The material on this blog might sometimes create the impression that I am not very fond of loans. Quite the opposite actually – I think loans are great and have an essential part to play in building our society. A loan is often the only way in which you can assemble the capital needed to get that great idea out of your head and into the real world. We need to get many great ideas out into the real world if we are to save it.
Not all loans are created equal though. The three categories of loans we will discuss here – investment, consumer and speculation loans – are certainly very different. Investment loans are great, but, on the contrary, consumer and speculation loans have to qualify as the scum of the earth. These are the loans which have bankrupted much of the developed world.
As a general guideline, a loan should only be taken if the item(s) bought with the borrowed money will actually enhance your ability to pay back the loan. This is what loans are meant for: providing people with the capital needed to add greater value to society and, in doing so, earn the increased income required to comfortably pay back the loan. We will call this type of loan an investment loan from now on.
This sounds very logical, but the unfortunate reality is that the majority of loans made today are simply not of this kind. For example; consumer loans – money borrowed simply to facilitate consumption – have become more and more popular over the past three decades. These are loans which make no contribution (or even a negative contribution) to your ability to pay back the loan. Naturally, these loans can very quickly lead to bankruptcy and should be avoided at all costs.
Finally, we have speculation loans. These are loans taken out for the sole purpose of gaining leverage as discussed in previous posts on paper wealth and the housing market. Such loans can pay off handsomely in the buildup of a financial bubble, but are extremely risky and, because of the massive economic distortions they create, always lead to the long-term detriment of society. The 2008 housing bubble was created almost exclusively by greedy “investors” utilizing speculation loans to lever up their profits.
The following posts will look at a wide range of loans regularly taken out by private individuals and even by government and discuss each of these on the backdrop of the three types of loans discussed in this post. Frankly put, the Western world is in constant economic crisis primarily because we have indulged in consumer and speculation loans for many years. Learning to borrow responsibly through investment loans really is the only way of restoring a positive economic environment.