Subject:
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Re: A hypothetical economics question... (long)
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Newsgroups:
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lugnet.off-topic.debate
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Date:
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Tue, 5 Mar 2002 19:07:17 GMT
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Viewed:
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297 times
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In lugnet.off-topic.debate, Dave Schuler writes:
> What would happen if all debts public and private were just plain
> SNIP
> Dave!
I think that there is a misconception about the role debt plays in the economy
and what interest actually is. Here is some basic financial theory (A good way
to get this is to have you company pay for you to get an MBA (U of Michigan)
:-))
Suppose after paying your base expenses (food, etc) you have $100. What do you
do with the money? You could go to a concert (consume) or just put the money in
your matress for later. Suppose someone you know wants to go to the concert and
you do not. The person will get $100 next week but the concert is tomorrow. You
lend (creating a debt) the money to the person and evveryone is happy ASSUME:
repayment is 100% sure. Now supose that the concert runs two weeks and you are
planning to attend the 1st week but someone you know wants to go the first week
also (this person is not someone you dislike but not someone you would
routinely do favors for). The person wants to borrow the money. Now lending the
money inconviences you. The person offers to pay back $105 to compensate you
for delaying you consumption (spending the money to go to the concert). This is
called the "time value of money".
Suppose you have $1000 and ten people want to borrow $100 each. ASSUME that one
and only one person will not pay the money back (ever). So you pay out $1000
and get back $900. You do not know who will not pay you back. To avoid a loss
(you are doing them a favor) you require each person to repay you $111.112 and
collect $1000.08. The 11.12 is called the "risk premium" and is the component
of interest that repays you for the posibility of loss. This idea of lending
money to a bunch of people and collecting extra money to cover non-payers is a
major concept in finance it is very similar to how insurance works.
When people have disposable income they can spend it now or hold it or invest
it. If one invests you must have an expecation of gaining something (in
mathematics the expected value of the future payment must be positive). If
there is no expected gain then the person will spend the money today (or hold
it). Lending is a form of investment where the payoff is predetermined, stock
purchase is a form of joint ownership where the eventual payoff is less certian
(hence larger returns are expected with stocks, bigger risk premium)
Suppose Joe is a very good chief and would be very sucessful at running a
resturant. He needs $100,000 to start the resturant but works at a low paying
job. If there was no way to borrow money there is no way Joe could start his
resturant (this is the captialist idea of raising capital from private sources)
One could suggest that the Joe's of the would get the start capital from
government grants (if it is not a gift, then it is debt with the public
shouldering the risk). This gets to the capitalist/socialist debate. My bottom
line on that issues is that the supplier of the money is going to be much more
careful an efficient with the money if it the the lenders on wealth at risk
In order for people to be willing to lend (invest) money there has to be an
expectation of repayment. If there was ever a debt cancelation like you propose
no one would ever lend money again. You would be very happy if you new mortgage
was canceled, until you wanted to move and discovered that no one could buy you
house because no one had $250,000 in their matress.
Finance is a very very interesting
Lester
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Message has 1 Reply:
 | | Re: A hypothetical economics question... (long)
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| (...) Unless he shared ownership with 99 other folks each of whom could come up with $1K. Joint ownership instead of borrowing, right? (...) Actually, that's just getting a loan. Finding partners who want their share value to increase seems more (...) (23 years ago, 6-Mar-02, to lugnet.off-topic.debate)
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Message is in Reply To:
| | A hypothetical economics question...
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| What would happen if all debts public and private were just plain cancelled as of, say, 1/1/2002? I choose an already-passed date so that there couldn't be a mad dash to accrue huge debt in hope that it would be eliminated. In all seroiusness, what (...) (23 years ago, 27-Feb-02, to lugnet.off-topic.debate)
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