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Debt is a promise. A promise you make is based on expectations about the future, including promises that others have made to you. The more promises we make to e
by mbar84 6y ago
Debt is a promise. A promise you make is based on expectations about the future, including promises that others have made to you. The more promises we make to each other, the more likely we are to be in a chain where somebody cannot keep their promise, which means that we are vulnerable to a cascade of failed promises. When such promises pervade the economy, once we see that they have been broken, we have to reorganize ourselves. This happens by closing businesses, by liquidating assets, switching jobs and eating cat food because the pension is now worthless.
In financial terms, such cascades are typically mopped up by central banks through dilution of the money supply and/or taxpayer financed bailouts.
Long story short: more debt means more risk of a financial crisis.
p.s. I think it is not helpful to use terms such as "our own", "ourselves" when trying to understand these issues.
- munificent 6y ago> The more promises we make to each other, the more likely we are to be in a chain where somebody cannot keep their promise, which means that we are vulnerable to a cascade of failed promises. You can think of a promise as an edge between nodes in a graph. A failure cascade occurs when removing a single edge causes many nodes to become unreachable. Whether adding edges increases that change depends entirely on the topology of the graph. A long linear chain increases the risk. (But you have to implicitly create new nodes—new lenders—in order to maintain that topology while adding edges.) But if you just add edges without increasing nodes, the result is that the graph becomes more connected and thus more resilient to edge loss. In other words, if you owe me $100 and don't pay, I'm out $100. But if five people owe me $20 and one doesn't pay, I still get $80 back.