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I think you are implying the companies and people borrow money for shits and giggles. The reality is that most companies borrow money only when the availability

I think you are implying the companies and people borrow money for shits and giggles. The reality is that most companies borrow money only when the availability of extra capital would help them generate more revenues or capture addtional market share. So they would take into account the cost of servicing the debt and repaying the loan. However, there are cases like IBM raing debt to buy back shares and boost share prices. I have no idea how that will work out for them.

tboyd47 8y ago
True; but the revenue / additional market share is never a sure thing. The company can't make a contract with the universe. The interest payments, however, are a contractual obligation.
- Nasrudith 8y ago
  The interest payment is partially because of the risk in the first place. Collateral if any is the only guarantee to the lender. They are taking the risk of losing it all or using a complicated yet sensible metainsurance plan at the cost of direct profit. If hypothetically we could see the future perfectly the financial market would start to look downright weird as predestined to fail loans would always be rejected but approved loans would go low margin from competition.
- manishsharan 8y ago
  Think of a restaurant that needs a new fryer because the one they had broke down. Wihout that new fryer , they will lose their business and livelihood. Debt allows them to make a risk calculation : they will take on an additonal overhead of deb servicing and in return they will keep their business. Now think of a dentist who wants to open her own practice. Her savings may not cover the cost of buying equipment that is needed. An asset backed loan may be a better opion for her. Of course, there is a risk involved -- she may not generate enough revenues to cover the cost of servicing the debt or her other liabilities. Typically she would consult with her accountant before starting on this journey. I would argue thay contractual obligations and regularity and severity with which they are enforced are a sobering influence on businesses. There are no contacts with universe needed for debt -- but there is an element of risk that needs to be accounted for. edit : typos
- dragonwriter 8y ago
  > The company can't make a contract with the universe. The interest payments, however, are a contractual obligation. Debt restructuring and bankruptcy are things, too. A contractual obligation isn't immutable or inviolable.
jaxtellerSoA 8y ago
>I think you are implying the companies and people borrow money for shits and giggles. Nope. I was just using an example. It could have been $100k and only $50K was lent out. You sill would need $105k at the end of the year to satisfy all debts and have an equilibrium within the economy. Where is the extra $5K coming from? Magic?? > The reality is that most companies borrow money only when the availability of extra capital would help them generate more revenues or capture additional market share. This doesn't change the fact that the demand back for money will exceed the actually money supply. It is simple math really. The fact that they are using the cash to, hopefully, generate more revenues is irrelevant. Private companies have no control over the the supply of money. This is a central banking problem.
- vageli 8y ago
  What happens when there are new entrants to your economy? Are they all forced to split the 100k? If not, where does new money come from? Magic?
  - jaxtellerSoA 8y ago
    How do you guys think the money supply works? I mean have never even thought about it? >What happens when there are new entrants to your economy? Nothing. >Are they all forced to split the 100k? No, if the new entrant can provide value then someone that already has some that $100K can give it to them for a good or service. >If not, where does new money come from? Magic? Comes from the Federal Reserve, when they decided to increase the money supply. The problem is you are on a never ending treadmill that is designed to have bubbles and failures, not that new money has to sometimes be created.
    - Matumio 8y ago
      > Comes from the Federal Reserve, when they decided to increase the money supply. Wait, really? I was pretty convinced that the vast majority of new money is created by private banks, when they decide to loan out money that nobody has paid in. It's called fractional reserve banking.

tboyd47 8y ago

True; but the revenue / additional market share is never a sure thing. The company can't make a contract with the universe. The interest payments, however, are a contractual obligation.

Nasrudith 8y ago
The interest payment is partially because of the risk in the first place. Collateral if any is the only guarantee to the lender. They are taking the risk of losing it all or using a complicated yet sensible metainsurance plan at the cost of direct profit. If hypothetically we could see the future perfectly the financial market would start to look downright weird as predestined to fail loans would always be rejected but approved loans would go low margin from competition.
manishsharan 8y ago
Think of a restaurant that needs a new fryer because the one they had broke down. Wihout that new fryer , they will lose their business and livelihood. Debt allows them to make a risk calculation : they will take on an additonal overhead of deb servicing and in return they will keep their business. Now think of a dentist who wants to open her own practice. Her savings may not cover the cost of buying equipment that is needed. An asset backed loan may be a better opion for her. Of course, there is a risk involved -- she may not generate enough revenues to cover the cost of servicing the debt or her other liabilities. Typically she would consult with her accountant before starting on this journey. I would argue thay contractual obligations and regularity and severity with which they are enforced are a sobering influence on businesses. There are no contacts with universe needed for debt -- but there is an element of risk that needs to be accounted for. edit : typos
dragonwriter 8y ago
> The company can't make a contract with the universe. The interest payments, however, are a contractual obligation. Debt restructuring and bankruptcy are things, too. A contractual obligation isn't immutable or inviolable.

jaxtellerSoA 8y ago

>I think you are implying the companies and people borrow money for shits and giggles. Nope. I was just using an example. It could have been $100k and only $50K was lent out. You sill would need $105k at the end of the year to satisfy all debts and have an equilibrium within the economy. Where is the extra $5K coming from? Magic?? > The reality is that most companies borrow money only when the availability of extra capital would help them generate more revenues or capture additional market share. This doesn't change the fact that the demand back for money will exceed the actually money supply. It is simple math really. The fact that they are using the cash to, hopefully, generate more revenues is irrelevant. Private companies have no control over the the supply of money. This is a central banking problem.

vageli 8y ago
What happens when there are new entrants to your economy? Are they all forced to split the 100k? If not, where does new money come from? Magic?
- jaxtellerSoA 8y ago
  How do you guys think the money supply works? I mean have never even thought about it? >What happens when there are new entrants to your economy? Nothing. >Are they all forced to split the 100k? No, if the new entrant can provide value then someone that already has some that $100K can give it to them for a good or service. >If not, where does new money come from? Magic? Comes from the Federal Reserve, when they decided to increase the money supply. The problem is you are on a never ending treadmill that is designed to have bubbles and failures, not that new money has to sometimes be created.
  - Matumio 8y ago
    > Comes from the Federal Reserve, when they decided to increase the money supply. Wait, really? I was pretty convinced that the vast majority of new money is created by private banks, when they decide to loan out money that nobody has paid in. It's called fractional reserve banking.