A Lesson in Debt
There are two very important things to consider when taking on debt. The first is, what is my income, and the second is, what are my payments.
Now for an individual, income is both limited and unlimited. An individual earns a certain wage from their employer, and said employer is only willing to compensate the individual for the amount of time they spend doing their job, so this wage is limited. However, the individual is free to pursue other methods of making money, whether this be a second job, starting a business, or even winning the lottery (as fool hardy as that sounds).
So when an individual decides to take on debt, they must first look at how much money they make, and what the total monthly (or in the case of government) yearly payment will be. Debt payments consist of two parts, the first part is the principle, or the defined payment (monthly, yearly) in order to satisfy and pay back the loan over a period of time. For individuals taking out a mortgage, these are usually in terms of 30 years, auto-loans in terms of 4 years, and so forth. For government, these range anywhere between 2 year, 5 year, 10 year, and 20 year terms (or notes as they are called). Now just like a home owner has a mortgage, government can extend or "refinance" these notes at any point to take advantage of lower interest rates, and just as many people do during financial slumps, the government does as well.
Now when a company needs capital to expand and grow their business, they take out loans, invest this money into their company, and when managed properly, and investors have confidence in this management, the company grows exponentially, and is able to pay back their investors (loans), earn a profit, and will able to borrow money in the future at lower rates due to their great debt rating, just like we as individuals who pay our bills on time, are able to improve our credit scores and can therefor in the future take out new loans at lower rates.
This is the basic premise of debt.
Which brings me to our current situation between the government shutdown, the debt ceiling, the national debt, the interest on this debt, and the showdown between republicans and democrats. Follow me after the delicious orange squiggle.
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