As my last blog for the day, I would like to address the notion that “you can’t borrow your way out of debt.”
Let’s go back to Bertha and let’s say that she has finally come to grips with her problem and has reduced her normal expenses to $42,000. Since she makes $50,000, this allows her to pay $8,000 per year on her credit card. As you recall, however, the $8,000 only covers the interest. The $100,000 isn’t going down.
Now let’s say that she learns that she can re-finance $50,000 of that $100,000 at an improved rate of 7 percent. Now what’s her annual interest payment? It’s $50,000 X 8 percent = $50,000 X 7 percent = $7,500.
At this point, Bertha has two choices. She can continue to make the $8,000 payment, bringing the new debt balance down to $99,500. If she continues to make the $8,000 payment year after year, the balance will continue to drop and she will ultimately pay everything off. There is something to be said for thoughtful restructuring of debt.
Bertha’s other choice would be to blow the $500 on something fun. If she hasn’t learned her financial lesson and does that, she will not have improved her situation. It boils down to self control.
Mayor Sanders’ decision to attack the deferred maintenance backlog with the judicious use of debt should not be dismissed lightly. It warrants thoughtful discussion and a clear understanding of the borrowing costs. Again, I’m not sure how fast the city’s physical assets are deteriorating, but my sense is that it is at a faster rate than the interest rate we would pay on some facilities bonds.