Good Debt, Bad Debt and Ridiculous Debt

We've spent most of the week picking on Canadians so I thought we'd let them off the hook today and talk briefly about debt – although if you want to see me pick on Canadians personally, in public, you won't want to miss my speech on Monday, January 24th at 3:30pm at the Vancouver Resource Investment Conference.

But, it's Friday, and so let's keep this easy and light.

I was thinking about debt today.  It seems to me that a lot of people don't really seem to understand the difference between “good debt” and “bad debt”.

I've only been in debt two times in my life.

The first was, when I was 18, and a budding young white rapper (10 years before Eminem even had his first hit) and I felt like I had an opportunity to “make it” as a rapper.  Anyone who has heard my old rap tracks knows that I was woefully, painfully wrong.  But, this was 1988, remember, and rap had basically just begun.

My rap tracks were played in clubs in Western Canada and were sometimes on the radio and I felt like if I had better musical gear to produce the music (I produced all the music myself) that I had a chance to do well.  So, I went into debt for the first time in my life.  I bought a $2,000 sampler and another thousand dollars worth of musical equipment.

But things never worked out.  The peak of our fame was that we were set to be an opening act for M.C. Hammer as part of his “Can't Touch This” tour stop in my hometown of Edmonton, Canada.  But the concert ended up being cancelled and soon after so did my music career.

As an interesting side note, my main competition in Canada was another white rapper who later went on to some Hollywood stardom, Tom Green.  His rap group, named Organized Rhyme, came along about 3 years after my “Jeff Steel Crew” was already playing on the radio in Northern Canada and, as bad as Organized Rhyme was, they were still better than me.  I folded up shop not long after they came out.

(Check out Organized Rhyme's “hit”, Check the O.R…. Tom Green appears at the 1:27 mark)

I ended up working as a sewer worker for 6 months to pay off my “rap” debt.

My second, and only other debt I've ever had came in my next business venture.

I had been a computer nerd from the moment I got my parents to buy me a Vietnamese made Apple II+ Clone called a Unitron, which I had to build myself, at age 12.

After my fall from rap I had resigned myself to getting into the investment industry and worked for a Canadian bank as an investment advisor.  But I always remained a hacker and after work every day I'd head home to hack on my computer and dial in to all the Bulletin Board Systems (BBS).

But, after hacking on my computer, pre-internet, for more than a decade I was becoming a bit bored with the whole thing.  Why couldn't they connect all these computers together, I thought.

Then, one day, and I still remember the moment it happened, a fellow employee at the bank came up to me.

“You hear about this internet?” he asked.

I'd never heard of it and so I asked him what it was.

“I'm not sure exactly, but it's a way for your computer to talk to any other computer in the world.”

I shook him, “I've been waiting my whole life for this!”, I said, and I ran home to log on.

Literally within days I was planning my first venture on the World Wide Web.

I knew I had to do something… this was too big to do nothing.  I thought about what it was that interested me, and I had grown interested in the stock market, into which I had just began investing and decided I was going to start a website where people could get stock market information.

Very quickly, by 1996,, had tens of thousands of regular users and was the top financial site in Canada.  But here was the problem, the great majority of people still didn't even know what the internet was.

I still remember our cold-calling advertising sales pitch that we would almost always have to do:

Me: “Hello, my name is Jeff, I'm calling from  We are the largest Canadian financial website on the internet with more than 10,000 investors using our site daily.  Are you interested in purchasing advertising?”

Prospective Client: “What's the internet?”

We literally spent most of 1996 just explaining to people what the internet was, much less how our advertising products could be of use to them.  But by the end of 1996 we were getting so big that there was no way to run the website on the few PCs we had at the time.

We needed a minimum of $100,000 worth of servers and related equipment to run the site properly.  But where was I going to get the money?  Calls to potential investors elicited the same string of questions:

Me: “Hello, we are the largest financial website in Canada on the internet and are growing at a 1,000% monthly rate and we need to raise some funds to help us grow.”

Potential Investor: “What's the internet?”

I remember banging the phone against my desk a lot in 1996.  But I knew the website had big potential so I went to every bank in Canada and applied for credit cards, lines of credits and any other credit instrument I could.  I literally funded nearly the entirely $100,000 on cash advances from credit cards!

Everyone thought I was insane but I was quite confident that the internet was going to be the biggest thing to ever happen in our lifetimes.

And by 2000, four years later, the company had a market capitalization of $250 million.  What happened after the tech bubble burst, however, is a story for another day!

But the point of both stories is to point out that both times I went into debt it was on a business venture.  I had identified a potential profit-making opportunity and didn't have the funds needed to take advantage of the opportunity so I borrowed the funds with the expectation that the borrowed funds, if the venture was successful, would be paid back many times over.

Contrast this to the American (and Canadian) style of debt over the last 20 years.  How many times have you heard of someone taking a vacation “thanks to their credit cards”.  Not to even mention the automobiles and houses paid for almost totally with debt.

That is called bad debt.  Debt for the sake of consumption except for anything but the most necessary of items is absurd.

But, perhaps they learned well from their masters:

Of that $14 trillion in debt, what percentage was made as an investment with at least a chance of making a return, as were both my personal debts earlier in life?  0%.  Every dollar of debt is entered into simply because the Government is unable to pay it.

Just look at that chart.  When was the last time it didn't increase on a year-over-year basis?  You could never tell, even by squinting, but it was in 1957.  In 1956 the deficit was $272 billion and in 1957 the deficit was $270 billion.  That was the last time the US Government reduced its debt.  54 years ago.

The last time the US Government was able to reduce its debt was three years before The Beatles even formed a rock group, popular artists included Little Richard and the average price of a home was $12,220 and average monthly rent was $90.

The total US debt now increases more in one year than the total debt accumulated from 1940 to 1985 and has more than doubled in the last five years.

That is ridiculous debt and it won't be much longer until this game comes to a halt.  When it does you had best have your assets outside of the US and outside of the western financial system as a whole or you risk going down with the ship.

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