In (Measured) Defense of Debt
There's been an awful lot of discussion about debt, and very little discussion about what debt and interest are, why they exist, and where this stuff comes from.
Money - gold, barter, fiat currency - is a means to obtain stuff and make people do things. You do something useful for people, you get money. You want someone to do something useful for you, you give them money. You've been doing useful things, and you haven't been asking too many favours in return, that's savings.
You've got this pile of money (potential productive activity) that's not doing anything. Someone else needs your help doing something productive. You lend them your money. Instead of going over to teach them a new skill or help them put a new machine in their shop, you give them money so that someone will teach them the skill or deliver the product. That's a loan. Once they've learned and got the shop running they'll be able to do stuff and have an easier time paying you back. Loans represents confidence in the person you're helping, and the economic system that enables people to help people.
But you're no chump - you do your friend a favour, but you expect they're going to return the favour. You're expecting to get paid back. Getting something now is always better than getting something in the future. The value of helping him now is greater than the value of him helping you "sometime in the future". So if you help him now, and he returns the favour sometime in the future, he still owes you a little. That's the fee for getting help when you need it, and the reward for waiting to call in your favours. That's interest.
Debt - a lot of debt, even - is not necessarily a problem. It's a good thing, in fact, to be able to call in favours to make that happen and use what you get to repay those favours. That's the function of debt in an economy.
The problem is when debt isn't used productively. If you call in some favours and go into debt to make a really indulgently expensive project that you set on fire at Burning Man, at the end of Labor Day weekend you don't have anything to pay them back with. It was fun, it was cool, it was artistically meaningful, but it wasn't productive. You're in no better position to pay them back than you were last Monday when the gates opened. And that's a problem because if you get a good idea, make a productive plan, and try to call in favours now, they'll say "Help you more? What about what you already owe us?" That's the "mountain of debt" that you don't want to get buried under. It's harmful to you, because you can't follow through with your plan, and it's harmful to your friends who won't benefit either.
Debt is not a problem: it's just people helping people. If we need to raise the debt ceiling to fund measures that would make the nation more productive that's exactly what we ought to do. But if we're raising the debt ceiling for the equivalent of building something fancy to set on fire, that's a problem. It's squandering our friends' favours, and potentially making it difficult to convince them to help us be productive in the future.
We need to take a look at our debt - who's helping us, and how much help they're providing. And we also need to take a look at what we're doing with that help. How much of it is laying the groundwork for a productive future, and how much of it is indulgent and expensive stuff that we're just setting on fire?
This is how I wish the debt conversation could be framed. I understand why interests align to prevent the discussion from being framed that way, but I wish it could.
Money - gold, barter, fiat currency - is a means to obtain stuff and make people do things. You do something useful for people, you get money. You want someone to do something useful for you, you give them money. You've been doing useful things, and you haven't been asking too many favours in return, that's savings.
You've got this pile of money (potential productive activity) that's not doing anything. Someone else needs your help doing something productive. You lend them your money. Instead of going over to teach them a new skill or help them put a new machine in their shop, you give them money so that someone will teach them the skill or deliver the product. That's a loan. Once they've learned and got the shop running they'll be able to do stuff and have an easier time paying you back. Loans represents confidence in the person you're helping, and the economic system that enables people to help people.
But you're no chump - you do your friend a favour, but you expect they're going to return the favour. You're expecting to get paid back. Getting something now is always better than getting something in the future. The value of helping him now is greater than the value of him helping you "sometime in the future". So if you help him now, and he returns the favour sometime in the future, he still owes you a little. That's the fee for getting help when you need it, and the reward for waiting to call in your favours. That's interest.
Debt - a lot of debt, even - is not necessarily a problem. It's a good thing, in fact, to be able to call in favours to make that happen and use what you get to repay those favours. That's the function of debt in an economy.
The problem is when debt isn't used productively. If you call in some favours and go into debt to make a really indulgently expensive project that you set on fire at Burning Man, at the end of Labor Day weekend you don't have anything to pay them back with. It was fun, it was cool, it was artistically meaningful, but it wasn't productive. You're in no better position to pay them back than you were last Monday when the gates opened. And that's a problem because if you get a good idea, make a productive plan, and try to call in favours now, they'll say "Help you more? What about what you already owe us?" That's the "mountain of debt" that you don't want to get buried under. It's harmful to you, because you can't follow through with your plan, and it's harmful to your friends who won't benefit either.
Debt is not a problem: it's just people helping people. If we need to raise the debt ceiling to fund measures that would make the nation more productive that's exactly what we ought to do. But if we're raising the debt ceiling for the equivalent of building something fancy to set on fire, that's a problem. It's squandering our friends' favours, and potentially making it difficult to convince them to help us be productive in the future.
We need to take a look at our debt - who's helping us, and how much help they're providing. And we also need to take a look at what we're doing with that help. How much of it is laying the groundwork for a productive future, and how much of it is indulgent and expensive stuff that we're just setting on fire?
This is how I wish the debt conversation could be framed. I understand why interests align to prevent the discussion from being framed that way, but I wish it could.