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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

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.
  - pjc50 8y ago
    Bonds are also debt, though? The normal operation of bankruptcy law puts bondholders and depositors on the same footing. If the bank is in a position where it can't pay the bondholders the depositors are also at risk. > deposits would be risk-free and interest-free That's pretty much what central bank insurance gets you. But you can't be free of the counterparty risk of the bank ceasing to operate rendering you illiquid while it's resolved.
    - trashtester 8y ago
      Bonds are debt, but they are not "money" (and not seen as such by the general public). Also, such bonds could be required to have maturities that matched the maturity curve of the assets/lendings (or slightly longer), which would help forestall a liquidity crunch. If more of the risk was carried by (lower priority) bonds, the central bank/government would not have to carry risks associated with a credit market crash. Central banks could still be lenders of last resort if there is a liquidity crunch, but only as long as the bank is well within its capital requirements. The main problem I see with the current system, is that it is so opaque to most people. Even if the system is not inherently corrupt using "fractional reserve banking", most people are not likely to be able to tell whether or not it is. If moving the risk to bonds (or all the way to bank stocks), it could hopefully shut down some conspiracy theories and also make it more difficult to resist various forms of moral hazard for regulators and bankers, as bond-holders would be more vigilant than most depositors.
      - hndamien 8y ago
        What about Bitcoin? Is it not equity based money rather than debt based money?
        trashtester 8y ago
        Today, Bitcoin is probably not "money" at all. It is a store of value, but it is too volatile to be used as a unit of account, and borderline as a medium of exchange. Also, both of the criticisms of traditional currencies (ie "debt backed" and "fiat") are flawed, I think. For a stores of value, for some to be "debt backed" is probably a necessity. To "save" means to postpone consumption. The efficient way of doing that, is to let someone consume more than they produce today, so that you can consume more than you produce tomorrow. The main other alternative is to invest in assets with actual value (stocks, real estate, etc). But there is a limit to how much value can be stored in this way without creating dangerous bubbles and extreme volatility. Also, for a currency to be "backed by government fiat" is also an advantage. While the government may ban bitcoins tomorrow (as many already have), with traditional currencies, you have some degree of certainty that it will be legal tender for at least the medium term future, and you can also expect some degree of predictability for what the value will be. Both are critical for a currency to be used as a unit of account and means of exchange (particularly for time-shifted or recurring payments).
panarky 8y ago
> we should probably not be letting individuals borrow a billion dollars if they're earning a median wage and have no net assets Creditors are intelligent and they have free will. They generally try not to lend to people who can't service the debt. It seems like a pretty good system to let creditors decide who to lend to and then allow them to go bankrupt when they make bad decisions.
- zepto 8y ago
  If we had that system, it might be good.

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.
- pjc50 8y ago
  Bonds are also debt, though? The normal operation of bankruptcy law puts bondholders and depositors on the same footing. If the bank is in a position where it can't pay the bondholders the depositors are also at risk. > deposits would be risk-free and interest-free That's pretty much what central bank insurance gets you. But you can't be free of the counterparty risk of the bank ceasing to operate rendering you illiquid while it's resolved.
  - trashtester 8y ago
    Bonds are debt, but they are not "money" (and not seen as such by the general public). Also, such bonds could be required to have maturities that matched the maturity curve of the assets/lendings (or slightly longer), which would help forestall a liquidity crunch. If more of the risk was carried by (lower priority) bonds, the central bank/government would not have to carry risks associated with a credit market crash. Central banks could still be lenders of last resort if there is a liquidity crunch, but only as long as the bank is well within its capital requirements. The main problem I see with the current system, is that it is so opaque to most people. Even if the system is not inherently corrupt using "fractional reserve banking", most people are not likely to be able to tell whether or not it is. If moving the risk to bonds (or all the way to bank stocks), it could hopefully shut down some conspiracy theories and also make it more difficult to resist various forms of moral hazard for regulators and bankers, as bond-holders would be more vigilant than most depositors.
    - hndamien 8y ago
      What about Bitcoin? Is it not equity based money rather than debt based money?
      - trashtester 8y ago
        Today, Bitcoin is probably not "money" at all. It is a store of value, but it is too volatile to be used as a unit of account, and borderline as a medium of exchange. Also, both of the criticisms of traditional currencies (ie "debt backed" and "fiat") are flawed, I think. For a stores of value, for some to be "debt backed" is probably a necessity. To "save" means to postpone consumption. The efficient way of doing that, is to let someone consume more than they produce today, so that you can consume more than you produce tomorrow. The main other alternative is to invest in assets with actual value (stocks, real estate, etc). But there is a limit to how much value can be stored in this way without creating dangerous bubbles and extreme volatility. Also, for a currency to be "backed by government fiat" is also an advantage. While the government may ban bitcoins tomorrow (as many already have), with traditional currencies, you have some degree of certainty that it will be legal tender for at least the medium term future, and you can also expect some degree of predictability for what the value will be. Both are critical for a currency to be used as a unit of account and means of exchange (particularly for time-shifted or recurring payments).

panarky 8y ago

> we should probably not be letting individuals borrow a billion dollars if they're earning a median wage and have no net assets Creditors are intelligent and they have free will. They generally try not to lend to people who can't service the debt. It seems like a pretty good system to let creditors decide who to lend to and then allow them to go bankrupt when they make bad decisions.

zepto 8y ago
If we had that system, it might be good.