Jump to content
Objectivism Online Forum

Stay away from the credit/debt system

Rate this topic


moralist
 Share

Recommended Posts

The currency in the Weimar Republic was denominated by a currency the government controlled. It did not help. The currency of the Weimar Republic became radically debased by runaway printing presses. The collapse of the currency was one of the things that lead to the political coup that the Nazis inflicted on Germany.

Those who fail to learn the lessons of history are doomed to repeat them.

ruveyn1

Indeed printing money when a country is not in a liquidity trap can be disastrous. The US is in a liquidity trap however, so printing money is not inflationary.

Link to comment
Share on other sites

Moralist, have you never borrowed or lent anything, to anyone? Maybe a tool, or even so much as a favor that they later returned? If you have, you've sinned against your own morality.

Come on Nicky, if you really need to defend the insolvent debt based economy with its matching insolvent government that badly, at least you can do is find a decent reason.

Link to comment
Share on other sites

That is what your government subsidized education taught you: Actions have no consequences.

Actually she is right. Under current conditions where there is uncertainty - people are holding on to their cash, banks are afraid to lend, and when people are paying down their debts instead of incurring more - QE isn't causing the normal inflationary effects because the money isn't reaching the market. However, that doesn't mean that conditions can't change.

Edited by thenelli01
Link to comment
Share on other sites

Actually she is right. Under current conditions when there is uncertainty - people are holding on to their cash, banks are afraid to lend, and when people are paying down their debts instead of incurring more

Yes. Depressions and recessions are always the inevitable consequence of debt binging: The return to the reality of Capital from the fantasy of credit. This is good, not bad. But for the addicts hooked on the debt based economy, going cold turkey is a self inflicted living hell.

QE isn't currently inflationary because the money isn't reaching the market. However, that doesn't mean that conditions can't change.

Well, that was my point: The assumption that economic actions are somehow magically free of economic consequences. And the only way to avoid getting whipsawed by the wild swings of economic cycles is to operate free of the need for debt.

Even though it's the tortoise in the race... it always finishes.

Edited by moralist
Link to comment
Share on other sites

She is wrong to say that QE isn't "inflationary" though. Although the inflation isn't showing as heavily in the price level of goods and services, the inflation is showing in the bond and the stock market. Those are two bubbles that are just waiting to pop.

There you go. Spot on.

The price of gasoline is already at a fairly high level and has been creeping up again. People just get used to it being high.

When irresponsible people claim that economic actions have no consequences... what they are really saying is that they believe the same fallacy applies to them personally... that their own actions do not have consequences.

Link to comment
Share on other sites

That's what's important here; having a model that is empirically testable against reality.

Your faith in this system as well as the difficulty you have in seeing any validity on the other side stem from this mistaken belief that any macroeconomic systems are "empirically testable." By their nature, a controlled, let alone a blind or double blind study is completely impossible. At best you may draw conclusions from similar circumstances in similar countries and at worst you may draw your conclusions from computer simulations, but neither of those imparts anything close to the scientific certainty you pretend at or even attempt to answer for the massive opportunity cost lost in each signature on a US presidents desk.

You don't lack a 200 level economics class as much as a class on critical thinking or even a decent book. To make the claims about our current economic model(note the word model) as though it were facts that you are dealing out is to equate alchemy with chemistry and religion with philosophy. It's not in the same realm as science. At best it is an art that might one day lead to an actual scientific understanding of economics but it is certainly not that now. This is why Ayn Rand and Objectivists generally do not argue against your paradigm on empirical grounds but only on the moral terms.

Link to comment
Share on other sites

In my opinion it's just unwise to become enslaved to others through debt. I've come to truly enjoy the freedom of not owing one cent to anyone, and have found that operating on the principle of 100% solvency has insulated me from the bad effects of economic and political cycles.

...

Even though today people can get others to pay off their debts, I still regard debt as economic slavery simply because it is antithetical to the economic freedom of solvency.

...

Truth is I'm actually not the least bit dependent upon the credit/debt system, because the only use I have for a bank is to cash checks. The credit/debt system is economically toxic. It's like a vampire that sucks out your wealth and then spits out your economic corpse. So I protect myself by always being 100% solvent, and have no business loans, no vehicle loans, no mortgages, no equity lines of credit, no student loans, no personal loans, and a zero credit card balance.

Others have already pointed out that you completely miss the distinction between the legitimate purpose of lending and the folly of a debt-driven economy, so I'll just add that you're misusing the concept of solvency, which you seem to think very highly of. It doesn't mean what you think it means.

Solvency basically means having enough short-term assets to cover your short-term liabilities. It means that you could pay your immediate debts right now if you had to. It does not mean that you have no debt or liabilities at all, as you seem to be implying. In fact, businesses and principles that adhere to the principle of solvency borrow all the time for various purposes. There is no term for what you mean (that I know of) because there's no need for one; practically no one operates that way, nor should they.

Link to comment
Share on other sites

Actually she is right. Under current conditions where there is uncertainty - people are holding on to their cash, banks are afraid to lend, and when people are paying down their debts instead of incurring more - QE isn't causing the normal inflationary effects because the money isn't reaching the market. However, that doesn't mean that conditions can't change.

When conditions change, QE will be fully reversed by the Fed if necessary. They would do this by selling their government bonds and deleting the proceeds.

She is wrong to say that QE isn't "inflationary" though. Although the inflation isn't showing as heavily in the price level of goods and services, the inflation is showing in the bond and the stock market. Those are two bubbles that are just waiting to pop.

Fair enough. By definition bond prices have risen from QE because that’s what the Fed does with the proceeds, it buys bonds. It could also be causing rising stock prices, but neither stocks nor bonds should be included in any measure of consumer prices.

When irresponsible people claim that economic actions have no consequences... what they are really saying is that they believe the same fallacy applies to them personally... that their own actions do not have consequences.

You keep repeating this, who is claiming economic actions have no consequences?

Your faith in this system as well as the difficulty you have in seeing any validity on the other side stem from this mistaken belief that any macroeconomic systems are "empirically testable." By their nature, a controlled, let alone a blind or double blind study is completely impossible. At best you may draw conclusions from similar circumstances in similar countries and at worst you may draw your conclusions from computer simulations, but neither of those imparts anything close to the scientific certainty you pretend at or even attempt to answer for the massive opportunity cost lost in each signature on a US presidents desk.

You don't lack a 200 level economics class as much as a class on critical thinking or even a decent book. To make the claims about our current economic model(note the word model) as though it were facts that you are dealing out is to equate alchemy with chemistry and religion with philosophy. It's not in the same realm as science. At best it is an art that might one day lead to an actual scientific understanding of economics but it is certainly not that now. This is why Ayn Rand and Objectivists generally do not argue against your paradigm on empirical grounds but only on the moral terms.

Obviously I am aware that economics is not a science. But you are mistaken if you think it cannot make testable predictions. For example, nearly 100% of economists agree with the idea of “comparative advantage” (http://en.wikipedia....ative_advantage). If this theory is right then the gains of free trade for all countries both rich and poor are enormous. In reality, we do in fact see that countries who open their markets do better than protectionist countries. Economists can see this by conducting econometric analysis (basically statistical analysis) to tease out cause and effect. Now statistics have all the usual qualifications, but to say they can say nothing about reality is absurd. I leave you with a brilliant quote about comparative advantage.

From Wikipedia:

Stanislaw Ulam once challenged Samuelson to name one theory in all of the social sciences which is both true and nontrivial. Several years later, Samuelson responded with David Ricardo's theory of comparative advantage: That it is logically true need not be argued before a mathematician; that is not trivial is attested by the thousands of important and intelligent men who have never been able to grasp the doctrine for themselves or to believe it after it was explained to them.[25]
Edited by Kate87
Link to comment
Share on other sites

When conditions change, QE will be fully reversed by the Fed if necessary. They would do this by selling their government bonds and deleting the proceeds.

So my question for you is this: what happens to the cost of servicing the 16 trillion dollar U.S. debt at that point? Currently, interest rates and yields are very low, which makes it easier to service the debt. In addition to this, the act of lowering interest rates involves the Federal Reserve buying up lots of government bonds, increasing demand, therefore increasing the price and lowering the yields (the cost of servicing these bonds). So what happens when one of the largest purchasers of U.S. bonds decides that it must not only stop buying government bonds, but turn around and start selling them itself? What happens when one of the Treasury's largest customers must become its competitor, to stave off high inflation?

From where I'm standing, at that point, with the Fed's previous demand for bonds gone, and in fact a larger supply of bonds, bond prices fall, yields go way up, and the cost of servicing our debt suddenly doesn't seem so insignificant. We need a plan for long-term restructuring of entitlements now, such that we can cut the debt burden before we are forced to by the sheer expense of the debt.

Link to comment
Share on other sites

Others have already pointed out that you completely miss the distinction between the legitimate purpose of lending and the folly of a debt-driven economy,

Due to macro level human nature never changing, legitimate lending always leads to a debt driven economy. No nation on earth has yet to escape that inexorable causality. This is why my own personal approach is to avoid becoming collatoral damage from the economic sectors which have become corrupted by Creditism when they inevitably collapse... and instead to focus my activities in those sectors which are still largely Capitalistic.

so I'll just add that you're misusing the concept of solvency, which you seem to think very highly of. It doesn't mean what you think it means. Solvency basically means having enough short-term assets to cover your short-term liabilities.

By that standard, the US government is solvent.

It means that you could pay your immediate debts right now if you had to. It does not mean that you have no debt or liabilities at all, as you seem to be implying. In fact, businesses and principles that adhere to the principle of solvency borrow all the time for various purposes. There is no term for what you mean (that I know of) because there's no need for one; practically no one operates that way, nor should they.

You're right. I do hold a far more narrow personal definition of solvency than is generally accepted. And because I do, I have no problem with anyone else who freely chooses to assume the financial risks of involvement in the debt markets. In a similar manner I have absolutely no sympathy for what happens to them when green double zero comes up on the roulette wheel as it did in 2008, because I'm already a safe distance from the casino with no bets on the table. And only speaking for myself alone, I truly enjoy doing business on that principle as it has allowed me to consistently prosper regardless of political or economic cycles. I refuse to link the quality of my own life to the economic policies of whoever happens to be in public office.

Edited by moralist
Link to comment
Share on other sites

By that standard, the US government is solvent.

The U.S. government is a whole different animal. They have the technical ability to create unlimited amounts of new short-term assets (cash) to offset (theoretically) any level of liability. We need to be careful when thinking about what it even means for the U.S. government to be solvent or insolvent. For individuals and private businesses, however (and even state governments) this issue does not arise, and solvency as I've outlined it is an important and informative concept.

Link to comment
Share on other sites

Obviously I am aware that economics is not a science. But you are mistaken if you think it cannot make testable predictions. For example, nearly 100% of economists agree with the idea of “comparative advantage” (http://en.wikipedia....ative_advantage). If this theory is right then the gains of free trade for all countries both rich and poor are enormous. In reality, we do in fact see that countries who open their markets do better than protectionist countries. Economists can see this by conducting econometric analysis (basically statistical analysis) to tease out cause and effect. Now statistics have all the usual qualifications, but to say they can say nothing about reality is absurd. I leave you with a brilliant quote about comparative advantage.

I don't mean to just be contrarian, but the latest research and the newest trade models imply that the gains from international trade are actually quite small, at least for a country of sufficient size. Comparative advantage is still an incredibly solid principle accepted by 100% of economists, but that doesn't mean that international trade is always quantitatively significant for welfare. Also, this obviously doesn't mean that trade itself is of little value; without any trade I'd still be growing all my own food outside the hut that I built. Nonetheless, international trade seems to carry much less in terms of welfare gains than previously thought. With all those caveats, here's a paper. It's working paper version, it was published the following year in the AER: http://economics.mit.edu/files/6445

Edit: This is probably off-topic. It's just a technical point, but as an econ guy I find it all very interesting nonetheless.

Edited by Dante
Link to comment
Share on other sites

I think those pushing back so adamantly against Moralist are maybe losing the spirit of what he's saying in the way he chooses to frame it.

Debt-serfdom and debt-peonage are very real.

And on a very real level the amount of debt every American is born with threatens their freedom.

You can argue advanced economics that indicate this may not necessarily be so but the fact is that we live in a country where ignorant people vote.

And they win.

And if you get a slick politician who keeps increasing the debt, and then keeps having people vote for higher taxes on everyone but themselves to pay that debt.....?

At what point of taxation that is ostensibly to service the debt are we living in indentured servitude?

2012 numbers indicate the average person works 107 days just to pay taxes.

Link to comment
Share on other sites

The U.S. government is a whole different animal. They have the technical ability to create unlimited amounts of new short-term assets (cash) to offset (theoretically) any level of liability. We need to be careful when thinking about what it even means for the U.S. government to be solvent or insolvent.

I know... that comment about government solvency was facetious. ;)

For individuals and private businesses, however (and even state governments) this issue does not arise,and solvency as I've outlined it is an important and informative concept.

The completely liberal Democrat controlled state government of California has 200 billion dollars in unfunded public union employee pension liabilities, and there is no way this 10,000 ton chicken isn't going to one day come home to roost. So, in your opinion. do you think that the California state government is solvent or insolvent? Or an even more specific question: Would you still buy California Municipal Bonds knowing that, for years, productive Capitalist businessmen have been fleeing the state government's bureaucratic taxation regulation and litigation? To borrow a term of Ayn Rand...

...the strike is on.

I view economics as being like the story of Noah: Build an ark before the flood comes.

Link to comment
Share on other sites

Obviously I am aware that economics is not a science. But you are mistaken if you think it cannot make testable predictions. For example, nearly 100% of economists agree with the idea of “comparative advantage” (http://en.wikipedia....ative_advantage). If this theory is right then the gains of free trade for all countries both rich and poor are enormous. In reality, we do in fact see that countries who open their markets do better than protectionist countries. Economists can see this by conducting econometric analysis (basically statistical analysis) to tease out cause and effect. Now statistics have all the usual qualifications, but to say they can say nothing about reality is absurd. I leave you with a brilliant quote about comparative advantage.

I'm familiar with comparative advantage. You've mostly just provided an example of what I said...

At best you may draw conclusions from similar circumstances in similar countries
That's not empirically testable except in the loosest sense of the term. One can also draw conclusions about free economies being more successful than dictatorships, oranges being cheaper near the equator, or the Pax Americana that occurred after and because of the industrial destruction of world war 2 and the inflationary crutch created byt Bretton-woods agreement. True or not, this derived knowledge does not constitute indisputable scientific fact, otherwise all of the conclusions I have come to about the harms of regulatory burdens or the the massive opportunity costs of all of the government intervention which you support, would be obvious to you in a way which would not require argument. The same holds for what you are advocating. That you find the evidence convincing that a debt based currency is preferable is all well and good, but it is not supportable enough to lend you the pretense of certainty or disdain of those with views less popular in the company of professional economists.

For the record, I don't share moralists views on debt on a personal level, but having leveraged debt at different times, I can certainly empathize with the peace of not having a stress-ridden nut to crack. As far as the US being better off because of our debt, however, or having lower than expected inflation I certainly take a broader perspective to come to my unscientific opinion and include Bretton-woods, reserve currency status, foreign purchases, and alterations in inflation and monetary measurement.

The moral part though is that goods and services are produced by individuals and, regardless of any perceived overall benefit, the fact is that real wealth(goods and services) are taken out of the economy and transferred to the government through a combination of systemic fraud and force. No increased rate of gdp expansion can justify it.

Link to comment
Share on other sites

For the record, I don't share moralists views on debt on a personal level, but having leveraged debt at different times, I can certainly empathize with the peace of not having a stress-ridden nut to crack.

I agree. For me, the tranquility of economic freedom is a quality of life issue. Life is too short to live it under self inflicted stress.

Link to comment
Share on other sites

Economic freedom is the right to trade with others without interference. What you're describing is not economic freedom.

It is for me... and what I do does nothing to interfere with others' choice to service debt. What they do is their business, not mine.

Edited by moralist
Link to comment
Share on other sites

Economic freedom is the right to trade with others without interference. What you're describing is not economic freedom.

You are the owner of your time, energy and life. If you want to live 100 percent cash and carry that is your decision.

There are times that I borrow. But I never borrow unless I have a good reason to, and I know that I can repay the load.

A convenient loan can be a time saver and well worth the interest charged over a reasonable period of time.

Example: I need a good reliable car to go out on the road and work. If I can not afford it at the instant that work is available I put some money down, borrow the rest, get the car, go out and work and repay the loan from the wages I new can get because I borrowed to purchase the car. If I forwent the loan, I would miss out on a good work opportunity, and that would be a loss or cost to me.

ruveyn1

Link to comment
Share on other sites

So my question for you is this: what happens to the cost of servicing the 16 trillion dollar U.S. debt at that point? Currently, interest rates and yields are very low, which makes it easier to service the debt. In addition to this, the act of lowering interest rates involves the Federal Reserve buying up lots of government bonds, increasing demand, therefore increasing the price and lowering the yields (the cost of servicing these bonds). So what happens when one of the largest purchasers of U.S. bonds decides that it must not only stop buying government bonds, but turn around and start selling them itself? What happens when one of the Treasury's largest customers must become its competitor, to stave off high inflation?

From where I'm standing, at that point, with the Fed's previous demand for bonds gone, and in fact a larger supply of bonds, bond prices fall, yields go way up, and the cost of servicing our debt suddenly doesn't seem so insignificant. We need a plan for long-term restructuring of entitlements now, such that we can cut the debt burden before we are forced to by the sheer expense of the debt.

If interest rates start to rise, that will be as a policy response to higher inflation. Higher inflation will erode the value of the debt. This is most likely to coincide with a recovery in economic growth rates which will also shrink debt levels as a % of GDP.

NB - Krugman has just posted about an example of a high debt country with it's own currency - France in the 1920s. - http://krugman.blogs.nytimes.com/2013/02/01/moveable-feast-macroeconomics/

Link to comment
Share on other sites

Join the conversation

You can post now and register later. If you have an account, sign in now to post with your account.

Guest
Reply to this topic...

×   Pasted as rich text.   Paste as plain text instead

  Only 75 emoji are allowed.

×   Your link has been automatically embedded.   Display as a link instead

×   Your previous content has been restored.   Clear editor

×   You cannot paste images directly. Upload or insert images from URL.

Loading...
 Share

  • Recently Browsing   0 members

    • No registered users viewing this page.

×
×
  • Create New...