A special report on debt: Repent at leisure
economist.com
economist.com
Debt is not all that much unlike a layer of indirection - it's basically a pointer to the debtor who's actually doing something with your money. And just like a heavily-layered Java program, it's often difficult to figure out exactly where the work is getting done. Add enough layers of indirection, and it's possible to have the appearance of a very complex system where no real work is getting done at all.
Maybe the financial crisis and associated bailouts were the equivalent of throwing out the old codebase and starting anew. "We don't understand the system anymore, so, err, let's throw it all out and rewrite everything!" With all the associated loss of institutional learning.
The economy is like a heavily layered enterprise Java program, where little useful work is performed by lots and lots of expensive layers of abstractions. There are so many abstractions that virtually nobody understands the program or where problems come from.
The bailout is not equivalent to throwing out the old codebase and starting anew. Just the opposite, it's the government saying do not abondon the old codebase, here's a $800 billion dollars, hire another 10.000 Java programmers to maintain it. If the government would let you abondon the old codebase, all the programmers who had jobs maintaining it would be unemployed, which is political suicide.
It's also the most politically unpalatable, which is why it won't happen while the politicals still have some control.
Depressions and Recessions are not allowed to happen anymore. They are actually healthier for an economy, as the bad debts get written off, lending practices get rewritten, consumers and companies learn the dangerous side of debt. Like a forest needs fire, economies need blow off periods where the bad decisions and investments get cleared off.
By shifting private losses to the public balance sheet, and producing shifty numbers which don't say 'depression', politicans dance around like project managers and keep the old codebase going. But, as we all now, you eventually have to toss it all in the bin and get going again.
The negatives, of course, is that people will lose jobs, homes and all that goes with it. The positives is that once you're bankrupt, you can't get any more bankrupt and can work your way back - this applies to companies and individuals. Old industries and practices die, and new ones rise up to take their place. It's the placing of old industries on life support that kill the economy in the long run. Keeping GM on life support through public money diverts that money away from worthwhile investments (either public or private) and keeps subsidising a smaller group of people at the expense of society at large.
The damage is already done, and the chips need to lay where they fall. Papering over the cracks with phony statistics and bailout after bailout will eventually fail with the same result, but it will take much longer to happen, and much longer to recover.
The irony in all this is that the only avenue left for governments (and being actively pursued) is inflation. Money printing through quantitative easing is going ahead in big numbers. Eventually all this fake new money will be lent out under fractional reserve by banks, and inflation will roar ahead. The only people left standing after that will be the ones with real assets (housing, factories and machinery, farmland) bought with debt denominated in 2010 dollars. People will turn off debt and onto saving just as savings become decimated by inflation. The smart thing right now is to buy real, worthwhile assets with locked-in low interest rates and just ride out the deflationary period until the inflation spark catches in the tinder-dry monetary world. It's quite likely that another stagflationary period will be with us in the next 10 years.
If you don't believe inflation will happen just tell me which paper currency is older than 150 years. All paper currencies eventually reach their intrinsic value - which is nothing. It's just the timeframe that varies.
I'd be more worried about pissing spending away than about debt-financed spending, per se. ($20k to get a degree, OK, $240k to get a master's degree in traditional dance... well, I hope you marry well. Buying houses on credit, OK, asset bubbles a little less OK. Constantly increasing QOL caused by expanding public services, ambivalence, capture of budgeting process by public service unions less OK.)
Seeing debt as a natural side effect of risk-taking is correct, but it isn't just a side effect. It's a gamble. If a large part of your economy is wrapped up in good gambles, then great. If it's mostly wrapped up in bad gambles, then it isn't so great. We assume that the gambles are sensible, but that depends on whether lenders are making sensible decisions. Somebody in the economy needs to be evaluating the risks companies are making. That's supposed to be what stock analysts, bond analysts, and other investment analysts do.
The vast majority of investors never check to see whether a given gamble is good or not, though. They trust some secondary signs, which are presumed to be driven by people who know what they're doing. What worries me is that the professionals who have the knowledge, time, and resources to investigate the risks that companies actually take may not be interested in doing so, because they can make more money by just being aggressive and staying ahead of the curve. Then it becomes a game of hot potato.
So what happens if you lend me $1 million and I don't pay you back because my business goes belly-up in a month? Well. No actual wealth is destroyed if you don't get paid back. Whatever you created (a business, a book, whatever) to get so rich still exists, and society still enjoys its benefits. You say that well, it could have been invested elsewhere; there's an opportunity cost. But assuming relatively fluid capital markets, someone else likely invested in whatever you didn't invest in, and so whatever great thing was created by that other business still exists.
Now, sometimes you have situations where no one trusts anyone to pay back their debts, and you have frozen credit markets. We saw this during the financial panic of 08-09. But the problem there is that real stuff---factories, people, stores---sit idle because capital markets are necessary for this stuff to function. The problem isn't that "lending isn't happening," the problem is that a society has a massive amount of idle stuff that could be otherwise productive, sitting around wasting away for no good reason.
I'm not sure I even disagree with you, I've just been trying to think through these issues in a non-abstract way.
Wealth is destroyed when you use the invested money to divert valuable resources into a non-productive enterprise. Energy is used to cool and light your office and run your computers. The useful lifetime of many computers is invested in the business. A running business consumes many, many resources, down to and including wear and tear on the carpet in your office. Not to mention that a lot of people's time and energy comes to naught... or at least to less than you paid for them, hence less than they should have come to.
Very incorrect. It was the Japanese government that decided that instead of demanding the banks to be responsible for their risky and ultimately bad real estate investments, they would prop the banks alive by stealing from their citizen's savings via massive borrowing. Fast forward to today: Japanese elders have their savings dwindled down, the government owes 200% GDP debt to its people, and the Japanese economy/innovation stalled because the 0% rate for 20 years policy drove all investments overseas.
There are many people that think US will have the same fate as Japan, but they're also incorrect. Japan had the massive savings rate and a booming global economy to prop itself up. US will have no such luxury. And there are many other people in this thread who thinks debt is a good thing. Well, when the US government, having to pay out 65T in medicare and social security in the next 20 years, decides not to one day, you'll see why that's bad.
The problem is that the government can just confiscate everything I own to pay off their debts with my belongings, so saving or investing does not seem to provide a way out.
By the time it might happen, I'll probably be too old to build something new. Otherwise I would say investing in skills would be a good idea (after the breakdown, capable people will still be in demand). Social networks might be good, too.
Gold? But I don't really like it, as in theory it is useless. And the government will try to seize it, too. The logistics of hiding gold somewhere make it impractical.
We now have probably the strongest balance sheet in Europe.
Of course a weakened krona fueled the export sector in the late 90s, a luxury the euro countries don't have but still, recovery can be surprisingly fast if you avoid the fate of Japan.
One thing to note is that the real estate market has not crashed in Sweden (yet) as in most other countries. Prices are high so this can still happen.
It's reasonably safe to assume that the government would not confiscate ALL your belongings at once to pay off the debt. The more likely scenario is for highly indebted governments to pay off their debts through inflation and a devalued currency.
One little image I did like was government debt as a ponzi scheme based on population growth. If population starts to decline, we'll need some fundamental changes to the economic system.
It's actually worse than that, since it's not the population as a whole, but, rather, the productive, working-age population.
The US (and perhaps the "West" as a whole) is already on the precipice, if not already tipping over, with Baby Boomers hitting retirement age. Even when the more patent Ponzi scheme of Social Security collapses, it won't solve the underlying economic problem, that so few will have to support so many.
Now, let's consider the average American Joe in this new world. Things are looking pretty grim for him -- corporations are inevitably looking forward to even more automation (as opposed to manual labor), because it's in their best interest, so as far as I see, there just aren't going to be very many jobs for the larger majority of the people in the times ahead.
What then?
By application of the original position, a radical rethinking of the fundamentals of governing bodies and economic systems is called for. Unlike centuries ago, when all mechanical work had to have been purely supplied by the raw muscles of humans, we now have technology. We can do so, so much more than we could have imagined with only a limited amount of man's mechanical power. We are actually in a very technical sense within our capability to feed every hungry mouth in the world today. And by any reasonable ethical framework, this free capability absolutely bounds to service this obligation.
Thoughts? And please go easy on me here, these are just the late-night musings of a 21st century youngin. ;)
> Thoughts? And please go easy on me here, these are just the late-night musings of a 21st century youngin. ;)
A couple thoughts. The first is that your top idea - "automation is coming, people are screwed" has been popular since the Industrial Revolution. Mary Shelley's Frankenstein was about automation. The term "Luddite" to refer to a technologically-unsavvy person came from this group:
http://en.wikipedia.org/wiki/Luddite
They actually attacked, broke, and destroyed automatic machinery. They're worth reading about.
The reality is, automating things let humans get on to more and more interesting things. Being afraid of automation is like being afraid of Ruby and Python because now what will coders in C do? In reality, automating/streamling/improving one area of business opens opportunities for new things to do. Not too long ago, society was comprised of between 60% and 80% farmers - without machinery and automation, we'd be ploughing fields right now instead of discussing on Hacker News.
As long as any human wants or needs are unfilfilled, there's a capacity for almost unlimited amounts of work. And we're nowhere close to automating/obsoleting things - today's manufacturing and shipping is going to look pretty primitative in 100-150 years. I won't hazard a guess of when it'll become available, but this is one of the most exciting new areas that'll come to bear in not-too-long:
There are numerous solutions to that problem, of course, and depend a lot on the society and culture involved. Preventing the automation from happening in the first place is probably not a good strategy though. Most countries have policies in place to redistribute wealth in various ways so as to provide some aid to people in the above situation. Of course, those policies have their own problems.
"It's complicated..."
Particularly interesting to me is the variation in debt mix amongst countries (click on the headers at the top of the image) and the changes over time (click on the countries on the map).
It also made me wonder. Looking at the UK, the largest proportion of debt was 'financial', which I assume is debt owned by businesses operating in the financial sector.
If so, is this even a bad thing? For example, does a hedge fund (which borrows large amounts of money to amplify it's wins and losses) naturally have a large "base" debt? Does a large financial sector just mean large financial debt as a matter of course?
UK household debt is also high. I'd expect a significant part of this to be mortgages. The combination of the culture of home-ownership (as opposed to renting) and high property prices (small island, lots of people) leads most people into a long-term mortgage quite early (and has for a long time).
Does that mean the UK's position isn't perhaps as bad as the "overall" graph paints it?
Germany and Switzerland have similar debt levels to the U.S., but the former two are going to do fine; I wish I could be so confident of the latter.
(I'm not an American and I won't say that all that the US does is great and fine but come on, if you're going to make outrageous statements you'll have to at least back them up a little, especially on a site where (I hope) people pride themselves on their rationality).
Sure the US has arable land. It has oil. The problem is, it doesn't have enough oil. (You probably weren't around in the 1970's, but there was a big crisis as America switched to depending foreign oil and OPEC took advantage.) It's been a net importer ever since. Two coasts? Really? Greece has more. It's not going to help them. The most advanced technology? That's China.
In fact, China and oil are the big elephants in the room. I can happily write more about why, if you're interested.
a government that actually supports rather than just pays lip service to capitalism, the only system proven to lead to economic prosperity
Sweden is doing much better than America by every account and it's Socialist.
- How can banking 'soon come at a premium'? Like I said, the only appealing quality of Swiss banking is its secrecy, and that is going away fast. How are Swiss banks going to be of any use to anyone that is not Swiss without their bank secret? It's a closed country, hard to reach, with no natural or other resources.
- Yes it's stable, but how is it any more stable than any other Western country? Besides like I already said it's very closed (the stability and closedness are intertwined, of course) - its internal stability has little value to anyone but the Swiss themselves.
- No the US doesn't have enough oil for its own use - my point is that at least it has some. I was contrasting it with Switzerland which has nothing (no offense to Swiss readers, I love hiking in your mountains so thanks for that ;) )
- You coastline argument is a red herring. A country that is basically a bunch of islands with irregular coastlines will of course have more coasts (but Greece has only a bit more than the US). Amount of kilometers of coastline is just a proxy for how much exploitable sea area that represents, and how much access it provides to the rest of the world for trade purposes, and the US crushes Greece on both accounts.
- Advanced technology: to paraphrase Charles Babbage (badly), "I'm unable to comprehend the level of confusion that could lead to such statements". Despite the sensationalist reporting and the high growth rates of China (and the rest of Asia) over the last 2 decades, China is still effectively a third world country. Its R&D capacity is below Western level and production capacity is highly concentrated in low-tech mass manufacturing like steel, clothing and electronics assembly. If you are serious in claiming that the Chinese have overtaken the West in technological development you'll have to come with proof of such claims, considering that all measures that would reasonably be used for such statements (GDP, R&D budgets, production in high-tech sectors, origin and ownership of leaders in the field, ...) solidly point to the US as world leader (with the EU as a second).
- I'm not sure what you're comparing by. GDP and consumption power are lower in Sweden, unemployment roughly equal, debt (as a ratio to GDP) is only a little bit below the US, and to get out of the near-bankruptcy state that Sweden was in in the early 2000's they had to significantly raise taxes yet cut in benefits. Not sure where you're going with this but Scandinavia being so much better is not a closed case as you try to make it seem.
Sweden isn't as socialist as you think and Sweden is dominated by Swedes. Moreover, Sweden is small.
Note that the most successful "Sweden" isn't Sweden, it's Minnesota and other Scandanavian dominated US states.
To me, this has always been the most crucial question to any discussino of "debt," but I don't believe the article actually answered it[1].
Perhaps more to the point, I don't believe I've encountered a concise explanation as to how debt, particularly sovereign debt, affects the real[2] worldwide economy.
Would a country go to war over a sovereign default?
[1] The section heading is "Why It Matters," so it's not really hiding that it's begging the question.
[2] i.e. human behavior as it applies to production and trade
It does seem that approach has some structural benefits, in that it doesn't produce long-term webs of debt that will never actually be resolved, but with everyone carrying on as if they will. Forcing a debt reset every 7 years or 20 years or whatever keeps things somewhat honest, making sure people are really talking about assets they have, as opposed to assets they supposedly are promised but will in reality never get.
Payday loans have a relatively low level of debt repayment (necessitating high interest rates) and also a very low debt lifetime (days to months). In contrast, many AAA corporate and govt bonds have long lifetimes and high repayment rates (until recently, mortgages did as well). There are also low repayment probability, long term debts (subprime mortgages) and high probability, short term debt (commercial paper).
I don't think debt lifetime is that important a factor. Long term debt makes sense to finance long term investments.
Wow, that can happen? Wouldn't that mean that no one would have any money but the people who have kept cash and rather than a 1930s style depression, more of outright anarchy!