I was hoping to have the book with me as I wrote about this. But I left it at home. So, these thoughts and comments are coming from my memory.
I was really drawn into Paper Money by the first few chapters. Essentially, “Adam Smith” argues that the problem with our economy today is debt.
Yes, the national debt is big, but Smith hits also on personal debt. I don’t remember if it was this book or another source that pointed out that the national debt has set the example for consumer (personal) debt.
I guess people think, “What the heck? If the government can spend that which they don’t have so can I.”
Debt is one of my biggest personal pet peeves. I actually was patting myself on the back all these years because I had no debt (except for my house). At least I thought I did. I had rationalized in my head that my student loans were okay, because they were for my education (which incidentally I don’t use in a professional capacity).
However, after having read Dave Ramsey‘s Total Money Makeover, I realized how wrong I was in thinking that nonsense. I am very proud to say that I am chipping away at this debt, and I am over 3 years ahead of schedule in paying it off. Actually, I hope to have this 20-year loan (now in the 5th year of paying it off) eliminated by the end of 2007.
Let’s get back to the point. Smith argues that by increasing the amount of debt that we incur we hurt the strength of the dollar. This was the first I had ever had my assumptions that we in America are operating under what I call a false economy. It is my opinion that we think we have a strong economy because the consumer market is doing so well. However, it is a false assumption because all of the consumer spending is done on debt.
As I understand it, the debt-based economy has three problems with it. First, we are spending more for things that they are worth. Because we are paying interest on the items we purchase, they are actually costing us more than the market value of the product. Thus, money is wasted and the consumer gets less for her dollar.
The second problem with a debt-based economy is that things become more expensive. If I recall correctly this concept actually came from Smith. When people are paying for things in installments it is easier for the seller to increase the price, because after all it’s only $5 more per month (over 36 payments), not $200 more. I think that the price of cars has gone up significantly because they are bought using debt.
The third problem with a debt-based economy is that we don’t have enough money to actually cover the total debt. Most people owe more than they make. Sure, there are credit agencies to monitor this, but it seems like every where to turn people are trying to sell you debt.
I wish that I could have used more information for Paper Money to discuss this subject, but I can’t. I might come back and touch this up with some support. Just understand that our debt, both the national debt and the consumer debt, is hurting us. We need to put out this fire before it destroys us.