My money, Your money

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There are only two types of money in this world. One is “my money” and the other is “your money”. In corporate finance, the former is called “equity” and the latter is called “debt”.

How efficient is my money utilized? Namely how much return per one unit of “my money”? The formula is given as return divided by “my money” (equity), so called Return of Equity (ROE).

There are only two ways to improve ROE, to increase the return or to decrease the equity. The latter can be achieved by utilizing “your money” i.e. borrowing your money, so that the share of my money per return will decrease. Then I can claim, “I am using my money efficiently”.

Quick question. I lend you 100 dollars and you lend me back 100 dollars. Is it my money or your money?

Technically, it’s your money. The 100 dollars are on my hands now but obliged to pay you back in future, as it belongs to you. I am just “borrowing”.

So… now I know it is your money… (My personality suddenly changes). Who cares about your money! I am the risk taker! Let us put your money into a risk asset such as sub-prime. (10 sec….). Oops, no money left to return “your money”, but can you pay me back “my money”?

In MBA, the place we can learn about the current “Capitalism”, being taught the virtue of borrowing money, and draw the clear line between your money (debt) and my money (equity), lacking a holistic view.

Yes, money must be used efficiently, and CAREFULLY regardless of my money, your money.

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