Debt implies a strong statement about the future, and a high degree of reliance on forecasts. If you borrow $100 and invest in a project, you still owe $100 even if you fail in the project (but you do a lot better if you succeed). So debt is dangerous if you are overconfident about the future.
Nassim Nicholas Taleb
There is confusion between the "disease" — high levels of debt — and the "cure" — the reduction of the level of debt now under way (deleveraging). Debt within the financial system is falling as some borrowers default, destroying existing debt and also limiting the capacity for further credit creation. Total losses from the crisis are estimated by the International Monetary Fund at about $US4.1 trillion ($A5.4 trillion), of which $US2.7 trillion will be borne by financial institutions.
Government ownership, or de facto nationalisation, has become the primary option to recapitalise the banking system in many countries. Even after recapitalisation there is likely to be a capital shortfall in the global banking system of about $US1 trillion-plus, forcing a contraction in global credit of about 20-30 per cent from existing levels. This is much more than a banking problem. At this point it affects the real economy.
Satyajit Das at The Age on End of the Age of Plentiful Debt.
Economic growth is a function of population growth plus improving productivity.
GDP is simply a nation’s output: it must grow if the increasing population is to be fed, and because we are an endlessly inventive and curious species, stuff gets invented all the time and new ways of doing things are found. New technology constantly improves productivity, which means the same number of people can produce more stuff by doing less.
The only problem that occurred over the past ten years – the only one in my view – is that debt grew faster than economic growth.
That is, the present generation borrowed excessively from the future to pay for a better life today. It’s now payback time.
Alan Kohler at the Business Spectator.
The intellectual fashion has been for companies to have “efficient” balance-sheets. If cash is not immediately needed to reinvest in the business, it should be handed back to shareholders, who can use it more profitably elsewhere. Hoarding cash for a rainy day was seen as a failure of executive imagination.
Corporate-finance theory may state that the value of a company should not be affected by its decision to finance itself with equity or debt. But, in practice, interest payments are generally tax-deductible; dividends are not. That gives companies a big push in the direction of debt.
Buttonwood in the Economist.
