In times of summer and COVID, one of the books being read is one titled London written by Edward Rutherfurd published by Fawcett Crest, NY, 1997. The book is a history of London, England through the fictional lives of a family. Generally the family is not the main characters of the chapter but through their profession is on the edge of power.
The context of the characters are both are merchants, for in 1066 England most people did not have money, the non rich were a combination of slave, serf, freeman who pays rent and generally living in the country. The nobles tended to own the land, the merchants need loans to buy goods, in order to sell them to repay the loans and make money to do it all again. That was a normal part of business and always will be.
In the chapter, the author adds a piece about chess and debt. The characters are playing chess and in chess you have to think 5 moves in advance. The writing goes as follows:
Two people are talking:
Who, generally is stronger, a man with cash or a man with debts?
Answer a man with cash.
Suppose that man owes you a debt and can not pay?
Answer He will be ruined.
But then you lose what you lent him?
Unless I seize all he is in payment, but if that is worth nothing, then I lose.
So as long as he owes you money, you fear him?
I agree, consider what if this man can in fact pay you what he owes, but chooses not to?
Now you fear him because he has your money, but since he can pay, he does not fear you.
Suppose you need that money badly. He offers to settle for less than he owes. Do you take it?
I might have to.
Indeed, you might have to. And now, do you agree, he has made money out of you? Because of the debt owed, he was stronger.
It will depend on whether he wants to do business with me again.
No it will depend on many things. On timing, on whether you need each other, on other opportunities, on who has the more powerful friends. It is a question of hidden balances. Remember this: Men trade for profit. They are driven by greed. But debt is about fear, and fear is stronger than greed. The true power, the weapon that defeats all others is debt.
Fools search for gold. The wise man studies debt. That is the key to all business.
Linking to dividend paying stocks, at the moment debt for companies can be had for very low interest rates, should a company add more debt? If they can afford it is the answer. If the debt is to pay shareholders, that is a one time event, how will the debt be repaid? Debt is always a double edged sword – it can be very useful and not to use debt is silly. However, too much debt means Chapter 11 bankruptcy hearings. Debt can and does change relationships, use it wisely.
There are more questions than answers, till the next time – to raising questions.