PKT message, Re: "debt virus"

Brief replies inserted below:

>From: "Gunnar Tomasson"

> ----- Original Message -----
> From: William B. Ryan
> To: pkt@xxxxxxxxxxxxxxxx
> Sent: Sunday, December 15, 2002 6:48 PM
> Subject: Re: "debt virus"
>
>
> Debts are contractual obligations expressed in monetary terms.
>
> Agree.
>
> We should expect in a balanced system that debt should be proportional to the rate of production.
>
> Agree - by definition "a balanced system" is one where debt is proportional to the factor value of work in process.
>
> The rational utilization of debt and its counterpart consumer credit allows consumers to balance their consumption over their lifetimes. It allows them, for example, to live in a house or drive a car, right now, and pay for them over their lifetimes as their incomes are increasing.
>
> Disagree - the "rational utilization of debt" means different things to the Enrons of the world and their Creditors.
>
[reply] What is "rational" to "the Enrons" and "their Creditors" should be irrelevant to what is considered to be rational by scientific observers.
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> For entrepreneurs, it allows them to recoup current investment from future sales. This facilitates the organization of the developing factors of production into their most efficient combination, as judged ultimately by final consumers in free markets. The availability of investment credit not constrained by the prior existence of monetary hoards was the great financial innovation that made possible the Industrial Revolution.
>
> Disagree - "investment credit" is as old as the division of labor.
>
[reply] There were indeed rudimentary precursors to modern credit mechanisms going back to antiquity. It is nonetheless true that in antiquity - as opposed to the modern era - most production, trade and commerce was conducted either in kind, through barter or indirectly with commodity money.
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> The expectation, then, for both consumers and entrepreneurs, is that their future income will increase proportionately to their current spending, which will enable them to amortize or repay their respective debts as they become due. Expressed mathematically, the expectation, as a statistical matter for the economy as a whole, is that income plotted as a curve against time is a tracking curve to spending.
>
> Disagree - the "business cycle" has deflated such "expectations" countless times in history.
>
[reply] Expectations are always being deflated. Our goal should be to eliminate the business cycle.
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> There is a way to explain the "debt virus" without recourse to the stupid fallacy that interest on bank loans is its root cause. In that explanation the "debt virus" will manifest even if the interest on bank loans could somehow become zero.
>
> Why "stupid"?
>
[reply] I take it from this that you think it is not stupid. Or do you agree it is stupid but would like to hear my explanation?
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> If the period of production is lengthening - which is what is happening with industrialization - it can be demonstrated that the costs of production are increasing disproportionately compared to the disbursement of income.
>
> Where is the proof for the proposition that "The period of production is lengthening"?
>
> Computerized "on-time" inventory management is the rage these days - it shortens the period of production.
>
[reply] Perhaps you do not understand the concept. Anything that increases efficiency in the productive process increases the period of production. In this respect just-in-time delivery increases the period of production because it frees up resources for other uses. It relates to the increasing division of labor and specialization in production. It does not relate to the time it takes to produce a specific item, which, in any case, has nothing to do with just-in-time delivery.
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> The reason for this is that with industrialization the account balances held by firms are increasing quantitatively in ratio to the account balances held by consumers, yet the account balances held by firms represents costs that are being charged against production for consumption [*].
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> Accounting practices have no bearing on the "period of production".
>
[reply] That is true, but it has everything to do with the expensing of the costs of production against production being sold into final consumption.
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> If the costs of production are increasing disproportionately compared to consumer income, it is impossible for the reflux from consumer income to proportionately amortize debt all the way up the chain of production.
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> Economics 101 - all "costs of production" = "income" of suppliers of factor inputs a.k.a. "consumers".
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> The result is debt that is increasing exponentially to production.
>
> See previous comment.
>
> It is a dilemma in accounting and nothing more.
>
> See previous comment.
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> As such it is amenable to conscious adjustment.
>
> Better go back to basics - Economics 101.
>
[reply] Economics 101 is in error in this regard. You start with false axioms you end with false conclusions. You could start with the assumption that all costs become income. That is something quite different than saying all costs equal income when both are plotted on the same chart against time. It can be easily demonstrated empirically that they are not equal. The question then becomes: Do they remain proportional through time? Double entry accounting assumes that they do when in fact they do not with improvement in process. It is the reality of accounting practice and not pure economic theory that is in doubt.
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> Gunnar
>
> --
>
> [*] Two curves are converging. There is the debt amortization schedule - keyed to depreciation - which plots a limiting function. The period of depreciation is increasing to a limit - say thirty years - at which point the costs of production are charged against sales into final consumption in their totality. There is the curve that plots the lengthening in the period of production which is unlimited with continuous improvement in process. That is to say, consumer income will fall as compared to the costs of production without limit. The curves converge making it impossible to amortize debt.

[addendum] Strictly speaking both are approaching a limit. The expense curve is approaching a limit where it is a straight time delay of the costs curve and is the same slope. The income curve is approaching a limit where it is a constant ratio to total costs through time, because it is not possible to totally eliminate labor or other resources from production. At some point - far into the future - it will become impossible as a practical matter to squeeze additional waste out of the process. But long before that point is reached the curves must converge to a limit where the rate of profit is zero. The point of maximum efficiency can therefore never be approached for purely financial - as opposed to real - causes. But there are simple ways to compensate for this which are in effect merely accounting adjustments.