Debt is a distributional issue. It nets down to zero as for each debtor there must be a creditor.

That's the NCE view.  

Looking at it Dynamically, debt has Opportunity Cost(s) for the debtor since they have to make the interest payments.  This reduces the amount of money they could spend on other things.  Compound interest really socks it to the debtor as the stream-of-payments amounts to as much as 300% of the initial borrowing.  

It wouldn't be so bad if this was recycled and circulated in the micro-economy.  What happens is the lender takes the payments and loans it out again, creating compounding on compounding, creating a parasite/host predatory economic environmental relationship.  

If the predation is not restricted the economy wanders to the right side of this:

graph and Things Fall Apart.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

Debt is a distributional issue. It nets down to zero as for each debtor there must be a creditor.

So Debt Deflation can't happen?

George Monbiot Seminar | Steve Keen's Debtwatch

I tried to point out that since the rate of change of debt contributes to aggregate demand (for both newly produced goods & services, and existing assets), then the change in debt matters, but I made no headway at all with the argument.

Finance is based on investments producing streams of revenue sufficient to pay back the investment with interest. If a given investment doesn't work out, it has to be written down to a level that can work, either by negotiation or as the result of a bankruptcy proceeding. Making sure this process will work properly is called underwriting. That is what banks are supposed to do. It is what Jerome does do.

What happened is Greenspan asserted that banks were self regulating and proceeded to let them perform the regulation. This policy was reinforced by appointing anti-regulators to other regulatory bodies. With the repeal of Glass-Steagall higher risk/higher return opportunities were available and the Fed was there when things went wrong, with the Greenspan Put.

Investment banks, such as Goldman's, wanted more and more mortgages to package and sell on and didn't care about the quality. There was a rush to oblige this interest and the price of real estate in large markets soared beyond the conceivable ability of the economy to sustain over time. So we got, say, $10 trillion in mortgages packaged into MBSs that, at current real estate prices, are only worth, say, $5 trillion, and that is only if the banks do not try to sell the non-performing loans. If they did the property underlying the mortgages would be found to be worth substantially less. So, everyone is just holding the bad mortgages on their books and are being allowed to pretend they are still worth face value - extend and pretend.

Worse, the depression that has resulted is making even prime mortgages worth only half or less of face value, as mortgagees lose jobs and become unable to pay. The same dynamic has played out in other areas and other countries. Recently Cyprus has emerged as a new Euro-zone problem with a massive title fraud problem.

ALL of these problems have to be resolved and the unsustainable debt has to be written down in order for a new cycle to begin, regardless of what may change in that new cycle. But those who issued and those who hold the bad MBSs, etc. are politically powerful and refuse to allow THEIR assets to be appropriately written down. The lawbreakers are in control. As any healthy economy relies on rule of law, we have another reason why the current system must change before recovery is possible.

Properly and lawfully resolving these problems, including prosecuting lawbreakers, would both eliminate unpayable debt and restore the rule of law. Otherwise it will be worse than Groundhog day, as the whole situation will just keep repeating, but each iteration will get worse.  

"It is not necessary to have hope in order to persevere."

Debt is a distributional issue. It nets down to zero as for each debtor there must be a creditor.

Yes and no.

Debt also allows you to invest more than you save, or to save more than you invest (in real terms).

When you work for me, and I pay you in an IOU rather than in the products of your labour, then I have invested your labour, but you have not accumulated any real stuff - only a claim on me. If you exercise that claim, then I have to give you money whether or not you intend to invest it in real stuff.

Debt therefore means that you can have periods in which everybody wants to save more than they want to invest in real stuff, which is what creates mass unemployment. It also means that you can have periods where people want to invest more than they want to save, which is a precondition for the growth rates we have come to associate with industrial society.

- Jake

Friends come and go. Enemies accumulate.

Debt is a distributional issue because it arises when people don't have enough wealth or income to support their needs. In the immortal Adam Smith quote:

By necessaries I understand, not only the commodities which are indispensibly necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without. A linen shirt, for example, is, strictly speaking, not a necessary of life. The Greeks and Romans lived, I suppose, very comfortably, though they had no linen. But in the present times, through the greater part of Europe, a creditable day-labourer would be ashamed to appear in public without a linen shirt, the want of which would be supposed to denote that disgraceful degree of poverty, which, it is presumed, nobody can well fall into without extreme bad conduct. Custom, in the same manner, has rendered leather shoes a necessary of life in England. The poorest creditable person, of either sex, would be ashamed to appear in public without them. In Scotland, custom has rendered them a necessary of life to the lowest order of men; but not to the same order of women, who may, without any discredit, walk about barefooted. In France, they are necessaries neither to men nor to women; the lowest rank of both sexes appearing there publicly, without any discredit, sometimes in wooden shoes, and sometimes barefooted. Under necessaries, therefore, I comprehend, not only those things which nature, but those things which the established rules of decency have rendered necessary to the lowest rank of people. All other things I call luxuries, without meaning, by this appellation, to throw the smallest degree of reproach upon the temperate use of them. Beer and ale, for example, in Great Britain, and wine, even in the wine countries, I call luxuries. A man of any rank may, without any reproach, abstain totally from tasting such liquors. Nature does not render them necessary for the support of life; and custom nowhere renders it indecent to live without them.

In another order of things, debt arises when people don't have the resources to carry out their projects and somebody else does. The ability to mobilize idle resources has been condensed into money (this is not entirely a bad thing). In the old days of metallic money the money stock was limited by what precious metals could be dug out of the ground. Today, with fiat money, we are fortunate that the money to mobilize resources for worthy purposes can be created ex nihilo. This highlights that money and credit are not just distributional issues, they're about power (the socially recognised power to mobilize resources) and therefore they're deeply political.

To err is of course human. But to mess things up spectacularly, we need an elite — Yanis Varoufakis