Turns out that most of the money circulating in the economy is credit.
Credit is the ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
So credit is based on TRUST.
Credit is made up of credit which also means the money available to borrow on one hand and debt which is the amount of money borrowed that needs to be repaid on the other hand.
Debt is an asset to the lender — a bank for instance — and a liability to the borrower.
Oh no ! Not debt ! Debt is bad, very bad !
Well actually debt is not all bad and even necessary in our economy.
Why is debt important ?
Our economy is quite interesting to study. Here is a video that will explain you how it works in the simplest way possible — it is by Ray Dalio a famous American hedge fund manager and a great financial mind.
Debt is good when the money borrowed is used as an investment to create value meaning that the investment you made using this loan will produce income that will allow you to pay back what you owe.
For instance, if you take out a business loan — and your business is viable — that’s good debt. But if you take out a loan to buy the most expensive microwave on the market, that’s bad debt — unless you make an income out of it.
If there’s anything you would want to add or share, please do so in the comment section :). I am learning as I do these articles so don’t hesitate to correct me if I said something wrong.
Additional resources :
Interesting video on debts and deficits