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| Illutration created and copyright by Drake Kim |
The world is a place where forces strive for equilibrium. Just as water flows from high to low, money moves in a similar way. However, this process is not always a simple flow—it can sometimes become a storm that sweeps people away. We often assume that repaying debt is the end of the story, but in reality, it’s far more complex. Behind the scenes of finance, the ripple effects of repaid money extend beyond imagination.
Where Money Disappears, Someone Gains
Once a symbol of American investment banking, Lehman Brothers collapsed due to a single moment of instability. During the subprime mortgage crisis, countless borrowers defaulted on their loans, sending shockwaves through the financial system. But can we simply blame those individuals who failed to repay their debts? In truth, the financial system thrived on these defaults, packaging them into derivatives and selling them back into the market. In other words, when one person failed to repay a loan, another’s investment portfolio collapsed.
Conversely, what happens if everyone repays their loans early at the same time? Financial institutions lose expected interest income, disrupting their anticipated cash flow. This, in turn, can trigger a chain reaction of crises for other loan-based financial products. In essence, debt is not just an individual’s burden—it is a fundamental component of the financial system.
The Psychological Game of Money
Human psychology makes it difficult to remain rational when dealing with money. Economist Daniel Kahneman found that people experience losses twice as intensely as they experience gains. As a result, individuals often repay loans while simultaneously taking on new ones at even higher interest rates. This paradox adds layers of complexity to capitalism.
For example, during the Great Depression, when banks abruptly demanded loan repayments, numerous businesses went bankrupt. As companies collapsed, workers lost their jobs, consumer spending plummeted, and the economy spiraled further downward. What if banks had not suddenly recalled all loans? Perhaps the situation could have played out differently. However, banks also needed to secure their survival, making this vicious cycle unavoidable.
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| Illutration created and copyright by Drake Kim |
How Should We Approach Finance?
So, what should we do? Should we avoid repaying loans? Of course not. The key lies in how we manage money.
Understand the Flow of Money
Debt repayment is not just a personal financial decision—it impacts the entire financial system. Instead of focusing solely on eliminating debt, it is essential to maintain a balance between assets and liabilities.
Use Debt Wisely
Businesses often leverage debt to drive growth, and individuals can do the same. The crucial factor is not the debt itself but how it is managed. Distinguishing between good and bad debt while avoiding unnecessary liabilities is a long-term survival strategy.
The Economy Is Interconnected
Understanding where your money goes and how your loan repayments influence financial markets can help you navigate the system more effectively. By grasping the essence of finance, we can better utilize the flow of money to our advantage.
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| Illutration created and copyright by Drake Kim |
Final Thoughts
Nobel Prize-winning economist Friedrich Hayek once said, “The economy is too complex for us to fully understand, but those who find opportunities within that complexity will succeed.” Money is not just about income and expenses—it is a powerful force that shapes our lives and society.
Rather than fearing debt or viewing loan repayment as a mere obligation, we should strive to understand and actively manage the flow of money. Ultimately, the economy is a series of choices. If we make wise decisions, a better future awaits.
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