Does debt matter? Will debt ever matter?

[Angrywoodchucksblog]

In my 12 years now of studying Austrian economics, monetary policy and Libertarianism, reading Sowell, Mises, Hayek and listening to Molyneux, Schiff, Cernovich, Woods, Stapleton and CATO, to name a few...it all seems to come down to...does debt matter?

We all know we had a gold standard. We left it. We started running massive amounts of debt, as have most other first world nations. This rocket fuel of debt has powered unlimited global warfare and an unlimited expansion of the social service welfare state which in turn has enslaved the States to the Federal Government through "free money" pay-to-play leftist totalitarianism upending what was left of State sovereignty, and allows vote buying on a megalithic scale for whichever side of the uniparty is handing out "free" stuff thus stacking the deck in favor of centralized command-and-control Leftist/Socialist micro-management with surveillance saturation of the body politic. No end in sight, all fueled with debt.

We thought debt finally mattered in 2001, but it didn't. We thought it mattered in 2007, but it didn't. And when I say "it didn't" I mean that the bankers or whatever powers you want to attribute this to were able to cobble together a defensive strategy and prop our debt spending back up. It would seem that to repeat the same mistake three times suggests insanity, but they cannot all be insane, therefore it must be deliberate. If it is deliberate then they must know what they are doing is going to lead to a negative event as the same actions have done in the past, and if they know a negative event is inevitable then they must have a plan to deal with it (prop it up) again, or some other goal.

Slight digression...

In fact, if we were to choose between them being insane (or inept), or their actions being deliberate, which is preferable - an insane ruling class or a malevolent one? If they are insane, then the market should correct it eventually despite their best efforts as the market forces exceed their administrative forces. If they are malevolent, then everything since 2001 (and earlier) has been intentional, and so are the current bubbles, and for some reason the last two collapses were not large enough for their goal and so they have been intentionally priming the pump with leveraged collapse built upon leveraged collapse for their ultimate finale by creating ever escalating crashes until one of sufficient size permits them to cross the finish line of whatever race they are in. It must be one or the other, crazy (inept) or malevolent, no?

Return to discussion...

And whereas in history we could rely on the check and balance of someone somewhere not willing to play the game, even if out of greed, it seems that every power in the world that matters has agreed to collude in order to maintain this global cartel of control, with none willing to blink and grab the brass ring from the others which suggests that their is a ring more desirable than brass IF they all agree to work together. Otherwise, why work together at all? Why are they working together now? (Such unilateral collusion also suggests malevolent forces at work and not just insane/inept ones).

So now we have surpassed home prices from 2006, student loan debt is at record highs with record default rates, and a wildly inflated stock market, and from what I have heard, a bond market as well. Does it matter?

If the Powers were able to backstop the last two times the market attempted to correct for this massive imbalance, who is to say they cannot do it a third, fourth, or fifth time...or, now that they appear to be working in concert with the other major nations of the world, who is to say that this is not a new normal, where debt never matters. Where trillions or even quadrillions just don't make a lick of difference.

I know there are several obvious counter arguments such as, debt has to matter eventually based on history and the nature of debt, often followed by Margaret Thatchers quote. But we are not spending other people's money, we are simply making money out of nothing. And for all the years this has been going on, where is all the hyper inflation it was supposed to cause? Some will say it is in the housing market, the stock market, the bond market, the student loan market...great...and? So what? It just doesn't seem to matter. If homes become too expensive, then they just build more condensed housing instead and that is what people buy. If student loans get too high, then people just take on as much debt as they can afford, over a 50 year payment plan.

If the government lets students default on their student loan payments, the government will just cover that with more printed money. If they allow students to declare it as part of a bankruptcy, it will come with a bailout of any entity impacted by that, more printed money. There is no problem that I can see that can't be fixed by the Gov printing money to paper it over. So will all that debt ever matter when the fallout from too much debt seems to be effectively repaired by issuing more debt.

Lastly, people are extremely flexible and will just bend to the will of the inflation wherever it might surface. And when they finally reach their max, when not a penny more can be squeezed out of them, the debt will stay right there with 45 year mortgages and 50 year student loan plans while the American dream becomes a 900 s.f. town-home. People just adjust. Some might argue that it might take decades to reach that, but that is decades for everyone in power or at the table to reap the rewards.

And if one of these bubbles does burst, some new plan will be hatched (or old plan already written will be executed) from the recesses of some mansion library filled with cigar smoke and whiskey tumblers that the Powers decide these things in, or wherever these globalist decisions are made these days, and another prop, probably made of debt, will be propped up under the last prop, and so on.

I am not advocating any of this. I don't like any of it. I want free markets, capitalism, NAP and individualism. But when I talk to people and they ask me about the economy, and they ask about when they should buy a home, or if they should buy gold, or what to do about saving for their kids college - the final solution of my thought process looks remarkably like those algebra problems we endured. A blank piece of paper then covered in numbers and symbols as we worked our way down to find a solution generating an upside down pyramid of pencil scratches and smeared lead in the process of solving for X, but in this case, for me, for this problem:

X = Does Debt Matter?

[ofd]

Private debt matters a lot. Over time, after a major crash, investments eventually become worth more and more. This leads to speculation with money, until the cash flow generated with the investment can't cover the payments for debt and you have a collapse.

The difference between private debt and government debt is that the fractional reserve money create fiat money out of thin air. Money is only created when there is a new obligation, paying it back doesn't create additional money. Government debt however is like a scale. The government's debt is an asset for somebody else.

[Erwin]

15 hours ago, Angrywoodchucksblog said:

Does Debt Matter?

To who? or to what? and what do you mean by matter?

Clarification: I know you mentioned imprisoning bad lenders, but that's a consequence of bad lending, not a definition of mattering.

[meetjoeblack]

On ‎6‎/‎1‎/‎2017 at 3:41 AM, ofd said:

Private debt matters a lot. Over time, after a major crash, investments eventually become worth more and more. This leads to speculation with money, until the cash flow generated with the investment can't cover the payments for debt and you have a collapse.

The difference between private debt and government debt is that the fractional reserve money create fiat money out of thin air. Money is only created when there is a new obligation, paying it back doesn't create additional money. Government debt however is like a scale. The government's debt is an asset for somebody else.

+ 1

At the risk of sounding sexist, I thought TS was a woman. A lot of women think it doesn't matter so, large student loans in absurd career paths like liberal arts/social science/women studies etc. Things like even visa card or silly spending sprees. Little care or reason to because some beta provider will pay for it.

I've spent quite a bit of time of the education system and I am absolutely disgusted by the approach to men, to young men, and the perspective people have. I watched in my college years the grading system lowered for women. The opportunities provided were just freely pedaled to the women. Many of the times, women in the workplace would do drop classes in attempt to pull prospects. Seems like a smart idea. Well, wherever there was a discrepancy with male to female career paths (engineering for instance), the best opportunities were pushed to women freely. In paths that were heavily influenced by female choice, even what few males were in the program were pushed toward more women without a thought.

 

The bubble is breaking and I think more women need to be educated on the importance of math, personal financing, and economics etc. Debt is a scary thing and with freebie student loans for absurd career paths, you cannot declare bankruptcy so, young people are getting fucked over. There futures in ruins and they cannot escape it. They are shackled to the low paying jobs that await.  

[plato85]

They're not creating money out of nothing. They're stealing money.

In Atlas Shrugged, Ayn Rand divides the world into producers and looters. There are only so many people producing and actually doing the work. Fiat money is only worth something because there are people working for it and producing. Gradually over time the Welfare state gets bigger and bigger as a proportion of the economy, untill there are not enough people producing to make the money worth anything. Excellent book. Totally recommend it.

In Plato's Republic Book 8, Plato describes how Democracy fails. He says people vote for leaders who promise more than they can deliver. Rather than accumulate wealth the state starts to go into deficit. Once a democracy goes into debt it is doomed. The Debt opens up a division in wealth between the rich and the poor. Eventually either the underclass revolt, or a demagogue comes along and mesmerizes the people with impossible promises. Once in office he raises taxes which kills the economy completely, and then he slaughters any opposition groups, and therefore the greatest thinkers.

As for whether it's deliberate or insane, look at the election in Britain last night. The Conservatives promised an austerity budget, slashing public health and other services, they were punished at the polls by Labour who promised to end Austerity. Also a democracy is dependent on a liberal society - ie a society that can think for its self, that is self regulated apart from the government/police. Now they're importing an authoritarian population from the third world, the government must crack down on security and surveillance. It seems deliberate.

[jimmo100]

On 5/31/2017 at 10:12 PM, Angrywoodchucksblog said:

X = Does Debt Matter?

Good question.

You're probably familiar with the saying whatever you reward in your society, you get more of.

Increasing debt rewards the least productive. If you continue to pile up debt.... you'll get more of these people i.e. the politically-protected class... and they will necessarily become poorer because of a shrinking productive class.

They might become poorer slower than the rest of us. But it's a cinch... they will become poor. Look at the authoritarians in countries which have capitulated already to authoritarianism... their authoritarians are dirt poor. It may not happen overnight, but if authoritarians persist... it will happen.

And when(if) we're all poor and miserable - when authoritarianism has won the battle - the war for individual liberty and free markets will resume. Those who are around to resume it might not remember the details of happened the previous cycle.... but they will engage in the fight for liberty again... because they will know they are better-off free from authoritarians. It's just they(we) will have have lost the momentum... again... for the who knows how many-eth time!!

So. yes. It matters very much. Because going into debt amounts to an erosion of productive capacity which immediately affects living standards.... which makes it harder to oppose authoritarians and win for sufficient length of time to break the cycle.

If we are to break the cycle, then we have to learn to push through at our strongest moments... to not capitulate and throw it away once again. Each time we throw it away it seems we suffer some kind of mass amnesia which means we are forever treading water, in the bigger picture.

 

[meetjoeblack]

If I met a woman with incredible amount of visa or student loan debt especially in majors like Social Science/Liberal Arts/Women studies, I am running for dear cover. I am terrified of debt. It is a huge deal and with the increase in outsourcing, and the lack of good jobs as well as job security, yeah, it is a nightmare.

[M.2]

There are 4 sorts of debt to consider.

1. External debt. This matters only if the borrowing nation is at the mercy of the loaning country. In the case of regional powers like the USA, UK, Russia, no it does not matter.

2. Internal debt. This matters only if the working population ceases to produce. The reason why the USA and Japan could burry themselves under so much debt is that their virtual wealth is still more or less backed up by real value. Change is in the air however, for better or worse, I don't know.

3. Corporate debt. This matters only if the given economy is relatiely unfree of government intervention. As long the government stays out of the business world, this debt should be sorted out among parties.

4. Private debt. These are student debt, mortgages, credit card debt. In my opinion, this is the most dangerous kind of debt, as it erodes the very personality of the individual. It causes social insecurity, familial disunity, and psychological problems.

In all cases though, sooner or later, the bill always comes due.

https://en.wikipedia.org/wiki/List_of_countries_by_public_debt

[smarterthanone]

There is good debt and there is bad debt. Good debt provides a return greater than the cost of the debt. Bad debt does not.

If the government used debt from China at 4% interest to lend to businesses that made 10%+ returns then it would be good debt. We couldn't have enough of it!

But the government never provides more value than it takes so really it borrows money at 4% interest and uses it on things that provide 0-2% return like environmental laws, entitlements, etc all have 0% return for example. So bad debt.

[OzWizard]

This is my first post.  

This apparently 'simple' question [Does Debt Matter?] is far more complex than it looks and I can't answer coherently without establishing some factual and legal premises (which you are all free to challenge and discuss), viz.:

1. All money is a liability of its issuer;
2. Most western economies operate with ~3% cash (notes & coin) and ~97% "credit"; and  
3. [Legal definition] "Credit is provided if ... payment of a debt ... is deferred".

N.B. The legal definition given in Item 3 comes from current Australian credit legislation (paraphrased), and "credit" [in Item 2] is NOT the same as Credit [in Item 3].  

My reasoning goes like this:

Firstly, it follows from [3] that Credit cannot be provided unless a prior debt exists.  This is very simple logic: without a pre-existing debt, no payment obligation can exist; if no payment obligation exists, payment cannot be deferred (because it is not even required) so, Credit cannot be provided in that circumstance. 

Secondly, the great bulk of our money (~97%) which is called "credit" is not, in fact, Credit (as legally defined in [3]).  It is the sum total of all of the credit-balances in various customer accounts held by the banks which make up the banking industry.  

Thirdly, all of those account balances [which are customer assets] are liabilities of those banks. 

And therein are the clues which lead to my conditional answer: "If the 'debt' originated from a bank 'loan' transaction it does not matter because it is not actually a debt." 

Why?  Quite simply, because you cannot "lend" a liability.  

To establish a debt, a true loan must involve an asset transfer from lender to borrower.  Since no bank "loan" transfers a bank asset to the customer, it is not actually a loan and therefore incurs no debt.   

So-called "bank credit" is not even Credit and never belonged to the bank that fraudulently laid claim to it when it created it (as a credit-balance) in the customer's account.  As it is actually a credit-balance in the bank's liability account, the bank is the debtor, and the customer is the creditor, on that account.

What a bank pretends to "lend" to its "borrowing" customer is the credit-item which it creates in its liability account, as the matching 'double-entry' for the debit-item it creates in its asset account, representing the commercial value of the "loan" document signed by the customer, considered as a promissory note.  

That document is a negotiable instrument;  it's worth the money amount written in it (like any formal IOU). No asset of the bank is involved in this "loan" transaction; the only asset involved is that provided TO the bank BY the customer.  

The customer does have a moral obligation (i.e. to keep his solemn promise-to-pay) but that obligation does not arise from a debt relationship.  

Since there is no debt relationship, interest charges are NOT justified.

The bank is merely society's book-keeper, monitoring the keeping of the customer's promise-to-pay.   Since the bank RISKS NO ASSET, the bank suffers no LOSS if a payment is delayed or even if payments stop for six months.  If the bank is entitled to anything, it is entitled to 'account-keeping fees' for actual effort involved in recording customer payments made into the account, for as long as the account remains open, and that will be small and uniform for all accounts, irrespective of the size of the account balance.

[Jsbrads]

That was 0 to -2%, correct?

just wanted to make sure I was reading it right.