I once asked Robin Hanson a question that occurred to me when watching a video that was half accurate economics and half crankery. He said he didn’t know the answer because he didn’t really know much macroeconomics.
Incidentally, the question was this: If you add up everyone’s cash-equivalent assets (actual cash, checking accounts, certificates of deposit, etc.) and then subtract everyone’s debts (mortgage balances, corporate and government bonds, money a bank has to pay to depositors, etc.) is the total positive or negative? In other words, if every last dollar-denominated debt or other debt-like obligation was paid back, would there be any money left in the world?
Interesting, and indeed fundamental question—if your preferred economic system isn’t capable of handling everyone being debt free (or you don’t know how it would work that way), then there is a serious problem.
This is a different question from whether people should go into debt, or whether there can be Pareto-improvements through debt transactions; it’s asking whether you hit some kind of (small-s) singularity as a result of nobody being debt due to an extreme preference for such.
We know for a fact that there have been economies without this kind of debt—they’ve all been primitive, of course, but they sustained the existence of humans, without anything bizarre happening. So a Level 2 understanding of economics needs to be able to handle these kinds of economies without having to treat them as a super-special case.
My initial answer to the question is that, well, sure it has to be positive because the money has to be paid to someone, and some people are cash-positive after paying their debts. But then, it may not even be possible for everyone to pay off debts—it could be that attempting to engineer this will necessarily bankrupt numerous people.
And no doubt, if everyone were brainwashed by Dave Ramsey, the government would still probably try to protect banks’ inalienable right to a loan market, despite the fact that no one wants loans—and these policies would be promoted by the same brainwashed people!
I’m pretty sure it will be negative. Many long term debt instruments are ultimately backed by the promise of future productivity. Debt is essentially a mechanism for transferring wealth from the future to the present. This is why debt for investment in production is generally good for an economy and debt for consumption (most consumer debt) is less good.
Cash and cash-equivalent assets represent a small fraction of the actual wealth in the world. Wealth exists in the form of actual things of value (houses, factories, human capital, etc.). Cash is just a medium of exchange and there is no particular reason for the ratio of cash to wealth to be constant. Long term debt is backed by currently existing wealth (secured debt like mortgages) and the promise of future wealth (corporate bonds etc.). It would be a very screwed up economy where cash on hand exceeded the value of debt, in fact this would probably be a sign of the apocalypse.
Good points, but I would hasten to add that there have been economies with money where that calculation would come out positive, but which weren’t headed for an apocalypse.
Also, the government doesn’t have to pay off its debt immediately, and money could change hands numerous times, each time yielding a taxable event.
Also, the government doesn’t have to pay off its debt immediately, and money could change hands numerous times, each time yielding a taxable event.
True but the government also has to pay interest on its debt. Anyway, this gets away from the original question which is whether the total value of cash and cash equivalent assets exceeds the total face value of all debt (public and private). If you make this question slightly more specific and talk about the value of US$ denominated cash and debt then the answer is ‘no, not by a long shot’. Or in the phrasing of the original question, you get a very negative number: total debt ~$52 trillion, M2 ~8.7 trillion.
This is not really a problem though. The debt doesn’t all come due at the same time for a start. Some of it will default (well, probably a lot of it actually). Some of it will be refinanced. What is a problem (and what caused problems for banks during the financial crisis) is when a bank has a maturity mismatch between its assets and liabilities or when there is a sudden and unexpected change in the estimated probability of default of the debt it holds (and so a sudden change in the net present value of that debt).
True but the government also has to pay interest on its debt. Anyway, this gets away from the original question which is whether the total value of cash and cash equivalent assets exceeds the total face value of all debt (public and private). If you make this question slightly more specific and talk about the value of US$ denominated cash and debt then the answer is ‘no, not by a long shot’. Or in the phrasing of the original question, you get a very negative number.
Looking back, it seems that Crono was asking two questions that only appear to be the same:
Incidentally, the question was this: If you add up everyone’s cash-equivalent assets (actual cash, checking accounts, certificates of deposit, etc.) and then subtract everyone’s debts (mortgage balances, corporate and government bonds, money a bank has to pay to depositors, etc.) is the total positive or negative? In other words, if every last dollar-denominated debt or other debt-like obligation was paid back, would there be any money left in the world?
One question is answered by comparing some accounting figures. The other is asking us to imagine a counterfactual in which everyone goes through and pays off debts. You’re answering the first one, while I was answering the second.
And in that case, there could be e.g. only $X in cash instruments, $10X in government debt, and yet it could still be paid off: Say, one year people earn $3X in wages, pay $0.5X in taxes, then the government pays the $0.5X of debt that just matured. Interest could kick in which is less than this amount. The people who get the money from the maturing bounds can’t making loans and so spend the money, generating wages, generating tax revenue, generating reduced government debt, and so on.
Oh, absolutely, I’m not disputing that the debt can theoretically be paid off in full—that’s exactly what I mean when I say it’s not really a problem that the accounting figure is negative. If that wasn’t the case we’d be in in real trouble. The idea that cash needs to match the face value of debt is a confusion in a debt based economy like ours.
To be honest it didn’t even occur to me that he’d confuse those two issues but I’d agree that it looks like he may have done. It did puzzle me when I first saw the question why Robin Hanson wouldn’t have just said ‘negative’.
You’d think that with his economics knowledge he’d be able to do the same thing...
I once asked Robin Hanson a question that occurred to me when watching a video that was half accurate economics and half crankery. He said he didn’t know the answer because he didn’t really know much macroeconomics.
Incidentally, the question was this: If you add up everyone’s cash-equivalent assets (actual cash, checking accounts, certificates of deposit, etc.) and then subtract everyone’s debts (mortgage balances, corporate and government bonds, money a bank has to pay to depositors, etc.) is the total positive or negative? In other words, if every last dollar-denominated debt or other debt-like obligation was paid back, would there be any money left in the world?
Interesting, and indeed fundamental question—if your preferred economic system isn’t capable of handling everyone being debt free (or you don’t know how it would work that way), then there is a serious problem.
This is a different question from whether people should go into debt, or whether there can be Pareto-improvements through debt transactions; it’s asking whether you hit some kind of (small-s) singularity as a result of nobody being debt due to an extreme preference for such.
We know for a fact that there have been economies without this kind of debt—they’ve all been primitive, of course, but they sustained the existence of humans, without anything bizarre happening. So a Level 2 understanding of economics needs to be able to handle these kinds of economies without having to treat them as a super-special case.
My initial answer to the question is that, well, sure it has to be positive because the money has to be paid to someone, and some people are cash-positive after paying their debts. But then, it may not even be possible for everyone to pay off debts—it could be that attempting to engineer this will necessarily bankrupt numerous people.
And no doubt, if everyone were brainwashed by Dave Ramsey, the government would still probably try to protect banks’ inalienable right to a loan market, despite the fact that no one wants loans—and these policies would be promoted by the same brainwashed people!
I’m pretty sure it will be negative. Many long term debt instruments are ultimately backed by the promise of future productivity. Debt is essentially a mechanism for transferring wealth from the future to the present. This is why debt for investment in production is generally good for an economy and debt for consumption (most consumer debt) is less good.
Cash and cash-equivalent assets represent a small fraction of the actual wealth in the world. Wealth exists in the form of actual things of value (houses, factories, human capital, etc.). Cash is just a medium of exchange and there is no particular reason for the ratio of cash to wealth to be constant. Long term debt is backed by currently existing wealth (secured debt like mortgages) and the promise of future wealth (corporate bonds etc.). It would be a very screwed up economy where cash on hand exceeded the value of debt, in fact this would probably be a sign of the apocalypse.
[ETA] The US national debt already exceeds M2.
Good points, but I would hasten to add that there have been economies with money where that calculation would come out positive, but which weren’t headed for an apocalypse.
Also, the government doesn’t have to pay off its debt immediately, and money could change hands numerous times, each time yielding a taxable event.
True but the government also has to pay interest on its debt. Anyway, this gets away from the original question which is whether the total value of cash and cash equivalent assets exceeds the total face value of all debt (public and private). If you make this question slightly more specific and talk about the value of US$ denominated cash and debt then the answer is ‘no, not by a long shot’. Or in the phrasing of the original question, you get a very negative number: total debt ~$52 trillion, M2 ~8.7 trillion.
This is not really a problem though. The debt doesn’t all come due at the same time for a start. Some of it will default (well, probably a lot of it actually). Some of it will be refinanced. What is a problem (and what caused problems for banks during the financial crisis) is when a bank has a maturity mismatch between its assets and liabilities or when there is a sudden and unexpected change in the estimated probability of default of the debt it holds (and so a sudden change in the net present value of that debt).
Looking back, it seems that Crono was asking two questions that only appear to be the same:
One question is answered by comparing some accounting figures. The other is asking us to imagine a counterfactual in which everyone goes through and pays off debts. You’re answering the first one, while I was answering the second.
And in that case, there could be e.g. only $X in cash instruments, $10X in government debt, and yet it could still be paid off: Say, one year people earn $3X in wages, pay $0.5X in taxes, then the government pays the $0.5X of debt that just matured. Interest could kick in which is less than this amount. The people who get the money from the maturing bounds can’t making loans and so spend the money, generating wages, generating tax revenue, generating reduced government debt, and so on.
Oh, absolutely, I’m not disputing that the debt can theoretically be paid off in full—that’s exactly what I mean when I say it’s not really a problem that the accounting figure is negative. If that wasn’t the case we’d be in in real trouble. The idea that cash needs to match the face value of debt is a confusion in a debt based economy like ours.
Understood. So do you agree Crono really is asking two very separate questions, even though it may seem like they’re the same?
To be honest it didn’t even occur to me that he’d confuse those two issues but I’d agree that it looks like he may have done. It did puzzle me when I first saw the question why Robin Hanson wouldn’t have just said ‘negative’.