Monday, September 9, 2013

The Dictionary of Debt

D is for Debt

In an effort to understand debt, beyond the neo-classical consensus, we should expand our vocabulary a little.

Posted by pete green @ 08:02 AM (2587 views)
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30 thoughts on “The Dictionary of Debt

  • mark wadsworth says:

    Excellent. He covers a lot of ground there.

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  • I already understand debt but I don’t think that little list will help anyone who doesn’t. Only the first 8 of 26 D’s are about debt and they are all brief potted definitions.

    I think it would take several text books full of definitions and system for putting them all into context plus an ability to read accounts

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  • flashy – his central argument in those definitions is that debt is a serious drag on the economy. Agree/disagree?

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  • flashy – his central argument in those definitions is that debt is a serious drag on the economy. Agree/disagree?

    Neither. Too little debt is a drag on the economy and too much debt is a drag on the economy

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  • mark wadsworth says:

    Wrong, it all depends on the kind of debt.

    Savers lending to productive business = very good.

    Debt based on land speculation = very bad

    Local council borrows money to build social housing, making a profit for itself, slashing its Housing Benefit bill and giving a safe return to lenders/investors = very good

    National government p***es money up the wall and increases national debt = very bad

    Poor, stupid and/or desparate people getting in hock to loan sharks = of very doubtful benefit indeed

    People borrow money to see them through further or higher education to enable them to earn and produce more in future = fairly good

    Etcera.

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  • mw: Who’s wrong? Even with your list (which I don’t disagree with) too much is bad, and too little is bad

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  • mark wadsworth says:

    F, that’s a cop-out. “Too much” is by definition always bad. “Too much” exercise will kill you, drinking “too much” water will kill you.

    I was pointing out that the total volume of debt is nigh irrelevant. You can’t say “£1,000 billion debt is about right, more than that is bad, less is also bad”.

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  • mw, I was answering the specific question “debt is a serious drag on the economy. Agree/disagree?” My answer was appropriate to that simple question and I couldn’t have said anything else without answering a question that had not bee asked.

    If I had been asked about specific types of debt, I would have answered specifically to that question.

    Ironically (in light of my too/much too little answer) you are wrong when you say “savers lending to productive business = very good”.

    If people save TOO MUCH and then lend TOO MUCH to productive businesses it is bad for the reasons I’m sure you already know.

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  • mark wadsworth says:

    F, you keep saying “too much”, which is a tad boring.

    Savers lending to productive business is always good. Once productive businesses have borrowed all they need, then clearly that is the upper limit, anything above and beyond that is lending to unproductive businesses. You can’t put a quart into a pint glass. Once the glass is full, there is no point pouring any more because there is nowhere for it to go except on the floor.

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  • On a more philosophical basis you MIGHT also be wrong when you say “People borrow money to see them through further or higher education to enable them to earn and produce more in future = fairly good”.

    I have often wondered about this but would it be a good thing if everyone was educated to a very high degree? Do we need some less educated ‘worker bees’? I’m not sure*

    * I’m aware that you only said ‘people’ and of course people could mean all people or just some people

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  • mark wadsworth says:

    F, don’t be such a Homey.

    My caveat was “to enable them to earn and produce more” and as per usual you take half of what I said and misquote it back at me.

    Newsflash: I know exactly what I said and I meant it.

    Clearly most people do not and would not benefit from most forms of education. If ugly and unmusical people go to stage school, that is a waste of time and money.

    Sending me on a car mechanics course would be a waste of time and money. That would not enable me to earn or produce more.

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  • @10 that was my point exactly. Too much lending leads to ‘productive businesses’ leads to overproduction with all its attendant problems. You can’t therefore say something as simplistic as “Savers lending to productive business is always good” In every boom we see that lenders/investors do not know the magic cut-off point and they keep on lending/investing until everything goes pop. If the magic cut-off point was advertised on public service broadcasts (or some such) then you could say what you did … but no one knows what it is until things go pop

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  • The problem here is that MH has taken his own arguments out of context and reduced them to what flashman calls ‘potted brief definitions’. The background to these definitions (I think) is his view that industrial capital is becoming finance capital and that this leads to debt deflation since more revenue is earmarked to pay bankers and less is available to spend on goods and services (keywords: financialisation, rent extraction, debt service, generation of interest, financial fees and capital gains that accrue mainly to insiders).

    He sees corporate cash flow used for debt service rather than for new tangible investment, especially when companies are bought by by borrowed cash in leveraged buyouts or corporate / management takeovers and the purchasers / managers use corporate earnings for stock buy-backs to bid up stock prices and increase the value of their stock options – again a buildup of financial capital rather than industrial capital.

    As for student loan debt (now well over $1 trillion in the US, his main point of reference), he sees that as depriving new graduates of the ability to buy new homes, start families and spend, and this as down partly to cutbacks in government support for universities but largely to the ‘financialising’ of education and the morphing of universities into profit centres that squeeze out an economic surplus to invest in real estate and financial holdings, to pay high salaries to upper management (but not to professors) and to create a thriving high-profit, zero-risk, government-guaranteed loan business for banks.

    So his answer is that we are in a ‘financialised’ economy, which is all about creating debt to for no other purpose than to extract rent or cream off the economic surplus while deflating the economy (since this rent is unavailable for spending, tangible capital investment and production).

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  • Flash – if too little debt is a drag on the economy and too much debt is a drag on the economy, where would you say we are currently in that range?

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  • timmyt: a little bit too much

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  • icarus: I agree, we are broadly speaking in a ‘financialised economy’. However this chap is really talking about the US and by proxy the UK etc and the trouble with this sort of language is that is always so absolute (we are not absolutely in a financialised economy).

    The main flaw as I see it with this sort of language is it’s failure to recognise the current nature of world trade and the international flows of capital. There is plenty of real production in this world ( some say too much) but in our newly globalised world the production is done wherever capital gets the best return. Sure the US/UK are relatively financialised but that’s how the world works now. Some countries are financialised and some are ‘productionised’. Although as I said earlier none of these conditions are as absolute as this kind of language suggests. It is not realistic to expect ‘industrial capital’ to flow to locations where it will not get an optimum return. In that regard this language is too isolationist but having said that it does have some value. The US/UK are a little bit too financialised and some adjustments need to be made. I think the need for these adjustments is widely recognized which is why they US/UK talk so much about rebalancing their economies. Shale has helped the US in this regard and their manufacturing sector is resurgent. We are behind the US in this regard which is one of the reasons we are shale obsessed. Unfortunately shale will not help our manufacturing sector much because unlike the US we will be better able to export the stuff so it will not drive down local energy costs and therefore production costs. If we try to ‘heavy-handedly’ legislate a change in the UK, then capital would go on strike. In a globalised world capital will go where it wants to go. However I do not want to talk in absolute terms. We are a bit too ‘financialised’ and some adjustments need to be made.

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  • i remember the 90`s says:

    The only debt that bothers me is the debt the country owns ,how the heck is that going to play out?

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  • Probably like it’s always played out. It peaks and then goes down again. We’ve paid down far bigger debt loads in the past. For example in the 50’s we had a far larger debt. We paid it down while simultaneously creating the NHS and the welfare state. The 50’s debt load was far bigger than our current one but it was not our biggest.

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  • flashman @19 – But the concern is that massive spikes in sovereign debt in the past have been caused by wars. People worry that now the debt is ‘systemic’ rather than ‘situational’. And of course the ’50s debt numbers didn’t include the massive unfunded liabilities the state now has.

    i remember – why is sovereign debt more worrying than household, corporate and financial sector debt?

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  • Icarus, we’ve just fought two wars (still in one of them) and are emerging from a global financial crisis. That sounds pretty ‘situational’ to me.

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  • We also had Gordon which I hope was only ‘situational’

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  • i remember the 90`s says:

    [email protected] it isn`t just that personnel debt can just be written off ,as for financial companies go bust all the time but a country going bust scares me or am I just naïve.

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  • icarus, I can’t speak for i remember but I imagine its because he’s seen the evidence that household debt has deleveraged and might also have seen that corporate debt is not a particular problem in the UK. Here’s a recent quote from “Actuarial Post” on the topic of UK corporate bonds/debt.

    “The fact that most companies are in good shape with low amounts of leverage has helped”

    I regularly read things like Actuarial Post (don’t want to – have to) because it is full of hard dry facts and unbiased editorial. It might not be as interesting as the sensationalised, politically motivated, advertisement driven stuff we see in blogs and the mainstream press but that’s what makes it so useful. There are lots of other sources like it but unfortunately you have to pay for most of them. I think people would be far clearer on the issues we discuss, if this sort of information was always free. It could be effectively free if financial journalists read the stuff and passed on the information but they are more concerned with revenue than truth. The truth is often a bit dull

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  • ‘i remember’, my post crossed with yours

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  • flash – I’m talking about Wars, not wars. Hard, dry facts : in 1943-5 UK defence spending (about £4.9 bn p.a.) was nearly half GDP (£10 bn). Today it’s about £44bn, less than 3% of GDP of over £1.5 trn. And the US has shouldered most of the cost of the wars.

    i remember – but the other three kinds of debt are together over three times govt debt (admittedly counting the last without those unfunded liabilities).

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  • Icarus, don’t forget that I said financial crisis as well as wars. A quick glance at a chart will show a sharp ramp up in debt as a direct consequence of the financial crisis. The wars didn’t help but the financial crisis was the main contributor (to a debt that is still much smaller than it has been many times). The financial crisis was ‘situational’ unless of course we think that it’ll happen frequently. Most people think that major financial crises only happen every few decades.

    Every time I write the plural of crisis, it looks wrong (crises).

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  • flash – you’ve already made the point that the debt has been larger than it is now (e.g. in the ’50s) and I think I’ve made my point that that was due to war expenditure.

    The NAO a couple of years ago said the cost in cash terms of the financial crisis was just £124bn (over the period since the crisis started) in loan or share purchases which required actual cash injections, although the govt has been on the hook for more (£332bn) in guarantees and indemnities/liabilities, with potential liabilities totalling over a trillion (but little payout on any of those). There has been a little payback from banks in fees and interest (though that interest is probably lower than the interest paid by the govt to get the money in the first place). Then you have to look at current prices of the govt’s bank shares. But all in all the cost doesn’t compare with the cost of WWII (even if you count lost production due to the crisis and the extra social security payments).

    As for the question of whether govt debt is scarier than private debt, the crisis / crises has /have shown that private debt can quickly morph into public debt.

    As for financial crises happening every few decades there are plenty of savvy people around who think that with ‘financialisation’ and still heavy leverage another crisis isn’t far off.

    From “Financial Crisis Anniversary: For Corporations and Investors, Debt Makes a Comeback”, Wall Street Journal:

    Five years after excessive debt propelled a housing-market collapse into a financial crisis and recession, similar bets are being placed across the U.S…..Leverage is getting back to where it was precrisis,” said Christina Padgett, head of leveraged finance research at Moody’s Investors Service….

    Total corporate-bond debt has grown to nearly $6 trillion, up 59% since 2007, the year before the financial crisis……Leverage by companies rated investment grade has risen 20% since 2010 … about 6% higher than in 2008, according to J.P. Morgan Chase JPM -0.48% & Co. ….

    Small investors are increasingly partners in the corporate-borrowing surge. In 2008, mutual funds held, on average, 17% of the bonds and 3% of the loans made to junk-grade companies, according to Bank of America. Today, they own about 26% of the bonds and 19% of the loans….

    Assets in mutual funds and exchange-traded funds that invest in junk bonds have grown to $285 billion in July from $92 billion at the end of 2008, according to Morningstar.”

    And margin debt on the NYSE is at an all-time high. If you think this doesn’t apply to the UK remember the cry “It’s not our fault, it’s a global crisis that started in America”.

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  • “flash – you’ve already made the point that the debt has been larger than it is now (e.g. in the ’50s) and I think I’ve made my point that that was due to war expenditure”

    Yes but you then went on to infer that I had only cited war debt as the cause of our current debt. I was therefore obliged to point out that I also cited the financial crisis. This was all related to your suggestion that our current debt might be structural rather than situational. When we worry about our debt it is important to stress that it is smaller than it has been many times in history. Context is all important. Sure we didn’t have a giant war but that’s a good thing and it’s why our debt is nowhere near as large as it was in the 50s. Instead of a war we had a financial crisis as our (smaller) situational crisis. I’ll try not to repeat myself unless absolutely forced 🙂

    You now appear to be inferring that the financial crisis was not that expensive and that it is not responsible for the large increases in debt that exactly coincided with the financial crisis? I don’t think you’d have many (any?) takers for that one. I’m sure you already know that the costs were far from limited to the £124 billion you quote. As you probably know there were many other extra costs including tax revenue losses.

    Regarding your comments on increasing financial leverage. Do you know why? It’s because the main players are gearing up for an almighty boom. Two billion extra people recently joined the world economy. The financial crisis stopped their present being properly felt. Now that the financial crisis is receding, the main players what to be sure they get a piece of a pie, that they believe will dwarf any previous pies. The leverage you think you see is actually a reflection of predicted future asset prices that are much higher than they are now.

    Now do you see why I’m concerned about a medium term energy crisis and a commodity price spike? We haven’t got enough stuff to handle the coming boom. It’ll severely hamper the boom in the medium term but on the plus side it will cause almighty investment in energy and materials technology.

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  • flash – I’ll make one or two points then call it quits. Large deficits, or large debt/GDP ratios in the past have been the result of wars – look at WWI and WII and their aftermaths (stock of national debt around 200% of GDP). To compare like with like we may have to strip out such massive one-off expenditures, depending on the point we’re making – it may be argued that big expenditures unconnected with world wars are a sign of expenditure getting out of hand, on the other hand you could argue that if we got out of trouble with the post-war debts we can get out of trouble with current debts. Either way it’s worth pointing out the overwhelming cause of that previous high indebtedness.

    To some extent we’ve crossed wires. When you talked of the cost of financial crisis, I interpreted that literally, but you meant the crisis plus the ensuing recession, so yes, the latter included lost tax revenue and rising. soc sec expenditures which caused a substantial rise in debt and deficits. Gordon also kept to 2007 expenditure plans despite the loss of revenue – a conscious decision to combat the recession and rational enough given (1) that he could borrow under historically favourable circumstances and (2) govt expenditure wasn’t crowding out the private sector. As to whether the current deficits are structural (your word) or systemic (mine) I said merely that ‘people worry that they may be systemic’. But there is a significant structural deficit (one that exists irrespective of cyclical variations in revenues and expenditures) and huge unfunded liabilities, especially regarding pensions.

    I’m not sure whether you think high leverage is a good or a bad thing.You quote, apparently approvingly, “The fact that most companies are in good shape with low amounts of leverage has helped” but then you responded to my comments on high leverage in the US that “It’s because the main players are gearing up for an almighty boom”. Some would say it makes things precarious – another almighty financial bust perhaps.

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  • and the Napoleonic wars. Massive debt after that. It’s the financial companies that are gearing up so heavily. Normal corporations, not so much. ‘Another almighty financial bust’? Of course but only after a Big boom. Nothing changes.

    Thanks for the debate

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