Follow up to Ken Fisher discussion

finance

In response to the recent post about Ken Fisher’s view on US borrowing, a couple of readers offered interesting takes. Chessiq, a friend of the blog who works in accounting, and a CPA candidate (I think he’s on his 4th test?) offered the following:

“My understanding of Fisher’s argument is that as long ROA>i [return on assets is greater than cost of debt] you should keep borrowing, because you will be able to pay off the debt, the interest, and have some left over for yourself. First off, what are these assets (for the USA or USA govt). My hope is that these assets are not 1) used up plugging the deficit, and 2) are not the borrowed money i.e. you borrow cash, so you have cash as your asset. The follow in the combination of 1) and 2) is that at the end of the day, you need a long time to pay off the debt. a simple example. deficit 100, interest 1, ROA 2, you would need 100 years to make enough profit to pay off the debt without using dipping into the principal/asset 100. If the debt needs to be paid in 20 years, then at that time, you will only have to get about 80 from the original borrowed money. My other issue is that it appears the debt we are getting is “consumer debt”. The government is needing this debt for operational purposes, not for investment, and the last time I checked, ROA or ROI on consumer debt was 0 or -ve. Am I missing something?”

I don’t think he’s missing something. That’s a better explanation than I could have given, which is why I’m moving it to the front page. I had the same thought about Fisher’s “return on assets” hypothesis. What assets? If they really are investing in “assets” then that’s one thing. If they’re borrowing the money to pay their debt or to spend more money on things that have little chance of benefitting the country, then the return is minimal. To the extent that the money creates jobs or raises salaries, then the US will experience some return by an increase in taxes paid in, as well as an increase on sales taxes (when people have more money, they buy more stuff). I’d like to see exactly how and what Fisher is classifying as “assets.” What are the assets, and how will they benefit the country? Thanks for reading.