As far as I understand it, a billionaire’s wealth is wrapped up in stock, which is used as collateral to borrow money to actually spend. So how do they pay off those loans? With other loans? Loans all the way down?
In: Economics
They don’t. Basically here’s how it works:
Let’s say you have a business venture and you expect a 5% return. You take out a loan to fund the venture at an interest rate of 2%. You pay the interest at 2% per year, make a return of 5% per year, and the balance of 3% per year is your profit. This doesn’t sound like a lot of money, but 3% of, say, 10 million dollars, is still in the hundreds of thousands. And if they can’t get a loan that would give them an acceptable profit, they simply don’t do the business deal.
By the way, “billionaires” aren’t the only people who take on debt in this way. The government does it all the time as well. The government will often take enormous loans (from the central bank) and claim (with dubious history of veracity) that the bill that is being paid for by this loan will provide an economic return larger than the value of the loan by some amount, so the loan is actually profitable, in much the same way as the above. The difference is, with the government, very few people actually go back and check them after the fact, and when they do it’s often prohibitively difficult to get the information so it often takes years of diligent investigation to do the fact-checking. Government bills also often scale over decades, where a 40-year-old senior editor today might be retired by the time the bill can actually be retrospected by independent media, so people just forget about it and don’t follow up.
Ordinary people also take on debt in this way. People who own multiple houses, for example, and take rental income do this. The money they get from renting their second house is expected to be more than the interest on their mortgage plus the cost of keeping the property in rentable condition, as one example (no, contrary to popular opinion, not all rental properties are owned by megacorps). A car loan can also be considered a similar venture, where your car will get you to work, where you will make more money than the cost of the loan, whereas if you did not have the car then you wouldn’t be able to have that job.
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