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What happened here is that the states "sold forward" the cash flow from the tobacco settlement...

This leads to a concept that I dearly wish I would have understood 20 (ok 30) years ago. In the 70 year or so credit boom/bust cycle that we are going thru, if you are on the boom side of the cycle it is foolish to build up cash, hoping to pay cash for something. Because of the boom nature of the cycle (where money is being created at a fast rate) prices will often go up much faster than you can save. Therefore, it is better to buy on credit and thus lock in the current price. State and especially local governments realized this and that is why they did bonds like crazy, the elected officials realized that when they waited a year and built up cash for a project that they actually lost ground, so they turned to debt.

The same thing happened to me. I saved like crazy wanting to buy a nice farm to live on but, for every dollar I saved the price of the farm I wanted went up by $5. I lost ground while saving like crazy. Had I just went ahead and bought it 20 years ago I would have had it paid off before the crash. :(

But, that does lead to the next part doesn't it. Having debt is (kind of) ok if you are on the upslope of the credit cycle. If you have it past the peak it becomes the definition of problematic.

This whole mess is why I like Karl's one-dollar-of-capital idea. It will prevent the credit cycle from having such a large amplitude and thus preseve the value of the save-and-pay cash strategy of life.

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2012-05-06 10:29:50


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