Abstract
Although historically creditors have been despised, it wasn’t until the 1930s that debt itself became the target of criticism. With the rise of democracy, rulers would favour the majority who owe against those few who save. Debt is an explicit contract that requires, above all, stability of cash flows from the debtor. As monetary and fiscal policies generate instability, they also affect the indebted. In the twenty-first century, the focus has changed from debt itself to the signals and mechanisms that define it. The main signal is the rate of interest, and as such, it has been suppressed completely. We examine this phenomenon, as well as the different types of debt in which we can invest, from an Austrian perspective.
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Notes
- 1.
Given the relevance of the United States at that time, this had a tremendous global impact.
- 2.
Investigations of Economic Problems, Hearings before the Committee on Finance, United States Senate, Seventy-Second Congress, Second Session, Pursuant to S. Res. 315, February 13 to 28, 1933.
- 3.
The concept of velocity of money is another aberration derived from thinking of money as an object instead of an institution. It was first formalized as part of the so-called Cambridge equation within the quantity theory of money. This equation states that there is a linear relationship between a demand for money, a fiction called “price level” and another platonic entity called “aggregate income” (in macro terms): M = k * P * Y, where k is a constant. Note how, for Eccles, a higher velocity of money is a desirable outcome. However, money can only serve its purpose when it is hoarded, which means that Eccles (and Keynesians in general) never understood what money is, confusing it with capital.
- 4.
For a good example, refer Addressing the causes of low interest rates May 2, 2016, by Mario Draghi, President of the European Central Bank. Draghi suggests that even under low-to-negative rates in 2016, savers can still earn satisfactory returns if they shift from debt to equity.
- 5.
The popular perception is that learning a trade was limiting and prevented a more general and diverse education. However, nothing is further from the truth. Unfortunately, one can only provide with inductive comparisons in this regard. I can think about the Wright brothers, who in their search for a flying machine, triggered research on aerodynamics, for instance. The particular astronomical interests of Sir Newton forced him to develop differential analysis, a tool. Today, the search for an efficient electrical car is forcing us to rethink the way we store and distribute energy. Lastly, my personal and tangible interest in protecting and growing my wealth has led me to write this book.
- 6.
In 2016, the European Union had no better idea than to level the field down, creating the legal figure of “electronic persons”. If entrepreneurs will seek to avoid paying taxes on the use of labour by shifting to robots, robots will be taxed as well.
- 7.
This was not unusual within the British Empire, as related by Niall Ferguson in The Ascent of Money, Penguin Press, 2008: “…none of the sovereign or colonial bonds that traded in London in 1913 yielded more than two percentage points above consols…That meant that anyone who had bought a portfolio of foreign bonds, say, in 1880, had enjoyed handsome capital gains…”. Note: “Consols” where short for “consolidated annuities”. These were perpetual obligations issued by the Bank of England, first in 1751. They have been fully redeemed.
- 8.
Unfortunately, this borrowing cause has increased since the crisis of 2008. It is only natural, considering that under Quantitative Easing, any business with access to funding at very low rates becomes an instantaneous ATM.
- 9.
Refer Lesson 3: “Turing’s decidability in Finance”.
- 10.
The Bank of Canada was forced to depreciate the Canadian dollar, by maintaining low its benchmark rate.
- 11.
When the number of participating banks is lower than seven, the loans are also called club loans.
Bibliography
Investigations of Economic Problems, Hearings before the Committee on Finance, United States Senate, Seventy-Second Congress, Second Session, Pursuant to S. Res. 315, February 13 to 28, 1933.
Von Mises, Ludwig. (1949). Human Action: A Treatise on Economics. Auburn, AL: Ludwig von Mises Institute, Scholar’s Edition, 1998.
Draghi, Mario, President of the European Central Bank. (2016). Addressing the causes of low interest rates. Introductory speech held at a panel on “The future of financial markets: A changing view of Asia” at the Annual Meeting of the Asian Development Bank, Frankfurt am Main, 2 May 2016. Retrieved May 2016, from https://www.ecb.europa.eu/press/key/date/2016/html/sp160502.en.html
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Arisson, M. (2018). Debt. In: Investing in the Age of Democracy. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-95903-0_5
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DOI: https://doi.org/10.1007/978-3-319-95903-0_5
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