I usually don’t go in for thought experiments, but for once I’ll make an exception. Let’s pretend for a moment that I need $50,000 to maintain a struggling business, and you, being the wealthy and charitable individual you are, provide me with $50,000 in the following manner:
1) $30,000 in ownership (a share in future profits, if any)
2) $13,000 for emergency cash (to be repaid at no interest)
3) $7,000 in debt (at an interest rate 7% lower than I could get elsewhere for accepting a similar risk)
Not too many angel investors, venture capital funds, or private equity funds would sign up for such an arrangement, and that, dear reader, is why I am relying on your generosity. After one year, the business still has not made a profit. However, I have managed to “pay back” the initial $7,000 in debt in the following manner:
1) I borrowed an additional $10,000 from you for environmentally friendly investments.
2) I used some of the $13,000 in emergency spending cash to pay back the $7,000.
In other words, at the beginning of the year, you provided me with $50,000. I now owe you $53,000 (plus the emergency spending cash I used and the interest you’ve lost), with no real prospects for paying the money back. However, I am confidently assuring my customers and you(!), of all people, that I have “repaid my loan in full,” by which I mean the $7,000 in debt, not, of course, the $53,000 you provided that has not yet been returned. Change the thousands in the thought experiment to billions and the debtor to Read the rest of this entry »