Friday, May 23, 2014

Debt A Mirage Always Moving Into The Distance

A great deal of our economic system is about debt. It is important to remember not all debt is created equal. A mirage is a naturally occurring optical phenomenon in which light rays are bent to produce a displaced image of distant objects. Joining the idea of a mirage and contagion with the reality of collapsing debt forms an interesting subject. It is important to remember all debts and obligations do not come due at the same time. Also, it must be noted when a bill is not paid or defaults it often starts a long and drawn out legal battle, this collection process that may extend years without harsh consequences. This my friends is the reality of modern life in America and much of the world.
Money Owed Can Be Like A Mirage Always In The Distance

For an individual the rules are different than the rules that govern a company or business but even after stretching out payments and out right default options exist. Bankruptcy can give those reaching the end of their rope a new lease on life. I feel sorry for those of us who have found themselves in the position of having to decide whether to most throw good money after bad by taking legal action against a debtor in the hope of recovering even part of what we are owed.

Companies and business in general play by a set of rules that can boggle the mind. Other than not meeting their payroll a situation that is immediately noticed, they can bob and weave in a series of moves to hide their true situation. Bringing in a new investor, shafting a current supplier after a big order and replacing them are just a few ways to extend the life of a dying business.  By stalling on paying bills a business can claim it is still solvent and reorganizing will set everything straight. If done correctly the top management can collect paychecks the entire time this unfolds. Debts unpaid are more than a transfer of wealth it is theft.

Government's can also play this game. They sell bonds, print money, make promises, and can even borrow from groups like the IMF. Bottom-line is after all is said and done debts that are not paid means someone has to write down their wealth and take a loss. The tool of reinventing what a debt is and how it will be paid is very useful. A key issue in contagion is when the debt holder realizes that will not be made whole and how they adjust paying their debts because of their newly gained knowledge. A big collapse without much notice that surprises the world can make a big wave that is unacceptable.

Those in power tend to constantly move the goal post wrapping the changes they make under a banner of reform. It sometimes appears that the laws covering bankruptcy were devised to drag on and on so as to lessen the blow or take sharp edges off reality. Often after years of chasing a bad dept the person or group owed a sum of money has in reality moved on and adjusted to the fact they are likely to recover very little of what they are owed.  Modern society has become very good at kicking the can down the road and delaying the day of reckoning. Yes, the part where you collect a debt that you are owed can be similar to a mirage that keeps moving away each time you approach it. This means that at some point the return on loaning money is simply not worth the risk!



  Footnote; This post dovetails with many of my recent writings. Other related articles may be found in my blog archive, thanks for reading, your comments are encouraged. A more recent article delves into why people might simply stop lending,
 http://brucewilds.blogspot.com/2014/06/the-economic-efficiency-of-credit-can.html



2 comments:

  1. This is a good analysis of the mirage that shows that the bad participant in the transaction is the debtor.

    I'd like to add that on the other side of the exchange that there are transactions where the creditor is the master of the mirage. For example, if the currency itself is loaned from counterfeit and not money as in the case of fractional reserve banking. The new currency that enters the economy does not come from productive work but instead its source is a digital blip and therefore it does not represent products added to the economy. The debtor receives this currency from the creditor and proceeds to do work and add products to the economy. Assume the the debtor does not default and does pay back the debt in full, plust interest.

    Where is the harm done, the mirage? The creditor by pumping counterfeit necessarily decreases the purchasing power of everyone who uses the currency, even himself. However, the creditor's incentive is to collect back the full principal repaid by the debtor. The creditor has exchange nothing for something. The loss of everyone's power to purchase is therefore the creditor's gain. That is theft too.

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  2. Debt is about trust.

    We sit at a phenomenal apogee of collective trust. Prechter's work suggests that such things are governed by endogenous cycles of human mentation, and if he's right, it will be one for the record books when collective DIS-trust makes a major comeback and people sequentially devalue and ultimately reject one subset of debt after another, starting with the most dodgy and ending only once even government debt has been cut down to a believable size.

    John Law had nothing on our modern central bank alchemists.

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