Self liquidating loan example

20-Jul-2016 02:30

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Cash that you can’t spend in the future represents consumption that you must forgo in the future.

In other words, a preference for a car today acquired via debt is really just another way of saying that having the car NOW has a higher ‘value’ than having a car’s worth of purchasing power in the FUTURE. And, finally, remember that there are only 2 ways to make a debt go away: 1) Pay it back 2) Default on it Unless you are the federal government in which case you can always go for the third option: 3) Print money to pay the debt.

And here’s the one thing we need to remember about this kind of debt: It represents future consumption taken today.

Sometimes people find this statement confusing, so let me flesh this out a bit.

The federal government always favors this last option because so very few people correctly perceive the (inevitable) resulting inflation for what it really is, a hidden tax that erodes the value of all existing money, whereas everybody understands that raising taxes directly takes their money away.

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Here the loan will clearly 'pay for itself.' More typically, self-liquidating debt has a productive asset tied to it, such as a utility company, an apartment building, or a factory which generates the income to pay off the debt.

So what does any of this have to do with the title? Well, if we rotate the topic slightly, we can observe that there are two other ways to view debt.

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