The nature of debt.

dtsazza

HAMISH_MCTAVISH wrote: »

Unless they just bring forward consumption, and repay the debt later.

In which case it's still a situation of zero net debt, but with economic stimulus today.

I disagree with that assessment of net debt; it sounds like an accounting fillip intended to make things look more appealing than they are.

If someone have £0 in the bank, and borrows £100 to eat hotdogs today, then they are £100 in debt. Granted, I assume that they have a job or some alternative income that means they'll be able to pay back that debt in future. (And in fact, such cashflows are exactly why they were able to get into debt in the first place.)

But it doesn't change the fact that right now, they're £100 in debt.


The consumption is brought forward, so there is economic stimulus today (insofar as hotdog buying can be considered stimulus) - but it's not free. The consumption that's brought forward no longer happens in the future. If the person hadn't gone into debt, he could have spent £110 on hotdogs next year. Instead, he'll just spend it on repaying the debt.

If you think the future is likely to be more rosy, then perhaps that's a good trick in order to smooth things out.

But on the whole, stealing from the future in order to spend slightly less money today (you're losing notional amount + (real) interest, but you only get to spend the notional) is not a good idea. And doing it as a government for the sake of inflating a GDP figure is pretty stupid.

(In my view the whole current recession/retraction is simply because people brought forward today's consumption to the 2000s, simultaneously increasing GDP then and decreasing GDP now. Sure, we can pull 2012's consumption to 2011 in order to buff up the GDP a bit. But that leaves us even worse off in 2012 - what then? With the interest costs accruing along the way, this is self-defeating and the only solution is to go cold turkey for a bit until all the brought-forward consumption has fallen out.)

dtsazza

HAMISH_MCTAVISH wrote: »

Even debt spent on consumer tat can be good because money recirculates within the economy, and thanks to fractional reserve banking, debt creates more money, which then recirculates further, etc.

...

And the process continues, at each stage creating multiple claims on the same money, and in so doing effectively creating more money until with a 10% reserve rate the original £1000 deposited has bloomed into £9000 circulating within the economy.

That's the problem though - you're only creating more money. Creating more money doesn't actually add any more value to the economy, and there are the same amounts of goods and services for people to lay claim to.

So all you're really producing is inflation. £1,000 has turned into £9,000, so now there's nine times as much competition for each thing and the market price of everything is nine times higher. Plus for even more fun, this adjustment doesn't happen immediately or obviously - and arrangements that were negotiated in the old nominal terms are now near-worthless.

If you really want to improve an economy, you need to increase the amount of goods and services that people are able to lay claim to, with less and less outlay (in terms of work, not money) on their behalf.

As one of those rare people who holds cash-backed assets, I'll thank you not to encourage higher and higher inflation.

Graham_Devon

I still fail to get the point of how this relates to anything to do with the economy.

HAMISH_MCTAVISH

dtsazza wrote: »

That's the problem though - you're only creating more money. Creating more money doesn't actually add any more value to the economy, and there are the same amounts of goods and services for people to lay claim to.So all you're really producing is inflation.

I disagree.

Money is the lifeblood of the economy, and the velocity of money is vital to economic growth. Inflation provides the incentive to invest instead of hoard, to increase productivity and efficiency, and to grow instead of stagnate. Without the creation of money and the use of debt for both investment and consumption, our economy and society would be in a far worse place.

arrangements that were negotiated in the old nominal terms are now near-worthless.

Yes, inflation lowers the value of debt, so that consumption you brought forward to today but paid for tomorrow actually costs you less. But in return you have to pay interest. But the key thing is it also stimulates economic growth in the meantime.

As one of those rare people who holds cash-backed assets, I'll thank you not to encourage higher and higher inflation.

:rotfl:

Ooops. Sorry.:o

Graham_Devon

HAMISH_MCTAVISH wrote: »

Yes, inflation lowers the value of debt, so that consumption you brought forward to today but paid for tomorrow actually costs you less. But in return you have to pay interest.

What product, other than a mortgage (in some cases), allows you to buy something, via debt, that also allows the item to cost less, taking into consideration paying interest on the debt?!

Even a mortgage is open to house price fluctuations.

HAMISH_MCTAVISH

Graham_Devon wrote: »

What product, other than a mortgage (in some cases), allows you to buy something, via debt, that also allows the item to cost less, taking into consideration paying interest on the debt?!

Even a mortgage is open to house price fluctuations.

No, I noted that "in return you have to pay interest".

By which I meant the total cost is generally greater for an individual on most products.

Although possibly still better for wider economic growth in general.

Graham_Devon

HAMISH_MCTAVISH wrote: »

No, I noted that "in return you have to pay interest".

By which I meant the total cost is generally greater for an individual on most products.

Although possibly still better for wider economic growth in general.

You also said the consumption costs you less.

But then you say it doesn't.

All these points you keep coming up with are bizzare. You even disagree with them yourself straight after.

Still don't get the point you are trying to make, but do get that you are saying it's cheaper but it's not.

Pimperne1

On the subject of things that are difficult to get your head round:

A man wants to buy a gun. The gun he wants to buy is £30.
The man only has £10, so he gets two of his friends to help out.
All three go into the shop with £10, £30 in total and buy the gun.
The store assistant realises his charged them £5 too much for it and runs after them.
Realising he can make sum money, he pockets £2.
He then catches up with them and gives them the remaining £3.
That’s £1 for each of them.

So now they've only paid £9 each.
9 x 3 is 27.
Plus the £2 the shop keeper kept is £29

Where’s the extra £ gone?

dtsazza

HAMISH_MCTAVISH wrote: »

I disagree.

Money is the lifeblood of the economy, and the velocity of money is vital to economic growth. Inflation provides the incentive to invest instead of hoard, to increase productivity and efficiency, and to grow instead of stagnate. Without the creation of money and the use of debt for both investment and consumption, our economy and society would be in a far worse place.

It's not the velocity of money that actually matters, but the velocity of goods and services. Since we usually pay for the latter with the former they're very tightly correlated in a relative sense, but it doesn't follow that increasing the money supply increases the amount that someone does, or is able to, consume. And if it does, that's only because of the inefficiencies of the market in how prices adapt to an inflated supply of money; those who get their hands on the money first get a first-mover advantage, at the expense of others.

The total amount of supply, or demand, hasn't changed by the creation of more money. So it can only ever change distribution.

A system that favourable those who take out the biggest and earliest loans can only lead to hyperinflation and ever richer banks.

Yes, inflation lowers the value of debt, so that consumption you brought forward to today but paid for tomorrow actually costs you less. But in return you have to pay interest. But the key thing is it also stimulates economic growth in the meantime.

Unless you get negative real interest, you're still paying more via the loan.

And it merely moves consumption around the timeline, it doesn't increase the aggregate amount. Is consuming twice as much this year and nothing the next favourable?

:rotfl:

Ooops. Sorry.:o

Yeah - I missed a from my comment. But I still forgive you.

HAMISH_MCTAVISH

dtsazza wrote: »

It's not the velocity of money that actually matters, but the velocity of goods and services. Since we usually pay for the latter with the former they're very tightly correlated in a relative sense, but it doesn't follow that increasing the money supply increases the amount that someone does, or is able to, consume. And if it does, that's only because of the inefficiencies of the market in how prices adapt to an inflated supply of money; those who get their hands on the money first get a first-mover advantage, at the expense of others.

The total amount of supply, or demand, hasn't changed by the creation of more money. So it can only ever change distribution.

A system that favourable those who take out the biggest and earliest loans can only lead to hyperinflation and ever richer banks.

Intuitively, I disagree, but I'm going to have to think about why.

Unless you get negative real interest, you're still paying more via the loan.

Like today then.:)

And it merely moves consumption around the timeline, it doesn't increase the aggregate amount. Is consuming twice as much this year and nothing the next favourable?

But you're assuming a static system with a fixed level of consumption and economic activity.

By increasing consumption today, you also increase economic growth today, thereby increasing economic activity and ultimately consumption next year.

If it was a zero sum game, economies would have stopped growing many centuries ago.

Yeah - I missed a from my comment. But I still forgive you.