Thursday, January 26, 2017

What is debt?


Debt is the money on which we pay interest.

Posted by The Arthurian at 4:00 AM
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15 comments:

The Arthurian said...

People pay so much attention to interest rates, and so little to private debt.

(Ironically, of those who *do* pay attention to private debt, most purposefully ignore public debt.)

January 26, 2017 at 6:52 AM
Oilfield Trash said...

Debt is a data record of the legal obligations of a borrower to a lender. Interest is just the cost the borrower pays for his legal obligations, which drives the obsession with it. I do not think Debt is a repository for money. You can not spend debt.

Or I am not understanding your definition.

January 26, 2017 at 7:01 PM
The Arthurian said...

I'll go with yours. Maybe I oversimplified. I did not mean to say debt is money. Usually I say "debt is the measure of ..." -- a "data record" as you say.

I was trying to make the point that debt is not free.

Thanks.

January 27, 2017 at 3:51 AM
The Arthurian said...

However, for every dollar of debt there is a matching dollar of money.

January 27, 2017 at 3:53 AM
jim said...

I prefer to say "for every dollar of debt there is a matching dollar of savings."

If they accept that statement. then most people will also accept that their savings is their money and thus every dollar of debt has a matching dollar of money.

Viewed from the perspective of savings it is easy to grasp the accounting fact that for every dollar that someone wants to put away for the future and is collecting interest on (savings) there must be a dollar that some other entity borrows from the future and is paying the interest (debt).

What is astonishing is that this guaranteed accounting balance between money amounts that are being paid interest and money amounts that are paying interest leads economists to assert that debt doesn't matter and can be disregarded.

This would be like a physicist saying that since we have discovered that "for every force vector, there is an equal and opposite force vector" we can simply disregard forces in are models of the real world.

By the way, this part is priceless :

by the 1990s, those rudderless economists were sitting around the "market reforms" campfire, building on each other's stories. But there was from the start a lack of clearness and of generality in the premises.

January 27, 2017 at 9:38 AM
The Arthurian said...

Thank you, Jim! BTW your "force vector" comparison is brilliant.

This surprises me:

I prefer to say "for every dollar of debt there is a matching dollar of savings."

I picture taking out a loan: Walk into a bank and sign some papers. Walk out with $1000 more in my checking account, and owing $1000 more debt.

I suppose my way requires me to understand that the addition to my checking account was newly created money...

January 27, 2017 at 11:12 AM
jim said...

"I picture taking out a loan: Walk into a bank and sign some papers. Walk out with $1000 more in my checking account, and owing $1000 more debt."

If you are planning to buy something tomorrow with that $1000, then you are saving it for tomorrow.

I assume what you were getting at is that your checking account is not savings because it doesn't pay as much interest as a so-called "savings account".

IMO, looking at it as borrowers/lenders obscures what is really going on. In your example I view it as you are borrowing and lending to/from yourself. The bank is just an intermediary. When you spend the $1000 it will become the savings of some other. The borrower/saving binary relationship survives even after you spend the money.

Bank loans are only 20% of credit market debt instruments. The other 80% are also debt/savings of somebody.

Borrowers want to bring money from the future so that they can use it now and savers want to hold onto money now so that they have it in the future. So this is a natural Yin/yang. A saver could just put money under the mattress, but usually they want to get some return on their savings. In order for a saver to get interest there must be a borrower who will pay the interest.

January 27, 2017 at 5:58 PM
Greg said...

good discussion here guys

@jim

"Bank loans are only 20% of credit market debt instruments. The other 80% are also debt/savings of somebody."

Im not sure I follow here, I dont get your distinction. The overwhelming majority of money spent is a private credit instrument usually via a bank. So Im not sure where you get 20%.

Are you calling credit card balances, corporate bonds, municipal bonds etc the rest of the credit market debt instruments?

January 28, 2017 at 9:42 AM
jim said...

Hi Greg,

I was making a comparison between loans that deposit facilities give, (the loans where loans create deposits) and all credit market debt (the TCMDO that Art has shown us in many graphs)

It turns out its not 20% - bank loans are 13% of total US debt instruments.

https://fred.stlouisfed.org/graph/fredgraph.png?g=cwrH

And yes, much of the other 87% of debt instruments are bonds and securities.
Before 2008 the volume of securities that changed hands daily was more than a $1 trillion which was close to double the daily volume of deposits changing hands. Today the 2 volumes are close to the same.

That was what the whole 2008 financial crises was all about. A whole bunch of debt instruments that were being used as money suddenly became
suspect and were no longer readily accepted as money. The only thing that makes money have value is acceptance.

The point I was making is that the borrower/lender dichotomy lacks clarity in part because the money changes hands thus obscuring the relationship. The borrower/saver dichotomy is more clear and more in line with the actual accounting.

See Marriner Eccles views on Debt and savings as the causes of
the Great depression.
http://www.mtnmath.com/banana/greatDepr.html

January 28, 2017 at 5:01 PM
The Arthurian said...

"Before 2008 the volume of securities that changed hands daily was more than a $1 trillion which was close to double the daily volume of deposits changing hands. Today the 2 volumes are close to the same."

What is the source of this information? Deposit turnover and stuff like that. I have not seen data of that sort since the 1970s.

January 29, 2017 at 1:50 AM
jim said...

What is the source of this information?

That's a good question.

The data on US Bond market trading is here:
http://www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/CM-US-Bond-Market-Trading-Volume-SIFMA.xls?n=84139


The data in bank deposit account credits and debits is apparently not so directly available. It seems the figures exist only by statistical analysis of surveys conducted every couple of years.

https://www.frbservices.org/files/communications/pdf/general/122216-2016-payments-study-summary.pdf

It is interesting that debit card transactions are by far the most in number of transactions but almost insignificantly small in the dollar value of the transactions.

January 29, 2017 at 10:12 AM
jim said...

"What is the source of this information?"

Good question

Data in bond trading can be found here:

http://www.sifma.org/uploadedFiles/Research/Statistics/StatisticsFiles/CM-US-Bond-Market-Trading-Volume-SIFMA.xls?n=84139

Data in bank deposit transfers seems to be available based on surveys and not direct accounting. I guess it would be too much of a regulatory burden to expect banks to keep track and report the flows of their
deposit accounts.

https://www.frbservices.org/files/communications/pdf/general/122216-2016-payments-study-summary.pdf

Interesting that debit card transfers are by far the most in number of transactions but almost insignificant in the dollar value of those transactions.

Then there is the Fedwire data.
https://www.frbservices.org/operations/fedwire/fedwire_funds_services_statistics.html

Fedwire transfers about $3 trillion per day, which is about the same amount in dollar value as the M1 money supply.

https://www.frbservices.org/operations/fedwire/fedwire_funds_services_statistics.html

January 29, 2017 at 10:40 AM
Greg said...

I like the borrower/saver thinking better as well. Borrower lender gives the impression to people that when you borrow you are getting someone elses dollars.... and they cant use them while you have them. But they do this willingly since you are paying them interest.

Of course there are types of borrowing which fit the above description, like when I take a bank deposit and transfer it to a corp for a bond. Or a municipality. But bank loans do not act in the above manner


One problem I see with discussions of debt is that we lazily lump it all together when there are important distinctions and things which can help to reduce one type of debt level will exacerbate other debt types.


The world could sure use another Marriner Eccles

January 29, 2017 at 3:07 PM
Oilfield Trash said...

"One problem I see with discussions of debt is that we lazily lump it all together when there are important distinctions"

Yes, I think this whole idea of a debt record with commercial banks having the advantage of creating it ex nihilo is an important distinction bewteen financial institutions simply acting as financial intermediary between savers and borrowers.

One allows for the endogenous expansion of the money supply the other not so much yet both are mixed in the debt record and are serviced by the future and exiting stock of savings.


The rule that total spending equals total income is very important, but only true for the economy. It is not true for individual households, businesses or sectors of the economy.

Household


Clearly, a household can choose to spend an amount different than its income.

Some of the income will go to taxes. The amount left over is called ‘disposable income’.

The household can use its disposable income for consumption or saving.

Consumption is a form of spending. It involves the purchase of goods and services.

Saving is defined simply as the act of not consuming. It is that part of disposable income not consumed.

If the household leaves some of its income in a savings account at a bank, this income is not consumed but saved.

Or the household might purchase some shares or bonds. Since shares and bonds are not goods or services, buying them does not count as spending, and so does not create income. Rather, holding shares or bonds are different ways of saving.

Some of the household’s income might be used to pay off debt, such as principal and interest on a home loan. This also counts as saving, because it is income not spent on goods and services.

So, part of income goes to taxes. Part can be consumed. And the rest will be saved.

It is also possible for a household to spend more than its income. There are two ways this can happen:

•Savings of an earlier period can be spent this period.
•Private borrowing.

When a household spends more than its income, its saving will be negative. This is called dissaving.

I consider the above my basic primer for my understanding on spending, saving, savings, debt.

Individuals can spend more than their income in any period of flow. But to do so they must consume savings from current stock or from future income flows.

The severity of your crisis is always based on the Liquidation value of the current stock of savings relative to future income flows to service the existing debt record.

This is IMO what a Central bank does, having deep pockets to put a floor on the Liquidation value of your current stock of savings (by buying them, or offering to buy them at a specific price level, or offer a repo at a discount level typically better than current market) especially if you can create liabilities ex nihilo.

So, you can technically argue at the macro level liabilities and savings on a balance sheet will line up, but that does not mean at the micro across sectors the Liquidation value of savings at any point in time will line up to the corresponding debt record between sectors (any institution that can create liabilities ex nihilo are not in household sector since no individual or business in the household sector can do this). Hence the possibility of bankruptcy (the confiscation of savings from the lender) without a central bank to provide adequate liquidation value for settlement between sectors.

The panic in a crisis is not directly about debt, it is how much savings a lender must put up to settle the debt record to compensate for the liquidation value of savings backing that debt not being at par. The lender of last resort is the only rational agent economist keep talking about in a financial crisis.

January 31, 2017 at 6:48 PM
Oilfield Trash said...

jim said...
I prefer to say "for every dollar of debt there is a matching dollar of savings."

TCMDO (All Sectors; Debt Securities and Loans; Liability, Level) end of 2015 was 63 trillion

2015-10-01 63467.96

What savings accounts offset do you use for matching?

February 2, 2017 at 7:47 AM

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