Subscribe to PostsAccording to this article, Arizona is considering selling capital buildings to fund immediate cash needs. The report is they are considering a sale-leasback where they will lease the buildings back from the buyer for a period of time after which they will own the property again.
Basically this is a loan. They are borrowing to cover today’s cash-flow problems. The problem with this is that in the future they will still have to cover the same expenses PLUS the additional cost of the borrowed money they spent today. The counter-argument on their part would be that “when the economy recovers” tax revenues will increase and cover the regular costs plus the additional interest expense.
This is, of course, not a healthy way to manage finances. If your income today decreases, then it is proper to modify your spending today. When/If your income increases in the future then at that time it is proper to increase spending (if you so choose, although saving may still be a better option). Many people make the mistake of thinking it is ok to borrow and spend now on the premise that future income will be sufficient to not only cover future expenses but also pay interest on those borrowed dollars. Apparently the Arizona government is run by exactly these sorts of people.
What those people often don’t understand is that regardless of future or present income it is always the case that when you borrow to spend in the present your total consumption (present and future) will have to decrease by at least the amount of interest paid. This doesn’t take into consideration opportunity cost of lost potential earnings on dollars saved (i.e. interest earned from savings or investments).
If the hypothetical person would instead delay spending until such time that the expected income increase happened, then his total capacity for consumption (present + future) will be increased by the amount of interest saved. An additional benefit to this way of thinking is that in the event the expected income increase doesn’t happen, you aren’t stuck with a bunch of debt you can’t handle.
Credit transactions are in fact nothing but the exchange of present goods against future goods. — Ludwig von Mises
