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If Fred and Ginger are an economic system whose total value at time t is $1000 (all of which is in Ginger's bank account), and Ginger loans Fred $500 on the pro
by vannevar 11y ago
If Fred and Ginger are an economic system whose total value at time t is $1000 (all of which is in Ginger's bank account), and Ginger loans Fred $500 on the promise that he'll pay her $600 at time t+1, then their agreement is predicated on the assumption that the Fred/Ginger economy will have grown 10% at time t+1.
- amateurpolymath 11y agoNo, it is predicated on the assumption that $500 at time t is worth $600 at time t+1.
- vannevar 11y agoIn that case Fred could simply pay her back the $500 and she would value it at $600 (ie, deflation). He has to pay her back $100 more in real value than he borrowed, so sometime between t and t+1, someone in the system must produce $100 in new wealth.
- amateurpolymath 11y agoI don't see the problem. Fred can sell his time/labor to make up the difference. If that is not possible for some reason, Fred could also default on the debt. Then the lender takes what she can get and learns not to make loans that cannot be repaid.
- vannevar 11y agoFred can sell his time/labor to make up the difference. In other words, Fred can bring new wealth into the system, yes. If he defaults, then Ginger learns that a key assumption of her loan---that the wealth of the Fred/Ginger system would increase at time t+1---was wrong. Which is exactly my point: that our system of finance relies on the implicit assumption that the economy will grow.
- barrkel 11y agoFred can create new wealth simply by dancing to Ginger's tune for an agreed period of time. There is no limit on the amount of "wealth" that can be created; as long as there are economic actors in the system, their action is wealth generating if it is done in exchange for money.
- vannevar 11y agoSee my answer to mrep above. There's no net increase in wealth there, Fred and Ginger merely shuffle money back and forth. And some of finance is exactly that. But some portion is not (ie Ginger loans out $1000, leaving her nothing to pay Fred with, and he has no interest in her services); that fraction of outstanding debt must be paid with new wealth, created in the interim. Ginger's loan is predicated on that possibility.
- mrep 11y agoNo, Ginger could take a small nap and pay Fred a 100$ to do some work for her that she would normally do. Then, Fred would have 600$ to pay her back, and the economy's output would stay the same.
- vannevar 11y agoTrue, and some portion of lending is no doubt exactly that kind of shuffling. But the total amount of debt also includes some proportion of Gingers who lent more than they can nap off.
- barrkel 11y agoNo it's not. Think about it.