Pundits bemoan the fact that America's official personal saving rate turned negative nearly two years ago, and has headed south ever since. Americans aren't saving. Worse still, we're allegedly drowning in debt on a personal level; and, on the national level, the government has profligate spending plans to drive the federal saving rate deeper into negative territory than ever before.

Most people are horrified about this. Americans have a near-religious aversion to debt. We agree that debt is bad, and lots of debt is downright immoral. Almost no one would say debt is good--unless he or she wants to be seen as a mentally infirm charlatan with malicious intent. Call me what you will. Debt is good.

Last fall (Financial Planning, November 2006), I showed you how to use the questions from my book, The Only Three Questions that Count, to debunk the fear that big federal budget deficits are bad for the economy and for stocks. In fact, by using the first of my three questions--What do you believe that's actually false?--I showed that big budget deficits are actually great for the stock market. Historically, big deficits are followed by stock-market returns that are dramatically superior to those following surpluses--for as long as 36 months out.

Still, it may be hard to fathom why budget deficits are good, since they add to our overall debt. But if you use the second question--What can you fathom that others find unfathomable?--you'll see that deficits are good because debt is good. Debt is so good, we could use much more of it. Just reading that sentence may enrage you. But anger is usually twisted fear, which can be addressed by my third question: What is your brain doing to blindside you now? The key is to untwist the fear to see reality better so we can make better stock-market bets.

PAYING IT FORWARD

Consider this: Do folks fret when GE or Apple incur debt? Hardly. Most rational people understand that corporations use debt responsibly all the time to grow, invest in research and develop cool new iterations of the iPod. We don't worry about corporations. We worry about addicts who can't control themselves and rack up credit-card debt buying designer handbags and random electronic devices like those cool new iPods.

To some, even worse and slightly stupider than a credit-addicted iPod collector is the government. But if that's so, why do federal budget deficits lead to such rosy stock returns? Deficits add to government debt, which everyone agrees is bad. Yet we've gone through periods in the 1940s, 1950s and 1990s when the country racked up as much or more debt as a percentage of GDP as we are running up now. These decades were perfectly grand for our economy and market--so we know debt doesn't have to be problematic. What can we fathom about debt that others can't?

Here's what: When money is borrowed--whether by a heroin addict, credit-card junkie, Steve Jobs or the Governor of California--it's as if that money were newly created. American money, created through a loan, changes hands six times on average in its first year of existence. The rate at which money changes hands is known as the velocity of money.

So, consider the worst case: a heroin addict. When an addict borrows money, he might stupidly buy drugs with some of it. But with the remainder, he might buy groceries and a new cell phone. The grocery store uses the heroin addict's money to pay for produce, electricity and employee salaries. The recipients take their money and spend it again--normally, not stupidly. The phone store manager does the same thing with the cell-phone money. The addict's dealer may spend part of his money to replenish his drug inventory, but he also pays rent for his fleabag apartment and maybe some salaries for druggy underlings. And everyone who receives the money, whether a slumlord, utility company or organic farmer, benefits from the borrowed and spent money. They spend the money again, and as it gets spent, it all averages out to be normal, and it all drives our economy. We're better off for the last five spends even if the first one is stupid.

It's the same when the government--local, state or federal-borrows money. The government borrows money to build a bridge that three people and a moose will use at rush hour. Yes, it's dumb. Yes, GE or Apple or even the heroin addict wouldn't make such a stupid first spend. But the money borrowed for the bridge passes to contractors and cement companies. Maybe some of it goes to the local government in the form of permits and other bureaucratic nonsense. But the local government takes the money and spends it again--on employees, street lamps and so on. Even when politicians borrow money and just hand it over to heroin addicts--it's better that the money was borrowed and re-spent five times than never borrowed at all.