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What does "too much borrowing & too little spending" even mean? Borrowing/growing debt is a negative balance after spending & earning are added up.

by netcan 7y ago

mdorazio 7y ago
I think you're conflating borrowing & spending with profit & loss, which is a separate thing. Borrowing literally just means taking money from other people. On the consumer side this means taking out loans for mortgages, cars, and credit cards. On the business side this means taking out business loans or issuing bonds. Yes, it will impact your balance sheet, but you don't calculate borrowing or spending by looking at profit and loss - these are all separate accounting categories. What I think the author was getting at is that generally speaking, when you borrow money the "good" thing to do with it is to use it toward economically productive means. You borrow money for a car so you can use the car to drive to work to make more money to spend on things you need. Businesses borrow money from a bank or equity firm so they can build a new factory to produce more things to sell to customers. The problem is when borrowing becomes divorced from economically productive spending. In the housing bubble this took the form of consumers borrowing huge amounts of money they could never afford to pay back not so they could be more productive and spend it on useful things, but rather so they could play at being housing speculators. Today's big issue is that businesses are borrowing large amounts of money just to do share buybacks [1]. They do this because borrowing money is so cheap right now (interest rates have been absurdly low for the better part of a decade) and they don't actually have good capital investment things to spend their money on any more. So the result is boosted share prices via borrowing, without any corresponding economically productive spending to go along with it. Student loans are another form of this on the consumer side - millions of American students rack up tens of thousands of dollars in debt (they're borrowing money from student loan providers) and then their jobs at graduation suck so they can't afford to actually spend money on productive things - too much of their income goes to paying the interest. Related concepts you might be interested in: Velocity of money [2], Debt to GDP [3], Debt to equity [4] [1] https://www.cnbc.com/2019/07/29/buybacks-companies-increasingly-using-debt-to-repurchase-stocks.html https://www.cnbc.com/2019/07/29/buybacks-companies-increasin... [2] https://fred.stlouisfed.org/series/M2V#targetText=The%20velocity%20of%20money%20is,services%20per%20unit%20of%20time https://fred.stlouisfed.org/series/M2V#targetText=The%20velo.... [3] https://en.wikipedia.org/wiki/Debt-to-GDP_ratio https://en.wikipedia.org/wiki/Debt-to-GDP_ratio [4] https://www.investopedia.com/terms/d/debtequityratio.asp#targetText=The%20debt%2Dto%2Dequity%20 https://www.investopedia.com/terms/d/debtequityratio.asp#tar...(,evaluate%20a%20company's%20financial%20leverage.
- netcan 7y ago
  In basic accounting, profit and loss affect assets & liabilities. Profit increases net assets, lowers net liabilities.
  - mdorazio 7y ago
    I'm not following how that has anything to do with what I said. Profit and loss are values calculated from other financials, not a starting point for them. Also, what? Net assets = assets - liabilities. That's it. Profit has nothing to do with it unless you're trying to say that after you account for profits and don't spend them on anything else your assets will be increased. Maybe you're referring to something related to Return on Net Assets?
pas 7y ago
It might mean that aggregate demand (consumption, investment) is low, yet that is still mostly debt fueled. It could indicate that households wealth (capital) is too low.
- abvdasker 7y ago
  This piece and the book it refers to talk a bit about that idea: Essentially that the diminishing marginal utility of wealth and its growing concentration is creating a problem of inadequate aggregate demand: http://bostonreview.net/class-inequality/jonathan-kirshner-whistling-past-graveyard http://bostonreview.net/class-inequality/jonathan-kirshner-w...
  - JMTQp8lwXL 7y ago
    By diminishing marginal utility of wealth, I presume you mean there is less incentive to spend money, the more of it you have. Because wealth is increasingly concentrated, less of it gets spent. Monetary velocity never recovered since the financial crisis. In fact, from 2011 onwards, monetary velocity has been at its lowest levels ever recorded. https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V

What does "too much borrowing & too little spending" even mean? Borrowing/growing debt is a negative balance after spending & earning are added up.

by netcan 7y ago

What does "too much borrowing & too little spending" even mean? Borrowing/growing debt is a negative balance after spending & earning are added up.

mdorazio 7y ago

I think you're conflating borrowing & spending with profit & loss, which is a separate thing. Borrowing literally just means taking money from other people. On the consumer side this means taking out loans for mortgages, cars, and credit cards. On the business side this means taking out business loans or issuing bonds. Yes, it will impact your balance sheet, but you don't calculate borrowing or spending by looking at profit and loss - these are all separate accounting categories. What I think the author was getting at is that generally speaking, when you borrow money the "good" thing to do with it is to use it toward economically productive means. You borrow money for a car so you can use the car to drive to work to make more money to spend on things you need. Businesses borrow money from a bank or equity firm so they can build a new factory to produce more things to sell to customers. The problem is when borrowing becomes divorced from economically productive spending. In the housing bubble this took the form of consumers borrowing huge amounts of money they could never afford to pay back not so they could be more productive and spend it on useful things, but rather so they could play at being housing speculators. Today's big issue is that businesses are borrowing large amounts of money just to do share buybacks [1]. They do this because borrowing money is so cheap right now (interest rates have been absurdly low for the better part of a decade) and they don't actually have good capital investment things to spend their money on any more. So the result is boosted share prices via borrowing, without any corresponding economically productive spending to go along with it. Student loans are another form of this on the consumer side - millions of American students rack up tens of thousands of dollars in debt (they're borrowing money from student loan providers) and then their jobs at graduation suck so they can't afford to actually spend money on productive things - too much of their income goes to paying the interest. Related concepts you might be interested in: Velocity of money [2], Debt to GDP [3], Debt to equity [4] [1] https://www.cnbc.com/2019/07/29/buybacks-companies-increasingly-using-debt-to-repurchase-stocks.html https://www.cnbc.com/2019/07/29/buybacks-companies-increasin... [2] https://fred.stlouisfed.org/series/M2V#targetText=The%20velocity%20of%20money%20is,services%20per%20unit%20of%20time https://fred.stlouisfed.org/series/M2V#targetText=The%20velo.... [3] https://en.wikipedia.org/wiki/Debt-to-GDP_ratio https://en.wikipedia.org/wiki/Debt-to-GDP_ratio [4] https://www.investopedia.com/terms/d/debtequityratio.asp#targetText=The%20debt%2Dto%2Dequity%20 https://www.investopedia.com/terms/d/debtequityratio.asp#tar...(,evaluate%20a%20company's%20financial%20leverage.

netcan 7y ago
In basic accounting, profit and loss affect assets & liabilities. Profit increases net assets, lowers net liabilities.
- mdorazio 7y ago
  I'm not following how that has anything to do with what I said. Profit and loss are values calculated from other financials, not a starting point for them. Also, what? Net assets = assets - liabilities. That's it. Profit has nothing to do with it unless you're trying to say that after you account for profits and don't spend them on anything else your assets will be increased. Maybe you're referring to something related to Return on Net Assets?

pas 7y ago

It might mean that aggregate demand (consumption, investment) is low, yet that is still mostly debt fueled. It could indicate that households wealth (capital) is too low.

abvdasker 7y ago
This piece and the book it refers to talk a bit about that idea: Essentially that the diminishing marginal utility of wealth and its growing concentration is creating a problem of inadequate aggregate demand: http://bostonreview.net/class-inequality/jonathan-kirshner-whistling-past-graveyard http://bostonreview.net/class-inequality/jonathan-kirshner-w...
- JMTQp8lwXL 7y ago
  By diminishing marginal utility of wealth, I presume you mean there is less incentive to spend money, the more of it you have. Because wealth is increasingly concentrated, less of it gets spent. Monetary velocity never recovered since the financial crisis. In fact, from 2011 onwards, monetary velocity has been at its lowest levels ever recorded. https://fred.stlouisfed.org/series/M2V https://fred.stlouisfed.org/series/M2V