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Asking the Wrong Questions About Debt

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Last year, investing guru Ken Fisher wrote that while a little debt may be good for us, a lot more of it can be great. According to the basic tenets of his book The Only Three Questions That Count, he thinks we should forget about our lack of savings discipline so that we can mortgage ourselves a lot more than we do.

I'm sorry, Kenneth, but you'll have to count me among the naysayers. That idea reminds me of my father's approach to fertilizing plants: If a little bit makes plants sprout, then a lot should make things really grow. Needless to say, what we ended up with was a lot of dead plants.

My father obviously didn't have much of a green thumb, and as much as I can respect Ken Fisher's investing acumen, I find his debt advice downright dangerous.

Personal finance brown thumb
Fisher does have some good points. No one gets upset when big corporations incur debt, because they often use debt responsibly to grow and invest. A company that completely shuns all debt may not be using shareholder resources as well as it could. Similarly, I've supported the idea of getting married to your mortgage, of having as large a mortgage as you can afford for as long as you can. Mortgage debt is cheap debt, as long as it's used wisely.

Of course, there's a limit to how much good debt companies can take on. Huge debt loads at many old-economy companies have raised bankruptcy concerns and caused long-term stock underperformance. Clearly, you have to find the right mix.

But where Fisher and I really start to differ is in his assertion that government also wisely uses debt to fund economic growth, even when the projects it funds are dumb. For instance, Fisher might like the idea of building a bridge that will serve a grand total of three people and a moose, because the money will trickle down to contractors and other companies that will use the money wisely. Says Fisher, "It's better that the money was borrowed and respent five times than never borrowed at all."

The fallacy of the broken window
Free-market economist Henry Hazlitt debunked that theory more than 50 years ago in his readable and easily accessible tome Economics in One Lesson. Through his parable of the broken window, Hazlitt explains that resources used for unnecessary expenditures are unavailable for other uses that would do more good for society.

In the case of the government-built bridge, local contractors may be happy, but public money has been directed away from things that the nation as a whole may want and need much more.

A bridge to nowhere
It's the same thing with the debt that Ken Fisher wants us to laden ourselves with. If we go out and max out our credit cards buying all manner of goods and services until we reach our limits, according to Fisher, this will create an economic boom. According to his calculations, people in the U.S. have a total of $55 trillion in debt across all categories. He thinks we can easily support tripling that amount of debt without endangering the well-being of our society.

Such thinking is dangerous because it is emblematic of a boom-time market. It squanders resources for tomorrow to enhance today. It also ignores the fact that the boom never lasts. The bill comes due, and the piper has to be paid.

That's what we're seeing now with the credit crunch. Many who were actually living out Ken Fisher's dream of highly leveraging themselves now find they cannot pay for the extravagances they mortgaged. Default, foreclosure, and bankruptcy are what awaits them, not fabulous wealth and social greatness.

Foolish final thought
At the end of his article, Fisher seems to regain his bearings. "Asking good questions and thinking logically to unmask our financial myths often leads to a simple fact: False fear is always bullish." Unfortunately, it seems Ken Fisher hasn't been asking the right three questions.

More Foolishness:

This article was originally published July 30, 2007. It has been updated.

Fool contributor Rich Duprey appreciates your comments. The Motley Fool has a disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 21, 2008, at 9:15 PM, JimJNalley wrote:

    I'm blowing the whistle on this cop. This article is exactly the same, except for the four words establishing the time frame and the title, as one published here last July (http://www.fool.com/personal-finance/credit/2007/07/30/askin....

    For shame! I hope Motley Fool doesn't pay for verbatim recycled tired content. I expect better from a site like Motley Fool. Maybe instead of worrying if his neighbors use debt responsibly, Mr. Duprey should worry about his own journalistic integrity. Passing this off as a new column, and not in any way indicating this is just a rerun of old copy, is just unethical. Time for Mr. Duprey to report to IAB.

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Rich Duprey
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Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.

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