The Lexicon of Debt: Is Debt Evil?

He looks the whole world in the face for he owes not any man.

~ Henry Wadsworth Longfellow

I’ve been writing  a lot about sovereign debt and the dangers it poses to the global economy lately. Debt in general is a frequent topic in the personal finance blogosphere and it is often painted as the enemy – a nefarious villain, evil incarnate.

I happen to agree with the contingent that says that there is no such thing as good debt. That doesn’t mean you can’t ever have debt. It just means that you need to control it so that it can’t control you.

Debt, by its very definition, is negative. It means below par, under water, less than zero. On your balance sheet, it’s a liability. Liability is defined as “the state of being legally obliged and responsible” or “anything that is a hindrance or puts an individual or group at a disadvantage”. So it looks like debt is not good. But is it inherently evil?

Debt, like money, is not evil in and of itself. But it has truly become a four letter word – and for good reason. It’s been used and abused. The rules of the debt game have changed and not everyone got the memo. In the U.S., banks have been allowed to hold less cash to back up loans and have given those loans to anyone who could fog a mirror.

When they inevitably went bad because the debtors could not pay, the debtors lost their homes and went bankrupt. The bankers got a taxpayer-funded bailout. Yeah. That means that you and I are footing the bill for the idiotic mistakes of both lenders and borrowers. (If you think my characterization is too harsh, read what Matt Taibbi had to say about Hank Paulson.)

The Lexicon of Debt

So is it the debt that’s evil, or are people using it unethically? Well, let’s ask the thesaurus. Here’s a rundown of the various words associated with “debt”:

Nouns: obligation, liability, charge, default, bankruptcy, insolvency, usury, deficit, insufficiency, poverty, encumbrance, hypothecation, failure

Verbs: owe, borrow, run a tab, finance, repudiate, dishonour, write off, borrow from Peter to pay Paul, outrun the constable (I’ve never heard of that last one before.)

Adjectives: indebted, liable, chargeable, answerable for, in embarrassed circumstances, in difficulties, up against it, in the red, in the hole, in hock, broke, in arrears, delinquent

It seems to me that two main themes arise from this terminology:

  1. Debt Is Negative: Terms like insufficiency, bankruptcy, default, dishonour, in embarrassed circumstances, delinquent, and ultimately, failure, do not conjure up feelings of pride and accomplishment. The message is that debt is to be used wisely, if not avoided altogether.
  2. Debt Means Responsibility: If you take on debt, you are legally obligated to pay it back, or the consequences are severe. You can lose precious assets, or even your freedom – unless you are a “systemically important” financial institution. In that case, anything goes and the taxpayer’s got your back. Can you say moral hazard?

The implications of debt provided by the thesaurus tell us that debt, while not a desirable condition, is not evil. I think the responsibility factor is the locus of our problem. Neither institutions nor individuals seem willing to accept the responsibilities inherent in a debt contract.

Under a properly functioning capitalist system, the borrower is supposed to incur no more debt than he or she can realistically pay back or he or she will lose the posted collateral. (That’s right, you used to need to have some skin in the game.) The lender is not supposed to lend more than the borrower can realistically pay back, or he or she will lose the money lent. (Unless the government decides to replace that money with taxpayers’ cash.)

So maybe debt is not a villain after all. It’s more like the super power that a villain might possess. There’s nothing wrong with the power. It’s just being used by a villain. What if we gave it to a hero instead? Wanted: heroes.

What do you think? Is debt evil or just abused?

Written by Kim Petch

12 Responses to The Lexicon of Debt: Is Debt Evil?

  1. Debt is abused. It has been so easy to access and justify that having it is just a ‘way of life.’ My wife and I have too much of it because we decided to buy things on payments instead of saving for them. Having debt is a choice that we need to be careful about.

  2. I don’t think debt is a bad thing. Too much debt or not controlling your debt is a bad thing.
    It would have taken me longer to accumulate my current net worth if I did not use debt to finance my operations and would not have the passive income I have now without using debt.
    I also think that the definition of good debt and bad debt is wrong. Good debt is when you go into debt that will produce some type result. Bad debt is going into debt for your personal needs that you cannot afford.
    I.E. sales person goes into debt to buy a BMW for their job. Is that good debt or bad debt?
    If their clients were high rollers, then this could be seen as good debt. Because pulling up to the private golf course in a beater just does not get the clients. If their clients are not high rollers and this is just to impress friends and family then this would be bad debt.
    I have seen both cases. The friend that needed the luxury car to get clients and the friend that was just trying to impress.

    • I agree with your good debt/bad debt distinction. In fact, many businesses large and small would never get off the ground without some kind of debt. I would not own a home without debt. I do, however, think that debt has been both overused and misused by individuals, businesses and governments. Still, if it were at all possible, wouldn’t you rather be able to pay cash for that BMW (unless it was financed at 0%)? As Ken said above, debt should be handled with care.

  3. I was brought up with the notion that debt is a bad thing to have. My parents never bought anything unless they had cash to pay for it (this included cars, houses, etc.). I currently have debt, a mortgage, but hopefully it’ll be paid off in a few years. It all comes down to personal responsibility. If you made the calculation and is confident that you can pay the mortgage/loan off quickly, than it’s okay.

  4. I agree that debt is not a good or bad thing, but the personal responsibility behind the debt that defines the role. As a lender, we do help our clients incur debt. However as also a responsible (key word here) lender, we help our clients to live within their means and not incur more than what they can afford. How would we be helping our clients if we painted an unrealistic picture and saddled them with a debt load they could never satisfy. The idea is to help our clients get that dream home, not an unrelenting nightmare. Sometimes you just need to refocus the dream.

  5. Depending on your housing environment, debt is sometimes inevitable and a very positive tool toward gaining market share. I bought property with significant debt and within 2 years, had an additional 50% increase in the property value, which really put my debt into perspective and increased my net worth significantly, thanks to debt.

  6. I don’t think debt is Evil. It only becomes a negative issue when we start abusing it. There’s nothing wrong with being indebted financially if we really have to pay-off something really important. It’s our character on availing loans, usage of card etc. that somehow give an impression that debt is evil where in fact it’s us that put it in that situation. Just an opinion. Very well written and I really do agree with you.

  7. Wow, I just love the last paragraph of this post! It really is a super power, that if used in the right way can be amazing for an economy, but unfortunately many people and business today are using it as a villain and causing such chaos. But wonderful way of putting that! “What if we gave it to a hero instead? Wanted: heroes.”

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