Oct

21

 The Value of Debt by Thomas Anderson is a good book for any individuals to read. It makes the point that most individuals don't have enough debt. The average for companies is 50 % of assets. No companies amortize their debt but all pay interest only. The ideal debt ratio changes as one ages, but a rule of 25 % of debt to assets is recommended. Anderson points out that debt has many advantages in providing liquidity, insulating from crises, and capturing the spread between cost and return, and availability for one time purposes including helping kids out on the path to life. He recommends that everyone set up an asset based loan facility. He recommends 50 % of assets as a good ratio. It's a good book for parents to discuss with their kids. The book is written for the layman but the author bases many of his discussions on Ross, Westerfield, and Jaffe's Corporate Finance which seems to have good academic distillations of many of the topics covered in the book.

Richard Owen writes: 

It sounds like a good book. I believe the thesis is probably correct… except for the practicalities.

I am not aware of any providers to the consumer at a bulk level of either secured or unsecured long term revolving credit facilities of either fixed or floating form.

Of course, there is the mortgage facility in the USA, but most people have substantial debt in this regard already.

Also, as a consumer it is hard to ring fence one pocket of borrowing, unlike for a corporation. In the USA, walking away from your mortgage affects everything else in terms of credit score. In the UK everything is recourse to your mortgage.

The Offset mortgage in the UK is marketed like a personal revolver but the small print makes it entirely unusable in such a manner due to stated repayment channels and penalty fees and so forth.

The problem also is that an individual can typically only possess capital markets assets or a small private business stake. Borrowing facilities for equities tend to be low quality and borrowing for small businesses or stakes therein quite expensive.

I was at an NHS hospital the other day and chatting with the student whilst the doctor disappeared. He was American and funded from the US system. His five year course was funded at USD 65k per annum at an 8% interest rate with federal loans. That sounds horrendous to me.


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