More Debt than Money?

  • #1
BilPrestonEsq
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Is there more debt then money?
 

Answers and Replies

  • #2
WhoWee
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Can you be a little more specific - do you mean globally?
 
  • #3
brainstorm
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Is there more debt then money?
Yes, first debt THEN money - otherwise you wouldn't need to borrow the money in the first place. . . ok, sorry to be rude but can't you visually spell check a 6-word post?

If someone has 1 million dollars, they can lend it out. Then the people who have it can lend it out for a higher interest rate to make money. Then those people can tack on more interest and loan it out. How far can this go before people start defaulting? This could be a type of pyramid scheme. It wouldn't matter how much debt there is - only the difference in interest between the rate you borrowed at and the rate you're collecting interest at.
 
  • #4
Brainstorm is correct - there is not enough money to go around. This is why money has value, and why there is a debt market.
 
  • #5
brainstorm
563
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Brainstorm is correct - there is not enough money to go around. This is why money has value, and why there is a debt market.
Or you could say that lending money generates inflation by (virtually) increasing the money-supply and this results in a lower ratio of money to prices, which causes the money that's in circulation to not be enough to go around. If I lend you 1 million to buy a house and then sell you a house for 1 million, I have made a million and you owe me a million. There's not enough money for you to pay off your debt unless you get it from me, but I have no reason to pay it to you unless you borrow it. Therefore, you could say, "there's not enough money to go around" without you borrowing more money.
 
  • #6
BilPrestonEsq
43
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Brainstorm is correct - there is not enough money to go around. This is why money has value, and why there is a debt market.

So money has value because of debt? Could you elaborate on that a little?
 
  • #7
russ_watters
Mentor
21,614
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So money has value because of debt? Could you elaborate on that a little?
That's not what talk2glenn said. "not enough to get around" is about scarcity:
Goods (and services) that are scarce are called economic goods (or simply goods if their scarcity is presumed). Other goods are called free goods if they are desired but in such abundance that they are not scarce, such as air and seawater.
http://en.wikipedia.org/wiki/Scarcity

In other words, if a certain item is extremely common, it will have no value. Scaricty creates a market (bidding, essentially), giving goods and services value. Scarcity is the most fundamental driver of economics. It helps determine what products are sold, what jobs are available, what they cost/pay, etc.
 
  • #8
WhoWee
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A real world example - assume you buy a house for $9,000 cash and spend $1,000 to paint and prepare for re-sale - total investment $10,000 in cash.

Now you offer the spruced up house at a price of $60,000 and offer owner financing with $5,000 down. If someone offers a cash price of $25,000 or more you'll probably accept - but if you have to wait for your money - you want a bigger profit (and the buyer might have marginal or poor credit - there is risk).

Along comes a prospect with $5,000 down that agrees to a $60,000 purchase price and monthly payments over 30 years on land contract. You have now reduced your investment from $10,000 to $5,000 and you have a $55,000 receivable (plus interest). The buyer has a debt of $55,000 (plus interest).

The debt exceeds the money by $50,000 (plus interest) when the transaction is initiated.
 
  • #9
It's the other way around - debt exists because money has value. If you didn't want more money than you had, why would you agree to pay someone for theirs? Money has value because it is scarce; there is less of it available on the currency markets than the demand. This causes its price (its value) to go up until an equilibrium is reached.

When someone else has something you don't have but want, you offer to buy it from them. If you value it more than they do, they agree to sell it to you, and both of you are made better off (all of this assumes you have both the desire and the means, of course). This is what goes on in the currency markets.

Alternatively, you can offer to lend it to them. This works when somebody has a relatively higher transitory demand for some good, and you have a relatively lower transitory demand for the same. Money is an excellent example of a transitory good - you may anticipate needing it again later, even though you might not need it all that much today, and vice versa somebody else may need more today but anticipate needing less tomorrow. This is what goes on in the debt markets.
 
  • #10
BilPrestonEsq
43
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If there is more debt than money how do you pay it back? If you pay it back then there would be no money right? And still more debt? Who owns this debt?
 
  • #11
BilPrestonEsq
43
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Also our debt seems to be rising and debt is money right? I believe you(talk2glenn) said that debt can be liquidated when the economy needs to be 'stimulated'. So why not just turn all that debt into money? Then we can spend all the money and everything will be ok, right?
 
  • #12
WhoWee
180
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Also our debt seems to be rising and debt is money right? I believe you(talk2glenn) said that debt can be liquidated when the economy needs to be 'stimulated'. So why not just turn all that debt into money? Then we can spend all the money and everything will be ok, right?

Glad you brought that up! Now go back to my example "Along comes a prospect with $5,000 down that agrees to a $60,000 purchase price and monthly payments over 30 years on land contract. You have now reduced your investment from $10,000 to $5,000 and you have a $55,000 receivable (plus interest). The buyer has a debt of $55,000 (plus interest).

The debt exceeds the money by $50,000 (plus interest) when the transaction is initiated. "
and sell the debt at ANY amount more than $5,000 to earn a profit - regardless of the credit-worthiness of the person buying the house. If you had 100 such transactions to bundle - you could make a lot of money VERY fast and walk away risk free.
 
  • #13
BilPrestonEsq
43
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That sounds a lot like what has happened in the states. Thats a pretty good flip! Sounds like you got a good deal on that house! All those houses.But I am talking about ALL the money in circulation, cash or digital. And ALL of the debt in existence. Is there more debt than money? And what does that mean to us exactly? I do understand that scarcity of money leads to it being valuable(talk2glenn) but tell me what it means for the future. Thats what I would like to know. And if the debt keeps rising where does it end? What are you leaving out here? It really seems there is an answer to all these questions and none of them make any sense. Let's hear it, give me some common sense, plain english answers. What is going to stop the debt from rising? What is going to stop inflation? 2 questions plain english in your words. READY...GO!
 
  • #14
WhoWee
180
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What is going to stop the debt from rising? What is going to stop inflation? 2 questions plain english in your words. READY...GO!

Cuts in spending will free cash to pay debt down. Inflation has been suppressed for the past few years - however, the increase in fuel prices (and increased demand for fuel globally) may trigger an increase beyond anyone's control?
 
  • #15
BilPrestonEsq
43
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Cuts in spending will free cash to pay debt down. Inflation has been suppressed for the past few years - however, the increase in fuel prices (and increased demand for fuel globally) may trigger an increase beyond anyone's control?

Fuel is completely seperate from this equation. Inflation is not suppresed as it has continued to grow since the Fed came into existence. Aren't you spending when you pay down debt?
 
  • #16
If there is more debt than money how do you pay it back? If you pay it back then there would be no money right? And still more debt? Who owns this debt?

It is not possible for every loan to be paid back simultaneously, obviously. If you tried, there'd be a debt crisis - the value of the dollar would skyrocket, and the value of the dollar denominated debt would plummet.

Think of the run on the banks during the depression. This is why the Fed responds to crises by increasing liquidity - Milton Friedman argued that the Depression was principally a liquidity crisis (there wasn't enough cash to meet demand).

You can think of deflation as the same thing - too little cash to meet demand (people in the market for cash respond by lowering prices). Inflation is the opposite.

So why not just turn all that debt into money?

Asked and answered - there just isn't enough money to go around! I'm trying to explain this as simply as possible.

Think of currency as just another good that isn't differentiable from, say, socks and cars. Its bought and sold according to supply and demand. People with cash can sell it to someone that doesn't have cash, and they buy pieces of paper called bonds. Later on, if they need more cash, they'll sell those bonds and buy more cash.

If a lot of people want bonds, and not a lot of people want cash, then the price of bonds goes up (and the yield or interest rate goes down) and the price of dollars goes down. This keeps things in relative equilibrium, so that you don't end up with everybody wanting to liquidate their debts at the same time (or vice versa) - we naturally avert the kind of crisis you seem to fear in the currency markets the same way its averted in the wine market or the sock market.

The Fed is just an actor who tries to take advantage of these relationships to steer things in desirable, cyclical or contracyclical directions. Maybe the market is moving bond yields up when the Fed wants them to stay low - it will respond by buying bonds, raising their prices and depressing their yields.

What is going to stop the debt from rising? What is going to stop inflation?

A little bit of inflation is desirable; the Fed has an interest in maintaining a target inflation rate greater than 0.01 and less than 0.02 per anum. Debt rises and falls according to the demand for money - as long as the global economy continues to grow, and the supply or currency fails to keep pace, then debt will continue to grow as existing currency changes hands to keep pace with the transaction demand. I gave you the formula in an earlier thread.

The alternative is a change in prices. If the currency side of the equation can't keep up with the change in the production side, then the price level must fall to restore equilibrium. This isn't desirable, though, because when prices fall so to does consumption (typically) - people tend to defer purchases in a deflationary environment.

Consumers tend to think of deflation as being a Good Thing, because they like falling prices. Macroeconomists don't share that perspective. Indeed, even a little bit of deflation can be very destructive to an economy, while a little bit of inflation can be constructive (it encourages consumption). Even if we decided, though, that no change in value was desirable, the cost of maintaining a static environment would be tremendous. It would require the Fed to do things during recessions, for example, to protect currency values when they should be doing the opposite. Likewise, during expansions, the central bank might want to do things to put the brakes on the economy, but be prevented from doing so because it had to maintain a strict interest rate.
 
  • #17
russ_watters
Mentor
21,614
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If there is more debt than money how do you pay it back? If you pay it back then there would be no money right? And still more debt? Who owns this debt?
If I lend you $10 and you lend it to someone else, there's $20 of debt for $10 of cash. As for paying it back...when people say the economy is a house of cards, this is what they are talking about. If you don't pay me back then TWO people default on their debt. That's a big part of what caused the current economic situation.
 
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  • #18
WhoWee
180
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Fuel is completely seperate from this equation. Inflation is not suppresed as it has continued to grow since the Fed came into existence. Aren't you spending when you pay down debt?

Consider your neighbor as an example. We'll assume he has net income of $50,000, a mortgage (25% of income), a car payment (8% of income), a few credit cards with balances (7% of income), and his savings rate is 5.2%. His investment/debt activity totals 45.2%.

His basic living costs (food, fuel, utilities and clothing) have increased. Utilities have increased from $350 to $550 per month, food has increased from $600 to $700 per month, clothing has remained the same at $100 per month, and fuel costs have risen from $200 to $350 per month. His basic living costs have risen to $1,700 per month (40.8% of income).

His fixed monthly expenses now total (45.2 + 40.8) 86% of income. This leaves 14% ($583 per month - $19.44 per day) discretionary spending.

What can he do?
 
  • #19
WhoWee
180
0
What can he do?

With less than $20 per day to make choices - he needs to focus on spending cuts. Perhaps less expensive grocery choices will help? Perhaps 87 octane will reduce fuel costs and the HVAC thermostat needs attention?

Assume his spending cuts are successful and he saves $20.56 per day - and now has $40 in discretionary spending - a more comfortable level.

If he chooses to use half of his discretionary amount to pay down credit cards $600 per month 14.4% of income (logistically - the funds will still be available) he will reduce the amount required for credit card payments over time.

If spending cuts were not possible - the 5.2% savings could have been applied to the credit cards as well.
 
  • #20
brainstorm
563
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If there is more debt than money how do you pay it back? If you pay it back then there would be no money right? And still more debt? Who owns this debt?
If you pay the required interest PLUS principle of a debt, the debt is repaid. The lender now has the money that you used to pay off the debt, provided that lender hasn't already spent it or lent it out to other borrowers. If you want to get that money without borrowing it or taking it by force, you would have to do something to solicit payment for some good or service. Since a lot of people don't like to be bothered by salespeople other than their usual providers, it can be very difficult to solicit revenues/income and many people resort to taking on more debt to continue funding their search for money. It is a problem, imo, when the economy has adjusted to this fact by expecting a certain amount of revenue to come from the spending of people searching for income. How is it fair to profit from people's search for money?
 
  • #21
BilPrestonEsq
43
0
Nowhere in this thread has anyone made a case that debt is a bad thing. I find that to be a little odd. Also talk2glenn why is inflation desirable? For whom is inflation a good thing? I can see how it's a good thing for the bank that gets to use the money in the first place(to 'stimulate') but what I don't get is why it's good for anyone else. I don't see what good debt is to any of us either. I have heard a lot about how some can profit off of a debt market with seemingly no risk. I have heard about all the wonderful things the banking system does but where are the results? What does the laws of this banking system do to benefit anyone. The track record of boom and bust, the value you of the dollar crumbling, debt skyrocketing, inflation growing and growing, yet no one can tell me why I should support this system. Why do anyone of us support our banking system. Oh can't let enormous banks fail, then we all lose right? So let's keep rewarding this irresponsible behaviour. Why does this make sense to anyone? There are a lot of problems, why aren't these being addressed?
 
  • #22
brainstorm
563
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Nowhere in this thread has anyone made a case that debt is a bad thing.
I consistently post about debt being not only bad but absurd. Did you read my post about people borrowing money and then lending it out at a higher interest rate, and so forth? It is disturbing to me that people think economic productivity can be generated by financial intermediacy. What would happen if everyone wanted to make money by borrowing at one price and lending at a higher price? How many such people can the productive sectors sustain? It would be far better, imo, to have an economy that is good at distributing labor than one that distributes money in the form of debt, bureaucratic jobs, etc. That way, no one would be able to claim that anyone else doesn't "pull their weight" when times get tough. To give just an oversimplified example, if everyone performed some agricultural labor, no one could ever say that anyone didn't earn the food on their table. With an economy driven by debt, stimulus, bailouts, and other forms of money-distribution/management services, too many people are left vulnerable as just one more employee whose layoff reduces costs. No one should be made redundant with superfluous jobs. No one should be denied learning the basic skills that make them proficient in generating their own food, shelter, and basic health-care from the ground-up if need be.
 
  • #23
WhoWee
180
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The key to wealth is leverage - used incorrectly - it's also the expressway to ruin.
 
  • #24
brainstorm
563
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The key to wealth is leverage - used incorrectly - it's also the expressway to ruin.
There needs to be some critical re-thinking of financialism. Hard work and innovation used to be the key to wealth. Now all people can think about is how to cash in on someone else's hard work and innovation. Too much management weighs down the cart and drains the horses dry. There needs to be a shift from investment-driven consumerism to increasing direct labor-contributions to your own wealth. What ever happened to "sweat-equity?"
 
  • #25
WhoWee
180
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There needs to be some critical re-thinking of financialism. Hard work and innovation used to be the key to wealth. Now all people can think about is how to cash in on someone else's hard work and innovation. Too much management weighs down the cart and drains the horses dry. There needs to be a shift from investment-driven consumerism to increasing direct labor-contributions to your own wealth. What ever happened to "sweat-equity?"

The person with the idea is usually the one that needs the leverage - someone else's money.
 
  • #26
brainstorm
563
0
The person with the idea is usually the one that needs the leverage - someone else's money.
That's what I would call financialist thinking. Why wouldn't you expect someone with the means to develop a good idea to invest in it themselves instead of using it as an opportunity to saddle someone else with debt?
 
  • #27
WhoWee
180
0
That's what I would call financialist thinking. Why wouldn't you expect someone with the means to develop a good idea to invest in it themselves instead of using it as an opportunity to saddle someone else with debt?

Actually, often times the person "saddled with the debt" is the one with the idea. The person with the means are often referred to as an "angel" - venture capital typically funds under-capitalized good ideas with a high rate of return expectation.
 
  • #28
brainstorm
563
0
Actually, often times the person "saddled with the debt" is the one with the idea. The person with the means are often referred to as an "angel" - venture capital typically funds under-capitalized good ideas with a high rate of return expectation.
I was trying to make the point that your framing is spinning the lender as doing a favor to the borrower, but you could just as easily spin it the other way and say the innovator is doing the person/people with means to implement the idea the favor.

In your version, the innovator takes the credit risk and everyone else, including her investors, employees, and sub-contractors get to walk away from the process with money free and clear of any outstanding debt. In my version, the innovator would just be one more party trying to sell their part of the project, the same as the employees and lenders. See, I don't think it's fair that the person with the idea has to shoulder all the risk while everyone else gets to cash in on the borrower's risk. If the borrower goes belly up, everyone else walks away with their money, including the lender provided the government is still bailing out banks at the time of the default.

This is confusing so let's put it concretely. If I design a new type of window and approach you as a window manufacturer, you could either invest in my design with your industrial resources or you could refer me to a lender and then charge me to use your facilities to develop my idea. If you do the latter, you would have no real interest in seeing my new window design succeed because either way you get your money and I get stuck with the debt. However, if you really believe my design is promising, you would jump at the chance to gain access to the technology instead of your competitors.
 
  • #29
WhoWee
180
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I was trying to make the point that your framing is spinning the lender as doing a favor to the borrower, but you could just as easily spin it the other way and say the innovator is doing the person/people with means to implement the idea the favor.

In your version, the innovator takes the credit risk and everyone else, including her investors, employees, and sub-contractors get to walk away from the process with money free and clear of any outstanding debt. In my version, the innovator would just be one more party trying to sell their part of the project, the same as the employees and lenders. See, I don't think it's fair that the person with the idea has to shoulder all the risk while everyone else gets to cash in on the borrower's risk. If the borrower goes belly up, everyone else walks away with their money, including the lender provided the government is still bailing out banks at the time of the default.

This is confusing so let's put it concretely. If I design a new type of window and approach you as a window manufacturer, you could either invest in my design with your industrial resources or you could refer me to a lender and then charge me to use your facilities to develop my idea. If you do the latter, you would have no real interest in seeing my new window design succeed because either way you get your money and I get stuck with the debt. However, if you really believe my design is promising, you would jump at the chance to gain access to the technology instead of your competitors.

I've always believed the greater the risk - the greater the reward was the standard. In your example, the idea person would be taking the path of least resistance and lowest reward.

If the idea person instead went to a group of private investors and offered them a 30% compounded return over 5 years (assuming the idea was suitable to such terms) and started a new venture. The idea person would assume risk, but would have unlimited earnings potential.
 
  • #30
brainstorm
563
0
I've always believed the greater the risk - the greater the reward was the standard. In your example, the idea person would be taking the path of least resistance and lowest reward.

If the idea person instead went to a group of private investors and offered them a 30% compounded return over 5 years (assuming the idea was suitable to such terms) and started a new venture. The idea person would assume risk, but would have unlimited earnings potential.
"Greater risk = greater reward" is a strategy to seduce someone into taking a leadership role that shifts the burden to them while promoting some secure gain for yourself. There are plenty of people with money to invest who would drool at the idea of someone approaching them with 30% over 5 years with unlimited potential - why, because that is their only means of income. What do the investors do when they have no one left but themselves to generate their 30% over 5 years?
 
  • #31
WhoWee
180
0
"Greater risk = greater reward" is a strategy to seduce someone into taking a leadership role that shifts the burden to them while promoting some secure gain for yourself. There are plenty of people with money to invest who would drool at the idea of someone approaching them with 30% over 5 years with unlimited potential - why, because that is their only means of income. What do the investors do when they have no one left but themselves to generate their 30% over 5 years?

Invest in the equity markets, real estate, Treasury bonds, corporate bonds, futures, or gold? Investors invest - that's what they do.
 
  • #32
brainstorm
563
0
Invest in the equity markets, real estate, Treasury bonds, corporate bonds, futures, or gold? Investors invest - that's what they do.
"Financialism" is getting an ever-clearer meaning to me from your posts. "Investor" is not a totalizing status. You may make money from financial investments, but you still spend money and perform labor to consume. You have to do some things for yourself and all those things are the beginnings of forms of labor that you could be contributing to some enterprise. Obviously it is easier if financial business remains lucrative enough to avoid any form of non-consumptive labor, but when it doesn't, "investors" can also end up looking for a way to substitute capital with labor. Investing your own labor is also a form of investment.
 
  • #33
WhoWee
180
0
I'll say it again - investors invest.

http://www.entrepreneur.com/vc100

"Entrepreneurs were the big winners in 2007, receiving more than $7 billion in venture capital a quarter for four straight quarters--a phenomenon not seen since 2001. Venture capitalists invested $29.4 billion in 3,813 deals in 2007, a 10.8 percent increase in dollars and a 5 percent increase in deal volume over 2006."

The "entrepreneurs" are the idea guys.
 
  • #34
brainstorm
563
0
I'll say it again - investors invest.

http://www.entrepreneur.com/vc100

"Entrepreneurs were the big winners in 2007, receiving more than $7 billion in venture capital a quarter for four straight quarters--a phenomenon not seen since 2001. Venture capitalists invested $29.4 billion in 3,813 deals in 2007, a 10.8 percent increase in dollars and a 5 percent increase in deal volume over 2006."

The "entrepreneurs" are the idea guys.
Ok, I get it. You're married to insisting that this exploitative relationship between investors and inventors is not only natural but in the benefit of the inventors because "risk bring rewards." What would it take to make you realize that risk/reward is something you can sell to people to secure a less risky profit for yourself?
 
  • #35
WhoWee
180
0
Ok, I get it. You're married to insisting that this exploitative relationship between investors and inventors is not only natural but in the benefit of the inventors because "risk bring rewards." What would it take to make you realize that risk/reward is something you can sell to people to secure a less risky profit for yourself?

It happens all of the time in R&D labs. The company funds the research, the inventors are secure in their jobs, and the investors reap the profits - I get it.
 

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