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…debt can be used to finance four different financial transactions:
1. productive investment
The first two add to the productive capacity of an economy. When the government builds roads, dams that produce hydro-electric power, or other infrastructure projects, debt is being used productively. Similarly, when debt is used by companies for research and development or new ventures, it may lead to the production of new goods or services, which then can lead to an expansion of GDP.
Debt that is used for consumption, however, is considered a dissipation of capital. Nothing is produced; rather, something is consumed. After something is consumed—such as a basic necessity like food—the debt remains even though the item consumed no longer exists. When debt is added for consumption purposes it enables the debtor to pull tomorrow’s demand forward into the present. As debt is used to expand consumption in the present period, it is in essence borrowing from the future therefore reducing future demand.
Debt taken on for speculative purposes is also unproductive as it can lead to asset bubbles or overinflated prices for assets. Eventually all asset bubbles go bust. The overinflated asset values decline but the debt still remains. Think of the recent housing bust and the technology bubble as an example of speculative bubbles financed by debt for unproductive purposes.
from this article.
So, “Is debt good or bad?”
My response, “Debt for what?”
Common system dynamics insight – delay makes thing worse:
“We are seeing the central banks trying to play catch-up and facing such intense inflationary pressures, in some cases, because they ran a monetary policy, set interest rates … too low for too long, on purpose,” said Chamie.
“Now they have to pay the piper. And it is time to hike rates, probably more so than what they would have had to have done if they’d just started hiking rates sooner.”
from this article.
One of the most serious and, in many cases now unpredictable, risks facing investors is “country risk” – where the political and economic stability of the host country is questionable and abrupt changes in the business environment could adversely affect profits or the value of the company’s assets.
Let’s never forget, in our rush for profit, that there is a real human cost involved.
These are not written by me, but a merciless capitalist.