Debt, credit, leverage… have become an increasingly important part of our modern society. It is simultaneously responsible for much of our growth and our destruction, booms and busts are exasperated by credit – specifically the access to credit.
When credit is widely available it creates growth and inflates asset prices through the increase of investment and spending. This initially seems great because individuals and business feel wealthier, but as too much credit becomes available it starts attaching itself to less worthy causes, including overpriced assets, high-risk assets (without a proper risk/reward relationship), or directly into liabilities. At first, these decisions may not look irresponsible because they are being clouded by a market that is rewarding risk. However, when that starts to change and the access to credit becomes both more difficult to access and expensive – cracks start to show.
“You only find out who is swimming naked when the tide goes out”
– Warren Buffett
Understanding debt and credit, along with analyzing its purpose, can help you understand the risks and opportunities associated with it.
