Monday, December 19, 2011

Before the "so"

Found this nicely organized site, with a bit of British flavor in the writing -- the Virtual Worlds section of Biz/Ed.

I have not figured out yet how to get from the home page to the page Google got me to. So I will skip over the niceties and get to the point.

From the Explanation of Interest Rate page:

The interest rate can be considered as the price of money.

It can be, but it shouldn't be. The interest rate is the price of credit, the price of using OPM, other people's money. Somebody said "OPM" back in the early '90s in one of the newsgroups, at 2400 baud, whatever -- long ago -- and those three letters stuck in my head. Useful.

That's from Milton Friedman, by the way: The interest rate is the price of credit.

Here's the rest of that first paragraph:

If you want to borrow money [the interest rate] is the percentage over and above the original loan that has to be paid back. This makes the interest rate a vital tool of economic management. A large amount of economic activity (both consumption and investment) is done on borrowed money, and so if the interest rate is changed it will either encourage or discourage borrowing and therefore tend to increase or decrease economic growth.

Know what gets me? These words:

A large amount of economic activity is done on borrowed money

Oh -- I don't deny it, not at all.

I object to taking that phrase and burying it before a comma and before the word "so". I object to taking that fact and treating it as a given, treating it as the type of fact that always has been and always shall be, world without end Amen. That's what I object to.

Sloppy it is. Even when the reliance on credit was low, you could easily say "a large amount of economic activity is done on borrowed money". Sure, and it would be true, too. HOWEVER...

The reliance on credit varies.

Sometimes, the large amount is about equal to GDP. Sometimes it is three times GDP or more. Sometimes the large amount is five times the amount of money we don't have to pay back. Sometimes the large amount is 35 times that money. The reliance on credit varies, and economic performance varies as a result.

Bury the Virtual Worlds phrase before the "so"... or insist that money and credit are the same thing... and you will never be able to understand the effect of varying the reliance on credit. The effect on the economy as a whole. The effect on economic performance.

The solution to the problem we cannot solve will be found in the place we do not look.

No comments: