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How I think about debt

247 points by pmzy 2y ago

anonymousiam 2y ago
The article doesn't mention businesses that periodically refinance their debit, which can kill a business when interest rates are unfavorable. Some business owners are experiencing that right now.
pif 2y ago
TL;DR: having tons of cash is better than having debt.
- falcolas 2y ago
  I thought the "The more debt you have, the less financially resilient you are" was the more important message.
  - mym1990 2y ago
    But this isn’t true, one has to consider the debt ratio, not just the debt. Someone with a million dollars of debt is financially resilient if they have a debt ratio of .1
    - vlunkr 2y ago
      True, but that is not the situation most of humanity is facing.
      - necovek 2y ago
        I read that as an example to illustrate a point: it could also have said debt of $1000 with a debt ratio of 0.1 which is still pretty resilient.
        falcolas 2y ago
        Resilient? Sure. Realistic for anyone with only $10k in assets? Not even remotely. Not in the market we have today. There are too many people who are using debt just to get their basic needs met, let alone something with enough permanence to be considered an asset.
        mym1990 2y ago
        We're just using arbitrary numbers to demonstrate a point, we aren't trying to assess anyone's actual financial health.
      - mym1990 2y ago
        That was exactly my point...a million dollars of debt is astronomical for the majority of people, but adding another data point such as DTA or DTI would make for a clearer picture of what the debt load actually is. Its like putting down a 100kg kettle bell and asking a group of people "is it hard to lift"? For the average person sure...but you're going to get a variety of answers if you put that kettle bell in front of kids vs a group of gym rats. Edit: I guess a smaller amount like 10k USD might be better to illustrate the point.
    - leononame 2y ago
      That's only true if the rest of their bet worth isn't tied up in some high risk investment where they could lose everything. Just because it's financially more optimal to have some debt in some situations doesn't mean that it's also more resilient. Yes, debt ratio plays a role (although a debt ratio of 0.1 is almost like having no debt at all), but no debt is for sure more resilient than debt.
      - mym1990 2y ago
        I think my point was more that 1 million dollars of debt is a pretty large sum to most people, but not much to someone who has substantial assets. You can draw up "that's only true" scenarios on basically any situation, so its not very helpful to go back and forth. I will say the point about having debt limits your future possibilities is very true, and if someone would like to maintain an open future, stay away from large amounts of debt(homes, expensive cars, boats, etc...)
    - triceratops 2y ago
      Debt to income or debt to asset is the only way of evaluating if someone's debt is high or low. I thought it was obvious that's what GP meant.
      - mym1990 2y ago
        I did not get that assumption from "The more debt you have, the less financially resilient you are". Debt is an absolute value, and debt-to-asset ratio is...not. You can also evaluate debt loads by debt-to-income ratio, which is not to be overlooked as most homeowners buy homes based on their income, rather than their savings. As others have said, debt-to-asset is also not a golden ratio, because if your assets are not liquid and you get called for your debt, you still have a bad situation.
        triceratops 2y ago
        > You can also evaluate debt loads by debt-to-income ratio, which is not to be overlooked Debt to income is literally the first thing I wrote in my comment. I didn't overlook it. The absolute value of a debt is a meaningless number so "more debt" should always be evaluated in that context. And that's how I took the comment I originally responded to. Some extremely obvious things are being rehashed for no apparent reason in this thread. When evaluating relative debt load, asset values should have a multiplier to reflect both liquidity and volatility.
    - phkahler 2y ago
      If your other millions are not liquid then the one million of debt is still a potentially significant liability when adverse events happen. If it is liquid then why bother borrowing for something so small? The spent cash can be replenished quickly when there are no debt payments.
      - mym1990 2y ago
        Very true, I think the article is pretty high level, and so are my comments. Actual financial health can be difficult to evaluate given that world events are pretty open ended and anything can happen.
    - its_ethan 2y ago
      It's still true though. If push comes to shove, having no debt will increase your odds of surviving volatility - it the debt ratio just expands or tightens what range of volatility you can survive (which he did write about). Even if you have $5 of debt and $5m in the bank, you would still be measurably better off to have had $0 of debt in financial "survival".
- mym1990 2y ago
  Having both can often be the ideal situation. It’s also really dependent on what the debt is, how is it being serviced…etc. For some people, not having any debt at all is extremely liberating, and that benefit outweighs any of the benefits of getting marginal returns.
  - coopertyme 2y ago
    >For some people, not having any debt at all is extremely liberating Indeed. I lived with my parents into my 30s, saved up for ~10 years and bought a nice house cash, no mortgage. Was it financially optimal? Probably not, but the peace of mind of being immune to market crashes or interest hikes (we tend to not have 20+ years fixed mortgages here) is just really nice.
    - sssilver 2y ago
      You simply restructured your debt and borrowed from parents instead, no? That is to say, you owe them for those ten years. Not saying there’s anything wrong with it. Most people in average circumstances owe a lot to their parents.
      - phkahler 2y ago
        >> You simply restructured your debt and borrowed from parents instead, no? >> That is to say, you owe them for those ten years. To me that seems like a strange take on it. I saw no indication of a debt owed in the GPs comment.
        bryanlarsen 2y ago
        I think the OP used "owe" in the second dictionary sense: 2: to be attributable an idea that owes to Greek philosophy
      - mym1990 2y ago
        This is a very transactional view of it, but I can see the line of thinking. My mom gave me everything I needed to succeed as an adult, and I owe her a lot, so now whatever she needs, I try to take care of it. Hopefully other people come to the same conclusion, but I don't think parents usually expect a financial ROI on raising kids haha.
tombert 2y ago
I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leverage several hundred thousands of dollars of debt, then yes I'd have more cash directly now, but I might have suffered the fate that lots of others faced with the recent spikes in rent that have happened due to COVID. I simply didn't have to worry about that. Obviously there's different types of debt; some insanely high-interest loan you get from a payday loan place absolutely is a bad and will hurt your ability to stand volatility.
- galdosdi 2y ago
  The way I think about this is: You already are in "debt" by being alive. You have the huge liabilities of needing food and housing and maybe sometimes some healthcare, in order to stay alive. By buying a perpetual source of one of those you aren't investing or expanding your liabilities-- just the opposite, you are hedging against and closing out your liability by prepaying for it. To take this idea further, this is why I think buying a little bit of stock in energy and agriculture companies is "risk free" because while they could go down if those things get cheaper, you would then win out as a consumer. You will need food and energy down the line anyway, so a modest investment in those closes out that hedge rather than expanding liability
  - anon7725 2y ago
    There are lots of ways that stock in food and energy companies could go down while prices go up. A drought or pipeline disruption come to mind.
    - yowlingcat 2y ago
      Absolutely. And I think the same is true for the commodities market correlates there; if memory serves correctly, crude commodity futures went negative for a break period during the supply chain volatility spike during the beginning of the pandemic.
2d8a875f-39a2-4 2y ago
I'm not qualified to expound on it but the featured article doesn't cover opportunity cost, and a scale of risk appetites. To name just two concepts it's missing.
- phkahler 2y ago
  >> the featured article doesn't cover opportunity cost, and a scale of risk appetites. If your business is moving along just fine and you have a decent cash reserve, what opportunity cost is all that important? FOMO doesn't seem like a good thing to let influence business decisions.
Brajeshwar 2y ago
Today, I started picking up what I started some time back -- the book “Debt: The First 5,000 Years” by David Graeber goes deep into the details of Debt. I've heard good reviews and I hope this is a good book as they say. https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
- arj 2y ago
  It is
- throw0101d 2y ago
  > the book “Debt: The First 5,000 Years” by David Graeber Also would recommend Money: The True Story of a Made-Up Thing: > Money only works because we all agree to believe in it. In Money, Jacob Goldstein shows how money is a useful fiction that has shaped societies for thousands of years, from the rise of coins in ancient Greece to the first stock market in Amsterdam to the emergence of shadow banking in the 21st century. > At the heart of the story are the fringe thinkers and world leaders who reimagined money. Kublai Khan, the Mongol emperor, created paper money backed by nothing, centuries before it appeared in the west. John Law, a professional gambler and convicted murderer, brought modern money to France (and destroyed the country's economy). The cypherpunks, a group of radical libertarian computer programmers, paved the way for bitcoin. * https://www.goodreads.com/en/book/show/50358103 https://www.goodreads.com/en/book/show/50358103 And The power of gold : the history of an obsession (and Bernstein's other books): > Incorporating myth, history and contemporary investigation, Bernstein tells the story of how human beings have become intoxicated, obsessed, enriched, impoverished, humbled and proud for the sake of gold. From the past to the future, Bernstein's portrayal of gold is intimately linked to the character of humankind. * https://www.goodreads.com/en/book/show/249245 https://www.goodreads.com/en/book/show/249245
  - belval 2y ago
    > Money only works because we all agree to believe in it. Respectfully, this is the type of true-that-sounds-deep statements that are absolutely shallow and pointless. Yes money the "paper" is not worth anything, but the same could be said of anything in an organized society. Ownership means nothing, it's just a title backed by the government which has a monopoly on violence. Ethics means nothing, it's just something we culturally decided was desirable because if you feel a-ok with murder any trip anywhere would turn into a blood bath. At this point it should be a named fallacy (maybe it is), if we are discussing the merits of debt as a tool, saying "money isn't worth anything" as if it means something is not some ground breaking statement.
Workaccount2 2y ago
Reminds me of those real estate influencer types you see on social media... "We are $4.25 million in debt but live care free vacation filled lives bringing in $40,000 a month"
- eadmund 2y ago
  $40,000 is $480,000/year, which is 11.3% of $4.25 million; if one borrowed that $4.25 million at a significant discount to 11.3% then that might be a very good financial decision indeed. If it’s at a floating rate, it might still be a good decision. But right now some business loans are up around 15%, at which point the situation above would be an absolute catastrophe.
DrPhish 2y ago
“Debt is slavery” is how I’ve always thought about debt, and what I’ve taught my kids.
- Night_Thastus 2y ago
  For low-income people, debt is slavery. For high-income people, debt is a powerful tool. The vast majority of people fall into group #1 and need to treat debts like credit cards and car payments with extreme caution.
  - psychlops 2y ago
    > For high-income people, debt is a powerful tool. How?
    - ihumanable 2y ago
      Not the original poster, but debt can allow you to shift transactions to periods that are most advantageous to you. Here's an example. Let's say that you as a high wealth individual have some stock. The stock has a value of $10M but you can only realize that value through the sale of the stock. If you sell the stock right now you have to sell it for the price the market will buy it at and you have to pay taxes on the profit, either income taxes if you've not had the stock for long or capital gains taxes if you've held it for the requisite period. It is in your interest to optimize your sale so that you pay the least amount in taxes and get the best price per share. You'd love to be able to hold your stock until you can do that, but you need money now. In comes debt. Someone will probably happily issue you some debt that you can use today as money. You can collateralize that debt with your $10M in paper value and get a nice interest rate. So you take out $1M in debt and enjoy life and at the end you have to pay back, to keep the math easy, $1.1M. This debt cost you $100k but if by taking on that debt you can sell when the stock price is higher or convert income tax (37%) into capital gains (20%) then the $100k could easily buy you much more than $100k. In our example if the stock price were the same but all you did was hold the asset long enough to convert it from short term to long term then instead of paying $10M * 37% = $3.7M in taxes, you'd pay $10M * 20% = $2M in taxes. That's a savings of $1.7M on your tax bill. This is how people with assets can use debt as a tool.
AndrewKemendo 2y ago
This guy's entire life (He's a VC) is about pushing debt in the form of promissory notes and equity-debt onto companies in exchange for his own ownership How does he reconcile the fact that the companies he lauds in the beginning, would completely shun any business with him (an investor) for precisely the reasons described? I feel like investors and VC are unaware of their own values
- deleted 2y ago
  [deleted]
- throw0101d 2y ago
  > This guy's entire life (He's a VC) is about pushing debt in the form of promissory notes and equity-debt onto companies in exchange for his own ownership There's a difference between business finance and personal finance. There's a difference between what needs to be done to start a business and what needs to be done to keep it going. Apple started in a garage, but it is no longer run out of one. Apple started with loans and investors, Apple now has a large pile of cash (though also bonds that it needs to pay).
  - yellow_lead 2y ago
    Well, the article specifically references Japanese businesses
    - throw0101d 2y ago
      In the introduction. He then has paragraphs such as: > Let’s say this represents volatility over your life. Not just market volatility, but life world and life volatility: recessions, wars, divorces, illness, moves, floods, changes of heart, etc. And further down: > I hope to be around for another 50 years. What are the odds that during those 50 years I will experience one or more of the following: Wars, recessions, terrorist attacks, pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children, and other mishaps? Not sure how many businesses experience divorce, family emergencies, career transitions, wayward children.
rKarpinski 2y ago
Interesting they chose to use this example of Japanese companies not having debt, when the country of Japan has the highest debt to GDP of any developed nation[1] which has contributed to its economic stagnation since the 1990s [1] https://en.wikipedia.org/wiki/National_debt_of_Japan https://en.wikipedia.org/wiki/National_debt_of_Japan
- gr8r 2y ago
  Interesting. Just another reason I'm convinced some of these recent non-fiction is just commentary (almost) making-up/inflating a problem and then providing a "magic" solution. The content isn't nearly as timeless nor broadly true.
  - rKarpinski 2y ago
    yeah, it's content marketing which is all the rage these days. The purpose of pieces like this is to advertise (the VC fund) not to provide deep insight
- smilebot 2y ago
  It is interesting because the top 5 oldest companies are Japanese https://en.wikipedia.org/wiki/List_of_oldest_companies https://en.wikipedia.org/wiki/List_of_oldest_companies. Their points are still valid even though the country has a different story.
throw0101d 2y ago
The author of the article, Morgan Housel, is also the author of the book The Psychology of Money. This thoughts on, e.g., paying down his mortgage: > It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it. * https://rationalreminder.ca/podcast/128 https://rationalreminder.ca/podcast/128 * https://www.youtube.com/watch?v=NSaRb-iFwPA https://www.youtube.com/watch?v=NSaRb-iFwPA
- eadmund 2y ago
  > > it's okay to make financial decisions that don't make any sense on paper if they work for you I consider that to be (mostly) pernicious nonsense, like ‘it’s okay to walk off of a cliff, if that works for you.’ To a very great degree, finances are a mathematical/legal reality: the path of wisdom is to adjust one’s emotions to that reality rather than to imagine that reality matches one’s emotions. There is some degree of truth to it, of course: at the end of the day, life is not about maximising one’s finances, and one’s emotions definitely have a role to play in one’s happiness. But the sooner one learns to defer immediate gratification, save for the future and build up a nest egg, the happier one is likely to be.
  - DiggyJohnson 2y ago
    Walking off a cliff doesn't work for anyone, that's why you're missing the point. The "some" degree of truth to it is the entire point. Nobody is suggesting to "do whatever feels right or good when it comes to financial decisions."
more_corn 2y ago
The core (flawed) assumption is that a thousand year business is desirable. As a business owner and a worker I don’t want to work in my great, great grand pappy’s toothpick company. I want to have opportunities to create my own business, make profit, enjoy profit, hand modest generational wealth to my descendants and die without regrets. Thousand year business are not the way to achieve my goals and my goals are not incomplete with debt. I hold debt on my house. My future is tied to that debt and I wouldn’t have it another way (I mean unless you want to pay off my house).
- CaptainZapp 2y ago
  Maybe Japan and the Japanese have some different values than our fast charging Western world? Let me introduce the Shokunin (translated as Artisan, when you look it up on Wikipedia, which isn't quite right). What a Shokunin produces is, sort of, the antithesis of what you can order from Temu. A rather interesting blog post[0] explaining the concept: "Shokunin is more than just a craftsperson or artisan. It represents the devotion and lifelong commitment of craftsmen who dedicate themselves to perfecting their art. They embody the values of dedication to craft, excellence in craftsmanship, and masterful work. Shokunin believe in meticulous attention to detail and uphold the highest standards of quality and skill in their work." For us Westerners it's not fathomable to work 20 years, or a lifetime, ro achieve a perfect product. Who's to say that this concept is wrong? And I think it has a lot to do with a society who believes that a 1000 year old company is not only desirable but a virtue. [0] https://tobyleon.com/blogs/art-design/shokunin-japan-artisan-craftsmanship https://tobyleon.com/blogs/art-design/shokunin-japan-artisan...
- its_ethan 2y ago
  So you're saying his assumption is incorrect because you want something else? You should read some of this guys other stuff - a point he's made many times is that most disagreements in financial advice come from "people with different experiences in life, different time horizons, different risk tolerances talking over each other". There's a lesson in there for you. You don't want to work at your grandpa's company, fine. This advice may not be for you then. That doesn't make his premise any more flawed than your own. And FWIW a thousand year old company does not require that it stay within the same family - which is from your (flawed) assumption. In your own example of "creating a business, making a profit, and handing down wealth to your family", one of the ways to make that profit is to sell your business to someone else, who may sell it to another (on and on for... a thousand years). So not only are you claiming he's wrong based on an opinion you have, your opinion isn't even contradictory to the point he's making.
5350-uiop-1130 2y ago
> "As debt increases, you narrow the range of outcomes you can endure in life." when you have cash you do what you want. when you have debt you do what someone else wants.
- Tokkemon 2y ago
  Real hard-hitting, groundbreaking news on HN.
  - deleted 2y ago
    [deleted]
adverbly 2y ago
This is an overly simplistic model which happens to have applied very well to Japan but would break down if applied in other economies where inflationary risk is present. I'm pretty sure there's a joke about there being three types of economies: developed, undeveloped, and Japan. Cash is useless if the value of the cash goes down by 10,000% and you don't have an inflation adjusted revenue stream. You have to do something with the cash to get enough interest to keep up with inflation.
- k__ 2y ago
  What about deflationary currencies?
  - adverbly 2y ago
    I don't think there have been any currencies that have been deflationary for 100+ years so it's impossible to say. Obviously currency risk is what you have to watch out for though if you're not able to consistently both spend and collect from this single currency over the lifetime of your business.
    - psychlops 2y ago
      Bitcoin is a deflationary currency.
      - callalex 2y ago
        It’s a security/commodity, not a currency.
        psychlops 2y ago
        It's a currency and used as a direct form of acceptable payment. Not as much as it's creator envisioned, but it is. It's not a security. It certainly shares attributes with a commodity although I think a characteristic of a commodity is that it is tangible.
        2y ago
Joel_Mckay 2y ago
Debt is essentially sacrificing future well-being for immediate access to some product or service utility normally inaccessible from current market conditions. Even if a specific type of debt load is not necessarily a liability for personal profit, it is assuredly someones problem eventually... The theory debt doesn't matter only applies to 0.04% of the population dodging tax burdens with structured financial instruments. The interest rates should be set over 14.2% (and we know it), as aristocratic gambling-culture has stolen living-standard value from great-great-grandchildren not even born yet. The poignant question is 'could anyone do anything about the trends', and the short answer is a simple 'No'. https://en.wikipedia.org/wiki/Tragedy_of_the_commons https://en.wikipedia.org/wiki/Tragedy_of_the_commons Have a great day, =3
- cess11 2y ago
  Might want to read this monograph from 1990: https://www.cambridge.org/core/books/governing-the-commons/A8BB63BC4A1433A50A3FB92EDBBB97D5 https://www.cambridge.org/core/books/governing-the-commons/A...
  - Joel_Mckay 2y ago
    Another counterargument: is the opportunity for individuals to improve family living standards increasing or decreasing since the 1950's? I'll spare you the exhaustive list from education, housing, infrastructure, and medical service access. It is not, kids are no longer getting stable jobs, their own homes, or starting families until later in life. In my opinion, creating financial securities out of communities just turned most cities into theme-park economies. Fun, but innately unsustainable for all visitors except the board. Personally, I have found the contradictions formed between macroeconomics and microeconomics fascinating. Primarily because tragedy can be profitable in a global context, but destructive from a personal perspective. "Do you want to be right or do you want to be happy?" (Phillip C. McGraw)
    - cess11 2y ago
      You haven't changed my mind, I still think you ought to read Ostrom. "Mankind does not strive for happiness; only the Englishman does". (Friedrich Nietzsche)
nineplay 2y ago
You can take money and pay off your mortgage or you can take that same money, throw it in a low cost index fund, and keep the mortgage. Most people are going to end up better off with the later. Cash has the illusion of being safer but start talking about inflation and it starts to lose its luster.
- gbalduzzi 2y ago
  Sure, and what happens when, after you do that, some calamity happens and stocks go down by more than 50%, you lose your job and you can't pay the mortgage anymore? That is of course extreme, but proves the article point: by not having debt, you can sustain a much broaden series of events. As everything in life, it's a spectrum. I think it's pretty reasonable to accept the "sustainability narrowing" that comes from an affordable mortgage, but I avoid taking debt for other goods that are less important and would limit my ability to withstand unexpected events and accidents
  - avgDev 2y ago
    You can easily plan for such events. What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%. Surviving market crashes is not rocket science, don't be 100% in stocks. Have a decent emergency fund if you have a family, have some bonds, have a house with decent equity, and don't subscribe to consumerism.
    - kgwgk 2y ago
      > What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%. Quite a lot of people have experienced a market dropping 50% - not so many have seen their house collapse due to some event not covered by their insurance.
      - avgDev 2y ago
incomingpain 2y ago
I love this article. Very well laid out and simply explained. This article is explaining the set in stone mental health association with debt servicing. >I’m not an anti-debt zealot. There’s a time and place, and used responsibly it’s a wonderful tool. I am, here's how I would add to this article. How do you tell how in debt you are. How tight is the graph? Its not just your debt. Your paycheque comes from your neighbour's spending. If they are in debt, then you too will feel their collective debt. Generally speaking debt is mortgages> cars> tuition. Not a great deal else. So you can actually look at the public data. Norway is 210% debt to income. Canada is 178% debt to income. The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt. It's generally regarded that you keep this in the 30-40% range. When these thresholds hit ~130% that's typical of a financial crisis. To reach 178% or above 200%... that's only possible if actions are being taken by the central banks to prevent a crash temporarily. Checking Norway, because I don't know the state of their central bank. It seems Norway went bankrupt in the early 2000s? It has been a steady crash since being prevented by their central bank? Private Debt to GDP in Norway increased to 277.90 percent in 2023 So here's the thing about central banks working to prevent crashes. You can do so of course, but you also need to deflate the risk. But all they are doing is inflating the inevitable pop. You're just making the crash worse over time.
- sokoloff 2y ago
  > Norway is 210% debt to income. > Canada is 178% debt to income. > The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt. You're confusing two different measures there. The first two are "total debt" (a stock) vs "total income" (a flow). Then, in the last paragraph, you switch to talking about consumption declines as if the total debt stock was directly comparable to a total income flow, which it obviously isn't. The total interest due on the debt is the flow that you should be comparing to the total income flow. (Otherwise, if spending stopped at 100% debt-to-income, how could Canada and Norway's economy be working at 1.8 and 2.1 times that trigger threshold?) My mortgage debt (the stock) is give-or-take 100% of our annual household income (the flow). We have plenty of money left over each month to buy things, because the payments on that mortgage (the flow) are a sensible fraction of our household income (the flow).
ChrisMarshallNY 2y ago
> they tend to share a common characteristic: they hold tons of cash, and no debt. That describes the old-fashioned company that I worked for. They are only a bit over 100 years old, but they are cheap bastards. I learned how to work quite frugally, under them.
- vlod 2y ago
  Isn't that (or still is) the attitude at early Amazon? i.e. using doors as desks. Seems prudent. Not sure if they still do that. I've always hated startups where I've worked, that burn through HUGE sums of money (per-profitablilty) on expensive coffee/snacks/foosball tables. I feel like proverbial old man (The Simpsons) shouting at the clouds: "You know that fancy coffee you're drinking? it's future diluted equity!" Of course, maybe there are ranges of being "cheap bastards". :)
  - ChrisMarshallNY 2y ago
    They had no problem dropping thousands, if the need was there, but they didn't suffer much, in the way of "fluff." From what I hear, most places that have foosball tables, have about an inch of dust, on said table, because they have all their employees burning out their eyeballs.
- smilebot 2y ago
  It reminded me of Berkshire Hathaway. Very old fashioned, run by sensible people, and hold a lot of cash (and very little debt%).
lkjlkjsdfdfas 2y ago
[flagged]
WalterBright 2y ago
Debt is a tool: 1. Use it to account for the mismatch between income and expenses. 2. It takes money to start a business. You can borrow and start the business now, or save up for N years and then start. Same thing for buying a house. 3. If you can borrow money at 5%, and invest it at 10%, you make money. Using debt to buy frills, though, is not a great idea. I also use margin debt to increase my stock purchases. The returns are larger, but I must also endure wilder swings in the value. Some people say "what if the stock market goes to zero, what then, huh?" My reply is if the stock market goes to zero, everything else has gone to hell including whatever other investments you have.
mempko 2y ago
Here is a mind bending concept. Those that hold a lot of cash are resilient. But that cash came from someone else getting into debt. That's because money IS debt. Money gets created when people take out loans. That debt ends up as income to someone else. If you hold a lot of savings, others had to get into debt to create the money that ended up in your bank account. If EVERYONE decides to hoard cash, then the economy goes into a deflationary spiral and everyone's ability to save goes to zero. This is called the Paradox of Thrift. Many folks on HN have huge savings accounts. Thank those that went into debt so you can have savings. They sacrificed their resilience for you to have yours.
- mucle6 2y ago
  Not trying to be pedantic, just curious. Money isn't zero sum right? Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt. Unless its in a metaphorical sense like we're all in "debt" to the U.S government and we pay interest when they inflate more money.
  - z0r 2y ago
    Money isn't zero sum, but its value is based on being able to exchange it for goods and services - or to compel the production of goods and the carrying out of services. The less debt exists, the less compelled people are to work.
  - nr378 2y ago
    > Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt. The US government prints it (“quantitative easing") by creating new money and buying its own debt. In this sense it’s still correct to say this Government printed money is backed by debt. Nb. That this is only a small proportion of the overall money supply though. Commercial bank deposits (created through bank lending) represent the vast majority.
  - mempko 2y ago
    The government creates money by spending, but most money is actually created by commercial banks when people take out loans. ALL money is accounted for in these ledgers. So consequently, most money in people's deposit accounts is debt, either their own or someone else's. I recommend reading the Bank of England's Money Creation in the Modern Economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
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curious_cat_163 2y ago
I think that the analogy of drawing lines on a volatile plot is a good starting point. But fails to account for some dynamics of how the consequences of debt can be different. Debt limits choices. But, one can still make a choice that expands their liberty. Having a stable home, being able to go to college, etc. are good uses of debt. Buying a flashy car purely to impress the neighbors? Maybe not.
TexanFeller 2y ago
I have a paid off house and zero debt. Sure I might be ahead if I had used some of the cash to buy stocks instead of paying down the house early, but I’m completely happy with my decision. There is no peace of mind like not owing anyone a cent and keeping your living expenses low. Having debt was incredibly stressful and no longer worrying about making payments is the best thing that’s ever happened to my mental health.
- dheera 2y ago
  I never understood buying things that I can't afford. I always thought you earn money and when you earn enough money to buy something you can buy that something. That is always how I have lived life. For that reason I also find it ridiculous that it's the social norm to take debt to buy a roof to put over your head. A (simple, clean, functional) house is a basic need, not a luxury item. I always assumed that if I don't have the cash for a house, I can't afford a house. In those terms, I can't afford a house right now, so I've been renting the whole time. I think it should be the social norm for the median income to be able to buy a house with cash. For that to happen either people need to be making $1M/year median, or house prices need to come down to 1/5 of what they are.
  - sokoloff 2y ago
    It's fine to expect some people to buy a house with cash. I don't think that precludes saving for many years to do so (meaning the median income doesn't need to be $1M/yr).
    - dheera 2y ago
      Unfortunately housing prices are rising so fast that saving for years doesn't necessarily get you there, unless median income is close to ~1M by my back-of-envelope calculations, which include: - taxes (1M is close to 500K after taxes) - money that you need to cut out and put into retirement to sustain yourself from age 65-100 - living expenses and rent until you buy - real estate prices rising the whole time
m463 2y ago
I like this article. I also like the book "Debt" by Graeber. Different, but very eye opening.
mayiintroduce 2y ago
necessary debt has value unnecessary debt costs value
personjerry 2y ago
That's a really naive view. If you take on debt for a good reason, you can alter the trajectory of the function completely.
- hinkley 2y ago
  Most people who take on debt believe they have a good reason to do so. It's like how almost nobody thinks of themselves as Evil. Everyone is doing their best, but nobody has the same yardstick.
bdjsiqoocwk 2y ago
What does "wayward children" mean? I never heard this expression before.
SkyMarshal 2y ago
This is essentially an explanation of "absorbing barriers" [1] from ergodicity economics [2]. In ergodic systems, the ensemble average and time average are equivalent, but in non-ergodic systems (most of real life) they aren't. In non-ergodic systems, E[X] [3] is path-dependent. An absorbing barrier is like going all-in on a hand in poker and losing - you lose your entire bankroll, are out of the game, you stop progressing and have no more iterations. Your E[X] no longer incorporates the set of all possible steps or outcomes (ensemble average), but only the ones you actually experienced before incurring the absorbing barrier (time/path dependent average). As a result your real-life E[X] materially differs from your theoretical one. The lesson is that long-term survival should anticipate absorbing barriers, prioritize avoiding them, and build deep buffers against them (cash on hand, etc). [1]:https://en.wikipedia.org/wiki/Absorbing_barrier_(finance) https://en.wikipedia.org/wiki/Absorbing_barrier_(finance) [2]:https://ergodicityeconomics.com/ https://ergodicityeconomics.com/ [3]:https://en.wikipedia.org/wiki/Expected_value https://en.wikipedia.org/wiki/Expected_value [4]:https://www.nature.com/articles/s41567-019-0732-0 https://www.nature.com/articles/s41567-019-0732-0
openrisk 2y ago
This thinking links to how corporate debt has being valued theoretically, starting with the work of Merton [1], by looking at debt as an option with non-linear payoff. The borrower can put the busted assets to the lender. In practice there are countless important complications that make a naive option theoretic analysis very incomplete, e.g., getting into debt makes a lot of sense if you can count on a bailout if things go pear shaped. [1] https://en.m.wikipedia.org/wiki/Merton_model https://en.m.wikipedia.org/wiki/Merton_model
lisper 2y ago
Not all debt is created equal. There is a really crucial distinction here that the author doesn't mention. Debt to finance consumption is very different than debt to finance production. The former narrows your volatility window permanently, but the latter only does so temporarily. Once you get past that, the window widens again and stays wider than it would have been without the debt. As long as the productive asset returns more than the cost of servicing the debt to acquire it, you win. Of course, that's a big if, but it happens regularly, and it's something that really needs to be taken into account when making these kinds of decisions.
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philosopher123 2y ago
This bro just described leverage lolz
adamredwoods 2y ago
Why is so much financial advice from very wealthy people who did not gain their wealth through their own advice? Ie. Most advice is retrospective.
- vlod 2y ago
  A lot of retrospective advice can be useful. i.e. For heavens sake, don't make the mistake that I did.
llorislloris 2y ago
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idontknowtech 2y ago
Most people don't think about debt rationally. If going into debt can accelerate your plans by a significant timeframe, why not do it, assuming it's affordable? Especially if you can get money without having to give up equity. Their funds accelerate your business, you pay them back with the increased earnings. It's literally how capitalism is supposed to work.
_heimdall 2y ago
I have always hated the recommendation that people should avoid paying off debt and instead leverage that money in interest paying investments. Sure, on paper you seem better off when you keep a mortgage at 5% and have investments paying 9%, but you're locked in place. That 4% in potential gains means you aren't nearly as flexible when it comes to a job and income, selling your house may be untenable or impossible if markets fall meaningfully, and ultimately you are living in a house that the bank owns while someone took your money and replaced it with IOUs.
- ornornor 2y ago
  You can always liquidate the investment, pay the house off, sell it, buy elsewhere. If you’ve invested in volatile titles that can be a problem. But if it’s a bond, it’s quite stable and doable.
  - Ekaros 2y ago
    Situations where a bond pays more than your own debt is either anomalous or carries a risk. The risk is where premium comes from.
  - _heimdall 2y ago
    How often do you have access to bonds that pay higher than a mortgage though? Bonds are much less risky than mortgages, I'd only expect them to pay higher in rare instances when rates changed dramatically and you happened to be in the market at the right time.
    - ornornor 2y ago
      I don’t have personal experience with this, I was referring to GP who said that’s what they did.
BinRoo 2y ago
Saw the title, jumped to the diagrams, and thought I knew where this was going, but I was way off. I made the exact opposite conclusion from a quick glance at the diagram - that debt gives you more freedom. It allows you to go in the red. That a safe, debt-free life leads to less volatility and therefore less ups. Then I read the article, and couldn't hold both opposing ideas in my head.
trojanalert 2y ago
From a geographical socio-economic standpoint, debt is not a profit maximising tool. In India, for example, debt is a last resort means that comes with contempt and social taboos. Yet people have no choice, but to avail debt.
t0bia_s 2y ago
Debt is perfect tool for obedient citizens. “sing the song of him who gives you bread”
pmg101 2y ago
One thing I don't understand is why mortgage payments are fixed in nominal terms over the terms of the repayment plan. This has the effect of meaning they are most painful on month 1 and can be almost trivial by month 360 since they've been inflated away. And that's not even taking into account that earnings tend to increase over time even in real terms. It seems there would be a gap in the market for a loan whose payments increase either at or above inflation (perhaps this does indeed exist and I'm simply unaware of it.). Rent doesn't stay flat over a decade time period so why should mortgage payments?
- tlonny 2y ago
  You could always refinance every 5 or so years to achieve this
GuB-42 2y ago
One can see cash as universal insurance. For example, if you have more than a car worth of cash in an easily accessible account, your car is effectively insured. If you break it, you can just buy another one. A car is a lot of money but insurance premiums are also a lot of money over time. And unlike a car insurance that only covers your car and only in specific cases (ex: crashes are covered but not mechanical failures), cash covers for everything up to the value you have available. It doesn't mean you shouldn't get "proper" insurance, there are extreme events you would need way to much cash to cover (ex: civil liability, health,...), just that cash can be counted as insurance.
- vlod 2y ago
  Doesn't car insurance also cover the cost of you hitting another car. Sure I can save enough to replace my 20 year car, but not for a Bugatti (~$3M).
  - GuB-42 2y ago
    Yes, but I assumed you already have this, as it is mandatory in most places. I was talking about the more expensive insurance policies that cover "all risks", including theft, vandalism, or damage to the car due to weather or accidents where the owner is at fault.

247 points by pmzy 2y ago

The article doesn't mention businesses that periodically refinance their debit, which can kill a business when interest rates are unfavorable. Some business owners are experiencing that right now.

pif 2y ago

TL;DR: having tons of cash is better than having debt.

falcolas 2y ago
I thought the "The more debt you have, the less financially resilient you are" was the more important message.
- mym1990 2y ago
  But this isn’t true, one has to consider the debt ratio, not just the debt. Someone with a million dollars of debt is financially resilient if they have a debt ratio of .1
  - vlunkr 2y ago
    True, but that is not the situation most of humanity is facing.
    - necovek 2y ago
      I read that as an example to illustrate a point: it could also have said debt of $1000 with a debt ratio of 0.1 which is still pretty resilient.
      - falcolas 2y ago
        Resilient? Sure. Realistic for anyone with only $10k in assets? Not even remotely. Not in the market we have today. There are too many people who are using debt just to get their basic needs met, let alone something with enough permanence to be considered an asset.
        mym1990 2y ago
        We're just using arbitrary numbers to demonstrate a point, we aren't trying to assess anyone's actual financial health.
    - mym1990 2y ago
      That was exactly my point...a million dollars of debt is astronomical for the majority of people, but adding another data point such as DTA or DTI would make for a clearer picture of what the debt load actually is. Its like putting down a 100kg kettle bell and asking a group of people "is it hard to lift"? For the average person sure...but you're going to get a variety of answers if you put that kettle bell in front of kids vs a group of gym rats. Edit: I guess a smaller amount like 10k USD might be better to illustrate the point.
  - leononame 2y ago
    That's only true if the rest of their bet worth isn't tied up in some high risk investment where they could lose everything. Just because it's financially more optimal to have some debt in some situations doesn't mean that it's also more resilient. Yes, debt ratio plays a role (although a debt ratio of 0.1 is almost like having no debt at all), but no debt is for sure more resilient than debt.
    - mym1990 2y ago
      I think my point was more that 1 million dollars of debt is a pretty large sum to most people, but not much to someone who has substantial assets. You can draw up "that's only true" scenarios on basically any situation, so its not very helpful to go back and forth. I will say the point about having debt limits your future possibilities is very true, and if someone would like to maintain an open future, stay away from large amounts of debt(homes, expensive cars, boats, etc...)
  - triceratops 2y ago
    Debt to income or debt to asset is the only way of evaluating if someone's debt is high or low. I thought it was obvious that's what GP meant.
    - mym1990 2y ago
      I did not get that assumption from "The more debt you have, the less financially resilient you are". Debt is an absolute value, and debt-to-asset ratio is...not. You can also evaluate debt loads by debt-to-income ratio, which is not to be overlooked as most homeowners buy homes based on their income, rather than their savings. As others have said, debt-to-asset is also not a golden ratio, because if your assets are not liquid and you get called for your debt, you still have a bad situation.
      - triceratops 2y ago
        > You can also evaluate debt loads by debt-to-income ratio, which is not to be overlooked Debt to income is literally the first thing I wrote in my comment. I didn't overlook it. The absolute value of a debt is a meaningless number so "more debt" should always be evaluated in that context. And that's how I took the comment I originally responded to. Some extremely obvious things are being rehashed for no apparent reason in this thread. When evaluating relative debt load, asset values should have a multiplier to reflect both liquidity and volatility.
  - phkahler 2y ago
    If your other millions are not liquid then the one million of debt is still a potentially significant liability when adverse events happen. If it is liquid then why bother borrowing for something so small? The spent cash can be replenished quickly when there are no debt payments.
    - mym1990 2y ago
      Very true, I think the article is pretty high level, and so are my comments. Actual financial health can be difficult to evaluate given that world events are pretty open ended and anything can happen.
  - its_ethan 2y ago
    It's still true though. If push comes to shove, having no debt will increase your odds of surviving volatility - it the debt ratio just expands or tightens what range of volatility you can survive (which he did write about). Even if you have $5 of debt and $5m in the bank, you would still be measurably better off to have had $0 of debt in financial "survival".
mym1990 2y ago
Having both can often be the ideal situation. It’s also really dependent on what the debt is, how is it being serviced…etc. For some people, not having any debt at all is extremely liberating, and that benefit outweighs any of the benefits of getting marginal returns.
- coopertyme 2y ago
  >For some people, not having any debt at all is extremely liberating Indeed. I lived with my parents into my 30s, saved up for ~10 years and bought a nice house cash, no mortgage. Was it financially optimal? Probably not, but the peace of mind of being immune to market crashes or interest hikes (we tend to not have 20+ years fixed mortgages here) is just really nice.
  - sssilver 2y ago
    You simply restructured your debt and borrowed from parents instead, no? That is to say, you owe them for those ten years. Not saying there’s anything wrong with it. Most people in average circumstances owe a lot to their parents.
    - phkahler 2y ago
      >> You simply restructured your debt and borrowed from parents instead, no? >> That is to say, you owe them for those ten years. To me that seems like a strange take on it. I saw no indication of a debt owed in the GPs comment.
      - bryanlarsen 2y ago
        I think the OP used "owe" in the second dictionary sense: 2: to be attributable an idea that owes to Greek philosophy
    - mym1990 2y ago
      This is a very transactional view of it, but I can see the line of thinking. My mom gave me everything I needed to succeed as an adult, and I owe her a lot, so now whatever she needs, I try to take care of it. Hopefully other people come to the same conclusion, but I don't think parents usually expect a financial ROI on raising kids haha.

tombert 2y ago

I don't think all debt is equal, and I don't think all debt hurts your ability to handle volatility. I have a 30 year mortgage on my house with a 2.75% interest rate. That has effectively given myself "rent control"; outside of a potential rise of property taxes, my "rent" payment will not exceed a certain number of dollars. That means that if the housing prices rise rapidly, I'm covered. If I had decided not to leverage several hundred thousands of dollars of debt, then yes I'd have more cash directly now, but I might have suffered the fate that lots of others faced with the recent spikes in rent that have happened due to COVID. I simply didn't have to worry about that. Obviously there's different types of debt; some insanely high-interest loan you get from a payday loan place absolutely is a bad and will hurt your ability to stand volatility.

galdosdi 2y ago
The way I think about this is: You already are in "debt" by being alive. You have the huge liabilities of needing food and housing and maybe sometimes some healthcare, in order to stay alive. By buying a perpetual source of one of those you aren't investing or expanding your liabilities-- just the opposite, you are hedging against and closing out your liability by prepaying for it. To take this idea further, this is why I think buying a little bit of stock in energy and agriculture companies is "risk free" because while they could go down if those things get cheaper, you would then win out as a consumer. You will need food and energy down the line anyway, so a modest investment in those closes out that hedge rather than expanding liability
- anon7725 2y ago
  There are lots of ways that stock in food and energy companies could go down while prices go up. A drought or pipeline disruption come to mind.
  - yowlingcat 2y ago
    Absolutely. And I think the same is true for the commodities market correlates there; if memory serves correctly, crude commodity futures went negative for a break period during the supply chain volatility spike during the beginning of the pandemic.

2d8a875f-39a2-4 2y ago

I'm not qualified to expound on it but the featured article doesn't cover opportunity cost, and a scale of risk appetites. To name just two concepts it's missing.

phkahler 2y ago
>> the featured article doesn't cover opportunity cost, and a scale of risk appetites. If your business is moving along just fine and you have a decent cash reserve, what opportunity cost is all that important? FOMO doesn't seem like a good thing to let influence business decisions.

Brajeshwar 2y ago

Today, I started picking up what I started some time back -- the book “Debt: The First 5,000 Years” by David Graeber goes deep into the details of Debt. I've heard good reviews and I hope this is a good book as they say. https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

arj 2y ago
It is
throw0101d 2y ago
> the book “Debt: The First 5,000 Years” by David Graeber Also would recommend Money: The True Story of a Made-Up Thing: > Money only works because we all agree to believe in it. In Money, Jacob Goldstein shows how money is a useful fiction that has shaped societies for thousands of years, from the rise of coins in ancient Greece to the first stock market in Amsterdam to the emergence of shadow banking in the 21st century. > At the heart of the story are the fringe thinkers and world leaders who reimagined money. Kublai Khan, the Mongol emperor, created paper money backed by nothing, centuries before it appeared in the west. John Law, a professional gambler and convicted murderer, brought modern money to France (and destroyed the country's economy). The cypherpunks, a group of radical libertarian computer programmers, paved the way for bitcoin. * https://www.goodreads.com/en/book/show/50358103 https://www.goodreads.com/en/book/show/50358103 And The power of gold : the history of an obsession (and Bernstein's other books): > Incorporating myth, history and contemporary investigation, Bernstein tells the story of how human beings have become intoxicated, obsessed, enriched, impoverished, humbled and proud for the sake of gold. From the past to the future, Bernstein's portrayal of gold is intimately linked to the character of humankind. * https://www.goodreads.com/en/book/show/249245 https://www.goodreads.com/en/book/show/249245
- belval 2y ago
  > Money only works because we all agree to believe in it. Respectfully, this is the type of true-that-sounds-deep statements that are absolutely shallow and pointless. Yes money the "paper" is not worth anything, but the same could be said of anything in an organized society. Ownership means nothing, it's just a title backed by the government which has a monopoly on violence. Ethics means nothing, it's just something we culturally decided was desirable because if you feel a-ok with murder any trip anywhere would turn into a blood bath. At this point it should be a named fallacy (maybe it is), if we are discussing the merits of debt as a tool, saying "money isn't worth anything" as if it means something is not some ground breaking statement.

Workaccount2 2y ago

Reminds me of those real estate influencer types you see on social media... "We are $4.25 million in debt but live care free vacation filled lives bringing in $40,000 a month"

eadmund 2y ago
$40,000 is $480,000/year, which is 11.3% of $4.25 million; if one borrowed that $4.25 million at a significant discount to 11.3% then that might be a very good financial decision indeed. If it’s at a floating rate, it might still be a good decision. But right now some business loans are up around 15%, at which point the situation above would be an absolute catastrophe.

DrPhish 2y ago

“Debt is slavery” is how I’ve always thought about debt, and what I’ve taught my kids.

Night_Thastus 2y ago
For low-income people, debt is slavery. For high-income people, debt is a powerful tool. The vast majority of people fall into group #1 and need to treat debts like credit cards and car payments with extreme caution.
- psychlops 2y ago
  > For high-income people, debt is a powerful tool. How?
  - ihumanable 2y ago
    Not the original poster, but debt can allow you to shift transactions to periods that are most advantageous to you. Here's an example. Let's say that you as a high wealth individual have some stock. The stock has a value of $10M but you can only realize that value through the sale of the stock. If you sell the stock right now you have to sell it for the price the market will buy it at and you have to pay taxes on the profit, either income taxes if you've not had the stock for long or capital gains taxes if you've held it for the requisite period. It is in your interest to optimize your sale so that you pay the least amount in taxes and get the best price per share. You'd love to be able to hold your stock until you can do that, but you need money now. In comes debt. Someone will probably happily issue you some debt that you can use today as money. You can collateralize that debt with your $10M in paper value and get a nice interest rate. So you take out $1M in debt and enjoy life and at the end you have to pay back, to keep the math easy, $1.1M. This debt cost you $100k but if by taking on that debt you can sell when the stock price is higher or convert income tax (37%) into capital gains (20%) then the $100k could easily buy you much more than $100k. In our example if the stock price were the same but all you did was hold the asset long enough to convert it from short term to long term then instead of paying $10M * 37% = $3.7M in taxes, you'd pay $10M * 20% = $2M in taxes. That's a savings of $1.7M on your tax bill. This is how people with assets can use debt as a tool.

AndrewKemendo 2y ago

This guy's entire life (He's a VC) is about pushing debt in the form of promissory notes and equity-debt onto companies in exchange for his own ownership How does he reconcile the fact that the companies he lauds in the beginning, would completely shun any business with him (an investor) for precisely the reasons described? I feel like investors and VC are unaware of their own values

deleted 2y ago
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throw0101d 2y ago
> This guy's entire life (He's a VC) is about pushing debt in the form of promissory notes and equity-debt onto companies in exchange for his own ownership There's a difference between business finance and personal finance. There's a difference between what needs to be done to start a business and what needs to be done to keep it going. Apple started in a garage, but it is no longer run out of one. Apple started with loans and investors, Apple now has a large pile of cash (though also bonds that it needs to pay).
- yellow_lead 2y ago
  Well, the article specifically references Japanese businesses
  - throw0101d 2y ago
    In the introduction. He then has paragraphs such as: > Let’s say this represents volatility over your life. Not just market volatility, but life world and life volatility: recessions, wars, divorces, illness, moves, floods, changes of heart, etc. And further down: > I hope to be around for another 50 years. What are the odds that during those 50 years I will experience one or more of the following: Wars, recessions, terrorist attacks, pandemics, bad political decisions, family emergencies, unforeseen health crises, career transitions, wayward children, and other mishaps? Not sure how many businesses experience divorce, family emergencies, career transitions, wayward children.

rKarpinski 2y ago

Interesting they chose to use this example of Japanese companies not having debt, when the country of Japan has the highest debt to GDP of any developed nation[1] which has contributed to its economic stagnation since the 1990s [1] https://en.wikipedia.org/wiki/National_debt_of_Japan https://en.wikipedia.org/wiki/National_debt_of_Japan

gr8r 2y ago
Interesting. Just another reason I'm convinced some of these recent non-fiction is just commentary (almost) making-up/inflating a problem and then providing a "magic" solution. The content isn't nearly as timeless nor broadly true.
- rKarpinski 2y ago
  yeah, it's content marketing which is all the rage these days. The purpose of pieces like this is to advertise (the VC fund) not to provide deep insight
smilebot 2y ago
It is interesting because the top 5 oldest companies are Japanese https://en.wikipedia.org/wiki/List_of_oldest_companies https://en.wikipedia.org/wiki/List_of_oldest_companies. Their points are still valid even though the country has a different story.

throw0101d 2y ago

The author of the article, Morgan Housel, is also the author of the book The Psychology of Money. This thoughts on, e.g., paying down his mortgage: > It just increased our independence, even if it made no sense on paper. So that's another element of debt that I think goes misunderstood. And a lot of that for both of those points is this idea that people don't make financial decisions on a spreadsheet. They don't make them in Excel. They make financial decisions at the dinner table. That's where they're talking about their goals and their own different personalities and their own unique fears and their own unique skills and whatnot. So that's why I kind of push people to say like, it's okay to make financial decisions that don't make any sense on paper if they work for you, if they check the boxes of your psychology and your goals that makes sense for you. And for me, extreme aversion, what looks like an irrational aversion today, and I would say is an irrational aversion to debt, is what works for me and what makes me happy, so that's why I've done it. * https://rationalreminder.ca/podcast/128 https://rationalreminder.ca/podcast/128 * https://www.youtube.com/watch?v=NSaRb-iFwPA https://www.youtube.com/watch?v=NSaRb-iFwPA

eadmund 2y ago
> > it's okay to make financial decisions that don't make any sense on paper if they work for you I consider that to be (mostly) pernicious nonsense, like ‘it’s okay to walk off of a cliff, if that works for you.’ To a very great degree, finances are a mathematical/legal reality: the path of wisdom is to adjust one’s emotions to that reality rather than to imagine that reality matches one’s emotions. There is some degree of truth to it, of course: at the end of the day, life is not about maximising one’s finances, and one’s emotions definitely have a role to play in one’s happiness. But the sooner one learns to defer immediate gratification, save for the future and build up a nest egg, the happier one is likely to be.
- DiggyJohnson 2y ago
  Walking off a cliff doesn't work for anyone, that's why you're missing the point. The "some" degree of truth to it is the entire point. Nobody is suggesting to "do whatever feels right or good when it comes to financial decisions."

more_corn 2y ago

The core (flawed) assumption is that a thousand year business is desirable. As a business owner and a worker I don’t want to work in my great, great grand pappy’s toothpick company. I want to have opportunities to create my own business, make profit, enjoy profit, hand modest generational wealth to my descendants and die without regrets. Thousand year business are not the way to achieve my goals and my goals are not incomplete with debt. I hold debt on my house. My future is tied to that debt and I wouldn’t have it another way (I mean unless you want to pay off my house).

CaptainZapp 2y ago
Maybe Japan and the Japanese have some different values than our fast charging Western world? Let me introduce the Shokunin (translated as Artisan, when you look it up on Wikipedia, which isn't quite right). What a Shokunin produces is, sort of, the antithesis of what you can order from Temu. A rather interesting blog post[0] explaining the concept: "Shokunin is more than just a craftsperson or artisan. It represents the devotion and lifelong commitment of craftsmen who dedicate themselves to perfecting their art. They embody the values of dedication to craft, excellence in craftsmanship, and masterful work. Shokunin believe in meticulous attention to detail and uphold the highest standards of quality and skill in their work." For us Westerners it's not fathomable to work 20 years, or a lifetime, ro achieve a perfect product. Who's to say that this concept is wrong? And I think it has a lot to do with a society who believes that a 1000 year old company is not only desirable but a virtue. [0] https://tobyleon.com/blogs/art-design/shokunin-japan-artisan-craftsmanship https://tobyleon.com/blogs/art-design/shokunin-japan-artisan...
its_ethan 2y ago
So you're saying his assumption is incorrect because you want something else? You should read some of this guys other stuff - a point he's made many times is that most disagreements in financial advice come from "people with different experiences in life, different time horizons, different risk tolerances talking over each other". There's a lesson in there for you. You don't want to work at your grandpa's company, fine. This advice may not be for you then. That doesn't make his premise any more flawed than your own. And FWIW a thousand year old company does not require that it stay within the same family - which is from your (flawed) assumption. In your own example of "creating a business, making a profit, and handing down wealth to your family", one of the ways to make that profit is to sell your business to someone else, who may sell it to another (on and on for... a thousand years). So not only are you claiming he's wrong based on an opinion you have, your opinion isn't even contradictory to the point he's making.

5350-uiop-1130 2y ago

> "As debt increases, you narrow the range of outcomes you can endure in life." when you have cash you do what you want. when you have debt you do what someone else wants.

Tokkemon 2y ago
Real hard-hitting, groundbreaking news on HN.
- deleted 2y ago
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adverbly 2y ago

This is an overly simplistic model which happens to have applied very well to Japan but would break down if applied in other economies where inflationary risk is present. I'm pretty sure there's a joke about there being three types of economies: developed, undeveloped, and Japan. Cash is useless if the value of the cash goes down by 10,000% and you don't have an inflation adjusted revenue stream. You have to do something with the cash to get enough interest to keep up with inflation.

k__ 2y ago
What about deflationary currencies?
- adverbly 2y ago
  I don't think there have been any currencies that have been deflationary for 100+ years so it's impossible to say. Obviously currency risk is what you have to watch out for though if you're not able to consistently both spend and collect from this single currency over the lifetime of your business.
  - psychlops 2y ago
    Bitcoin is a deflationary currency.
    - callalex 2y ago
      It’s a security/commodity, not a currency.
      - psychlops 2y ago
        It's a currency and used as a direct form of acceptable payment. Not as much as it's creator envisioned, but it is. It's not a security. It certainly shares attributes with a commodity although I think a characteristic of a commodity is that it is tangible.
      - 2y ago

Joel_Mckay 2y ago

Debt is essentially sacrificing future well-being for immediate access to some product or service utility normally inaccessible from current market conditions. Even if a specific type of debt load is not necessarily a liability for personal profit, it is assuredly someones problem eventually... The theory debt doesn't matter only applies to 0.04% of the population dodging tax burdens with structured financial instruments. The interest rates should be set over 14.2% (and we know it), as aristocratic gambling-culture has stolen living-standard value from great-great-grandchildren not even born yet. The poignant question is 'could anyone do anything about the trends', and the short answer is a simple 'No'. https://en.wikipedia.org/wiki/Tragedy_of_the_commons https://en.wikipedia.org/wiki/Tragedy_of_the_commons Have a great day, =3

cess11 2y ago
Might want to read this monograph from 1990: https://www.cambridge.org/core/books/governing-the-commons/A8BB63BC4A1433A50A3FB92EDBBB97D5 https://www.cambridge.org/core/books/governing-the-commons/A...
- Joel_Mckay 2y ago
  Another counterargument: is the opportunity for individuals to improve family living standards increasing or decreasing since the 1950's? I'll spare you the exhaustive list from education, housing, infrastructure, and medical service access. It is not, kids are no longer getting stable jobs, their own homes, or starting families until later in life. In my opinion, creating financial securities out of communities just turned most cities into theme-park economies. Fun, but innately unsustainable for all visitors except the board. Personally, I have found the contradictions formed between macroeconomics and microeconomics fascinating. Primarily because tragedy can be profitable in a global context, but destructive from a personal perspective. "Do you want to be right or do you want to be happy?" (Phillip C. McGraw)
  - cess11 2y ago
    You haven't changed my mind, I still think you ought to read Ostrom. "Mankind does not strive for happiness; only the Englishman does". (Friedrich Nietzsche)

nineplay 2y ago

You can take money and pay off your mortgage or you can take that same money, throw it in a low cost index fund, and keep the mortgage. Most people are going to end up better off with the later. Cash has the illusion of being safer but start talking about inflation and it starts to lose its luster.

gbalduzzi 2y ago
Sure, and what happens when, after you do that, some calamity happens and stocks go down by more than 50%, you lose your job and you can't pay the mortgage anymore? That is of course extreme, but proves the article point: by not having debt, you can sustain a much broaden series of events. As everything in life, it's a spectrum. I think it's pretty reasonable to accept the "sustainability narrowing" that comes from an affordable mortgage, but I avoid taking debt for other goods that are less important and would limit my ability to withstand unexpected events and accidents
- avgDev 2y ago
  You can easily plan for such events. What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%. Surviving market crashes is not rocket science, don't be 100% in stocks. Have a decent emergency fund if you have a family, have some bonds, have a house with decent equity, and don't subscribe to consumerism.
  - kgwgk 2y ago
    > What if your house collapses due to some event that is not covered by your insurance and you used all the capital to purchase it? This is as an extreme example as the market dropping 50%. Quite a lot of people have experienced a market dropping 50% - not so many have seen their house collapse due to some event not covered by their insurance.
    - avgDev 2y ago

incomingpain 2y ago

I love this article. Very well laid out and simply explained. This article is explaining the set in stone mental health association with debt servicing. >I’m not an anti-debt zealot. There’s a time and place, and used responsibly it’s a wonderful tool. I am, here's how I would add to this article. How do you tell how in debt you are. How tight is the graph? Its not just your debt. Your paycheque comes from your neighbour's spending. If they are in debt, then you too will feel their collective debt. Generally speaking debt is mortgages> cars> tuition. Not a great deal else. So you can actually look at the public data. Norway is 210% debt to income. Canada is 178% debt to income. The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt. It's generally regarded that you keep this in the 30-40% range. When these thresholds hit ~130% that's typical of a financial crisis. To reach 178% or above 200%... that's only possible if actions are being taken by the central banks to prevent a crash temporarily. Checking Norway, because I don't know the state of their central bank. It seems Norway went bankrupt in the early 2000s? It has been a steady crash since being prevented by their central bank? Private Debt to GDP in Norway increased to 277.90 percent in 2023 So here's the thing about central banks working to prevent crashes. You can do so of course, but you also need to deflate the risk. But all they are doing is inflating the inevitable pop. You're just making the crash worse over time.

sokoloff 2y ago
> Norway is 210% debt to income. > Canada is 178% debt to income. > The threshold of 100% is a big deal. It's when discretionary spending stops. At 100%, your income goes 100% toward servicing debt. You're confusing two different measures there. The first two are "total debt" (a stock) vs "total income" (a flow). Then, in the last paragraph, you switch to talking about consumption declines as if the total debt stock was directly comparable to a total income flow, which it obviously isn't. The total interest due on the debt is the flow that you should be comparing to the total income flow. (Otherwise, if spending stopped at 100% debt-to-income, how could Canada and Norway's economy be working at 1.8 and 2.1 times that trigger threshold?) My mortgage debt (the stock) is give-or-take 100% of our annual household income (the flow). We have plenty of money left over each month to buy things, because the payments on that mortgage (the flow) are a sensible fraction of our household income (the flow).

ChrisMarshallNY 2y ago

> they tend to share a common characteristic: they hold tons of cash, and no debt. That describes the old-fashioned company that I worked for. They are only a bit over 100 years old, but they are cheap bastards. I learned how to work quite frugally, under them.

vlod 2y ago
Isn't that (or still is) the attitude at early Amazon? i.e. using doors as desks. Seems prudent. Not sure if they still do that. I've always hated startups where I've worked, that burn through HUGE sums of money (per-profitablilty) on expensive coffee/snacks/foosball tables. I feel like proverbial old man (The Simpsons) shouting at the clouds: "You know that fancy coffee you're drinking? it's future diluted equity!" Of course, maybe there are ranges of being "cheap bastards". :)
- ChrisMarshallNY 2y ago
  They had no problem dropping thousands, if the need was there, but they didn't suffer much, in the way of "fluff." From what I hear, most places that have foosball tables, have about an inch of dust, on said table, because they have all their employees burning out their eyeballs.
smilebot 2y ago
It reminded me of Berkshire Hathaway. Very old fashioned, run by sensible people, and hold a lot of cash (and very little debt%).

lkjlkjsdfdfas 2y ago

[flagged]

WalterBright 2y ago

Debt is a tool: 1. Use it to account for the mismatch between income and expenses. 2. It takes money to start a business. You can borrow and start the business now, or save up for N years and then start. Same thing for buying a house. 3. If you can borrow money at 5%, and invest it at 10%, you make money. Using debt to buy frills, though, is not a great idea. I also use margin debt to increase my stock purchases. The returns are larger, but I must also endure wilder swings in the value. Some people say "what if the stock market goes to zero, what then, huh?" My reply is if the stock market goes to zero, everything else has gone to hell including whatever other investments you have.

mempko 2y ago

Here is a mind bending concept. Those that hold a lot of cash are resilient. But that cash came from someone else getting into debt. That's because money IS debt. Money gets created when people take out loans. That debt ends up as income to someone else. If you hold a lot of savings, others had to get into debt to create the money that ended up in your bank account. If EVERYONE decides to hoard cash, then the economy goes into a deflationary spiral and everyone's ability to save goes to zero. This is called the Paradox of Thrift. Many folks on HN have huge savings accounts. Thank those that went into debt so you can have savings. They sacrificed their resilience for you to have yours.

mucle6 2y ago
Not trying to be pedantic, just curious. Money isn't zero sum right? Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt. Unless its in a metaphorical sense like we're all in "debt" to the U.S government and we pay interest when they inflate more money.
- z0r 2y ago
  Money isn't zero sum, but its value is based on being able to exchange it for goods and services - or to compel the production of goods and the carrying out of services. The less debt exists, the less compelled people are to work.
- nr378 2y ago
  > Like the U.S. Government prints it and spends it, so its not clear to me that there is a balance sheet of cash being someone elses debt. The US government prints it (“quantitative easing") by creating new money and buying its own debt. In this sense it’s still correct to say this Government printed money is backed by debt. Nb. That this is only a small proportion of the overall money supply though. Commercial bank deposits (created through bank lending) represent the vast majority.
- mempko 2y ago
  The government creates money by spending, but most money is actually created by commercial banks when people take out loans. ALL money is accounted for in these ledgers. So consequently, most money in people's deposit accounts is debt, either their own or someone else's. I recommend reading the Bank of England's Money Creation in the Modern Economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

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curious_cat_163 2y ago

I think that the analogy of drawing lines on a volatile plot is a good starting point. But fails to account for some dynamics of how the consequences of debt can be different. Debt limits choices. But, one can still make a choice that expands their liberty. Having a stable home, being able to go to college, etc. are good uses of debt. Buying a flashy car purely to impress the neighbors? Maybe not.

TexanFeller 2y ago

I have a paid off house and zero debt. Sure I might be ahead if I had used some of the cash to buy stocks instead of paying down the house early, but I’m completely happy with my decision. There is no peace of mind like not owing anyone a cent and keeping your living expenses low. Having debt was incredibly stressful and no longer worrying about making payments is the best thing that’s ever happened to my mental health.

dheera 2y ago
I never understood buying things that I can't afford. I always thought you earn money and when you earn enough money to buy something you can buy that something. That is always how I have lived life. For that reason I also find it ridiculous that it's the social norm to take debt to buy a roof to put over your head. A (simple, clean, functional) house is a basic need, not a luxury item. I always assumed that if I don't have the cash for a house, I can't afford a house. In those terms, I can't afford a house right now, so I've been renting the whole time. I think it should be the social norm for the median income to be able to buy a house with cash. For that to happen either people need to be making $1M/year median, or house prices need to come down to 1/5 of what they are.
- sokoloff 2y ago
  It's fine to expect some people to buy a house with cash. I don't think that precludes saving for many years to do so (meaning the median income doesn't need to be $1M/yr).
  - dheera 2y ago
    Unfortunately housing prices are rising so fast that saving for years doesn't necessarily get you there, unless median income is close to ~1M by my back-of-envelope calculations, which include: - taxes (1M is close to 500K after taxes) - money that you need to cut out and put into retirement to sustain yourself from age 65-100 - living expenses and rent until you buy - real estate prices rising the whole time

m463 2y ago

I like this article. I also like the book "Debt" by Graeber. Different, but very eye opening.

mayiintroduce 2y ago

necessary debt has value unnecessary debt costs value

personjerry 2y ago

That's a really naive view. If you take on debt for a good reason, you can alter the trajectory of the function completely.

hinkley 2y ago
Most people who take on debt believe they have a good reason to do so. It's like how almost nobody thinks of themselves as Evil. Everyone is doing their best, but nobody has the same yardstick.

bdjsiqoocwk 2y ago

What does "wayward children" mean? I never heard this expression before.

SkyMarshal 2y ago

This is essentially an explanation of "absorbing barriers" [1] from ergodicity economics [2]. In ergodic systems, the ensemble average and time average are equivalent, but in non-ergodic systems (most of real life) they aren't. In non-ergodic systems, E[X] [3] is path-dependent. An absorbing barrier is like going all-in on a hand in poker and losing - you lose your entire bankroll, are out of the game, you stop progressing and have no more iterations. Your E[X] no longer incorporates the set of all possible steps or outcomes (ensemble average), but only the ones you actually experienced before incurring the absorbing barrier (time/path dependent average). As a result your real-life E[X] materially differs from your theoretical one. The lesson is that long-term survival should anticipate absorbing barriers, prioritize avoiding them, and build deep buffers against them (cash on hand, etc). [1]:https://en.wikipedia.org/wiki/Absorbing_barrier_(finance) https://en.wikipedia.org/wiki/Absorbing_barrier_(finance) [2]:https://ergodicityeconomics.com/ https://ergodicityeconomics.com/ [3]:https://en.wikipedia.org/wiki/Expected_value https://en.wikipedia.org/wiki/Expected_value [4]:https://www.nature.com/articles/s41567-019-0732-0 https://www.nature.com/articles/s41567-019-0732-0

openrisk 2y ago

This thinking links to how corporate debt has being valued theoretically, starting with the work of Merton [1], by looking at debt as an option with non-linear payoff. The borrower can put the busted assets to the lender. In practice there are countless important complications that make a naive option theoretic analysis very incomplete, e.g., getting into debt makes a lot of sense if you can count on a bailout if things go pear shaped. [1] https://en.m.wikipedia.org/wiki/Merton_model https://en.m.wikipedia.org/wiki/Merton_model

lisper 2y ago

Not all debt is created equal. There is a really crucial distinction here that the author doesn't mention. Debt to finance consumption is very different than debt to finance production. The former narrows your volatility window permanently, but the latter only does so temporarily. Once you get past that, the window widens again and stays wider than it would have been without the debt. As long as the productive asset returns more than the cost of servicing the debt to acquire it, you win. Of course, that's a big if, but it happens regularly, and it's something that really needs to be taken into account when making these kinds of decisions.

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philosopher123 2y ago

This bro just described leverage lolz

adamredwoods 2y ago

Why is so much financial advice from very wealthy people who did not gain their wealth through their own advice? Ie. Most advice is retrospective.

vlod 2y ago
A lot of retrospective advice can be useful. i.e. For heavens sake, don't make the mistake that I did.

llorislloris 2y ago

[dead]

idontknowtech 2y ago

Most people don't think about debt rationally. If going into debt can accelerate your plans by a significant timeframe, why not do it, assuming it's affordable? Especially if you can get money without having to give up equity. Their funds accelerate your business, you pay them back with the increased earnings. It's literally how capitalism is supposed to work.

_heimdall 2y ago

I have always hated the recommendation that people should avoid paying off debt and instead leverage that money in interest paying investments. Sure, on paper you seem better off when you keep a mortgage at 5% and have investments paying 9%, but you're locked in place. That 4% in potential gains means you aren't nearly as flexible when it comes to a job and income, selling your house may be untenable or impossible if markets fall meaningfully, and ultimately you are living in a house that the bank owns while someone took your money and replaced it with IOUs.

ornornor 2y ago
You can always liquidate the investment, pay the house off, sell it, buy elsewhere. If you’ve invested in volatile titles that can be a problem. But if it’s a bond, it’s quite stable and doable.
- Ekaros 2y ago
  Situations where a bond pays more than your own debt is either anomalous or carries a risk. The risk is where premium comes from.
- _heimdall 2y ago
  How often do you have access to bonds that pay higher than a mortgage though? Bonds are much less risky than mortgages, I'd only expect them to pay higher in rare instances when rates changed dramatically and you happened to be in the market at the right time.
  - ornornor 2y ago
    I don’t have personal experience with this, I was referring to GP who said that’s what they did.

BinRoo 2y ago

Saw the title, jumped to the diagrams, and thought I knew where this was going, but I was way off. I made the exact opposite conclusion from a quick glance at the diagram - that debt gives you more freedom. It allows you to go in the red. That a safe, debt-free life leads to less volatility and therefore less ups. Then I read the article, and couldn't hold both opposing ideas in my head.

trojanalert 2y ago

From a geographical socio-economic standpoint, debt is not a profit maximising tool. In India, for example, debt is a last resort means that comes with contempt and social taboos. Yet people have no choice, but to avail debt.

t0bia_s 2y ago

Debt is perfect tool for obedient citizens. “sing the song of him who gives you bread”

pmg101 2y ago

One thing I don't understand is why mortgage payments are fixed in nominal terms over the terms of the repayment plan. This has the effect of meaning they are most painful on month 1 and can be almost trivial by month 360 since they've been inflated away. And that's not even taking into account that earnings tend to increase over time even in real terms. It seems there would be a gap in the market for a loan whose payments increase either at or above inflation (perhaps this does indeed exist and I'm simply unaware of it.). Rent doesn't stay flat over a decade time period so why should mortgage payments?

tlonny 2y ago
You could always refinance every 5 or so years to achieve this

GuB-42 2y ago

One can see cash as universal insurance. For example, if you have more than a car worth of cash in an easily accessible account, your car is effectively insured. If you break it, you can just buy another one. A car is a lot of money but insurance premiums are also a lot of money over time. And unlike a car insurance that only covers your car and only in specific cases (ex: crashes are covered but not mechanical failures), cash covers for everything up to the value you have available. It doesn't mean you shouldn't get "proper" insurance, there are extreme events you would need way to much cash to cover (ex: civil liability, health,...), just that cash can be counted as insurance.

vlod 2y ago
Doesn't car insurance also cover the cost of you hitting another car. Sure I can save enough to replace my 20 year car, but not for a Bugatti (~$3M).
- GuB-42 2y ago
  Yes, but I assumed you already have this, as it is mandatory in most places. I was talking about the more expensive insurance policies that cover "all risks", including theft, vandalism, or damage to the car due to weather or accidents where the owner is at fault.