Tobold's Blog
Monday, October 12, 2026
 
Some thoughts about debt

Different people have different values. There are some fundamental values like "thou shalt not kill" that most people agree about, but even in that case there are fierce debates about allowable exceptions. And there are a bunch of minor values that differ a lot between people in function of cultural factors, age, and upbringing. So I hold a minor value that not very many other people hold: I strongly dislike debt. I believe that I should rather limit my lifestyle to my income, rather than borrow money. I'm not saying that my values are somehow morally superior to other people's values; but that anti-debt value sure worked out financially for me over the course of a lifetime, and especially now.

The discussion of debt has risen over the last few years, due to rising interest rates. If you take a 30-year fixed interest mortgage of $500,000 at 3% interest, you end up paying $258,887 in interest. In other words, you have to pay back $758,887 on that $500,000 debt. If you take a 30-year fixed interest mortgage of $500,000 at 7% interest, the interest payment nearly triples to $697,544, and you have to pay back a total of $1,197,544. It is easy to see how the interest rate can completely change the viability of the concept of buying a house on a 30-year mortgage and hoping that this house will actually be worth more in 30 years than your overall payment.

A lot of people have debt on which the interest rate isn't fixed, but variable. Thus the current increase in interest rates is really hurting them, some of them to the point of financial breakdown. Governments are increasingly in trouble for their national debt; students end up with forever student loans, where repayments based on income never decrease the principal debt; and on credit cards the interest rates charged in the US can now reach between 20% and 25%.

And then there is Warren Buffet's eternal wisdom of "Only when the tide goes out do you discover who's been swimming naked.". A lot of businesses, and not just private equity, for the past decades relied on the idea that returns on a business investment would be higher than interest rates. Thus they borrowed money to invest. When interest rates went up, and the business cycle pushed down returns, a lot of these companies ended up with the interest payments being higher than the investment yields.

However, many of the gloom and doom stories show only one side of that story, the distress of the people or governments in debt. In reality, debt is a zero sum game, as we never got a loan from the Martians. Every debt corresponds to somebody else's savings. If the discussion of US debt this year mentions "treasury yields" a lot, instead of calling it an interest rate, it is because for the buyers of those treasuries this *is* a yield on a financial investment. A 7.4% 30-year mortgage interest is a 7.4% yield for the bank that gave out that mortgage.

Now it is totally possible for you to get negatively affected by rising interest rates despite you having been personally prudent with debt: You might live in a big apartment building, and suddenly your rent goes up, because your landlord is an investment company that financed the building with debt; or you might get laid off from a company that got acquired by private equity and is now struggling with a high debt load. But the more general case is that a person that doesn't have debt is a lot less affected by rising interest rates than a person who is in debt. And there are quite a number of people out there with savings, who are quite happy to be able to buy US treasuries with a risk-free guaranteed interest of 5.6%. Finding a reasonably safe fixed income investment that paid more than inflation had been quite difficult in the past decades, and now they are back.

On a personal side, my anti-debt value sometimes felt outdated in the long period of extremely low interest rates. With rising interest rates, my values suddenly align better with conventional wisdom. Values are often a result of history. In June 1981, in the so-called Volcker Peak, the US federal interest rate reached 20%; in 2003 that fed interest rate had fallen to 1%. It isn't surprising that people of different generations who experienced these vastly different interest rate environments came out of it with very different views on debt. It is just that missing out on opportunities when interest rates are low is ultimately a much less serious risk than getting surprised by rising interest rates while being deeply in debt.

- posted by Tobold @ 10:54 AM Permanent Link
Comments:
I think it's also essential to consider what you're using the debt for. My wife and I have used leverage to emincrease our investment returns over the past decade significantly. This, our usage of debt actually increased our savings beyond what would have been achievable with a zero debt strategy. However our usage was never extreme, so on one hand, we still left some money on the table, but on the other hand we were never at risk of being totally wiped out by a margin call at a bad time. Nowadays, our leverage only makes up about 8% of our net worth, and we'll probably trim that a bit as interest rates rise (assuming they do). But as with many things, there's a lot of nuance to be had in discussions of the utility of debt. Technically we also bought a house with a mortgage, and have kept the mortgage while investing. That said, if you included the mortgage debt, our leverage is still only about 15% of our total net worth - very manageable for our parameters.
# posted by Anonymous Anonymous : 12/10/26 21:32
 
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