The necessary addition
Ideas do not rule the world, people with financial power do. It is the ideas that these people (with financial power) fund that rules the world. To the average person, the idea was great and the genius was the inventor (or innovator). But those of us who understand (how the world works) know that the idea wasn’t special. Someone else probably had the same idea. The one thing that makes people with ideas rich is credit. Let me explain.
Credit Makes People Rich
Credit is the money you have before you start making money. Credit is money given to you in advance to bring your idea to life. Rich people don’t start from zero, they start with credit.
Credit can be in the form of a loan to start up a business. It can be in the form of a grant. It can even be in form of a gift, perhaps from parents or relatives. Money in any form that you get to begin work on your idea is credit. But there is only one condition for it to be really called credit.
The condition is that you are expected to return the money, possibly with some interest. Or you trade ownership of your business for it.
It is very hard to start a business in today’s world without some form of credit. And sometimes, the amount of credit a business has access to determines its success or failure.
Many businesses are not profitable in the first 5 years. But they can afford to stay in business because they have credit. And the founders will be celebrated as successful entrepreneurs. Meanwhile, it’s just credit.
In a world flush with cash and with the cost of borrowing money at an all-time low in the past few years, credit has been king.
But like all good things, humans are bound to abuse the credit system. Today, people buy food, clothes, and other consumption items with credit. Recently with the interest rate hikes, the cost of borrowing money has gone up. But credit is still the lifeblood of most businesses.
Debt is Money. Loans are Assets
One of the savviest financial inventions of all time is the conversion of debt to money. Asides from derivatives, debt is by far the largest form of money available today.
First, you should understand how debt turns into money. People borrow money from the bank in form of credit card debt, mortgages, business loans, etc. They have to pay back what they borrowed with interest. And as such, it is a good business for the bank.
Let’s say the bank gives you a loan of $100k. And you are due to pay back $110k in 12 months. The $10k extra is the profit of the bank. Since the bank (or financial institution) is sure that you will pay back the money, that loan is an asset to them.
It is a debt to you, but it is an asset to the bank. That’s because the bank makes money by giving loans. Now if the bank has a lot of loans (which is their asset), they can put together those loans as one big asset package and sell it to a bigger bank or a financial institution.
The bigger bank or financial institution pays money for those debts. This is because they know that they will make a profit when the debts are finally paid.
And this is how they turn debt into money. Now, if the people who took those loans in the first place cannot afford to pay, then it becomes a bad debt. And the bigger bank (or financial institution) that has already paid money to own debts will be at a loss. And sometimes, the loss is very severe.
This is what happened in 2008. The big banks that bought all those housing loans (subprime mortgages) were in trouble because loans had been given to people who could not afford to pay them back. And to make things worse, Wall Street packaged the loans as “bond” assets and sold them to investors. To further complicate the issue, after selling those loans as assets to investors, they took short positions on the “bond” assets.
Anyway. Just a digression. The point here is that debt is money. And loans are assets.
So, Is That Okay?
Is it okay that debt is money? Well, it depends. If loans are given to credit-worthy people and are used to create more value and drive productivity growth, it would be a good thing.
However, when credit is being used to fund a lavish lifestyle, there is a big problem. When credit is used to fund consumption and not creation, the financial world has a huge problem.
As long as the central bank exists, debt will remain a form of money. But you must be smart as to how you use debt and be aware of the kind of debt you are buying when investing.
This is today’s reality. Things might change tomorrow. But as of now, credit makes people rich.
Thriving in Economic Chaos
Whether you have access to credit or not, you must be able to sell. If you run a business, you must be able to sell. This is the only way to thrive in economic chaos.
In this world, you either sell or be sold. You are being sold something every day, consciously or subconsciously. And the purchasing power of most people is credit.
In other words, if you want to be rich, you have to be comfortable with the idea of people buying your stuff with credit. Even people who can afford it prefer to use credit. This is because they want to put their real money where it can grow and multiply.
My number one recommendation to anyone who wants to be successful in business is to learn how to sell. If you don’t sell something, someone will sell you something.
If you know how to sell, you have a great team, a big audience/market, and you got credit, you are unstoppable
Think about that.
Read also: How to create a life full of abundance
If there is anything I can convince you of today, it is this:
Idea + credit makes people rich
To stay rich, you need a team, knowledge of how to sell, and a few other things. But to rise fast to the rich status, all you need is the credit to fuel your idea.
CONTRIBUTED BY David O
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