16 ms·

Taking Stock of the World’s Debt

82 points by prostoalex 8y ago

panarky 8y ago
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panarky 8y ago
> The world has never had as much debt as it has right now Since Earth doesn't owe money to Mars, it's not at all clear that world-level debt is good or bad. Every dollar or euro liability for someone is an asset for someone else. For example, I own US treasury bonds, so for me that's an asset. They pay interest and they're extremely likely to get paid back in full. For me, debt is good. It allows me to consume less than I produce right now so years later I can consume more than I produce. Obviously when a family or a company takes on too much debt it can bad for the debtor (interest payments compete with rent and food) and it's bad for the creditor if the debtor can't pay it back. But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now.
- lowracle 8y ago
  >But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. Isn't it the actual problem though ? When a small portion of people consume a lot less than what they "produce", and another big portion of people borrow from them to consume more than what they produce, isn't it an indicator of rising inequality ? This imbalance can't last forever, and either it provokes a cascade of default and threatens the stability of the economy, or it keeps the big portion of people in an interest rate paying spiral, slowing the growth of the economy. Either way, I don't see it as a good thing at all
  - panarky 8y ago
    > This imbalance can't last forever Why not? Debt doesn't necessarily resolve itself by default. Most of it is just lifecycle timing differences. If I'm 40 years old, I'm saving for the future. I consume less than I produce, and I lend the surplus now so I can get it back later plus interest. > interest rate paying spiral, slowing the growth of the economy When I was 20 years old and early in my career, I didn't want to wait to pay cash for a house and car. Then I consumed more than I produced, and I'm thankful that debt allowed me to do that. So more debt actually increases the growth of the economy, since it allows people to buy houses and cars earlier in their lives. Reduce debt and the economy shrinks (which is basically what happens when central bank raises interest rates). > isn't it an indicator of rising inequality? At any given moment, some families, companies and governments want to save, and others want to consume. Debt lets us trade time preferences so we all get more of what we want, when we want it. In my example, I'm lending money to the United States so I can get it back 10 years from now. That's not causing inequality, it's giving me the freedom to produce now and consume later.
    - simonh 8y ago
      Those are absolutely excellent arguments for why debt itself, as a mechanism, can be beneficial and useful. That isn't the questions. The question is how much debt is too much, and why, and what happens when the debt level becomes unsustainable. Greece is an extreme example. They borrowed far more than they could ever pay back and wasted it. When borrowing is spent on things that don't pay back a return higher than the cost of the borrowing, and when that's done on a large scale with no other credible source of income to pay back the debt, both the borrower and the lender get burned. The problem is that you don't always know the return you're going to get on the investment, and you don't always know the full cost of the borrowing to fund it because interest rates can go up.
      - chadcmulligan 8y ago
        The real problem with countries and debt is the people who take out the debt aren't the people who have to pay it off. This is a real flaw in the system.
      - 8y ago
  - pjc50 8y ago
    You left out "right now": the key here is pensions. People spend a majority-but-shrinking proportion of their life as net producers and a growing part as consumers. Not to mention student debt.
- jaggederest 8y ago
  I'd argue that debt, unlike direct payment and savings, always comes with added risk. So in a sense, debt can be intrinsically bad, if the total value added by that debt is less than the risk plus the time value of the debt (the classic Black Scholes model). To put it another way, there's always an intrinsic limit to debt that may or may not be concretely captured in practice - we should probably not be letting individuals borrow a billion dollars if they're earning a median wage and have no net assets, for example. That's the way in which debt can be dangerous, on a societal level - as in 2008, when society as a whole over-leverages itself, there's no easy path back to a safe level of debt.
  - pjc50 8y ago
    Parent poster's point is that your "savings" are money owed to you by the bank: ie "debt". And the only way the bank can make money on those savings is to lend them out again as debt to the bank. What's the alternative, equity? Traditionally regarded as more risky? > when society as a whole over-leverages itself, there's no easy path back to a safe level of debt. This is a rather climate change like situation, isn't it? It's always advantageous to each individual to have more, and it produces economic growth - but if there is Too Much, then it's a problem to society as a whole.
    - c22 8y ago
      > This is a rather climate change like situation, isn't it? It's always advantageous to each individual to have more, and it produces economic growth - but if there is Too Much, then it's a problem to society as a whole. Some people would call this a tragedy of the commons.
    - trashtester 8y ago
      Alternatives saving methods would be equities and bonds. If regulators required banks to finance at least half their lending portfolios by bonds (+equity) instead of deposits or intra-bank loans, the risks for both bonds and deposits would be much more transparant. Bonds would be seen as risky, but would pay a reasonable interest rate, while deposits would be risk-free and interest-free.
- dnautics 8y ago
  > But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. I don't think it is that simple. 1) If the world is overleveraged you wind up in a situation where the insolvency of one debtor dominoes over to the lender, who is then unable to pay the next debtor, etc. In one sense some leverage means we are interconnected, which is good because we are likely to pay attention to each other, but if it gets too much, that the effects of bad events can spread. 2) By the nature of compounding interest, having a system that depends on leverage (as ours does now) puts a societal requirement on growth that is enforced through fiscally punitive reinforcement... So that is a fundamental reason why there is a lot of consumption, environmental destruction, and energy demand, even when we try to be active towards conservation -- our current economic structure (and i'm not talking about 'capitalism') simply is not compatible with those goals writ large. 3) when a individual cannot pay their debt, it is because they consensually took on that debt. When a sovereign nation cannot pay its debt, often times the effects are generational, and very much nonconsenual. The current generation cannot go back in time and vote against the profligate spending of the previous generation. One wonders if this is ethically tenable, yet every government does it. Moreover, when a government overspends, the ill effects of that overspending typically hurt the poorest the hardest.
  - pjc50 8y ago
    > When a sovereign nation cannot pay its debt, often times the effects are generational, and very much nonconsenual. The current generation cannot go back in time and vote against the profligate spending of the previous generation. One wonders if this is ethically tenable, yet every government does it. I do think this might be one of the big questions of the 21st century. Stable society requires long-term commitments (debt, investment), but people demand the ability to swing policy back and forth on 4 or 5 year timescales. > Moreover, when a government overspends, the ill effects of that overspending typically hurt the poorest the hardest. This is usually inflicted on them by the lender of last resort, the IMF.
    - votepaunchy 8y ago
      >> Moreover, when a government overspends, the ill effects of that overspending typically hurt the poorest the hardest. > This is usually inflicted on them by the lender of last resort, the IMF. Is what way? I’ve never heard of the IMF demanding this. The method of “austerity” or reducing a deficit could very well include taxes on the rich. It is a local choice to hurt the poor instead (and then blame the IMF).
- pasxizeis 8y ago
  > But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. Then why the 2008 financial crisis happened? It was because of bad lending which resulted to defaults.
- pasxizeis 8y ago
  > But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. Thing is, since taking debt is inherently taking risks, if you look at it from a sociopolitical view, the effects of managing this risk badly can be disastrous for a society. For example, if incompetent governments take on debt that they cannot pay back, future generations will suffer, like it happens to Greece right now.
- konschubert 8y ago
  If the poor owe debt to the rich, then it’s bad probably because it means a constant transfer of rent from the poor to the rich. And if a country owes money to its richest inhabitants then it means that effectively, the poor owe the rich.
  - trashtester 8y ago
    Owing money doesn't necessarily imply paying rent. Some countries have net negative interest rates. This is not at strange as it seems. In fact, throughout most of history, a negative interest rates on savings were the norm, simply because what was saved was usually grain or rice. People still saved in this manner. Even if 50% had been eaten by rats, having at least some extra food in the famine year would be worth it.
- Grangar 8y ago
  That works, until you add rehypothecation to the mix. The balance sheet doesn't add up anymore.
- claydavisss 8y ago
  > they're extremely likely to get paid back in full in dollars that may become increasingly or fully worthless, and you cannot choose to be paid back in anything else
- porpoisely 8y ago
  At a world level that's not what debt really is and that's not how debt is created. Debt isn't created by production/consumption. Debt is created by central banks + treasuries in today's world. In the past, people worked and created value and that produced money. Today, "the system" creates money ( or debt ) first and then society is expected to work to "pay it back". It truly is a form of quiet slavery, not based on race, but based on wealth and privilege. You can say that debt is a liability for one party and an asset for the counterparty. But debt or bonds are also control. One party has control over the other. And more importantly, the more debt there is, the more power the people who control debt and who control interest rates have on governments, nations and the world. If you look at debt through a narrow window, then it's just a simple ledger entry. If you realize what debt is and see it in relation with power and influence, things aren't so simple.
  - dnautics 8y ago
    > It truly is a form of quiet slavery, not based on race, but based on wealth and privilege. That sovereign debt has this property is truly underappreciated in our society and I think one of the great tragedies of the 20th century. We see ostensibly liberal economists calling for increased sovereign spending and sovereign debt without understanding that the debt treadmill enslaves the poorest the in the heaviest shackles. Generally the mathematical resolution for sovereign debt is inflation and the blind retort that I hear all the time is that the poor are in debt and inflation helps those in debt which I don't know where it comes from but is woefully ignorant of the thue state of things (the poor are usually not in debt having less access to finance and when they do they are in short term high interest debt - and many financial instruments, that the wealthy use to increase their wealth like options and leveraged trading, require availability of lending to exist).
    - panarky 8y ago
      > the [sovereign] debt treadmill enslaves the poorest the in the heaviest shackles I hear this frequently stated as fact but I've seen no evidence for it, and it doesn't make intuitive sense to me. Sovereign debt is serviced either through taxation or through inflation. It's the rich who pay a majority of the taxes, and rich creditors also suffer the most from inflation. So how, exactly, are the poor on the hook for national debt?
- saint_abroad 8y ago
  > For me, debt is good. It allows me to consume less than I produce right now so years later I can consume more than I produce. Individuals produce less taxes than governments spend and consume more than a paycheck. This gap is what got Greece into trouble but it certainly felt like "the good life" while it lasted. > But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. Every generation since the 1950s has consumed unsustainably high returns on their taxes (by government expenditure and with maturing bonds paid by bonds issued). It's fraudulent when extraordinary returns to earlier generations are funded not by growth but sustained by new generations seeking the same returns.
  - quadrangle 8y ago
    I find the monetization of consumption to be misleading. We can externalize costs and pretend that we're more sustainable. Or someone can invent a new technology that doesn't actually affect our core sustainability in terms of food and energy etc. but we value the new tech at billions or trillions of dollars and then we can pretend we're suddenly in the black in our accounting. The real sustainability issues need to be measured in something other than money.
- rossdavidh 8y ago
  I believe it was Nassim Nicholas Taleb who said that debt has a tendency to "fragilize". If you pay as you go, there are issues, but you can a lot more easily reduce your expenses when you have a reduction in income. If you have debt, it is almost always either impossible or very difficult to reduce your expenses, because debt repayment is almost always requiring monthly payments. This is especially true if you're talking about a weaker debtor (e.g. individual, poor country) and a stronger creditor (bank, rich country). More debt, means less ability to modify your expenses quickly, which means less ability to respond to changes in your income. This is, in aggregate, a very bad thing.
- cascom 8y ago
  I would also add two things: 1. Debt needs to be taken in context with both income and wealth e.g. italy's $2.8T [1]in debt seems large as a ratio of GDP, but considering the country's NET wealth is $10.5T [2] meaning the country is in fact quite rich 2. Who owns the debt matters as well, for example if Icelandic government debt is held only by Icelanders the difference between defaulting and raising taxes is purely an accounting exercise at the macro level [1]https://www.nationaldebtclocks.org/debtclock/italy https://www.nationaldebtclocks.org/debtclock/italy [2]https://www.nationaldebtclocks.org/debtclock/italy https://www.nationaldebtclocks.org/debtclock/italy
- gammateam 8y ago
  Your example of US Treasuries might work out, everyone elses examples of other sovereign treasuries and non-financial corporate bonds might not. Thats what this is about, not some personal finance blog’s conment section where you broke away from the herd to say “hey debt can be good”
- pesmhey 8y ago
  Debt is a way to invest in the future. If the world is taking out debt and the investment is in enhanced productivity, better health outcomes, etc. then the debt is good because it more or less pays for itself. If the debt is used to make bad investments, things that won’t necessarily benefit anyone, then it’s bad. It becomes not so much an issue of never having to pay the debt back because we owe ourselves and can ultimately write it off, but an issue of, at a certain level of easy credit, is it possible that it becomes impossible to keep making good investments. There’s definitely a balancing act in how much world debt is too much.
- wutbrodo 8y ago
  I agree with you that people tend to have an over-simplified model of debt as something negative instead of a relatively efficient way to transfer liquidity from where it is to where it's needed. My parents are retired with a decent amount of assets and I'm young with low expenses and a high income, so we regularly loan each other money to bridge moment-to-moment liquidity gaps[1]. That being said, a high level of debt can still be notable. The cost of this liquidity transfer is risk, and the usual way entities holding a lot of debt handle this is by spreading the risk across the debt they hold. This obviously doesn't work perfectly if the debt is correlated, and as the proportion of debt goes up (relative to other assets, economic growth, etc), this risk also goes up.
ww520 8y ago
Consumer debt level had dropped sharply post 2008 and slowly came back up along with wage and saving rises. That's good. Corporate debt level has risen sharply due to low interest rate. Corporate bond coming due will be re-financed at higher rate now. Bad for earning. Government debt level rising is just new money creation to fuel the economies.
- prostoalex 8y ago
  > Corporate bond coming due will be re-financed at higher rate now. If ever. A lot of high-quality corp debt was issued around (a) record low interest rates, (b) high tax penalties for repatriating foreign earnings into the US. Neither of those are a factor anymore.
- quadrangle 8y ago
  Government debt is new money, but money isn't economic fuel, it just manages economic distribution. If you make more money, it has zero productive impact directly. What it does is designate wealth claims to whoever gets the money at the expense of whoever doesn't get the new money. So, if the government gives every citizen a billion dollar check, besides causing inflation, that drastically dilutes the relative purchasing power of Jeff Bezos. It's not that different from the government simply taxing out of existence a good portion of the money held by the wealthy. Either way, it's redistribution. And it's a powerful and important tool for carrying out political agendas which themselves may be good or bad based on your political values.
chadcmulligan 8y ago
Is this a valid back of the envelope sort of calculation? World Debt is $250T World GDP is $80T https://www.visualcapitalist.com/80-trillion-world-economy-one-chart/ https://www.visualcapitalist.com/80-trillion-world-economy-o... Central bank interest rates are around 1 or 2% for the west ( https://au.investing.com/central-banks/ https://au.investing.com/central-banks/ ), a lot higher for others So at the moment servicing that debt is doable - for the west anyway. If interest rates go up then things might get tricky. However the debt seems to keep going up, so if the debt keeps increasing and the interest rates go up then things will turn nasty. There are no doubt some countries now that are effectively dead man walking and if interest rates go up could start crashing which could collapse the whole house of cards. I suppose rampant inflation will remove the debt. Total wealth of the world is $317T (https://en.wikipedia.org/wiki/List_of_countries_by_total_wealth https://en.wikipedia.org/wiki/List_of_countries_by_total_wea...) so everyone could liquidate and have some money left over. So as long as the assets of the world make enough to service the interest on the debt things will keep chugging along. The real problem I suppose is how much of the world has to work to service the interest bill. Or is that ridiculously naive?
- lifeisstillgood 8y ago
  Seems sensible - worth noting that who owns the debt will be an increasingly important political issue
- tim333 8y ago
  Not ridiculously naive but probably a simplification. The devil's in the detail really. Very large debts can be stable especially if they are in the local currency and the government will help out if banks are a bit over leveraged such as in China so far. Things can go very wrong in other circumstances such as borrowing in a foreign currency followed the local currency crashing, eg Argentina, the Asian financial crisis.
- robertAngst 8y ago
  >So as long as the assets of the world make enough to service the interest on the debt things will keep chugging along. The real problem I suppose is how much of the world has to work to service the interest bill. I worry that this is the case. Our best economic leaders have been wrong(or told to do wrong policies for political reasons for ~200 years). Tasty candy today can spell a stomach ache later. Given the numerous times our grandparents generation has pushed off problems, I wonder if government debt is a short term political win, with long term ramifications(looking at Japan).
otalp 8y ago
Wonder what HN thinks of Modern Monetary Theory[1] which posits amongst other things that government debt is consumer surplus - and not inherently a bad thing, and also that printing fiat currency specifically to pay for domestic programs does not itself increase inflation [1] - http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html http://neweconomicperspectives.org/2014/01/diagrams-dollars-...
- robertAngst 8y ago
  > that government debt is consumer surplus and not inherently a bad thing, and also that printing fiat currency specifically to pay for programs does not itself increase inflation Sounds like when cigarette companies funded studies to 'prove' cigarettes were safe. They even went full 'USA Freedom Act' by throwing the word Modern in the title. Those are two non-political red flags. I'll save my personal ideas on economics as this gets into politics.
  - otalp 8y ago
    Both MMT advocates and critics have agreed that MMT isn't particularly new; it seems to be a rekindling of Neo-Keynesianism. And generally people do have a misconception that printing more money = inflation. For example in the last 2 decades the amount of Chinese currency has increased by more than 800%(https://webofdebt.files.wordpress.com/2018/12/m2-for-China-FRED.png https://webofdebt.files.wordpress.com/2018/12/m2-for-China-F...), but inflation remains at 2.2%.
    - pixl97 8y ago
      At what rate has Chinese production increased. Money supply does need to increase in some situations.
    - quadrangle 8y ago
      I don't think all the MMTers are Neo-Keynesian. The alternate term applicable to MMT is neochartalist. It's more of a claim about money and systems, and less of a statement about what should or shouldn't be done once these facts are acknowledged.
AndrewDucker 8y ago
Rather than thinking in terms of "How much is owed", it's far more sensible to think about liquidity "How much of my income goes towards servicing debt?" There's a huge difference between "I owe £10k tomorrow" and "I owe £10k over the next 20 years with 1% interest." When you start thinking in terms of liquidity it makes a real difference to how you think about money.
- lsd5you 8y ago
  Not a financial expert, but is that really such a difference, and is that what liquidity really means? At the end of the day most short term debt can be converted into longer term debt possibly with some associated cost.
- bittercynic 8y ago
  Considering it from both angles would probably be a good idea..
jamesnicholas65 8y ago
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JDiculous 8y ago
Dumb question - why does the central bank need to raise interest rates if everyone says that doing so will likely cause a recession, and virtually every recession in the past has been preceded by a central bank raising interest rates?

82 points by prostoalex 8y ago

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> The world has never had as much debt as it has right now Since Earth doesn't owe money to Mars, it's not at all clear that world-level debt is good or bad. Every dollar or euro liability for someone is an asset for someone else. For example, I own US treasury bonds, so for me that's an asset. They pay interest and they're extremely likely to get paid back in full. For me, debt is good. It allows me to consume less than I produce right now so years later I can consume more than I produce. Obviously when a family or a company takes on too much debt it can bad for the debtor (interest payments compete with rent and food) and it's bad for the creditor if the debtor can't pay it back. But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now.

lowracle 8y ago
>But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. Isn't it the actual problem though ? When a small portion of people consume a lot less than what they "produce", and another big portion of people borrow from them to consume more than what they produce, isn't it an indicator of rising inequality ? This imbalance can't last forever, and either it provokes a cascade of default and threatens the stability of the economy, or it keeps the big portion of people in an interest rate paying spiral, slowing the growth of the economy. Either way, I don't see it as a good thing at all
- panarky 8y ago
  > This imbalance can't last forever Why not? Debt doesn't necessarily resolve itself by default. Most of it is just lifecycle timing differences. If I'm 40 years old, I'm saving for the future. I consume less than I produce, and I lend the surplus now so I can get it back later plus interest. > interest rate paying spiral, slowing the growth of the economy When I was 20 years old and early in my career, I didn't want to wait to pay cash for a house and car. Then I consumed more than I produced, and I'm thankful that debt allowed me to do that. So more debt actually increases the growth of the economy, since it allows people to buy houses and cars earlier in their lives. Reduce debt and the economy shrinks (which is basically what happens when central bank raises interest rates). > isn't it an indicator of rising inequality? At any given moment, some families, companies and governments want to save, and others want to consume. Debt lets us trade time preferences so we all get more of what we want, when we want it. In my example, I'm lending money to the United States so I can get it back 10 years from now. That's not causing inequality, it's giving me the freedom to produce now and consume later.
  - simonh 8y ago
    Those are absolutely excellent arguments for why debt itself, as a mechanism, can be beneficial and useful. That isn't the questions. The question is how much debt is too much, and why, and what happens when the debt level becomes unsustainable. Greece is an extreme example. They borrowed far more than they could ever pay back and wasted it. When borrowing is spent on things that don't pay back a return higher than the cost of the borrowing, and when that's done on a large scale with no other credible source of income to pay back the debt, both the borrower and the lender get burned. The problem is that you don't always know the return you're going to get on the investment, and you don't always know the full cost of the borrowing to fund it because interest rates can go up.
    - chadcmulligan 8y ago
      The real problem with countries and debt is the people who take out the debt aren't the people who have to pay it off. This is a real flaw in the system.
    - 8y ago
- pjc50 8y ago
  You left out "right now": the key here is pensions. People spend a majority-but-shrinking proportion of their life as net producers and a growing part as consumers. Not to mention student debt.
jaggederest 8y ago
I'd argue that debt, unlike direct payment and savings, always comes with added risk. So in a sense, debt can be intrinsically bad, if the total value added by that debt is less than the risk plus the time value of the debt (the classic Black Scholes model). To put it another way, there's always an intrinsic limit to debt that may or may not be concretely captured in practice - we should probably not be letting individuals borrow a billion dollars if they're earning a median wage and have no net assets, for example. That's the way in which debt can be dangerous, on a societal level - as in 2008, when society as a whole over-leverages itself, there's no easy path back to a safe level of debt.
- pjc50 8y ago
  Parent poster's point is that your "savings" are money owed to you by the bank: ie "debt". And the only way the bank can make money on those savings is to lend them out again as debt to the bank. What's the alternative, equity? Traditionally regarded as more risky? > when society as a whole over-leverages itself, there's no easy path back to a safe level of debt. This is a rather climate change like situation, isn't it? It's always advantageous to each individual to have more, and it produces economic growth - but if there is Too Much, then it's a problem to society as a whole.
  - c22 8y ago
    > This is a rather climate change like situation, isn't it? It's always advantageous to each individual to have more, and it produces economic growth - but if there is Too Much, then it's a problem to society as a whole. Some people would call this a tragedy of the commons.
  - trashtester 8y ago
    Alternatives saving methods would be equities and bonds. If regulators required banks to finance at least half their lending portfolios by bonds (+equity) instead of deposits or intra-bank loans, the risks for both bonds and deposits would be much more transparant. Bonds would be seen as risky, but would pay a reasonable interest rate, while deposits would be risk-free and interest-free.
dnautics 8y ago
> But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. I don't think it is that simple. 1) If the world is overleveraged you wind up in a situation where the insolvency of one debtor dominoes over to the lender, who is then unable to pay the next debtor, etc. In one sense some leverage means we are interconnected, which is good because we are likely to pay attention to each other, but if it gets too much, that the effects of bad events can spread. 2) By the nature of compounding interest, having a system that depends on leverage (as ours does now) puts a societal requirement on growth that is enforced through fiscally punitive reinforcement... So that is a fundamental reason why there is a lot of consumption, environmental destruction, and energy demand, even when we try to be active towards conservation -- our current economic structure (and i'm not talking about 'capitalism') simply is not compatible with those goals writ large. 3) when a individual cannot pay their debt, it is because they consensually took on that debt. When a sovereign nation cannot pay its debt, often times the effects are generational, and very much nonconsenual. The current generation cannot go back in time and vote against the profligate spending of the previous generation. One wonders if this is ethically tenable, yet every government does it. Moreover, when a government overspends, the ill effects of that overspending typically hurt the poorest the hardest.
- pjc50 8y ago
  > When a sovereign nation cannot pay its debt, often times the effects are generational, and very much nonconsenual. The current generation cannot go back in time and vote against the profligate spending of the previous generation. One wonders if this is ethically tenable, yet every government does it. I do think this might be one of the big questions of the 21st century. Stable society requires long-term commitments (debt, investment), but people demand the ability to swing policy back and forth on 4 or 5 year timescales. > Moreover, when a government overspends, the ill effects of that overspending typically hurt the poorest the hardest. This is usually inflicted on them by the lender of last resort, the IMF.
  - votepaunchy 8y ago
    >> Moreover, when a government overspends, the ill effects of that overspending typically hurt the poorest the hardest. > This is usually inflicted on them by the lender of last resort, the IMF. Is what way? I’ve never heard of the IMF demanding this. The method of “austerity” or reducing a deficit could very well include taxes on the rich. It is a local choice to hurt the poor instead (and then blame the IMF).
pasxizeis 8y ago
> But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. Then why the 2008 financial crisis happened? It was because of bad lending which resulted to defaults.
pasxizeis 8y ago
> But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. Thing is, since taking debt is inherently taking risks, if you look at it from a sociopolitical view, the effects of managing this risk badly can be disastrous for a society. For example, if incompetent governments take on debt that they cannot pay back, future generations will suffer, like it happens to Greece right now.
konschubert 8y ago
If the poor owe debt to the rich, then it’s bad probably because it means a constant transfer of rent from the poor to the rich. And if a country owes money to its richest inhabitants then it means that effectively, the poor owe the rich.
- trashtester 8y ago
  Owing money doesn't necessarily imply paying rent. Some countries have net negative interest rates. This is not at strange as it seems. In fact, throughout most of history, a negative interest rates on savings were the norm, simply because what was saved was usually grain or rice. People still saved in this manner. Even if 50% had been eaten by rats, having at least some extra food in the famine year would be worth it.
Grangar 8y ago
That works, until you add rehypothecation to the mix. The balance sheet doesn't add up anymore.
claydavisss 8y ago
> they're extremely likely to get paid back in full in dollars that may become increasingly or fully worthless, and you cannot choose to be paid back in anything else
porpoisely 8y ago
At a world level that's not what debt really is and that's not how debt is created. Debt isn't created by production/consumption. Debt is created by central banks + treasuries in today's world. In the past, people worked and created value and that produced money. Today, "the system" creates money ( or debt ) first and then society is expected to work to "pay it back". It truly is a form of quiet slavery, not based on race, but based on wealth and privilege. You can say that debt is a liability for one party and an asset for the counterparty. But debt or bonds are also control. One party has control over the other. And more importantly, the more debt there is, the more power the people who control debt and who control interest rates have on governments, nations and the world. If you look at debt through a narrow window, then it's just a simple ledger entry. If you realize what debt is and see it in relation with power and influence, things aren't so simple.
- dnautics 8y ago
  > It truly is a form of quiet slavery, not based on race, but based on wealth and privilege. That sovereign debt has this property is truly underappreciated in our society and I think one of the great tragedies of the 20th century. We see ostensibly liberal economists calling for increased sovereign spending and sovereign debt without understanding that the debt treadmill enslaves the poorest the in the heaviest shackles. Generally the mathematical resolution for sovereign debt is inflation and the blind retort that I hear all the time is that the poor are in debt and inflation helps those in debt which I don't know where it comes from but is woefully ignorant of the thue state of things (the poor are usually not in debt having less access to finance and when they do they are in short term high interest debt - and many financial instruments, that the wealthy use to increase their wealth like options and leveraged trading, require availability of lending to exist).
  - panarky 8y ago
    > the [sovereign] debt treadmill enslaves the poorest the in the heaviest shackles I hear this frequently stated as fact but I've seen no evidence for it, and it doesn't make intuitive sense to me. Sovereign debt is serviced either through taxation or through inflation. It's the rich who pay a majority of the taxes, and rich creditors also suffer the most from inflation. So how, exactly, are the poor on the hook for national debt?
saint_abroad 8y ago
> For me, debt is good. It allows me to consume less than I produce right now so years later I can consume more than I produce. Individuals produce less taxes than governments spend and consume more than a paycheck. This gap is what got Greece into trouble but it certainly felt like "the good life" while it lasted. > But at the world level, it's just some of us choosing to consume more than we produce right now, and others of us choosing to consume less than we produce right now. Every generation since the 1950s has consumed unsustainably high returns on their taxes (by government expenditure and with maturing bonds paid by bonds issued). It's fraudulent when extraordinary returns to earlier generations are funded not by growth but sustained by new generations seeking the same returns.
- quadrangle 8y ago
  I find the monetization of consumption to be misleading. We can externalize costs and pretend that we're more sustainable. Or someone can invent a new technology that doesn't actually affect our core sustainability in terms of food and energy etc. but we value the new tech at billions or trillions of dollars and then we can pretend we're suddenly in the black in our accounting. The real sustainability issues need to be measured in something other than money.
rossdavidh 8y ago
I believe it was Nassim Nicholas Taleb who said that debt has a tendency to "fragilize". If you pay as you go, there are issues, but you can a lot more easily reduce your expenses when you have a reduction in income. If you have debt, it is almost always either impossible or very difficult to reduce your expenses, because debt repayment is almost always requiring monthly payments. This is especially true if you're talking about a weaker debtor (e.g. individual, poor country) and a stronger creditor (bank, rich country). More debt, means less ability to modify your expenses quickly, which means less ability to respond to changes in your income. This is, in aggregate, a very bad thing.
cascom 8y ago
I would also add two things: 1. Debt needs to be taken in context with both income and wealth e.g. italy's $2.8T [1]in debt seems large as a ratio of GDP, but considering the country's NET wealth is $10.5T [2] meaning the country is in fact quite rich 2. Who owns the debt matters as well, for example if Icelandic government debt is held only by Icelanders the difference between defaulting and raising taxes is purely an accounting exercise at the macro level [1]https://www.nationaldebtclocks.org/debtclock/italy https://www.nationaldebtclocks.org/debtclock/italy [2]https://www.nationaldebtclocks.org/debtclock/italy https://www.nationaldebtclocks.org/debtclock/italy
gammateam 8y ago
Your example of US Treasuries might work out, everyone elses examples of other sovereign treasuries and non-financial corporate bonds might not. Thats what this is about, not some personal finance blog’s conment section where you broke away from the herd to say “hey debt can be good”
pesmhey 8y ago
Debt is a way to invest in the future. If the world is taking out debt and the investment is in enhanced productivity, better health outcomes, etc. then the debt is good because it more or less pays for itself. If the debt is used to make bad investments, things that won’t necessarily benefit anyone, then it’s bad. It becomes not so much an issue of never having to pay the debt back because we owe ourselves and can ultimately write it off, but an issue of, at a certain level of easy credit, is it possible that it becomes impossible to keep making good investments. There’s definitely a balancing act in how much world debt is too much.
wutbrodo 8y ago
I agree with you that people tend to have an over-simplified model of debt as something negative instead of a relatively efficient way to transfer liquidity from where it is to where it's needed. My parents are retired with a decent amount of assets and I'm young with low expenses and a high income, so we regularly loan each other money to bridge moment-to-moment liquidity gaps[1]. That being said, a high level of debt can still be notable. The cost of this liquidity transfer is risk, and the usual way entities holding a lot of debt handle this is by spreading the risk across the debt they hold. This obviously doesn't work perfectly if the debt is correlated, and as the proportion of debt goes up (relative to other assets, economic growth, etc), this risk also goes up.

ww520 8y ago

Consumer debt level had dropped sharply post 2008 and slowly came back up along with wage and saving rises. That's good. Corporate debt level has risen sharply due to low interest rate. Corporate bond coming due will be re-financed at higher rate now. Bad for earning. Government debt level rising is just new money creation to fuel the economies.

prostoalex 8y ago
> Corporate bond coming due will be re-financed at higher rate now. If ever. A lot of high-quality corp debt was issued around (a) record low interest rates, (b) high tax penalties for repatriating foreign earnings into the US. Neither of those are a factor anymore.
quadrangle 8y ago
Government debt is new money, but money isn't economic fuel, it just manages economic distribution. If you make more money, it has zero productive impact directly. What it does is designate wealth claims to whoever gets the money at the expense of whoever doesn't get the new money. So, if the government gives every citizen a billion dollar check, besides causing inflation, that drastically dilutes the relative purchasing power of Jeff Bezos. It's not that different from the government simply taxing out of existence a good portion of the money held by the wealthy. Either way, it's redistribution. And it's a powerful and important tool for carrying out political agendas which themselves may be good or bad based on your political values.

chadcmulligan 8y ago

Is this a valid back of the envelope sort of calculation? World Debt is $250T World GDP is $80T https://www.visualcapitalist.com/80-trillion-world-economy-one-chart/ https://www.visualcapitalist.com/80-trillion-world-economy-o... Central bank interest rates are around 1 or 2% for the west ( https://au.investing.com/central-banks/ https://au.investing.com/central-banks/ ), a lot higher for others So at the moment servicing that debt is doable - for the west anyway. If interest rates go up then things might get tricky. However the debt seems to keep going up, so if the debt keeps increasing and the interest rates go up then things will turn nasty. There are no doubt some countries now that are effectively dead man walking and if interest rates go up could start crashing which could collapse the whole house of cards. I suppose rampant inflation will remove the debt. Total wealth of the world is $317T (https://en.wikipedia.org/wiki/List_of_countries_by_total_wealth https://en.wikipedia.org/wiki/List_of_countries_by_total_wea...) so everyone could liquidate and have some money left over. So as long as the assets of the world make enough to service the interest on the debt things will keep chugging along. The real problem I suppose is how much of the world has to work to service the interest bill. Or is that ridiculously naive?

lifeisstillgood 8y ago
Seems sensible - worth noting that who owns the debt will be an increasingly important political issue
tim333 8y ago
Not ridiculously naive but probably a simplification. The devil's in the detail really. Very large debts can be stable especially if they are in the local currency and the government will help out if banks are a bit over leveraged such as in China so far. Things can go very wrong in other circumstances such as borrowing in a foreign currency followed the local currency crashing, eg Argentina, the Asian financial crisis.
robertAngst 8y ago
>So as long as the assets of the world make enough to service the interest on the debt things will keep chugging along. The real problem I suppose is how much of the world has to work to service the interest bill. I worry that this is the case. Our best economic leaders have been wrong(or told to do wrong policies for political reasons for ~200 years). Tasty candy today can spell a stomach ache later. Given the numerous times our grandparents generation has pushed off problems, I wonder if government debt is a short term political win, with long term ramifications(looking at Japan).

otalp 8y ago

Wonder what HN thinks of Modern Monetary Theory[1] which posits amongst other things that government debt is consumer surplus - and not inherently a bad thing, and also that printing fiat currency specifically to pay for domestic programs does not itself increase inflation [1] - http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html http://neweconomicperspectives.org/2014/01/diagrams-dollars-...

robertAngst 8y ago
> that government debt is consumer surplus and not inherently a bad thing, and also that printing fiat currency specifically to pay for programs does not itself increase inflation Sounds like when cigarette companies funded studies to 'prove' cigarettes were safe. They even went full 'USA Freedom Act' by throwing the word Modern in the title. Those are two non-political red flags. I'll save my personal ideas on economics as this gets into politics.
- otalp 8y ago
  Both MMT advocates and critics have agreed that MMT isn't particularly new; it seems to be a rekindling of Neo-Keynesianism. And generally people do have a misconception that printing more money = inflation. For example in the last 2 decades the amount of Chinese currency has increased by more than 800%(https://webofdebt.files.wordpress.com/2018/12/m2-for-China-FRED.png https://webofdebt.files.wordpress.com/2018/12/m2-for-China-F...), but inflation remains at 2.2%.
  - pixl97 8y ago
    At what rate has Chinese production increased. Money supply does need to increase in some situations.
  - quadrangle 8y ago
    I don't think all the MMTers are Neo-Keynesian. The alternate term applicable to MMT is neochartalist. It's more of a claim about money and systems, and less of a statement about what should or shouldn't be done once these facts are acknowledged.

AndrewDucker 8y ago

Rather than thinking in terms of "How much is owed", it's far more sensible to think about liquidity "How much of my income goes towards servicing debt?" There's a huge difference between "I owe £10k tomorrow" and "I owe £10k over the next 20 years with 1% interest." When you start thinking in terms of liquidity it makes a real difference to how you think about money.

lsd5you 8y ago
Not a financial expert, but is that really such a difference, and is that what liquidity really means? At the end of the day most short term debt can be converted into longer term debt possibly with some associated cost.
bittercynic 8y ago
Considering it from both angles would probably be a good idea..

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JDiculous 8y ago

Dumb question - why does the central bank need to raise interest rates if everyone says that doing so will likely cause a recession, and virtually every recession in the past has been preceded by a central bank raising interest rates?