Why don't creditors soak up all the money?

[lpetrich]

That would be a byproduct of lending at interest. When a debtor pays off a debt, the creditor gets back not only the money lent in the debt, but also some interest. This means a net loss on the part of the debtor. If this continues long enough, the creditors would end up with all the money and the debtors with none.

Creditors include investors, and Thomas Piketty's Capital in the 21th Century has a famous result. For return on investment r and growth rate g, if r > g, then great economic inequality results for the reason that I have described. He notes that a common theme of many 19th cy. novels is an ambitious man marrying a woman from a wealthy family, as if that was the only feasible way to get rich -- his labors alone won't do it.

But what keeps this economic Goetterdaemmerung from happening? There are various things that can do so.

* The creditors going on a spending binge or a giving binge. However, they are usually careful not to sacrifice very much of their money in that fashion, so that is not usually very effective. At least not short of starting a latter-day Potlatch cult.

* The creditors become unable to collect what their debtors owe them. This can happen from the debtors running out of money, by the debtors declaring bankruptcy, the debtors refusing to pay, or by a government cancelling the debt (the Bible's Jubilee years, for instance).

* Governments printing money. This risks the opposite calamity: inflation.

* Abolishing money. That strikes me as economic crackpottery, though I have seen some people advocate it.

* Redistributive taxation, from creditors to debtors. That does work, but it makes the creditors resentful of having to support those that they consider losers and failures. This sometimes gets turned into redistribution in the opposite direction, by the upper classes getting the politicians to exempt them from taxation.

 

[JonA]

As long as the interest rates aren't outrageous and people are borrowing the money for mostly productive purposes, then there shouldn't really be a problem.

 

[EricK]

Everybody needs food. When a food producer sells his food he gets back not only the money he spent on producing the food but also some profit. Why don't food producers end up with all the money and the food buyers with none?

 

[dismal]

Um, if you borrow at 5% and invest it in something that returns 15% the creditors don't soak up all the money.

If you borrow at 5% and invest it in something that returns <0% the creditors don't even get their money back.

 

[Bronzeage]

Plainly said, creditors don't soak up all the money, because there's no money in that, at least in the long term.

Credit is the ultimate long term strategy. One gives money to someone, with the hope it will be returned with a little added. A creditor depends upon an expanding economy with increasing wealth. This is the classic goose that lays golden eggs. If the goose is killed, there are no more eggs.

 

[Horatio Parker]

You might check out Michael Hudson.

http://michael-hudson.com

He talks about the FIRE sector (finance, insurance, real estate). The FIRE sector is an asset owning sector, not a productive one. It basically works to divert income in the form of interest, insurance or rent from productive activity. This income is invested in assets, inflating their value and increasing fixed costs. More and more income going to debt servicing creates debt deflation.

His argument is that the classical economists sought to free productive activity from nonproductive overhead in the form of rent paid to landed aristocrats. That's been turned on its head.

 

[Alcoholic Actuary]

That would be a byproduct of lending at interest. When a debtor pays off a debt, the creditor gets back not only the money lent in the debt, but also some interest. This means a net loss on the part of the debtor. If this continues long enough, the creditors would end up with all the money and the debtors with none.

Creditors include investors, and Thomas Piketty's Capital in the 21th Century has a famous result. For return on investment r and growth rate g, if r > g, then great economic inequality results for the reason that I have described. He notes that a common theme of many 19th cy. novels is an ambitious man marrying a woman from a wealthy family, as if that was the only feasible way to get rich -- his labors alone won't do it.

But what keeps this economic Goetterdaemmerung from happening? There are various things that can do so.

* The creditors going on a spending binge or a giving binge. However, they are usually careful not to sacrifice very much of their money in that fashion, so that is not usually very effective. At least not short of starting a latter-day Potlatch cult.

* The creditors become unable to collect what their debtors owe them. This can happen from the debtors running out of money, by the debtors declaring bankruptcy, the debtors refusing to pay, or by a government cancelling the debt (the Bible's Jubilee years, for instance).
* Governments printing money. This risks the opposite calamity: inflation.

* Abolishing money. That strikes me as economic crackpottery, though I have seen some people advocate it.

* Redistributive taxation, from creditors to debtors. That does work, but it makes the creditors resentful of having to support those that they consider losers and failures. This sometimes gets turned into redistribution in the opposite direction, by the upper classes getting the politicians to exempt them from taxation.

I bolded the primary reason I think all the money doesn't end up with the lender. To command any kind of interest on debt there has to be a risk of default.

aa

 

[Will Wiley]

If growth stops, it all stops

 

[SimpleDon]

That would be a byproduct of lending at interest. When a debtor pays off a debt, the creditor gets back not only the money lent in the debt, but also some interest. This means a net loss on the part of the debtor. If this continues long enough, the creditors would end up with all the money and the debtors with none.

Creditors include investors, and Thomas Piketty's Capital in the 21th Century has a famous result. For return on investment r and growth rate g, if r > g, then great economic inequality results for the reason that I have described. He notes that a common theme of many 19th cy. novels is an ambitious man marrying a woman from a wealthy family, as if that was the only feasible way to get rich -- his labors alone won't do it.

But what keeps this economic Goetterdaemmerung from happening? There are various things that can do so.

* The creditors going on a spending binge or a giving binge. However, they are usually careful not to sacrifice very much of their money in that fashion, so that is not usually very effective. At least not short of starting a latter-day Potlatch cult.

* The creditors become unable to collect what their debtors owe them. This can happen from the debtors running out of money, by the debtors declaring bankruptcy, the debtors refusing to pay, or by a government cancelling the debt (the Bible's Jubilee years, for instance).

* Governments printing money. This risks the opposite calamity: inflation.

* Abolishing money. That strikes me as economic crackpottery, though I have seen some people advocate it.

* Redistributive taxation, from creditors to debtors. That does work, but it makes the creditors resentful of having to support those that they consider losers and failures. This sometimes gets turned into redistribution in the opposite direction, by the upper classes getting the politicians to exempt them from taxation.

This is the fatal flaw of capitalism, first realized by Marx. His solution for it was even more flawed as we found out, but that doesn't detract from the veracity of it.

Adam Smith also realized the problem, but had no solution for it. Obama quoted him in a speech recently, something like “they who feed, clothe, and lodge the whole body of the people, should have such a share of the produce of their own labor as to be themselves tolerably well fed, clothed, and lodged.” Admittedly, Smith also identified and endorsed trickle down.

It was Kalecki and Keynes who put it all together, the problem and the solution. Capitalism, even under a democratically elected government, tends to concentrate income and wealth in the hands of progressively fewer hands over time, until it is corrected by social unrest. The only long term, stable cure for it is intentional, continuous redistribution of income by the government and support for the bargaining power of labor, i.e., support for unions or industry sector wide wage setting.

Under democratically controlled capitalism money isn't free speech, it is political power. The only way to have a robust, sustainable democracy is to have the money distributed somewhat evenly through the society. Money is life, the only way to have a robust, sustainable economy is to have the money, the incomes and the wealth, distributed somewhat evenly throughout society.

These realizations of Kalecki and Keynes and the success of the practical application of them, generated the predictable reaction from the wealthy. This reaction is known by some, mostly opponents, as the neoliberal thought collective, an umbrella political philosophy to restore the favoritism of the government and the economy to the already wealthy.

This wealth friendly set of often conflicting political and economic philosophies include libertarianism, movement conservatism, neoclassical synthesis economics, Reaganomics, supply side economics, Friedman's monetarism, NGDP targeting, free market economics, market fundamentalism, the genesis of the Tea Party, etc., all promoted and supported by the wealthy with the single, hypocritical purpose of controlling the government and using its control of the economy to further enrich the wealthy at the expense of everyone else.

And has been proven daily in this discussion board, the wealthy have been very successful at selling these wealth friendly, and non-wealthy disadvantaging ideas to a broad range of people, who in adopting one or more of them are deluded into voting against their own interests. [/possibly too subtle]

 

[SimpleDon]

That would be a byproduct of lending at interest. When a debtor pays off a debt, the creditor gets back not only the money lent in the debt, but also some interest. This means a net loss on the part of the debtor. If this continues long enough, the creditors would end up with all the money and the debtors with none.

Creditors include investors, and Thomas Piketty's Capital in the 21th Century has a famous result. For return on investment r and growth rate g, if r > g, then great economic inequality results for the reason that I have described. He notes that a common theme of many 19th cy. novels is an ambitious man marrying a woman from a wealthy family, as if that was the only feasible way to get rich -- his labors alone won't do it.

But what keeps this economic Goetterdaemmerung from happening? There are various things that can do so.

* The creditors going on a spending binge or a giving binge. However, they are usually careful not to sacrifice very much of their money in that fashion, so that is not usually very effective. At least not short of starting a latter-day Potlatch cult.

* The creditors become unable to collect what their debtors owe them. This can happen from the debtors running out of money, by the debtors declaring bankruptcy, the debtors refusing to pay, or by a government cancelling the debt (the Bible's Jubilee years, for instance).
* Governments printing money. This risks the opposite calamity: inflation.

* Abolishing money. That strikes me as economic crackpottery, though I have seen some people advocate it.

* Redistributive taxation, from creditors to debtors. That does work, but it makes the creditors resentful of having to support those that they consider losers and failures. This sometimes gets turned into redistribution in the opposite direction, by the upper classes getting the politicians to exempt them from taxation.

I bolded the primary reason I think all the money doesn't end up with the lender. To command any kind of interest on debt there has to be a risk of default.

aa

Unfortunately, to rely on default to correct the problem of high private debt requires a delicate balance between the moral hazard of too easy bankruptcy and turning the collection of debt into a moral good. A balance that is too easily tipped in favor of one by too much political power by one camp or the other. Witness the current situation with student debt.

 

[lpetrich]

First, some other ways to avoid this economic Goetterdaemmerung:

* The creditors voluntarily deciding to forgive their debtors' debts.

* Would-be debtors refusing to go into debt.

... When a debtor pays off a debt, the creditor gets back not only the money lent in the debt, but also some interest. This means a net loss on the part of the debtor. If this continues long enough, the creditors would end up with all the money and the debtors with none. ...

This is the fatal flaw of capitalism, first realized by Marx. His solution for it was even more flawed as we found out, but that doesn't detract from the veracity of it.

I don't know where Karl Marx stated that problem with capitalism.

I also note that over the centuries, many people have grumbled about "usury": lending money at excessively high interest -- and sometimes at any interest at all.

Adam Smith also realized the problem, but had no solution for it. ...

It was Kalecki and Keynes who put it all together, the problem and the solution. Capitalism, even under a democratically elected government, tends to concentrate income and wealth in the hands of progressively fewer hands over time, until it is corrected by social unrest. The only long term, stable cure for it is intentional, continuous redistribution of income by the government and support for the bargaining power of labor, i.e., support for unions or industry sector wide wage setting.

Under democratically controlled capitalism money isn't free speech, it is political power. The only way to have a robust, sustainable democracy is to have the money distributed somewhat evenly through the society. Money is life, the only way to have a robust, sustainable economy is to have the money, the incomes and the wealth, distributed somewhat evenly throughout society. ...

That's what has worked in practice, but as you point out, the upper classes have revolted against it.

 

[SimpleDon]

Um, if you borrow at 5% and invest it in something that returns 15% the creditors don't soak up all the money.

If you borrow at 5% and invest it in something that returns <0% the creditors don't even get their money back.

If he borrows from a bank then there is no real problem with default. The bank is betting with house money. If the borrower defaults the bank suffers some loss of future profits but nothing else. The vast majority of the money that they loan is money created out of thin air by the loan. It isn't the banks' money, it isn't the depositors' money. It is magic money that the government has allowed the bank to create. See  fractional reserve banking and answer the question "where does the vast majority of the money come from?"

The problem is when the loan comes from investors who have considerably more money than can be productively invested, re. the so-called "shadow banking," and enough political power to avoid default. See the Greek situation for an example or the situation with mortgage backed securities that caused the Great Financial Crisis and Recession.

And the problem is compounded by the fact that the excessive amount of money in the hands of the shadow banking system has been provided by excessive profits that reduced wages. Reducing wages increases the amount of consumer debt.

 

[SimpleDon]

As long as the interest rates aren't outrageous and people are borrowing the money for mostly productive purposes, then there shouldn't really be a problem.

The problem is that "the people" aren't suppose to be borrowing money for productive purposes. They are suppose to be spending their wages mostly on consumption to provide the demand that is the sole rationale for investment in the industrial economy.

When consumers incomes aren't sufficient to provide this growth inducing demand the suppliers are now able to induce the consumers into increasing their' debt to provide this growth creating demand and consumption. But this is limited by the consumers' tolerance for debt. Invariably the consumers stop borrowing and a recession results or a small downturn occurs causing consumers to stop borrowing and to turn to paying off their accumulated debt, deepening and prolonging the recession.

 

[dismal]

Um, if you borrow at 5% and invest it in something that returns 15% the creditors don't soak up all the money.

If you borrow at 5% and invest it in something that returns <0% the creditors don't even get their money back.

If he borrows from a bank then there is no real problem with default.

In my experience the bank has a problem with it.

 

[fromderinside]

If he borrows from a bank then there is no real problem with default.

In my experience the bank has a problem with it.

Nope. Its all about the Jones'.

 

[SimpleDon]

You might check out Michael Hudson.

http://michael-hudson.com

He talks about the FIRE sector (finance, insurance, real estate). The FIRE sector is an asset owning sector, not a productive one. It basically works to divert income in the form of interest, insurance or rent from productive activity. This income is invested in assets, inflating their value and increasing fixed costs. More and more income going to debt servicing creates debt deflation.

His argument is that the classical economists sought to free productive activity from nonproductive overhead in the form of rent paid to landed aristocrats. That's been turned on its head.

He is correct, the classical economists, Smith, Ricardo, Malthus, Mill, etc. when they argued that the economy that works the best is the economy with the least government interference in the market, they were arguing against the economic system of mercantilism, not a mixed mode government and private partnership like we have today. Mercantilism is national power politics carried off by protectionism, trying to strengthen ones own economy by economically attacking another country's economy.

Most of the ... the Wealth of Nations are warnings against rentiers and their ability to capture the government to benefit themselves, part of mercantilism. Exactly what has happened in the US under the various neoliberal political economic theories. The FIRE sector claimed only 2% of the US corporate profits in 1970. In 2007 it was up to 40% of the corporate profits and growing until interrupted by the Great Recession.

 

[SimpleDon]

If he borrows from a bank then there is no real problem with default.

In my experience the bank has a problem with it.

The bank loses future profits but not the amount of the loan. And of course, the bank that holds the loan works hard to prevent default because they don't want to lose those potentional profits.

Please try to read my whole post, not just to the point that you can make one of your non-responses.

Please read the article on fractional reserve banking, if you need to, and tell me whose money it is that makes up the non-reserve portion of the loan and where it comes from.

 

[Bomb#20]

That would be a byproduct of lending at interest. When a debtor pays off a debt, the creditor gets back not only the money lent in the debt, but also some interest. This means a net loss on the part of the debtor. If this continues long enough, the creditors would end up with all the money and the debtors with none.

That strikes me as economic crackpottery

^^^^ This ^^^^

In the immortal words of Lieutenant Doolittle, are you willing to entertain a few concepts?

Let's imagine that you are an employee and I am your employer. I make you the following proposition: "Lpetrich, you're an excellent employee, so, to show my appreciation, I've decided to do you a favor, if you want it. Just for 2017, if you agree, I'm going to increase your wage by 2%. You were going to get a check for $1000 on Jan. 7, 2017. Now, you're going to get a check for $2020 on Jan. 7, 2018. That's your regular $1000 wage for the first week of 2018 plus your increased wage of $1020 for the first week of 2017. See? This is a net gain of $20 on the part of you, and a net loss of $20 on the part of me. This will continue for the remaining 51 weeks. By the end of 2018, you'll have received $105,040. If you turn me down you'll only have received $104,000 at that time. Do we have a bargain?"

For the thought-experiment, you may assume the 2017-2018 inflation rate will be zero. Would you accept that offer?

 

[SimpleDon]

First, some other ways to avoid this economic Goetterdaemmerung:

* The creditors voluntarily deciding to forgive their debtors' debts.

* Would-be debtors refusing to go into debt.

This is the fatal flaw of capitalism, first realized by Marx. His solution for it was even more flawed as we found out, but that doesn't detract from the veracity of it.

I don't know where Karl Marx stated that problem with capitalism.

I also note that over the centuries, many people have grumbled about "usury": lending money at excessively high interest -- and sometimes at any interest at all.

Adam Smith also realized the problem, but had no solution for it. ...

It was Kalecki and Keynes who put it all together, the problem and the solution. Capitalism, even under a democratically elected government, tends to concentrate income and wealth in the hands of progressively fewer hands over time, until it is corrected by social unrest. The only long term, stable cure for it is intentional, continuous redistribution of income by the government and support for the bargaining power of labor, i.e., support for unions or industry sector wide wage setting.

Under democratically controlled capitalism money isn't free speech, it is political power. The only way to have a robust, sustainable democracy is to have the money distributed somewhat evenly through the society. Money is life, the only way to have a robust, sustainable economy is to have the money, the incomes and the wealth, distributed somewhat evenly throughout society. ...

That's what has worked in practice, but as you point out, the upper classes have revolted against it.

Marx said in Capital, volume III chapter 33,

“Talk about centralisation! The credit system, which has its focus in the so-called national banks and the big money-lenders and usurers surrounding them, constitutes enormous centralisation, and gives the class of parasites the fabulous power, not only to periodically despoil industrial capitalists, but also to interfere in actual production in a most dangerous manner – and this gang knows nothing about production and has nothing to do with it.


Simultaneously, precisely this can incidentally provide a very profitable business for manufactures and others. Returns become wholly deceptive as a result of the loan system…”.
A high rate of interest can also indicate, as it did in 1857, that the country is undermined by the roving cavaliers of credit who can afford to pay a high interest because they pay it out of other people’s pockets (whereby, however, they help to determine the rate of interest for all), and meanwhile they live in grand style of anticipated profits.”

This is what we call debt deflation today.

If you are questioning if Marx predicted, incorrectly, that capitalism is self-destructive, I would respectively suggest that your reading of Marx is somewhat lacking on the whole.

 

[fast]

If growth stops, it all stops

That sucks