it has a tendency of ending up being worse than the condition it was meant to cure when taken irresponsibly or in too large a dose.
There's another way in which debt resembles medicine: those who sell it are wont to sell it as widely and at as high a price as possible, no matter whether it is the right medicine for the condition at hand.
When used responsibly debt can be a net positive. When allowed to run amok it is a burden upon society. Maybe debt, like medicine, should only be allowed to be taken with a prescription?
Why does debt need to be paid off? There’s nothing wrong with running debt forever and never paying it off. Debt, and other stuff like selling options or shorting or futures, is just a way to obtain more money than you have (leverage). If you can use that money efficiently while managing your risk there’s no problem. Without leverage, many business opportunities simply cannot be exploited, such as retail and investment banking. Capital reserve requirements make it impossible to lever up forever, but even so, these institutions are running at like 20x leverage. In particular, quantitative funds like RenTec or AQR could not exist without leverage since the unlevered returns of their strategies are much too low to be attracrive. In its essence, debt promotes the efficient exploitation of market mispricing and business opportunities.
Moreover, it often makes sense to not pay down debt even if you can afford it. Like if I can get a fixed 30yr 3.5% mortgage, why would I even want to pay it off? I can do a ton of different things to make more than a 3.5% return per year. Of course, I’ll have exposure to some risk, but that’s not necessarily a bad thing.
Looking at places like Japan who eschew debt as much as possible, the affects are not positive. Businesses are moribound and hampered by their irrational aversion to debt.
Mathematically, debt scales future expected return and risk by the same amount. Without debt, investors wouldn’t be able to implement their risk preferences, which surely would make the economy worse for everyone, especially those with little capital.
I don't love this analogy because a healthy person doesn't need medicine. If you can make something for $1 and sell for $2, it's very healthy for a business to take on debt in order to make more of those things. Which is why debt is a normal part of many healthy businesses.
> Maybe debt, like medicine, should only be allowed to be taken with a prescription?
Isn't it though, really?
The bankers determine your "need" and price it according to the risk of you defaulting -- which would seem to put a kink in TFA's argument since most startups fail, the interest rate would be astronomical if true risks were priced in.
Bankers both 'prescribe' as well as sell debt, this is - in theory, at least - different from medicine where the prescriber is not related to the seller.
I agree with everything except the last line (and I suspect that’s where your downvotes are coming from).
The CEO/CFO should have the freedom to self-prescribe, IMO. In that regard, debt might be more like food. Some businesses have a chronic need for debt and can live quite fine with a lifetime of healthy debt usage.
It is also like medicine in that it has a tendency of ending up being worse than the condition it was meant to cure when taken irresponsibly or in too large a dose.
There's another way in which debt resembles medicine: those who sell it are wont to sell it as widely and at as high a price as possible, no matter whether it is the right medicine for the condition at hand.
When used responsibly debt can be a net positive. When allowed to run amok it is a burden upon society. Maybe debt, like medicine, should only be allowed to be taken with a prescription?