Hacker News Reader

Comment by patio11 | Hacker News Reader

It seems to me that debt is virtually a necessity created by prosperity: otherwise, the folks with all the capital end up with very lumpy mattresses. Take the Japanese government debt (please!): the reason they're able to sustain such a staggering amount of it is that the debt is owned mostly by older Japanese folks who spent a few decades with savings rates in the 20% plus region.

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.)

View on HN

It sounds great when you keep debt and lending in zero-sum. Problem is, the numbers don't add up anymore, and they haven't been for quite some time.

What? Of course they do. For every dollar borrowed, a dollar is lent. U.S. debt is financed through the sale of Treasury bonds, for example. And for each bond sold there is a real investor on the other end who paid actual money for it.

The problem with debt is that unrepayed debt represents economic destruction. To take the most extreme example, when a startup raises money, fails to produce a product that anyone wants, and can't repay its investors, the economic effect of that company has been to destroy wealth. Not all the wealth was destroyed, of course. Some was simply passed along: employees and vendors got paid. But some was destroyed; the same money invested in a different company would have produced economic output in the form of goods and services.

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.

I'm not so sure about this—the "unpaid debt equals destroyed wealth" part. It's important to be concrete about what we're talking about here. A society's wealth can't be sensibly measured in money, because currency is just a neutral medium of exchange having no intrinsic value. Central banks control its supply in an instrumental way. This is monetary policy 101. I trust we agree.

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.

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.

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.

"debt is virtually a necessity created by prosperity: otherwise, the folks with all the capital end up with very lumpy mattresses. Take the Japanese government debt..."

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.

Reply on news.ycombinator.com