Real World Graduation: Question 53: Rising Debt

RealWorldGraduation_Question_53_Rising_Debt   <– PDF

A certain man has a steady job and earns a good income. However, he likes to spend more than he makes.  In fact, he has no savings or assets, and he spends about 10% more than he earns every year.  At first he financed his excesses by running up large balances on his credit cards.  Then, when they were at their maximum, he opened up new accounts, paid off the old accounts, and continued to run up debt on the new accounts.  He eventually had to stop paying on the principal he owes, and is now only paying the current monthly interest due (although the principal keeps rising due to his continued spending).  Over time, he earns more income, but continues to spend about 10% more than he earns, year in and year out.  What is his long-term financial outlook?

a) Gradually, the effect of inflation, in which each new dollar has less buying power, will serve to reduce the true debt and he will then be able to pay it off.

b) In the long run, his real income after inflation will continue to rise, and he will be able to grow his way out of debt.

c) He has purchased a number of things with the debt, and can sell them when he needs to in order to pay off the debt.

d) He will be able to borrow indefinitely, since the creditors realize that they may lose what he already owes them if they force him into bankruptcy.

e) Some combination of two or more of the above.

(The answer is on p. 2 of the PDF.)

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