
A special report on debt: Repent at leisure - pg
http://www.economist.com/node/16397110?story_id=16397110
======
nostrademons
Reminds me of the old software engineering maxim "All problems can be solved
with another layer of indirection - except too many layers of indirection."

Debt is not all that much unlike a layer of indirection - it's basically a
pointer to the debtor who's _actually_ doing something with your money. And
just like a heavily-layered Java program, it's often difficult to figure out
exactly where the work is getting done. Add enough layers of indirection, and
it's possible to have the appearance of a very complex system where no real
work is getting done at all.

Maybe the financial crisis and associated bailouts were the equivalent of
throwing out the old codebase and starting anew. "We don't understand the
system anymore, so, err, let's throw it all out and rewrite everything!" With
all the associated loss of institutional learning.

~~~
Maro
I like your analogy, so I'll extend and maybe fix it.

The economy is like a heavily layered enterprise Java program, where little
useful work is performed by lots and lots of expensive layers of abstractions.
There are so many abstractions that virtually nobody understands the program
or where problems come from.

The bailout is _not_ equivalent to throwing out the old codebase and starting
anew. Just the opposite, it's the government saying do not abondon the old
codebase, here's a $800 billion dollars, hire another 10.000 Java programmers
to maintain it. If the government would let you abondon the old codebase, all
the programmers who had jobs maintaining it would be unemployed, which is
political suicide.

------
patio11
It seems to me that debt is virtually a necessity created by prosperity:
otherwise, the folks with all the capital end up with very lumpy mattresses.
Take the Japanese government debt (please!): the reason they're able to
sustain such a staggering amount of it is that the debt is owned mostly by
older Japanese folks who spent a few decades with savings rates in the 20%
plus region.

I'd be more worried about pissing spending away than about debt-financed
spending, per se. ($20k to get a degree, OK, $240k to get a master's degree in
traditional dance... well, I hope you marry well. Buying houses on credit, OK,
asset bubbles a little less OK. Constantly increasing QOL caused by expanding
public services, ambivalence, capture of budgeting process by public service
unions less OK.)

~~~
varjag
It sounds great when you keep debt and lending in zero-sum. Problem is, the
numbers don't add up anymore, and they haven't been for quite some time.

~~~
isamuel
What? Of course they do. For every dollar borrowed, a dollar is lent. U.S.
debt is financed through the sale of Treasury bonds, for example. And for each
bond sold there is a real investor on the other end who paid actual money for
it.

------
Tichy
Is there any way to escape? What depresses me is that I really don't like the
spending habits of my government (Germany). Already the "theoretical debt"
(what the government owes per working citizen) I have is higher than what I
own. I don't have any hopes of it getting any better.

The problem is that the government can just confiscate everything I own to pay
off their debts with my belongings, so saving or investing does not seem to
provide a way out.

By the time it might happen, I'll probably be too old to build something new.
Otherwise I would say investing in skills would be a good idea (after the
breakdown, capable people will still be in demand). Social networks might be
good, too.

Gold? But I don't really like it, as in theory it is useless. And the
government will try to seize it, too. The logistics of hiding gold somewhere
make it impractical.

~~~
erikstarck
In Sweden we had our crash in the early 90s. The government was forced to
borrow huge amounts of money but after a few rough years cleaning up the
balance sheet the economy recovered.

We now have probably the strongest balance sheet in Europe.

Of course a weakened krona fueled the export sector in the late 90s, a luxury
the euro countries don't have but still, recovery can be surprisingly fast if
you avoid the fate of Japan.

~~~
akadien
Would you elaborate on how Swedes save and invest? I'm curious about behaviors
of investors and savers in economies that don't seem to be on the brink of
death.

~~~
erikstarck
Taxes in Sweden are extremely high so people tend not to save but rather rely
on the government helping them out if things go south. You can probably find
all the stats you need here: <http://www.scb.se/default____2154.aspx>

One thing to note is that the real estate market has not crashed in Sweden
(yet) as in most other countries. Prices are high so this can still happen.

------
cwp
Interesting, but I was disappointed. This article seem to promise a lot, but
then peter out at the end without coming to a strong conclusion.

One little image I did like was government debt as a ponzi scheme based on
population growth. If population starts to decline, we'll need some
fundamental changes to the economic system.

~~~
mmt
_If population starts to decline, we'll need some fundamental changes to the
economic system._

It's actually worse than that, since it's not the population as a whole, but,
rather, the productive, working-age population.

The US (and perhaps the "West" as a whole) is already on the precipice, if not
already tipping over, with Baby Boomers hitting retirement age. Even when the
more patent Ponzi scheme of Social Security collapses, it won't solve the
underlying economic problem, that so few will have to support so many.

------
jimmyjim
From all angles the situation manifests itself as a gridlock. The article
seems to have very concretely taken the harrowing position that the future is
either default or inflation.

Now, let's consider the average American Joe in this new world. Things are
looking pretty grim for him -- corporations are inevitably looking forward to
even more automation (as opposed to manual labor), because it's in their best
interest, so as far as I see, there just aren't going to be very many jobs for
the larger majority of the people in the times ahead.

What then?

By application of the original position, a radical rethinking of the
fundamentals of governing bodies and economic systems is called for. Unlike
centuries ago, when all mechanical work had to have been purely supplied by
the raw muscles of humans, we now have technology. We can do so, so much more
than we could have imagined with only a limited amount of man's mechanical
power. We are actually in a very technical sense within our capability to feed
every hungry mouth in the world today. And by any reasonable ethical
framework, this free capability absolutely bounds to service this obligation.

Thoughts? And please go easy on me here, these are just the late-night musings
of a 21st century youngin. ;)

~~~
lionhearted
> Things are looking pretty grim for him -- corporations are inevitably
> looking forward to even more automation (as opposed to manual labor),
> because it's in their best interest, so as far as I see, there just aren't
> going to be very many jobs for the larger majority of the people in the
> times ahead.

> Thoughts? And please go easy on me here, these are just the late-night
> musings of a 21st century youngin. ;)

A couple thoughts. The first is that your top idea - "automation is coming,
people are screwed" has been popular since the Industrial Revolution. Mary
Shelley's Frankenstein was about automation. The term "Luddite" to refer to a
technologically-unsavvy person came from this group:

<http://en.wikipedia.org/wiki/Luddite>

They actually attacked, broke, and destroyed automatic machinery. They're
worth reading about.

The reality is, automating things let humans get on to more and more
interesting things. Being afraid of automation is like being afraid of Ruby
and Python because now what will coders in C do? In reality,
automating/streamling/improving one area of business opens opportunities for
new things to do. Not too long ago, society was comprised of between 60% and
80% farmers - without machinery and automation, we'd be ploughing fields right
now instead of discussing on Hacker News.

As long as any human wants or needs are unfilfilled, there's a capacity for
almost unlimited amounts of work. And we're nowhere close to
automating/obsoleting things - today's manufacturing and shipping is going to
look pretty primitative in 100-150 years. I won't hazard a guess of when it'll
become available, but this is one of the most exciting new areas that'll come
to bear in not-too-long:

<http://en.wikipedia.org/wiki/Molecular_engineering>

~~~
gaius
Hmm, I am reminded of that (dreadful) Star Trek movie where one of the
characters says "we believe when you create a machine to do the work of a man
you steal something from that man" (or something like that). So wrongheaded
that I barely even know where to start, yet it seems that many people did and
do really believe it. Of course it's only true if the "value" you create
consists only of holding people to ransom. But that's not the way honest folk
do business.

------
woodrow
This is a useful interactive feature from the article that lets you look at
various countries' debt over time and by type -- financial, government,
household, etc.):
[http://www.economist.com/blogs/buttonwood/2010/06/indebtedne...](http://www.economist.com/blogs/buttonwood/2010/06/indebtedness_after_financial_crisis)

Particularly interesting to me is the variation in debt mix amongst countries
(click on the headers at the top of the image) and the changes over time
(click on the countries on the map).

~~~
jbert
Yes, thanks. That was very interesting.

It also made me wonder. Looking at the UK, the largest proportion of debt was
'financial', which I assume is debt owned by businesses operating in the
financial sector.

If so, is this even a bad thing? For example, does a hedge fund (which borrows
large amounts of money to amplify it's wins and losses) naturally have a large
"base" debt? Does a large financial sector just mean large financial debt as a
matter of course?

UK household debt is also high. I'd expect a significant part of this to be
mortgages. The combination of the culture of home-ownership (as opposed to
renting) and high property prices (small island, lots of people) leads most
people into a long-term mortgage quite early (and has for a long time).

Does that mean the UK's position isn't perhaps as bad as the "overall" graph
paints it?

~~~
arethuza
As far as I understand it there is no fundamental reason why a hedge fund has
to take on any debt at all - just that the investment strategies they often
employ actually have very small returns so to make the overall returns to
investors attractive they often borrow (or used to) large multiples of
investors capital.

------
david927
I wouldn't be comforted by the _Debt as a % of GDP_ figures. The GDP is a
washy figure that shouldn't be relied on; it can easily be overstated. And
just like with a person, the big question is future income -- whether a
country can pay back that debt as things change.

Germany and Switzerland have similar debt levels to the U.S., but the former
two are going to do fine; I wish I could be so confident of the latter.

~~~
roel_v
How so? What kind of productive capacity does Switzerland have? Their have
cheese, watches and cuckoo's clocks. And the finance industry obviously, but
only because of their secrecy towards the tax agencies of other countries,
which is going to go away in the next decade or so. So what kind of logical
reasoning can lead to the conclusion that a country whose only asset is a
bunch of mountains where people can ski is going to fare so much better than a
country that has everything it needs to be self-sufficient (arable land, oil
and other resources, 2 coasts, the most advanced technology in the world, a
huge work force), plus a government that actually supports rather than just
pays lip service to capitalism, the only system proven to lead to economic
prosperity?

(I'm not an American and I won't say that all that the US does is great and
fine but come on, if you're going to make outrageous statements you'll have to
at least back them up a little, especially on a site where (I hope) people
pride themselves on their rationality).

~~~
david927
I am American and it's not outrageous, just not (yet) conventional wisdom.
Switzerland has banking and stability. That will soon come at a premium. It
has self-sustaining energy and perfect transportation systems. This will all
be very valuable in the near future.

Sure the US has arable land. It has oil. The problem is, it doesn't have
enough oil. (You probably weren't around in the 1970's, but there was a big
crisis as America switched to depending foreign oil and OPEC took advantage.)
It's been a net importer ever since. Two coasts? Really? Greece has more. It's
not going to help them. The most advanced technology? That's China.

In fact, China and oil are the big elephants in the room. I can happily write
more about why, if you're interested.

 _a government that actually supports rather than just pays lip service to
capitalism, the only system proven to lead to economic prosperity_

Sweden is doing much better than America by every account and it's Socialist.

~~~
roel_v
I don't quite know where to begin, so I'll have to default to a point-by-point
approach I'm afraid, sorry about that.

\- How can banking 'soon come at a premium'? Like I said, the only appealing
quality of Swiss banking is its secrecy, and that is going away fast. How are
Swiss banks going to be of any use to anyone that is not Swiss without their
bank secret? It's a closed country, hard to reach, with no natural or other
resources.

\- Yes it's stable, but how is it any more stable than any other Western
country? Besides like I already said it's very closed (the stability and
closedness are intertwined, of course) - its internal stability has little
value to anyone but the Swiss themselves.

\- No the US doesn't have enough oil for its own use - my point is that at
least it has some. I was contrasting it with Switzerland which has nothing (no
offense to Swiss readers, I love hiking in your mountains so thanks for that
;) )

\- You coastline argument is a red herring. A country that is basically a
bunch of islands with irregular coastlines will of course have more coasts
(but Greece has only a bit more than the US). Amount of kilometers of
coastline is just a proxy for how much exploitable sea area that represents,
and how much access it provides to the rest of the world for trade purposes,
and the US crushes Greece on both accounts.

\- Advanced technology: to paraphrase Charles Babbage (badly), "I'm unable to
comprehend the level of confusion that could lead to such statements". Despite
the sensationalist reporting and the high growth rates of China (and the rest
of Asia) over the last 2 decades, China is still effectively a third world
country. Its R&D capacity is below Western level and production capacity is
highly concentrated in low-tech mass manufacturing like steel, clothing and
electronics assembly. If you are serious in claiming that the Chinese have
overtaken the West in technological development you'll have to come with proof
of such claims, considering that all measures that would reasonably be used
for such statements (GDP, R&D budgets, production in high-tech sectors, origin
and ownership of leaders in the field, ...) solidly point to the US as world
leader (with the EU as a second).

\- I'm not sure what you're comparing by. GDP and consumption power are lower
in Sweden, unemployment roughly equal, debt (as a ratio to GDP) is only a
little bit below the US, and to get out of the near-bankruptcy state that
Sweden was in in the early 2000's they had to significantly raise taxes yet
cut in benefits. Not sure where you're going with this but Scandinavia being
so much better is not a closed case as you try to make it seem.

------
mmt
_Since Earth is not borrowing money from Mars, does the debt explosion really
matter, or is it just an accounting device?_

To me, this has always been the most crucial question to any discussino of
"debt," but I don't believe the article actually answered it[1].

Perhaps more to the point, I don't believe I've encountered a concise
explanation as to _how_ debt, particularly sovereign debt, affects the real[2]
worldwide economy.

Would a country go to war over a sovereign default?

[1] The section heading is "Why It Matters," so it's not really hiding that
it's begging the question.

[2] i.e. human behavior as it applies to production and trade

------
mmaunder
It's worth reading a history of Usury if you're interested in more on the
history and morality of debt.

<http://en.wikipedia.org/wiki/Usury>

~~~
_delirium
Not sure it was correct, but it's interesting how much of the focus
traditionally was on the lending side of the equation, whereas today it's
mostly on the borrowing side. Today people will look disapprovingly on someone
who borrows more than they can repay, but traditionally people would look
disapprovingly on someone who lent to someone who couldn't repay it. Regular
debt amnesties every N years also seem to have been a common traditional
feature, making it impossible for debt to persist beyond short-term loans (and
discouraging lending to someone who you weren't _very_ sure was going to repay
it soon).

It does seem that approach has some structural benefits, in that it doesn't
produce long-term webs of debt that will never actually be resolved, but with
everyone carrying on as if they will. Forcing a debt reset every 7 years or 20
years or whatever keeps things somewhat honest, making sure people are really
talking about assets they have, as opposed to assets they supposedly are
promised but will in reality never get.

~~~
yummyfajitas
I think you are confusing two separate issues. One is the probability of debt
repayment, and the other is debt lifetime. The two are not necessarily
related.

Payday loans have a relatively low level of debt repayment (necessitating high
interest rates) and also a very low debt lifetime (days to months). In
contrast, many AAA corporate and govt bonds have long lifetimes and high
repayment rates (until recently, mortgages did as well). There are also low
repayment probability, long term debts (subprime mortgages) and high
probability, short term debt (commercial paper).

I don't think debt lifetime is that important a factor. Long term debt makes
sense to finance long term investments.

------
Ardit20
"Falling property prices caused defaults and a liquidity crisis in the banking
system so severe that the authorities feared the cash machines would stop
working."

Wow, that can happen? Wouldn't that mean that no one would have any money but
the people who have kept cash and rather than a 1930s style depression, more
of outright anarchy!

