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I don't suppose you could give us a detailed example of some particular company's/country's debt situation? (Just, since it's rare to find people who can explai

I don't suppose you could give us a detailed example of some particular company's/country's debt situation? (Just, since it's rare to find people who can explain that depth)

BenoitEssiambre 8y ago
Well, I'm not an economist and a detailed example would be a lot of work. But here are some points to consider: - Aggregate financial liability is the flip side of aggregate financial assets. Net financial savings/debt is zero for the economy as a whole. Because of this, looking at particular companies or sectors is very different than looking at the economy as a whole. - When looking at entire countries especially large ones, there are important aggregate effects so depending on what you are trying to understand, it often makes sense to take an aggregate perspective where this net savings/debt are zero (ignore international imbalances, cross country debt etc. ) . - Debt is usually denominated in a currency, government debt is particularly intertwined with the behavior of its currency, so it makes sense to take into account central bank regimes, the effect of inflation etc. -When taking the aggregate, whole economy perspective where net financial assets net to zero, it's important to keep some focus on the non financial assets that makes up the residual non-zero net positive. This is the stock of economic capital: physical intrinsically valuable forms of wealth such as inventory, stockpiles, infrastructure, factories, machinery, tools, knowledge, land, natural resources, production capacity, energy, technological advancement etc... The financial assets, the debt, is just indirect claims on this capital and on the future production you might get from it. -Since economy wide financial crises are about claims on things, about coupons, about promises that net to zero, they can pretty much always be resolved smoothly through sufficient central banks accommodation that, through inflation, readjust the real value of all these claims to be in line with what is actually reasonably redeemable in a timely manner. However, this can result in some unfair redistribution or painfully high inflation (It's still much less unfair, and much much less painful than widespread defaults and gridlock in the investment and labor markets). -Central banks are often not competent enough to maintain stability and readjust properly. I don't know what can be done about that. The ECB's performance for example, has been pathetic. It was so procyclical as to almost bring down western civilization IMO, emboldening foes such as Russia and China and utterly destroying Greece and Italy, those poor Europeans. The US Fed has also been somewhat bad, failing to hit its inflation target for years after the financial crisis, a time when it should have been overshooting a little, but has recently been doing better. On the flip side, the Canadian central bank was great during the financial crisis, and saved Canada from a large part of the downsides. Marc Carney who was heading the Bank of Canada, then moved to head the UK's Bank of England and saved the British from Brexit turning into a massive disaster that brought unemployment in the tens or twenties of percents. However, the UKs proximity to the eurozone resulted on some splash damage from the ECB. Australia's money supply has been competently managed. Japan was horrible in the 90s but has been doing better in the last decade. BTW Japan is an interesting case to look at from a debt perspective because its government has by far the highest level of debt per capita. -The assumption that savings must always have positive real returns, that interest rates must be positive, is one of the most weirdly persistent fallacy in economic debates. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for a large part of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The effect of recency on our collective minds probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources. While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century. There are good reasons to keep government debt low enough but long term possibility of repayment is not a huge worry when market real interest rates and safe asset returns are very low or negative. In the latter case, you can just wait and let the real debt evaporate through inflation.

I don't suppose you could give us a detailed example of some particular company's/country's debt situation? (Just, since it's rare to find people who can explain that depth)

BenoitEssiambre 8y ago

Well, I'm not an economist and a detailed example would be a lot of work. But here are some points to consider: - Aggregate financial liability is the flip side of aggregate financial assets. Net financial savings/debt is zero for the economy as a whole. Because of this, looking at particular companies or sectors is very different than looking at the economy as a whole. - When looking at entire countries especially large ones, there are important aggregate effects so depending on what you are trying to understand, it often makes sense to take an aggregate perspective where this net savings/debt are zero (ignore international imbalances, cross country debt etc. ) . - Debt is usually denominated in a currency, government debt is particularly intertwined with the behavior of its currency, so it makes sense to take into account central bank regimes, the effect of inflation etc. -When taking the aggregate, whole economy perspective where net financial assets net to zero, it's important to keep some focus on the non financial assets that makes up the residual non-zero net positive. This is the stock of economic capital: physical intrinsically valuable forms of wealth such as inventory, stockpiles, infrastructure, factories, machinery, tools, knowledge, land, natural resources, production capacity, energy, technological advancement etc... The financial assets, the debt, is just indirect claims on this capital and on the future production you might get from it. -Since economy wide financial crises are about claims on things, about coupons, about promises that net to zero, they can pretty much always be resolved smoothly through sufficient central banks accommodation that, through inflation, readjust the real value of all these claims to be in line with what is actually reasonably redeemable in a timely manner. However, this can result in some unfair redistribution or painfully high inflation (It's still much less unfair, and much much less painful than widespread defaults and gridlock in the investment and labor markets). -Central banks are often not competent enough to maintain stability and readjust properly. I don't know what can be done about that. The ECB's performance for example, has been pathetic. It was so procyclical as to almost bring down western civilization IMO, emboldening foes such as Russia and China and utterly destroying Greece and Italy, those poor Europeans. The US Fed has also been somewhat bad, failing to hit its inflation target for years after the financial crisis, a time when it should have been overshooting a little, but has recently been doing better. On the flip side, the Canadian central bank was great during the financial crisis, and saved Canada from a large part of the downsides. Marc Carney who was heading the Bank of Canada, then moved to head the UK's Bank of England and saved the British from Brexit turning into a massive disaster that brought unemployment in the tens or twenties of percents. However, the UKs proximity to the eurozone resulted on some splash damage from the ECB. Australia's money supply has been competently managed. Japan was horrible in the 90s but has been doing better in the last decade. BTW Japan is an interesting case to look at from a debt perspective because its government has by far the highest level of debt per capita. -The assumption that savings must always have positive real returns, that interest rates must be positive, is one of the most weirdly persistent fallacy in economic debates. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for a large part of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The effect of recency on our collective minds probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources. While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century. There are good reasons to keep government debt low enough but long term possibility of repayment is not a huge worry when market real interest rates and safe asset returns are very low or negative. In the latter case, you can just wait and let the real debt evaporate through inflation.