Article : why debt growth must exceed interest payments

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

What are the net expenses in Week 1 in your scenario? -- They are:

1. A $10 loan payment;
2. A $1 wage payment.

That is a total of $11. Right? Yes, of course that's right, and you can see that it is.

Now, what are the net incomes in Week 1 in your scenario? -- They are:

1. gnk, $10-$1=$9;
2. tpc, $1.

There were two transactions that week:

1. gnk paid tpc $1 wage
2. tpc paid gnk $10 on the loan

When you wrote "net expenses", you added up the amounts paid (gnk paid $1, tpc paid $10, total $11.)

When you wrote "net income", you did not do the converse. You did not add up the amounts received (gnk received $10, tpc received $1, total $11.)

Rather you netted out gnk's two payments (he had $10 income and $1 outgo, for a net of $9). For tpc, you just considered one of his two payments, his wage income of $1.

What you compute as "net income" is the meaningless sum of two incompatible numbers, hence comparison of that number with any other number is also meaningless.

Most folks have a clue. A few don't.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

The actual fact is that TPC's excuse for accounting would get him thrown in prison.

I don't think so.

Rest assured, Nivelles, that I would have added you to my ignore list a couple of days ago, except that I am still intrigued as to how one poster, who has been on iTulip for a year now with a modest and sensible posting history, could erupt in such a volume of erroneous analysis and ad hominem attacks on this particular subject. I'm still suspecting that you are an accountant. Are you? You did not answer the first time I asked you that, so far as I noticed.

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

No, TPC, that's how "balancing the books" is done.

When you give tpc a +100 you have to give gnk a -100. That is called "balancing the books."

You have to do that with any kind of bookkeeping. In any kind of bookkeeping, or accounting, the books have to balance. The only thing that changes, in different systems, is in the details of balancing the books, not in the basic fact of doing it.

You did not balance the books. You started gnk off at 0. That was wrong.

I started everyone off with 0 cash on hand. Then gnk scribbled his mark on 100 scraps of paper and had 100 units of $GNK$ currency on hand, freshly made.

Some kind soul above observed that you do not understand single entry bookkeeping. I see you agree.

[Rajiv]

Re: Article : why debt growth must exceed interest payments

My difference with TPC boils down to the fact that, in trying to make his scenario work, he foolishly kept counting the same $1 note twice. He didn't realize he was doing that, but I noticed it, of course.
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The books have to balance in any system, y'know. ;-) When it's done right.

Yes you are correct of course. Whether it be single entry, or double entry, the entries have to be made correctly. It is just that double entry can help one avoid stupid mistakes -- they are still possible, and books can still be cooked, but it makes the detection of the errors and cooking easier. double counting is much harder.

I think it is worthwhile educating TPC -- Also it will also educate me, as it has been sooooooooo long since I last did accounting.

If you don't mind, would you do a side by side of Double entry, single entry - correctly done, alongside the point where TPC made his error. Please! If it is not too onerous, and time allows for it.

Thanks

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

Yes you are correct of course. ...

If you don't mind, would you do a side by side of Double entry, single entry

To what do you respond? To whom do you speak?

[Rajiv]

Re: Article : why debt growth must exceed interest payments

I started everyone off with 0 cash on hand. Then gnk scribbled his mark on 100 scraps of paper and had 100 units of $GNK$ currency on hand, freshly made.

That was error 1

At that point gnk -100 tpc +100 net still 0 -- If you started at zero, after that initial transaction you should still be zero. You have +100 gnk is -100. In other words, if you do not pay back gnk, gnk has lost $100 which has to come out of his capital, and tpc has just enriched himself by $100, and the sherriff is out looking for tpc!

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

Self liquidating Cow (with emphasis on "Self"). Your car could not pay for itself, you paid for it. Yes the quote "Used for any other purpose, it is non-self-liquidating and results in payment obligations with no countervailing source of income." balls up what should just simply be stated as "productive" VS "unproductive" Debt. I think we would all agree that the BmR was not a productive debt, but a consumption based debt.

Hope that makes sense and you don't have to translate Jtabeb again (which you should be getting paid overtime for).

Well - bad news. It didn't make sense. It reads as if you had posted earlier on this thread and I had responded to your post with some clarification or further comment. But I don't see any previous jtabeb comments on this thread.

I agree well enough with your explanation of what self-liquidating debt is, and entirely agree that my fine BMW (BmR) was not such. But I don't know to what you are responding, or the point of your response.

Whatever ...

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

That was error 1

At that point gnk -100 tpc +100 net still 0 -- If you started at zero, after that initial transaction you should still be zero. You have +100 gnk is -100. In other words, if you do not pay back gnk, gnk has lost $100 which has to come out of his capital, and tpc has just enriched himself by $100, and the sherriff is out looking for tpc!

What was error 1? To whom and to what do you respond?

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

If you started at zero, after that initial transaction you should still be zero.

Not in single entry bookkeeping. In a simple cash based system, that just tracks how much cash you have. The scenario started with 0 cash, then gnk made 100 $GNK$. At that point, gnk then had 100 $GNK$ and tpc had 0 $GNK$. From that point onward, there was always exactly 100 $GNK$ in the system, and each one of those 100 scraps of paper was always either in gnk's hands or in tpc's hands.

Besides, there is no sheriff in that scenario, so tpc has no concern there ;).

[unlucky]

Re: Article : why debt growth must exceed interest payments

Not in single entry bookkeeping. In a simple cash based system, that just tracks how much cash you have. The scenario started with 0 cash, then gnk made 100 $GNK$. At that point, gnk then had 100 $GNK$ and tpc had 0 $GNK$. From that point onward, there was always exactly 100 $GNK$ in the system, and each one of those 100 scraps of paper was always either in gnk's hands or in tpc's hands.

Besides, there is no sheriff in that scenario, so tpc has no concern there ;).

TPC, it sounds to me that at the moment just after gnk has created the $100, and before "lending" it to tpc, he has an asset with no corresponding liability - i.e. he has $100 equity. Exactly why this $100 is an asset is an interesting question; perhaps it represents an ownership share in gnk's property or perhaps gnk is a government who will lock up anyone who refuses to accept it as payment.

Either way, if I'm not mistaken there is $100 of equity in your system, whereas in the analysis being offered by others there is $0 of equity. Never the twain shall meet!

[ThePythonicCow]

Re: Article : why debt growth must exceed interest payments

TPC, it sounds to me that at the moment just after gnk has created the $100, and before "lending" it to tpc, he has an asset with no corresponding liability

Yes, that's true.

The essential detail of my scenario was the flow of tpc's payments to gnk ($10/week) back to tpc as wages ($1/week), thus enabling tpc to make that critical 11th and final week $10 payment and thus paying back both the $100 principle and the $10 interest on his $100 loan all without introducing more than $100 total money into the system.

The startup conditions and initial steps I kept as simple as possible, to the point of being rather silly.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

There were two transactions that week:

1. gnk paid tpc $1 wage
2. tpc paid gnk $10 on the loan

When you wrote "net expenses", you added up the amounts paid (gnk paid $1, tpc paid $10, total $11.) ...

No, I added up the amounts that were due, according to your scenario. I did not add up the amounts paid when I did what I did.

You have things confused again. You've made the blunder of calling the expenses "paid" before they really were.

I did not do that, because I knew better.

As far as your transactions 1 and 2, those are supposed to be the transactions, but will they actually occur? Is the question. Intentions are not results, until after the intentions are achieved.

Agreeing to repay a loan, and actually repaying it, are two different things. You know that.

When you wrote "net income", you did not do the converse. You did not add up the amounts received (gnk received $10, tpc received $1, total $11.)...

$11 is not the total for the amounts received. You have that wrong. gnk received only $9 that week. We know that, because that is what he was left with that week. Your own spreadsheet shows that much, at least.

Maybe you'll be able to understand this.

gnk borrows $100 from you on Monday. He agrees that he will pay it all back on Friday.

Friday arrives, and gnk shows up with a single $1 bill in his hand.

Between 3pm and 4pm he hands the $1 to you, and you hand it back to him, and he hands it back to you, and etc, until the $1 has gone back and forth between you a hundred times, and you end up with it.

gnk then leaves.

Has he paid you back the $100 he owes you?

Certainly not. It doesn't matter at all that the $1 was passed back and forth a hundred times, gnk still owed you $99 when he left, because he only gave you $1. He did not repay the loan.

The principle in that is exactly the same as what you did. Doing things like that, you'd screw yourself out of $99 with every $100 you lent.

That's why the net has to be used, to have things correct.

Passing a dollar back and forth is not the same as making a payment.

Do you understand?

Most folks have a clue. A few don't.

In my experience, most don't, and only a few do.

[Nivelles]

Re: Article : why debt growth must exceed interest payments

I don't think so.

Then you are just ignorantly wrong, again, because the kind of "accounting" you did, out in the real world, really could get you thrown in prison, right beside Madoff.

But of course you don't know enough about it to understand why I'm telling you that.

[Glenn Black]

Re: Article : why debt growth must exceed interest payments

My point is that it is incorrect to claim the problem is due to exponential growth. We could have the same problems with linear or other growth curves; we could not have the same problems with exponential growth; we probably don't even have exactly an exponential growth anyway (real world messy curves seldom fit any particular analytic function perfectly.)

I'm not denying we have a problem with mushrooming debt. I'm not denying that one way to (approximately) model mushrooming debt is with exponential curves. But focusing on the word "exponential", with examples of such functions, is a distraction from the real causes of our economic problems. For example, your 7% example becomes less scary if I just adjust the exponent or its time scale. A growth of 7% per billion years is no problem; the sun turns into a red giant destroying all life on earth before that growth gets out of hand.

Exponents don't kill economies. Mushrooming fraud in an economies major institutions kills economies... or something like that.

Which Doctor, which video, do you refer to?

Dr. Albert Bartlett, Prof. Emeritis, Univ. of Boulder Colorado

[Minion]

Re: Article : why debt growth must exceed interest payments

Hi Itulipers,

Not sure if a random engineer's opinion carries much weight, but just in case:

In a closed economy, the force of inflation is new debt and the force of deflation is interest. For the price level to stay stable, the money supply must grow at a rate equal to the interest on the outstanding currency (debt). This adds more debt and therefore, a feedback loop which ends in exponential growth of money supply (debt) just to keep a stable price level.

Ka-Poom is just the side effect of central banks under, then over-reacting to this due to the lag between money creation and economic activity (velocity?)

*edit* fiscal deficits amplify the eventual "poom"

-amateur economist