Borrowing for Business Ventures

When I was in business school, I was taught that borrowing is necessary. Now I know that nothing could be further from the truth. In the early years of our country, borrowing for business ventures was rare. When the idea of lending by the goldsmiths started, we began a slow desensitizing to the dangers of debt. Today investors look for a key number in a business called a "Return on Investment" or ROI. It is calculated by the amount of their investment divided into the profit. ( Annual Profit/Investment= ROI). If you use less investment capital and more debt, you can boost this ratio by making the amount of the investment smaller.

What is the effect of this boost in ROI through borrowing? It artificially inflates the apparent success of the business. You can look at other business ratios and uncover this scheme, but in today's business environment it is hard to compete for investment capital without the use of debt, because of this artificial boost. Investors expect a certain amount of debt, unless they are unusually conservative.

This is why debt is called "leverage" in business schools. It is a principle that has inflated the prices of homes, because they are almost always purchased with a loan. Credit cards have the same effect on consumer prices. When consumers spend more, which credit cards encourage, the economy looks healthy. Credit cards have artificially inflated the apparent health of our economy, and we are starting to feel the effects with the high levels of bankruptcies. Actual bankruptcies will drop significantly after this year, because it will be harder to file, not because people are doing better financially in general. Our economy has become a house of cards, literally. The question is, are you contributing to the problem, or are you solving the problem? The Federal Reserve's stated mission is to provide the nation with a safer, more flexible, and more stable monetary and financial system, and to that end they have failed if you compare their performance with pre-Federal Reserve conditions. That is because a fiat currency does not provide stability, it provides the policy makers power to print money when they need it, at the expense of their citizens. Fiat currency is unsecured debt, plain and simple. It is the Federal Government's credit card.

You can write your senators or house representatives and voice your opinion. Do so regularly. File complaints about bank's abusive fees and interest rates at the OCC and the Federal Reserve Board.