I got my copy last week. I follow most Tickers, but there are parts I have not internalized yet and I am hoping the book will help me do that.

So - question about p20

1) nobody intentionally lends at a loss.
2) Two exponentials will run away from each other.

I think the reader is invited to draw a conclusion right there, and then you illustrate GDP and debt. Debt growth > GDP growth means recessions are a necessary feature of the system.

My question is - why can't debt grow at a lesser rate than GDP? Is it because any capital holder gets the GDP rate of return for free, therefore private lending necessarily exceed GDP growth? I feel something here is supposed to be obvious but isn't to me.

It can, but it hasn't for the last 30 years.

That's the point. If debt is only used for productive purposes it WILL grow slower than GDP (think about it; it will immediately make sense.) It is when debt is used to consume or speculate that it grows faster than GDP does.

Lenders should not be willing to lend at a rate of interest that is "kind" to the borrower for these purposes, and absent intentional distortions (like bailing them out when they do dumb things) they wouldn't be.

It does make sense.

I wasn't sure if this section meant:

a) Lenders in a sane capitalism system should never lend at a rate > GDP

OR

b) Lenders in the aggregate WILL lend at a rate > GDP because anything lower would be lending at a loss since they can get GDP growth without risk. Therefore in the aggregate, debt growth exceeds GDP for periods of time, therefore you need recessions to aligns the functions periodically.


I wasn't sure if the part in italics was correct, without which b) falls apart.

Under b) recessions are a feature of the system if an only if lenders in the aggregate are imprudent (which I understand will happen in practice).

How do you get GDP growth without risk?

Work for nothing.

No.

Recessions are necessary because lending is always a negative-sum game.

Take a balanced monetary system with no inflation (or deflation.) As soon as lending begins the persons doing the lending will seek to profit. As such they will charge an interest rate that reflects (1) time value of money, (2) the inflation rate (zero in this case) and (3) the risk of not being paid plus (4) a profit.

Time value is of course real, and this means that in aggregate the lending is "overpromised." If the other factors accurately reflect risk and profit is sought then by definition the total of interest to be paid will exceed the growth in GDP generated by the lending.

This means that someone's not going to get paid!

Well, when someone doesn't get paid then both a borrower and lender go bankrupt. That is economic contraction -- recession.

Attempting to short-circuit this process is extremely damaging as doing so forces an ever-larger amount of lending to take place in order to prevent the defaults. That's a ponzi as it an ever-expanding exponential series.

Just let the 'no one lends intentionally at a loss' part sink in for a while.

Consider that the Federal Reserve and its member banks, the primary dealers (all private, for-profit, institutions), which are responsible for the creation of our money through demand for debt, are lending to our government, which in turn, allows our government to spend money it doesn't have. The reason that the private banks do this is because the taxpayer is an 'infinite' source for the payment of interest, even as the money for payment of that interest is never created. In essence, the leverage, from their perspective, is unlmited. The banks profit off of all Americans regardless of whether or not Americans personally borrow money.

Taxpayer ===><=== Banks

Except it's not unlimited, as the capacity to actually pay by the taxpayer is finite.

Heh. Yeah, you and I know that...but the bankers seem to be unable to grasp this fact.

Oh they grasp it, they just think they will be able to steal everything you have on the way down.

Quote:

Take a balanced monetary system with no inflation (or deflation.) As soon as lending begins the persons doing the lending will seek to profit. As such they will charge an interest rate that reflects (1) time value of money, (2) the inflation rate (zero in this case) and (3) the risk of not being paid plus (4) a profit.

Time value is of course real, and this means that in aggregate the lending is "overpromised."

I am rarely the only one to not understand something, so pursuing...


I understand how lenders won't lend at a lesser rate than risk free securities, which I believe is the time value of money for a given term. But what drives the TVoM? Is it natural productivity gains?

As in -
Island uses stones as a currency.

On year 1, it produces 100 trouts, 1000 apples and 10 units of labour.
On year 2, it produces 102 trouts, 1020 apples and 10 units of labour.

Is the extra productivity gain what determines the time value of money?



And if so, then productive lending will simply accelerate that natural increase in productivity and lenders get paid in stones that buy more apples.

Don't productivity gains actually decrease the time value of money?

Time value of money is the imputed cost of the loss of access to the capital for the time it has been loaned. There is a value to that -- it is variable, but never zero.

Couldn't the time value of money be negative in a deflationary scenario?

It can't since no matter what, you have more options with a dollar in your pocket than a dollar next week. So even in deflation, it has to be > than zero.

Then, if we suppose the bond market is the best proxy for it, I guess it can be < 0 (or counterbalanced by counterparty risk of having cash in the bank)

No, because of what Maurevel said.