Debt

…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?”

How to reform monetary system so that it can fit with sustainable economy?

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!

Exponential growth lecture

Some lectures about the exponential growth. There are 8 parts in this series.