Creative use of debt

Over the past few weeks, and linked to the mitzvot concerning the lending of money and management of an economy in recent parshiot, I have been studying some of the Jewish laws which prohibit the charging of interest on a loan, and the use of financial instruments to stimulate economic growth.

Debt is not necessarily a bad thing.  Most of us can only obtain a house purchase under mortgage.  Business development depends on the provision of credit.  This was recognised by the Rabbis, and Jewish tradition has a number of ethical and practical guidelines to support the provision of debt, and its ultimate relief.  Many of these precepts have been picked up by other religions.  For example, some of the prohibitions on charging interest on loans also feature in Sharia law.

Debt is a topical political issue at the moment.  Consider these thoughts from Ross Greenwood:

Something to look forward

Right now the Federal Government is at pains to tell everyone – including us the mug-punters to the International Monetary Fund that it will not exceed its own, self-imposed, borrowing limits. How much? $200 billion. And here’s a worry. If you work in a bank’s money market operation; or if you are a politician; the millions turn into billions and it rolls off the tip of the tongue a bit too easily.

But every dollar that is borrowed, some time, has to be repaid. By you, by me and by the rest of the country.

Just after 5 o’clock tonight I did a bit of maths for Jason Morrison. But it’s so staggering its worth repeating now. First though … here’s what Chairman Rudd has been saying about – what he calls – these temporary borrowings. Remember those words … temporary deficit … but the total Government debt could end up around $200 billion.

So here’s a very basic calculation … I used a home loan calculator to work it out … it’s that simple.

$200 billion is $200,000 million. The current 10 year Government bond rate is 4.67 per cent. I worked the loan out over a period of 20 years.

Now here’s where it gets scary … really scary.

The repayments on $200 billion come to more than one and a quarter billion dollars – every month – for 20 years. It works out we – as taxpayers – will be repaying $15.4 billion in interest and principal every year … $733 for every man woman and child – every year.

The total interest bill over the 20 years is – get this – $108 billion.

And remember, this is a Government that just 18 months ago had NO debt … NO debt. In fact it had enough money to create the Future Fund to pay the future liabilities of public servants’ superannuation … and it had enough to stick $20 billion into the Building Australia Fund last year …

It is interesting to note that the Jewish commentaries on business law and halacha focus on debt from the individuals perspective.  Can the same ideals also apply on a collective or national scale?  When is too much debt a future economic inhibitor?  What is the source of funding for national debt, and how is it controlled?

If there is a “Jewish position” on the issue of economic borrowing by the Government, it would be that debt is favourably considered as an economic stimulator.  However, using the same interpretive principles, controls would need to be exercised to ensure that the use of this debt is focussed on the creation of jobs and revenue generating projects that then generate the wealth to repay the debt.  So long as the debt is not used to subsidise an unsustainable welfare burden, it would seem to be kosher.

On this basis, we could conclude that negative taxes (economic stimulus payments to individuals) is not as important as infrastructure development and spending in order to use debt in the most effective manner.  We could also suggest that the Rudd Government has only recently realised this.