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A tractor loan beats a TV loan
Borrow money to buy a big TV and nothing comes in to help repay it. The debt is just spending pulled into today, and it has to be paid for out of spending that goes missing later.
Borrow money to buy a tractor and the picture changes. The tractor lets its owner harvest more crops and earn more money, so the debt can be repaid and living standards improve. Credit works this way whenever it efficiently allocates resources and produces income.
Debt always carries both sides of that trade. Acquiring it lets people consume more than they produce, and paying it back forces them to consume less than they produce. Those swings run in two big cycles, one lasting about 5 to 8 years and the other about 75 to 100, and most people feel them without recognizing them as cycles, because they see them up close, day by day and week by week.
What can go wrong with productive loans?
During World War I, high crop prices led many US farmers to borrow for land and new machinery, including tractors. After 1920, crop prices fell sharply while loan payments stayed the same.
Farm foreclosures and rural bank failures climbed through the 1920s, years before the 1929 stock market crash.
How do economists tell good debt from bad?
Borrowing for investment adds to the stock of tools, buildings, or skills that produce future output, while borrowing for consumption does not. The test is whether the return on what is bought exceeds the interest paid.
In corporate finance this is the net present value rule, which discounts future earnings back to today and accepts a project only if they exceed its cost.
How did economists find decades-long cycles?
The Soviet economist Nikolai Kondratiev proposed in the 1920s that capitalist economies move in waves of roughly 50 to 60 years. Joseph Schumpeter later popularized the idea and named the waves after him.
Many economists remain skeptical because the data series are short, with too few full waves to test statistically.
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