Myth of Debt-Free Living
by Gary North: The
I have set
up a free website for
people who are deep in consumer debt.
I am a great
believer in getting out from under the burden of consumer debt.
But I am not a believer in getting out of debt. There is a reason
for this. The only way to get out of debt is to die.
Here are two
great myths of the American dream: (1) financial independence; (2)
Why are they
myths? Because life involves both.
money. Money involves the division of labor. We are all interdependent.
Even a hermit is dependent on others: the owners of the land he
secretly lives on and secretly poaches on.
"financial independence" when they really mean "no dependence on
a salary." They can achieve this if they own lots of income-generating
assets. They do not have to show up at a job. But they are not financially
independent. They are dependent on all those people whose productivity
enables companies or governments to keep paying on the assets that
the job-free people have invested in. This is not financial independence.
It is independence from a salaried job. Let's keep our terminology
kids are not financially independent. They are dependent on the
decisions of their trust funds' managers, who are in turn dependent
on the productivity of the companies whose shares and bonds they
In a division
of labor economy, there is no independence.
about debt-free living? Why is it a myth? Let me offer an example.
One of my subscribers
has a problem. He must overcome his young wife's fear of debt. He
wants to invest in real estate. But he faces a problem: "My wife
is very risk-averse. She doesn't like debt."
She is 27.
He is 32. It is clear that his wife does not understand debt. She
is in debt up to her ears.
She is five
years younger than he is. On average, American wives outlive their
husbands by 4 years. So, in terms of statistical probability, she
will have no financial support from him in her last nine years of
life. If he retires early, they will live off of their savings.
Then he will die, leaving her with reduced capital for her final
years. She may have no capital remaining by age 80.
In those not-so-golden
years, she will be physically weaker than she is today. She will
probably be unable to earn money in the labor market. She will be
dependent on others.
She has lifetime
obligations that are inescapable: she will consume resources. That
is what life requires. If she ceases to be able to work to pay those
obligations, she will become dependent on others to pay. For her
to think that she can safely live debt-free is to think that others
are in some way in debt to her: the government, the pension fund
asset managers, or her children. Maybe all of them.
She is saying
that she is offering credit today FICA taxes, pension investments,
care for her children and that these investments will pay
off. If they don't, she will die in a hovel, unless she and her
husband invest wisely.
Debt is inescapable
for as long as we live. We will owe others whatever our support
in old age will require.
We can begin
to prepare now to deal with this in mind, or else we can roll the
statistical dice and say, "I'll pass this debt onto someone else.
I hope they pay off." In short, the person tries to get his future
debt paid by others.
around the West have made promises to their entire populations regarding
retirement living. They have promised voters that, in their old
age, the government will take over their medical expenses. In most
Western European nations, the government already pays for most medical
will bankrupt all nations without exception. The governments' statisticians
have known this for at least two decades, but the politicians keep
this hidden from public view as much as possible.
like rich, ugly heiresses: they want to be lied to. If they didn't,
they would not re-elect politicians who do not publicly announce
the inevitable bankruptcy of socialized medicine and old-age retirement
programs. They reject any candidate who tells the truth about Medicare.
In short, "Don't tell me I'm a rich, ugly woman. Tell me I'm beautiful,
and you just can't live without me." Her wish is their command.
Voters do not
want to save enough money for their retirement. They want to eat,
drink, and be merry, and then go onto a tax-funded life-support
system. They do not want to hear about "tomorrow we die." They reply:
"That's old-fashioned thinking. That's mere accounting. That's ideology."
They do not want to count the cost. They want their cake, and they
want to eat it, well into their nineties. And they want someone
else to fund it.
is universal in the West. Voters look at the costs of old age, which
are very high for most people, and they want to pass on the Old
Maid's expenses to younger voters.
make a promise: "Pay taxes today that fund the expenses of oldsters,
and we promise to pass on the costs of supporting you to younger
voters when you're old." In short, "You're beautiful, and I just
can't live without you."
forget the obvious: younger voters giveth, and younger voters taketh
away. When the existing arrangement seems to be front-loaded with
costs and back-loaded with benefits, younger voters are going to
pull the plug. They are going to say, "We won't pay." In short,
"You've spent your inheritance, you ugly old hag. I'm outta here."
All the talk
about burdening out children and grandchildren with enormous debt
is naive. Talk changes nothing. There are no revisions in the programs.
When older voters hear the words, "burdening our children with debt,"
the vast majority conclude: "Yea! Stick it to them good and hard!
We deserve everything we can squeeze out of them."
on politicians' promises will backfire on the oldsters who vote
for them today and expect to be paid. The kids all grown
up will have the votes to elect a new generation of Congressmen
and Senators, who will announce revisions in the programs. The revisions
will come at the expense of new entrants onto the rolls of the old-age
welfare state began in Prussia in the 1880s, when conservative Chancellor
Otto Von Bismarck got the legislature to provide government-funded
old age programs. The modern welfare state will abandon those programs.
The state giveth, and the state will take away.
UP THE TAB
they are in the catbird's seat politically. They can get politicians
to keep the Ponzi scheme rolling. They do not save as much as they
should. They borrow from the future politically. They buy the good
life today on the assumption that the state will take care of them
in their old age.
They are running
up the tab. They think that younger voters will pay off their tab.
As they get
closer to the day of reckoning, they refuse to change their habits.
They do not look at a retirement calculator. They do not estimate
how much income they will need, and for how long, and at what rate
of price inflation, to live in comfort in the last 15 years of their
lives (men) or 29 years (women). Here
is one. Are you willing to do the homework? Your peers aren't.
they are not going in debt, but they are. They think others will
pick up their tab. They think they have the votes to coerce others
to pay their tabs. They do have this power today; they will not
have it a decade from now, let alone two decades from now.
They do not
think of themselves as accumulating debts. They think they will
get through old age by passing on the debts of old age to others.
Because they do not understand that future voters will renounce
their obligations, either openly (national default) or by hyperinflation,
or by raising the age for access to collect these benefits.
They are adding
to their debts, yet they do not perceive this. Why not? Because
they really believe the mantra: "We're passing these debts to our
grandkids." They are not incensed by its implications. They rejoice
in its implications.
with our parents and grandparents in 1935: Social Security. The
mindset of the New Deal was to get something at the expense of someone
else. It escalated in 1965: Medicare. This has become the outlook
of the West. It has accelerated.
China is taking
advantage of this. China has no developed welfare programs for oldsters.
So, their people save for the future. Their supply of capital increases.
Their output increases. They are not burdened with FICA taxes. They
are not expecting anyone to care for them in their old age, other
than their one son. Half of them have no son.
stick it politically to everyone's children and grandchildren. The
Chinese assume that they will be responsible for aged parents and
themselves, so they save close to half of their income, if we are
to believe the statistics provided by the Chinese government. This
generation of Chinese does not expect the state to care for them
in their old age. They are working hard to accumulate capital, so
that they will not fall into poverty in old age. They do not expect
everyone else's children to pick up their tab in old age.
ESTATE AS A SOLUTION
ask me what the best way to retire is, I say "With a new career."
Most of them
reply: "That's not what I mean. I do not want to work after age
I ask them
to go through the following mental exercise. First, estimate how
much monthly income it would take today for them to be comfortable
if they lost their job and could not get a new one.
They come up
with a figure. Let's say that it's $5,000 a month before taxes.
Second, I tell
them that they need about six 3-bedroom, 2-bath houses that generate
$1,000 a month net income before income taxes.
It is possible
to get this in some regions from a house that costs under $150,000.
should be to own six debt-free houses at age 65.
If they buy
one house per year for six years, using owner-financed financing,
they can then sit back and let renters pay off the mortgages.
buy one a year for a decade. They may want to own ten. Or maybe
they can sell two or three of them and pay off the others.
This is the
strategy recommended by John Schaub.
My view is
that it's better to take on real estate investment debt today, when
you are young, and let renters pay it off. Then, at age 65, you
have a portfolio of ten debt-free houses or more. Your renters will
pay you until you die.
You now have
motivated people to pay your expenses. They don't pay you because
they have a contract with you. They pay because they want a roof
over their heads. They are highly motivated to pay your debts.
You have spread
your risk. You will not be heavily dependent on government. Your
children will not regard you as a burden. You will not be dependent
on a pension fund, which may or may not fulfill its obligations.
We cannot escape
debt. Debt is basic to life. It is therefore a question of how we
secure income to pay off our debt.
Taking on real
estate debt at low rates to buy a bargain-priced home is a way to
build up a portfolio of houses that will provide income when you
are old and infirm.
is no escape from debt. Anyone who tells you that you can ever live
debt-free has not thought through the implications of what he is
It is possible
to live debt-free on a net basis. You can have monthly income that
more than pays for your monthly debt. But there is always the possibility
that your income will disappear.
I contend that
it is more likely to disappear if it comes from the government than
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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