Sunday, April 3, 2011

What is Debt?

I asked the question recently at the "number one MMT site on the web" but there were no good answers. The subject came up because Mike Norman says debt is the same thing as cash, or maybe the same thing as "cash that has been literally handed out." Tom Hickey gets close, saying "Credit is the flip side of debt. All debt is the result of a credit." But that is still not a satisfying answer.

Here's my answer, from a file off the old computer:


What is debt?


Debt has been variously defined as the opposite of credit1, the same as credit2, the opposite of money3, and a sin4. Debt has also been defined as an abstraction5, but then so has money6.

In The Truth about the National Debt, Francis X. Cavanaugh wrote, "I believe that we don't understand the nature of the deficit” [page 2]. In United We Stand, Ross Perot said, "We need government officials who understand credit." In Wealth and Poverty, George Gilder wrote, "If American conservatism can come to terms with the meaning of debt, it will represent a nearly unprecedented intellectual triumph"7.

There is no index-entry for debt in Milton Friedman’s Money Mischief and none in Free to Choose; none in Galbraith’s New Industrial State; none even in Cliffs Rapid Reviews workbook for economics. In Samuelson’s Economics the index-entry for debt says “see Public debt.” Samuelson's book and many others refer to examples of debt and the significant (or insignificant) problems attributed to those examples. Not one of these books provides a better definition than those presented above. And those definitions are nonsense.

Debt is the measure of credit in use. When you borrow money, you put credit to use. Debt is the tally of money borrowed and not yet repaid. Every dollar of debt can be traced back to a dollar someone borrowed and put into circulation. Having put those dollars into circulation, we might like to forget that we borrowed them. Debt simply serves as a reminder.

//

1 The Economic Encyclopedia: “Credit and its opposite, debt, are transactions…”
2 Money and Banking, by Raymond P.Kent, p.100: “debt and credit are synonymous terms…”
3 Economics, Lipsey and Steiner, p.646: “Money is the other side of debt…”
4 My dictionary defines debt as a sin, or something owed.
5 The Roaring ‘80s, Adam Smith, p.17: “Debt is an abstraction.”
6 The Death of Money, Joel Kurtzman: “Money is an abstraction.”
7 Page 228. Two pages later Gilder reaches the astonishing conclusion that "only in an abstract mathematical world can the burdens of debt seem crushing."

6 comments:

piet said...

"Debt is the measure of credit in use."

or of certified, notarized and minted sentiments and symptoms of entitlement syndrom, outbreaks of certain types of radiation that spread and dilute themselves around the world within weeks. Debt is like the 'dreumis' 309,000x on google, means toddler demanding the wrong thing due to receiving the wrong thing, real or perceived.

wronged and wrok (grudge) are close. This morn the author of 'the other cheek' on the radio, christian broadcaster but do you think they'd take the opportunity that book keeping and the bible books especially are for the most part bundled biles? Nope.

The potemkinoid blanketness of monies is to blame.

What you said about Hudson is not wrong, Rowan Berkeley once claimed that Hudson is the type of anti-semite who never mentions jews.

You quote Gilder:

"If American conservatism can come to terms with the meaning of debt, it will represent a nearly unprecedented intellectual triumph"7.

He now likes us to prostrate ourselves and worship Israel

"There is no index-entry for debt in Milton Friedman’s Money Mischief and none in Free to Choose; none in Galbraith’s New Industrial State; none even in Cliffs Rapid Reviews workbook for economics."

Astonishing.

Debt is a measure of misfiring contract.

The Arthurian said...

Oh, Piet, you have moved on from "dust" to "radiation."

Calgacus said...

Debt is the other side of credit - they are two words for different perspectives on the same thing. Credit/debt is a social relationship, between a creditor and a debtor. The relationship means that the debtor owes the creditor a something. Owing someone a favor is the same type of relationship. Money is nothing but transferable credit/debt, transferable favors. A dollar bill is nothing but a statement that Uncle Sam owes you a favor. A dollar in the bank is a statement that you have a friend at Chase Manhattan.

Anyone, e.g. Arthur, can write on a piece of paper - IOU (a specific person, or the Bearer) one favor.
Uncle Sam has a particular position in the money game because he can call in his favors. We call this taxation. He can write these IRS letters that say you, Arthur, owe Uncle Sam a favor.

Credit/debt is a very fundamental concept, more fundamental than money. I don't know of any economist analyzing it further. One sees even chimps remembering bilateral favors - I'll scratch your back if you'll scratch mine later - the essence of credit/debt - but as far as I know they don't use a banana standard. :)

The Arthurian said...

What is a banana? Is it the edible part, or is it the whole thing, peel and all? And if the latter, then is it still a banana when only the peel remains?

If you like: When I borrow a dollar (putting a dollar of credit to use) I receive a banana, peel-and-all. When I spend it, I spend the edible part, the money. And then I am left with only the peel, the debt.

Calgacus said...

I was imprecise above when I said "The relationship means that the debtor owes the creditor a something." Should have omitted the "a". Money or credit isn't something exchanged in a relationship, it is the relationship.

The point is that there is no tasty money, no edible part. It's all peels. The chimp tribe just decides the peels you have to borrow to get your back scratched are better than your stack of peels.

The Arthurian said...

It's all peels?

There is a spendable part ("money") and an owe-able part ("debt"). And there is money that you get by earning it ("money") and money that you get by borrowing it ("credit"). And "credit" is composed of two parts: the spendable part, and the owe-able part.

Owing is not the same as earning. And money you owe is not the same as money you earn. The same "dollar" can be used for either, but then there is that "relationship" thing. Oh yeah, and "owing" is not the same as "being owed."

These are important distinctions and I don't understand why you seem to want to overlook them.