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A Place for Debt

June 9, 2011

Debt and investment provides liquidity for producers to be able to anticipate consumer demand.  One of the ways this happens is by the use of fractional reserve banking.  In fractional reserve banking, a bank is required to keep part of someone’s savings deposits in reserve.  If this amount is 15% and one deposits $100 in a bank, the bank keeps $15 and loans out $85.  This $85 dollars is able to be loaned to a producer to generate wealth.  The bank then passes on the maturation of the loan as interest on the savings.

 

Debt is an essential part of the modern US economy being used to allow producers to keep up with consumer demand.  It allows for flexibility and foresight.  It can also be used to aid speculation feeding a speculative bubble.  It can also be used to artificially inflate the indicators of wealth in a society.  In the fractional reserve situation above there is an indication of $185 dollars in an economy (a $100 deposit and an $85 loan) despite there actually only being $100 in circulation.  A precipitous increase in the amount of debt in a society can cause an inflated measure of the wealth in society.

 

In a situation where debt is being abused to keep consumer appetites artificially inflated and to keep up the ability of producers to meet this inflated demand, a culmination of this unsustainable situation causes a crash in demand and a crash in producer ability along with an apparent large loss of wealth.  In such crashes there is no wealth being destroyed (nothing is physically being destroyed) but the accounting is showing a drop in wealth in society.  This is merely a correction to reflect the reality of a situation by a destruction of imagined wealth.  It is necessary although painful but attempts to avoid the pain by maintaining the unsustainable situation only causes more pain in the long run.

 

What I desire to emphasize is that there is no change in actual wealth in this situation.  Debt in any case and in a holistic perspective is only an accounting tool.  When used well it allows for the present creation of wealth based on its use in the future.  When abused it allows for a production of goods that is unjustified by future distributions of wealth.  Someone who purchases something with a $100 of debt that cannot repay it still influences consumer demand and is either generating $100 of wealth for him or herself and taking it from another or must lose $100+ of wealth him or herself in the future to make up for it.

 

The presence of debt as an accounting tool is caused by the fact that money itself is an accounting tool.  Money is a measure through which wealth is measured.  Distributions and flows of money is what allow for information to be transmitted for the functioning of the production consumption cycle.  The money is an abstract quantity designed for this information exchanged but the actual wealth is produced by producers and consumed by consumers.

 

How money is used in modern economies necessitates the use of dept so that producers can meet the demand of consumers.  If poorly regulated debt can hide the presence of economic stagnation and make it harder to deal with such a situation.

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From → Economics

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