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…debt can be used to finance four different financial transactions:
1. productive investment
2. innovation
3. consumption
4. speculation

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?”

We’ve all seen kids present parents with irrational demands. It could be a pony, a jet pack, a real light saber, a trip to the Moon, or a swimming pool on the roof of the (single-story) house. Adults are adept at deflecting these requests—sometimes with logic, and sometimes with distraction tactics. Adults know that some of the demands are technically impossible, or that others are simply outside their financial means. Just because we want something doesn’t mean it is possible to have it. Just because we want our fossil fuel alternatives to be as cheap and convenient doesn’t mean they will be, no matter how much we might belly-ache.

Somehow, kids who vow to eat only ice cream as adults or look forward to never having to go to bed learn for themselves as young adults that these are not viable strategies—no matter how desirable they seemed to be as a kid. Likewise, kids grow out of fantasies like believing in Santa Claus, the Easter Bunny, and the Tooth Fairy. Yet, just as we don’t shake all of our mythical beliefs as adults, we don’t shed all of our irrational expectations and demands for the future.

When we are told we can’t keep growth going, that we face resource limitations, or that alternative energy sources may not be able to maintain our current standard of living, we see tantrums. When we’re told we can’t have free checking anymore, we howl in protest. When fuel prices skyrocket, airlines dare not raise airfare enough to cover costs, or the fits we throw will cause significant loss—so they lose money with under-priced fares and hope to make it up by keeping prices a bit elevated after fuel prices begin to ease. When taxes go up or stamps cost more, what do we do? We kick and pound the floor. Granted, some injustices are addressed effectively by tantrums, and sometimes with stunning results (Boston Tea Party). But on the whole, our tantrums are not held in check by the equivalent of a parent. We’re free to howl.

Many look to political leaders for, well, leadership. But I’ve come to appreciate that political leaders are actually politicians (another razor-sharp observation), and politicians need votes to occupy their seats. Politicians are therefore cowardly sycophants responding to the whims of the electorate. In other words, they are a reflection of our wants and demands. A child who has just been spanked for throwing a tantrum would probably not re-elect their parent if allowed the choice. We all scream for ice cream. Why would we reward a politician for leading us instead to a plate of vegetables—even if that’s what we really need. Meanwhile we find it all too easy to blame our ills on the politicians. It’s a lot more palatable than blaming ourselves for our own selfish demands that politicians simply try to satisfy.

My basic point in all this is that I perceive fundamental human weaknesses that circumvent our making rational, smart, adult decisions about our future. Our expectations tend to be outsized with respect to the physical limitations at hand. We quickly dash up against ideological articles of faith, so that many are unable to acknowledge that there is an energy/resource problem at all. The Spock in me wants to raise an eyebrow and say “fascinating.” The human in me is distressed by the implications to our collective rationality. The adult in me wants less whining, fewer temper tantrums, realistic expectations, a willingness to sacrifice where needed, the maturity to talk of the possibility of collapse and the need to step off the growth train, and adoption of a selfless attitude that we owe future generations a livable world where we can live rich and fulfilling lives with another click of the ratchet.

from this post.

Fundamental human weaknesses?

The adult in me says, “Let nature takes its course.” The human in me says, “Your food and knowledge comes from human community. You have the obligation to contribute to human community.”

In summary, the overall me says, “Do your best to influence the course to where you envision, and no hard feeling if it falls short.”

One of the most valuable things, and very easy to forget, is relationship. Social cohesion of the global society is a key stock, on a par with physical capital stock and natural resource and sink capacity. Just like damage of nature will affect the economy, damage of society will also affect the economy. Changes in each of them will change the other two significantly. Unfortunately, the invisible property of social relation compared to the other two makes it easy to be forgotten (and thus vulnerable).

It is a bit like Morale in an organization. Hidden, but important to survival of the organization.

Social cohesion is strongly affected by distribution (relative wealth). Wider and wider rich-poor gap (rich gets richer) hurts social relation; decreasing the gap so that weaker people can survive strengthens social cohesion. The problem of current system is that it does not internalize 2 major externalities enough – nature/environment and society/politics. There is social capital but it is not yet defined and entered the mainstream.

The social cost will need to be paid by one day. Society with low social cohesion is very vulnerable to shock. Conflicts make it even weaker. Survivalist who is aware of the crisis but just prepare for himself or his family is likely failed to survive because lack of community support. Human is social animal, don’t underestimate the importance of society.

Of course, it needs not be the case of collapse if we value the cohesion of global society. In this age of globalization, we are actually very interconnected and inter-dependent. We now have the common future (命运共同体).

Currently global community is dominated by international and inter-MNC (multinational corporation) relationship. These are very fragile and better be diversified to many types of relationship, such as inter-regions, inter-cities, inter-NGO and even inter-individual among different nations. The creation of internet and social networking web services is actually opportunity for sustainability, if we know how to utilize them.

Note: When measuring social relation, consider quality besides quantity. Various metrics in social network analysis may be helpful.

How to make a civilization fail? Borrow until broke, from future generation.

Inspired by this column.

… being persuaded to spend money we don’t have, on things we don’t need, to create impressions that won’t last on people we don’t care about.

One interesting idea is the quadrants formed by self-regarding to other-regarding behaviours axis and novelty-seeking to tradition/conservation axis. He argued that our systems systematically encourage one narrow quadrant of self-regarding and novelty-seeking behaviour. Therefore the solution is not about changing human nature, but opening up the breadth of human possibilities.

While China’s GDP has overtaken Japan as the world’s second largest, it is interesting to find that China had abandoned Green GDP few years ago because in some provinces the pollution-adjusted growth rates were reduced almost to zero.

Overpopulation, or over-consumption?

No, not a question of either/or, it is BOTH.

The earth may support 7 billions Cubans,
but only 2 billions Americans.

This is my question after reading M. King Hubbert’s Two Intellectual Systems: Matter-energy and the Monetary Culture.

Interesting quote:

Despite their inherent incompatibilities, these two systems during the last two centuries have had one fundamental characteristic in common, namely, exponential growth, which has made a reasonably stable coexistence possible. But, for various reasons, it is impossible for the matter-energy system to sustain exponential growth for more than a few tens of doublings, and this phase is by now almost over. The monetary system has no such constraints, and, according to one of its most fundamental rules, it must continue to grow by compound interest. This disparity between a monetary system which continues to grow exponentially and a physical system which is unable to do so leads to an increase with time in the ratio of money to the output of the physical system. This manifests itself as price inflation. A monetary alternative corresponding to a zero physical growth rate would be a zero interest rate. The result in either case would be large-scale financial instability.

Economy depression and price inflation of commodities right now are not coincidences. Watch out!

Just discover Scholarpedia. It might be a good try to gather all the knowledge we have in a place accessible to public, instead of subscribing million of journals. Would it change the way scholar converse?

It is interesting to see how epidemics and predator-prey model being presented in the differential equations format. What do you think if they are presented in stock and flow diagram, like Figure 4 of

A good example of online System Dynamics Interactive Learning Environment (ILE):
Oil Dynamics
helps you to understand dynamics of oil price better.

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