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Debt is a mechanism for moving risk around - risk-averse parties (the people taking the loan) selling risk to risk-seeking parties (the lender). You're buying m
by adw 15y ago
Debt is a mechanism for moving risk around - risk-averse parties (the people taking the loan) selling risk to risk-seeking parties (the lender). You're buying money now and paying interest, providing return, against which there's a chance it doesn't get paid back.
As such, there's actually not much of a difference between debt, insurance, and synthetic derivatives such as credit default swaps. (Modern debt and insurance practice both originate from the shipping industry.)
Of course, if you believe the world's a better place without corporate finance, you're entitled to think so, but we'll have to disagree.
- carsongross 15y agoAm I allowed to think that the world would be a better place without implicitly and explicitly publicly backed private corporate finance? Just want to make sure that'd be OK.
- sethg 15y agoI don’t think you can have a stable financial system without a government that is willing and able to step in when things go pear-shaped. (You might say “if the government weren’t doing that, then lenders would be more careful with their money and things wouldn’t go pear-shaped”, but the string of crashes in the late 19th and early 20th centuries, before the Federal Reserve was created, suggests otherwise.)
- mseebach 15y agoThe argument isn't that if only the government keeps out there will be no pears, but that if the government keeps out the following recoveries will be faster and those responsible for the crash will take a hit financially, so hopefully someone learns a lesson or two.
- sethg 15y agoBut this did not happen. http://en.wikipedia.org/wiki/File:US-GNP-per-capita-1869-1918.png http://en.wikipedia.org/wiki/File:US-GNP-per-capita-1869-191...
- scythe 15y agoFrom 1869 to 1918, the per-capita GDP increases from $4600 to $12000 -- a time constant of 1.95% per year. From 1918 to 2011, the per-capita GDP increases from $12000 to $47300 -- a time constant of 1.47% per year. That is, the pre-Fed period experienced 32% faster growth over-all, or at least that's what it looks like, to me. Feel free to contest my analysis. http://www.wolframalpha.com/input/?i=log%2812000+%2F+4600%29+%2F+49 http://www.wolframalpha.com/input/?i=log%2812000+%2F+4600%29... -- first time period. Per-capita GDP starts at $4600 and ends at $12000 over 49 years. http://www.wolframalpha.com/input/?i=log%2847300+%2F+12000%29+%2F+93 http://www.wolframalpha.com/input/?i=log%2847300+%2F+12000%2... -- second time period. Per-capita GDP starts at $12000 and end at $47300 over 93 years.
- carsongross 15y agoThat certainly is the consensus, isn't it? Of course, depressions didn't become Great until our friends at the Fed got involved. Maybe another twenty years of flat to down real growth will change some minds. Although, the Japanese show no signs of changing course. _shrug_ Who can claim to understand humans, let alone economics?
- uvdiv 15y agoDebt is a mechanism for moving risk around Much more fundamentally, it is a mechanism for moving things around -- tangible capital like tools and buildings. Interest is in part a payment for risk of default, but it is also payment for use of capital (the debtor gets to use it, the creditor gives up his ability to use it). There would still be interest even if there were no risk at all.
- adw 15y agoGood point! I tend to think of the time value of money, loosely speaking "opportunity cost", as a sort of risk (the risk that you needed the money right now to go do something else with it), but that's a pretty idiosyncratic way to think about it, really.
- Derbasti 15y agoThat is a very interesting thought. Thank you for mentioning it!