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The problem with debt is that unrepayed debt represents economic destruction. To take the most extreme example, when a startup raises money, fails to produce a

by dkarl 16y ago

The problem with debt is that unrepayed debt represents economic destruction. To take the most extreme example, when a startup raises money, fails to produce a product that anyone wants, and can't repay its investors, the economic effect of that company has been to destroy wealth. Not all the wealth was destroyed, of course. Some was simply passed along: employees and vendors got paid. But some was destroyed; the same money invested in a different company would have produced economic output in the form of goods and services. Seeing debt as a natural side effect of risk-taking is correct, but it isn't just a side effect. It's a gamble. If a large part of your economy is wrapped up in good gambles, then great. If it's mostly wrapped up in bad gambles, then it isn't so great. We assume that the gambles are sensible, but that depends on whether lenders are making sensible decisions. Somebody in the economy needs to be evaluating the risks companies are making. That's supposed to be what stock analysts, bond analysts, and other investment analysts do. The vast majority of investors never check to see whether a given gamble is good or not, though. They trust some secondary signs, which are presumed to be driven by people who know what they're doing. What worries me is that the professionals who have the knowledge, time, and resources to investigate the risks that companies actually take may not be interested in doing so, because they can make more money by just being aggressive and staying ahead of the curve. Then it becomes a game of hot potato.

isamuel 16y ago
I'm not so sure about this—the "unpaid debt equals destroyed wealth" part. It's important to be concrete about what we're talking about here. A society's wealth can't be sensibly measured in money, because currency is just a neutral medium of exchange having no intrinsic value. Central banks control its supply in an instrumental way. This is monetary policy 101. I trust we agree. So what happens if you lend me $1 million and I don't pay you back because my business goes belly-up in a month? Well. No actual wealth is destroyed if you don't get paid back. Whatever you created (a business, a book, whatever) to get so rich still exists, and society still enjoys its benefits. You say that well, it could have been invested elsewhere; there's an opportunity cost. But assuming relatively fluid capital markets, someone else likely invested in whatever you didn't invest in, and so whatever great thing was created by that other business still exists. Now, sometimes you have situations where no one trusts anyone to pay back their debts, and you have frozen credit markets. We saw this during the financial panic of 08-09. But the problem there is that real stuff---factories, people, stores---sit idle because capital markets are necessary for this stuff to function. The problem isn't that "lending isn't happening," the problem is that a society has a massive amount of idle stuff that could be otherwise productive, sitting around wasting away for no good reason. I'm not sure I even disagree with you, I've just been trying to think through these issues in a non-abstract way.
- dkarl 16y ago
  So what happens if you lend me $1 million and I don't pay you back because my business goes belly-up in a month? Well. No actual wealth is destroyed if you don't get paid back. Wealth is destroyed when you use the invested money to divert valuable resources into a non-productive enterprise. Energy is used to cool and light your office and run your computers. The useful lifetime of many computers is invested in the business. A running business consumes many, many resources, down to and including wear and tear on the carpet in your office. Not to mention that a lot of people's time and energy comes to naught... or at least to less than you paid for them, hence less than they should have come to.

by dkarl 16y ago

isamuel 16y ago

I'm not so sure about this—the "unpaid debt equals destroyed wealth" part. It's important to be concrete about what we're talking about here. A society's wealth can't be sensibly measured in money, because currency is just a neutral medium of exchange having no intrinsic value. Central banks control its supply in an instrumental way. This is monetary policy 101. I trust we agree. So what happens if you lend me $1 million and I don't pay you back because my business goes belly-up in a month? Well. No actual wealth is destroyed if you don't get paid back. Whatever you created (a business, a book, whatever) to get so rich still exists, and society still enjoys its benefits. You say that well, it could have been invested elsewhere; there's an opportunity cost. But assuming relatively fluid capital markets, someone else likely invested in whatever you didn't invest in, and so whatever great thing was created by that other business still exists. Now, sometimes you have situations where no one trusts anyone to pay back their debts, and you have frozen credit markets. We saw this during the financial panic of 08-09. But the problem there is that real stuff---factories, people, stores---sit idle because capital markets are necessary for this stuff to function. The problem isn't that "lending isn't happening," the problem is that a society has a massive amount of idle stuff that could be otherwise productive, sitting around wasting away for no good reason. I'm not sure I even disagree with you, I've just been trying to think through these issues in a non-abstract way.

dkarl 16y ago
So what happens if you lend me $1 million and I don't pay you back because my business goes belly-up in a month? Well. No actual wealth is destroyed if you don't get paid back. Wealth is destroyed when you use the invested money to divert valuable resources into a non-productive enterprise. Energy is used to cool and light your office and run your computers. The useful lifetime of many computers is invested in the business. A running business consumes many, many resources, down to and including wear and tear on the carpet in your office. Not to mention that a lot of people's time and energy comes to naught... or at least to less than you paid for them, hence less than they should have come to.