Wednesday, May 16, 2012

Is debt bad?

The recent happenings in France and Greece got me thinking on the concept of debt. The concept of debt is quite simple. Try to clear your debt as fast as possible and keep it minimal. This is why Europe is focusing on reducing their total debt.

However, I feel that reducing debt may not apply in all situations, especially in our current environment. In economics, there is always a cost in any kind of investment. What truly matters is your total return of investment. Therefore the cost of debt must be taken into consideration in any kind of investment.

If you're in an environment where the cost of debt is low, and the return of investment is high, why will you not use debt to fund the operational needs while using that amount of money to generate a higher return? Of course there must be safeguards such that the money can be withdrawn in a reasonable amount of time in the event that the cost of debt rises and the debt securities itself must be structured properly.

Having high debt doesn't mean that there is a problem. There is only a problem when you do not know what you're doing and you're over leveraging yourself. Greece is an example of that. But the rest?

1 comment:

Stephanie said...

Thanks for taking the time to discuss this. I feel strongly about it and love learning more on this topic. If possible, as you gain expertise, would you mind updating your blog with more information? It is extremely helpful for me. Thanks!

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