Bulk of Debt to GDP generated by investment?

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kmarinas86's picture
kmarinas86
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Bulk of Debt to GDP generated by investment?

How could attempts to increase investment increase debt? It is not because they are investments but because the way they are financed involves debt that doesn't get paid for decades, or in some cases, it doesn't get paid at all.

Look at Japan for example. A lot of infrastructure spending was financed by government intervention. The result was that Japan's debt (non-periodic) exceeded its GDP (annual). Now would it make any signficant difference to the result if private industry was able to take on much just as much debt to have a similar amount invested in infrastructure? Even considering the different way it would be paid for (tolls instead of taxes), it does not seem that it would affect Debt-to-GDP any differently. The real difference of course is that such business would be heavily leveraged and more likely to hurt their investors and pensioners.

In the US, the government intervention (primarily by the Democratic party) which allowed mortgage lenders to provide unaffordable loans to those who couldn't afford it. In hindsight 20/20, it is obvious that it had caused private debt to skyrocket. This problem is then further exacerbated by recent government intervention in the form of stimulus plans, and now public debt is higher than ever before.

The simplest solution to these problems would be just to keep spending on infrastructure and investment in houses in moderation. However, that level of investment corresponding to "moderation" may be so low that it would involve a reduction of prospertity to levels reminiscent of the U.S.S.R.. Thus that simple solution may lead to a less than desirable standard of living. If and when society manages to excel in terms of Energy and Enviroment, the effects of adhering to such criteria of moderation may prove to be needlessly forcing people to accept a backwards economic trend.

A more complicated solution would not involve reducing the volume of investment, but rather, it would reduce the financial barriers of investment and market entry. Under that constrain, investment in infrastructure should be financed in such a way that does not result in compounding of deferred obligations. Of course, that would mean that somehow compounding interest would have to be avoided in the first place. A simple way to do this would involve having a financial clearing house where new investments are paid by a fund into which debts in connection with old investments are paid for. Thus, as soon as payment to an old debt is made, it is automatically lent to a new investor. That is essentially a Ponzi scheme in reverse because a Ponzi scheme pays old investors with the money of new investors. In Ponzi schemes as well as its reverse counterpart, the old group is typically larger than the new group. Thus the classic Ponzi scheme is less sustainable than the reverse counterpart described. The reverse counterpart, where a large old groups pay their debt while simultaneously lending to smaller new groups, can afford to pay at a slower rate than what is needed for the typical ponzi scheme. Thus, for example, such payments could be made over 30 year intervals in which the total of new investments (1 year old) is valued 1/30th of the old investments. This would avoid compounding interest entirely, reducing the costs of starting a business, easing market entry, which allows for greater innovation and compettition.

I think that inevitably that the "Bulk of Debt to GDP" will be "generated by investment" with or without compounding interest. However, I am certain that somehow I am close to finding a theoretical solution that can feasibly allow investment of all kinds to be financed with no compounding interest, which in the long-term may reduce the unsightly ratio of debt to GDP. I think that it can do all that while having the practical result of abolishing Keynesian/Mugabian idelogy.

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pleaseremoveme
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Re: Bulk of Debt to GDP generated by investment?

Keynes had the very same fantasy you did, of an investment fund moving from one investment to the next. I believe I read that on Steve Keens site somewhere, or possibly on geldreform.de.

The problem is that speculation makes people invest at inflated prices, or what comes down to the same thing: in the wrong markets. For example, if you loan money to build houses, you should be able to pay you loan back by renting the houses, not by selling them. Even if your intention is to sell them, or to live in one of them yourself. Because in selling the houses, you're selling your debts along with it, and the buyers should stand a fair chance of paying of the debts by renting the houses too. Unfortunately, people have invested in houses just to profit from rising prices. 

 

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kmarinas86
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Re: Bulk of Debt to GDP generated by investment?
woupiestek wrote:

Keynes had the very same fantasy you did, of an investment fund moving from one investment to the next. I believe I read that on Steve Keens site somewhere, or possibly on geldreform.de.

It's hard to find this, can you clarify?

woupiestek wrote:

The problem is that speculation makes people invest at inflated prices, or what comes down to the same thing: in the wrong markets. For example, if you loan money to build houses, you should be able to pay you loan back by renting the houses, not by selling them. Even if your intention is to sell them, or to live in one of them yourself. Because in selling the houses, you're selling your debts along with it, and the buyers should stand a fair chance of paying of the debts by renting the houses too. Unfortunately, people have invested in houses just to profit from rising prices.

I do not think your statements here present the same problem which I am attempting to deal with. The problem that I believe exists is the cost of compounding interest that doubles or in some cases triples the cost of owning a house or other form of property. The added cost of compounding interest is not created by speculation because it already exists prior to speculation in the form of higher monthly payments.

I am not sure if Keynes really proposed anything similar to my idea, and I think it is probable that there is a signficant difference between Keynes' ideas vs. mine which you did not account for. What my proposal does is reconcile the following needs:

1) The need for the builder to recieve payment upfront

2) The need for most homeowners to pay over time

Need 1&2 imply

3) The need for most new homeowners to borrow money

4) The need for established homeowners to pay down what they borrow

The people of 4 (established homeowners) were formerly people of 3 (new homeowners), and the cash they use to pay down thier debt is the source of money used for covering the cost of the new homes. Some people moving into the new homes will have enough equity compared to the value of the home such that they will have no debt tied to it. Those who have not built enough equity to match the value of their property will have the associated debt, requiring them to be just as those established homeowners (of 4) by paying it down. The rate at which they do so would be obligated by the rate of growth of new property relative to established property. The faster the number of homes rises, the higher the rate. In this, exchanges between the M1 money supply and the M2 and M3 money supplies is unnecessary, and as a result, no money creation is encouraged by the operation of my plan. Thus, the primary benefit of this is the dramatic 50% cut (or more) of oppurtunity costs of setting up property for households, firms, and even for government. The benefits of doing so are so large that any transition costs will be peanuts by comparison.

pleaseremoveme's picture
pleaseremoveme
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Re: Bulk of Debt to GDP generated by investment?

Firstly, you called this thread 'Bulk of Debt to GDP generated by investment?'. I think the answer to that question should be: no. The reason for the current overindebtness is speculation. Secondly, blaming Keynes for the actions of central bankers and governments right now, is like blaming Jesus for the inquisition. If you actually read the bible and find out what Jesus said, obviously he didn't suggest that people should be tortured into submission to the Church. To call that 'Christian' is pure blasphemy. The same thing goes for keynesian economic policy. I'm just guessing here, because I haven't read Keynes writings yet, but I don't think he would have approved of what governments and central banks have been doing since his dead. Lastly, no, I don't recall where I have read that Keynes had the idea of a rolling investment fund. 

 

DrKrbyLuv's picture
DrKrbyLuv
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Posts: 1995
Re: Bulk of Debt to GDP generated by investment?

I think that a big problem has been that investments in the real economy were temporarily surpassed by the casino alley off Wall Street.   Average manufacturing net profit was just over 5% in 2007 while the financial sector was hitting over 15%. 

G.E., GM, AIG, and many other corporations stopped investing in products and services and started pumping money into financial markets where the return looked better and they thought they could eliminate risk by writing credit default swaps.  Everyone and everything big became a big hedge fund.

This helped wipe out national industries in many western countries.  This was all fueled by bubbles, one after the other get rich for free (no real economy investments but rather investments in debt instruments) scams.  

Larry

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