So let's say one year I take out a loan for $50,000. I agree to pay it all back in one year, with interest. Only problem is, by the end of the year, I don't have enough money to pay it off. Let's say I still owe the full $50,000, plus, I don't know, 10% interest; so that's $55,000.
I decide I'll just take out another loan to pay off my debt. Only I start to get clever. I take out a loan for $110,000, and agree to pay it all back by the end of the year, again with 10% interest. I take half of it and pay off the $55,000 I owe. Then for the next year I live on my $55,000 which I have left over. By the end of the year, I owe $110,000 plus 10%, or $121,000.
Perhaps you already know what comes next. I take out a loan for $242,000. Half of it pays off the debt I owe, and half of it pays for what by now is a pretty sweet apartment. By the end of the year, I owe around $266,000. So then I take out a new loan for $532,000, and the next year a loan for about $1.2 million, the next year about $2.6 million, and so on.
Each year, not only am I getting rid of all my past debt, I'm actually getting richer. Twice as rich, as you can see. And I'm not even doing any work. Seriously. I'm living like a king on someone else's money, and I don't even have to produce anything.
The thought experiment assumes that there is no limit on the size of the loan for which I can get approved. It does not assume, however, that interest rates have to be reasonable; it doesn't matter whether I'm paying 10% or 50% at the end of the year. All that matters is that each year I can take out a new loan to pay for past debt and give me something to live on for the next year. If I don't want to be so greedy, I can just keep living on $50,000 a year (for instance); the amount I have to borrow each year will still increase, just not so dramatically.
Question: what's wrong with this? In the real world, I'd never get approved, blah blah blah. But let's just think about it in the abstract. Assume I can always get approved for another loan for as high an amount as I need. What's wrong with this scheme? Each lender I deal with is actually making money off me through interest, so he should have nothing to complain about. I may not be producing anything tangible, but I must be doing something right if I'm happy and people are making money off of me. Right?
Oh, well, I did forget one little thing. Eventually I'm dead. And then the last lender who gave me money won't ever get his money back, unless of course my children after me are able to give it to him. But that's not my problem, right? I mean, after I'm dead, I don't have to worry about money any more.
And maybe I can actually avoid that, anyway. Instead of just spending all the money I borrow each year, I'll actually invest some of it. Putting it in the bank would obviously not get me interest fast enough to keep up with my exponentially increasing loans. So I'll invest in the stock market. Who knows? Maybe I'll get lucky enough on the stock market that my investment will outgrow my debt, and when I'm ready to retire from my life of doing nothing but push money around, I'll be able to pay off all my debt entirely and still have a nice little nest egg so I can spend the rest of my days in peace.
So what's wrong with this? Accepting the assumption that I can always get that new loan, is there anything to be said against this scheme?
Other than, you know, morals and everything. But you know, in the long run we're all dead, anyway.
Addendum: Note well that this thought experiment could easily be modified to say that, instead of looking for larger and larger loans, I'll just look for more and more loans, that is, I'll spread the amount over more and more lenders. The scheme would last as long as I could find enough lenders out there to make it work.