[MUSIC] If there's one thing I want you to think about is we wrap-up our course on debt, it's french fries or maybe it's ice cream, cookies or chocolate. Feel free to pick your favorite guilty snack. For me, I'll stick with french fries. In the right amount at the right times, french fries make my life better. For relatively small price, they bring me embarrassingly large amounts of joy. There is a great french fries commercial from 1987 that shows exactly what am talking about. But if I eat french fries all the time or in extremely large quantities I will pay the price. My health will suffer in the short term and in the long term, I could face a catastrophic health crisis. So let me summarize this course like this. French fries are like debt. Today, worldwide, interest rates are at historic lows. As a result, the cost of french fries, I mean, the cost of borrowing money is incredibly cheap. Debt, which has always been tempting, is now more tempting than ever. Debts of all kinds are ballooning and we've discussed throughout this course, individuals, corporations, and governments can't seem to stop themselves from indulging. They are borrowing at what I believe are dangerous levels. Most of us are familiar with the tools of personal debt. You likely have experienced with one or more of the following mortgages, credit cards, lines of credit, car loans, student loans and others. So we discussed the role that these kinds of personal borrowing tools can play in our financial health. For better, and for worse. We also explored other kinds of borrowing tools used by corporations and governments, tools like bonds. The easy availability of all these tools has combined with a cultural shift that has seen attitudes change in the space of a generation or two, so that people today accept debt in ways that our grandparents certainly did not. More specifically we have moved from a time of thrift and saving to a time of borrowing and spending. This has made our debt markets huge. And one of the key points we've emphasized throughout the course is that every piece of the debt market is connected. Personal borrowing is connected to corporate borrowing, which is connected to government borrowing. And all of those debt market segments cross national borders as easily as the internet. This means that a crisis in Greece or Italy or Japan for that matter, inevitably has repercussions in the United States, in Canada or in Hong-Kong. Since we can't escape the elephant of debt, we need to understand it and that's why finance for everyone, and specifically this course on debt is so important, because understanding debt is our best path to controlling it and using it to our advantage. In other words, we need to protect ourselves by enhancing our financial literacy. And that's what this entire specialization is about. That literacy should apply to all the areas of finance, and specifically, all sectors of the debt market because as we know, everything is connected. In our discussion of corporate finance, we explored how useful debt can be. It's amazing really and maybe even counter intuitive. In fact we saw that in some cases taking on more debt makes a company more valuable. You'll recall that there are a number of reasons for this paradox. One reason is that because shareholders take on more investing risks than debt holders, shareholders get better returns which means they cost the company more. This of course makes debt cheaper than equity as a way to fund a company's operations. Another reason debt can be so enticing to companies is that governments actually subsidize debt by allowing corporations to write off interest payments as business expense when paying their taxes. Of course corporate debt is not always good. Companies can take on too much debt. And when they get to a point reaching what we called a debt capacity, they can run into big trouble. That's why a big challenge for any corporate finance officer is to identify the best debt ratio for the company. That is the relationship of debt to equity or assets depending on how you want to measure this ratio. The fun part for us as students to finance is that, determining the ideal ratio uses a scientific framework. In the 1950s, two professors named Miller and Modigliani even came up with the formula for this that won a nobel prize, which is pretty impressive. We also saw that by using fairly straightforward earnings per share data we can identify the indifference point where debt and equity provide equal return to the company. But it's always important to remember that there is more to it than just the math. Situations and conditions can vary from company to company. On the one hand companies with predictable earnings or cash flow can more easily carry more debt, that just makes sense. But on the other hand, companies with variable rates of income often go with lower debt ratios. Something we all fancy with firms operating in durable goods markets affected by consumer disposable income or in the agricultural sector affected by economic cycles. The bottom line is that debt, like my french fries, is tasty in some ways and dangerous in others. And of course, no perspective or discussion of debt is worth while without corresponding understanding of what the corporation is worth. Which draws a clear connection between this course on debt and our previous finance for everyone course on value. We also discussed how important government debts also called sovereign debt is to our lives. Even as the numbers involved can be so astronomically large that they feel a little bit like science fiction. It's no surprise to anyone who has read or watch the news that governments borrow money, lots and lots of money. In fact, the largest data in the world is the United States' government which was owed money than the gross annual economic product of the entire world. That's a lot of debt. But like corporate debt, and french fries, government debt can be a good thing at the right time in the right amount. Government borrowing helped us escape the great depression. It often pays for the kinds of public infrastructure that has been part of the foundation of every great economic boom of the last century. It has helped us to recover from a variety of natural and manmade disasters. So in many ways, the proper use of government debt has paved the way for incredible prosperity and improvement in the quality of life. Just like people in companies, governments can borrow too much. Just look at Greece in recent years. The twist with government borrowing is that federal government in particular have some unique tools at their disposal in creating and paying off the debt. The most interesting is what's called quantitative easing, also known as printing more money. So it can be tempting both for criminals and governments to simply print the money they need. And thought the strategy isn't illegal for governments, it nonetheless has down sides since it can create economic ripples that usually end up causing far more problems than it solves. Of course most of us get our most powerful experience with debt at home. That's why understanding ones personal threshold of debt is so important. We've explored some of the limits of personal debt, but let's remind ourselves of the benefits because there are many. Personal debt can raise standards of living almost instantly, impose physical discipline on certain people and even lift families out of crashing poverty in the right circumstances. Here I'd like you to think of another Nobel Prize winner, Muhammad Yunus and the Grameen Bank which he founded which showed how tiny microloans can turn around the lives of people in developing countries. However, personal debt can also become dangerous. Especially when low interest rates make borrowing seem so affordable. Too many people are simply tempted into living beyond their means. There is math here, just as there is in the corporate world. To help us determine the right debt ratios to maintain on the personal level. But it is far harder to make personal choices, strictly because on mathematical models, when human nature means balancing numbers against the emotion and the desire to drive a new car let's say, or to enjoy a newly renovated kitchen. It's incredibly difficult to be objective when it comes to our own money and lifestyles. We also need to recognize that if we are trying to control our personal debt, we are working against very, very powerful forces. Every time we see an advertisement for a loan interest points earning or credit card or no money down new car or a pay day loan service that offers the first loan free we're being tempted. Other situations almost demand that we take on debt. Very few people can, for example, pay for a house, a new car, a university education without borrowing money. A most useful tool in navigating these difficult choices, is financial literacy. So I want to wrap up where I began with the importance of developing our personal financial literacy. First, let's recognize that it doesn't matter how much experience you have with finance or money. It doesn't matter how good you are with numbers. It doesn't matter how much money you have. You've heard me say that many times already. Financial literacy helps you to better understand and contribute to our society. It helps you take care of and support the people in your life, and it helps you to make the kinds of decisions, purchasing decisions, voting decisions, advocacy decisions that help create and sustain the kind of society that you want to see. Financial literacy is a tool that can help us all become more responsible, more accountable, and more aware of our impact on our world and the people around us and the people we care about. The time to build your financial literacy is right now. Don't wait until you are forced to learn lessons the hard way. When a personal or global financial crisis hits, you can start by identifying your next step goals. Maybe your logical next step is being able to do a simple household budget. Maybe it's preparing a basic cash flow analysis to put a new idea where you work. Maybe it's being able to asses, if your financial advisers and financial managers are doing their jobs. Pick some attainable goal and start working on them. In fact, you've already taken a very important step with this particular course and this specialization. Next, let's once more recognize that everything is connected. It's one thing to keep in mind that income, expenses, liabilities, equity and assets are closely linked in both creating and destroying value. But it's another thing to recognize that financial decisions are influenced by non financial factors like psychology, sociology and especially politics. Each of us needs to connect the dots which is our entry point to enhancing our financial literacy significantly. For example, today most people are able to connect income inequality with financial decisions that either bridge or exacerbate inequity. As we have seen in all of the previous courses leading to this one, financial decisions can create value both in tangible terms, as in the value of an investment project increases the value of the firm, or when financial decisions increase stock prices. But these decisions must also consider how that value is distributed and which of the stake holders stand to gain more at the expense of others. In this regard, one of the more obvious connections is made when politician of all stripes irrespective of their ideology, want to spend beyond their means. This is the case today in most developed nations of Europe and in the Americas and certainly Japan, be the Democrats, Republicans, Liberals, Conservatives or what have you. They continue to commit hundreds of billions of dollars to all kinds of projects. Austerity is a though and unpopular choice, it does not matter whether these are commitments to infrastructure spending on roads, bridges, rail lines or airports. Or whether they are to help Speed the transition to a green energy economy. Collectively, politicians are bent on achieving growth at any cost. Irrespective of whether these schemes are affordable or whether money is printed by the central banks to keep the financial industry afloat With upside down interest rates. The richest nations on earth are on a spending spree, and there is no sign that this is going to change in the near future. Except, that this part comes with ever larger mountains of borrowed money. This course on debt has drawn on historical precedent where borrowed money always had its limits. And considered examples of cracks in the system revealed by how contemporary, political, and economic forces appear to increasingly rely on desperate measures, or, a least, raise red flags for all of us to consider. Overall, how much debt is too much debt has become one of the critical questions that all of us must think about. The answer to this question depends on our financial literacy once again, which involves understanding the steps we can take to both anticipate possible repercussions and take advantage on this developments on particular context. So if any of these gives you an appetite to engage with the world of finance, whether as a member of a household or someone working in a private or public organization, this is an excellent sign. I can guarantee that you will enjoy your french fries even more if you eat them, [LAUGH] you can be confident about how they fit into your overall diet for good financial health. Through finance for everyone we have explored financial connection and phenomena that reach around the globe and reach into your wallet. We have discussed interest rates that are less than zero and debts figures in the trillion of dollars, but as we conclude our course on debt and prepare for the capstone course that will complete the specialization, I want to bring finance for everyone back to the constant that connects us all. And that's you. And by taking a step back, at the end of the day, everything that has been said and financed for everyone has been really about improving our own well being and the well being for those in the communities that we care about and the ones that we wish to serve. Thank you so very much for joining us on this journey and thank you for being a valued colleague by discovering how you might make a difference. A mission that learners enrolled in the Capstone will continue to explore. But in concrete ways. I'm hoping to see you again as we complete the specialization with the Capstone project that follows.
