Debt’s Two Sides: Riches and Misery
An excellent, and balanced, discussion of debt from the New York Times. My belief is that debt, if used judiciously, can be a powerful tool, and if used incorrectly can be very dangerous.
Debt is a double-edged sword. Charles Dickens’s character Wilkins Micawber warned eloquently of debt’s downside: “Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
He was certainly right: Debt can blight your life. But what Mr. Micawber didn’t say is that debt can make you much wealthier. Then it’s called leverage, and it can supercharge your investment returns if you use it wisely.
To a startling degree, the two sides of debt — its destructive and its beneficial powers — have been responsible for the shifting fortunes of vast numbers of Americans since the turn of the century. Data collected by the Federal Reserve and analyzed in a recent paper by Edward N. Wolff, an economics professor at New York University, makes it clear that many American households of moderate means got much richer, on paper, anyway, from 2001 to 2007, largely because of rising home prices combined with mortgage debt.