To anyone wondering what debt "means", or if some debts will ever be repaid, or wondering about "jubilees" where debts are forgiven, I recommend David Graeber's book "Debt: The First 5000 Years".
I am not sure if some of the ideas about debt that Graeber argues are correct, but he does discuss a lot of interesting examples of debt from societies throughout history.
A debt is a very natural thing for humans, because we feel compelled to provide value to people who can't pay us yet.
Even before money people had gifts and favors - we give with the expectation that we'll be given something in the future - or we say 'you owe me one' when someone has helped us through an issue without sending us an invoice.
So the genius of fiat currency is that you get to represent these IOUs as a standard, fungible currency, such that I can take the debt you owe me and transfer it to someone else, so now you owe them. Being able to trade debt like this essentially turns debt into the currency.
The benefit of this being that economic growth is not limited to how many gold coins we can mint -- we can become as indebted to each other as we like -- the more people go into debt, the more money we have to trade. Pretty neat.
Each IOU is actually a promise to work. Before money it could have been 'I will work for you 30 years' and if someone believes that, they can trade that promise for a nice house for the person to live in. A promise is basically analogous to a debt.
In todays world, the promise is made to a lender (a bank), which then creates a fungible IOU, i.e standard currency for that promise, which can be exchanged for equivalent amount of work.
The whole system is a collective promise to work, and that keeps the society running.
The problem is that if everyone were to try to collect all the debts owed to them, there would not be enough currency to fulfill it all. We freely create debt, but the result is a deficit that can only be resolved by creating enough value to offset the debt. And if that is somehow infeasible, economic collapse occurs.
Currency is debt. If you have a 20$ bill that means essentially that the government owes you the equivalent in value. If everyone converted all their debt to currency that just means the state buys all the debt and prints sufficient government IOU’s (bills) along the way. If there is not enough value to cover the debt, the notes just lose value as others refuse to trade them at their previous rate.
> If you have a 20$ bill that means essentially that the government owes you the equivalent in value.
This may be true in some theoretical sense, but in practice, it is hard to believe. How would I go around to make the government accept my 20$ and give me some equivalent of that? What could government possibly give me for my 20$?
Dollar bills are for buying things. I could go to a store and buy a bottle of expensive wine for that bill. But I wouldn't say the store owes me.
That is true. But if the only way a government owes me something is that it has to accept dollar bills to erase my tax/fee duty, then I think this proves my point - the government does not owe me equivalent of those bills, it only has to accept them for limited set of "services".
"I could go to a store and buy a bottle of expensive wine for that bill. But I wouldn't say the store owes me."
That's a misunderstanding. A $20 bill is the government's liability, not the store's liability. You and a third party are using government liabilities as a currency. Every $20 bill is on the liability side of the central bank's balance sheet. Every entity accepts its own liabilities as a form of payment. Governments issue currency which they then must accept as payment for taxes. Banks issue credit which they then must accept as payment for debt service.
Interesting video, but can't help to notice it paints too simple and dandy picture and probably has an agenda behind it. If you read the comments, not everybody believes in this "the government created the money so there is no problem in creating some more" idea. In principle yes, the government has that power. But in practice, this is being prevented by powerful people in and out of government and only gets a pass in special cases (like saving the big banks yes, funding public healthcare no).
The answer is gold. Your $20 is worth a certain amount of gold, and that is what the government owes you. $20 in gold. These days you'd be hard pressed to get the government to give you gold, of course, but that is the answer to your question.
As an example, British pound notes have the wording "I promise to pay the bearer on demand the sum of five [ten/twenty/fifty] pounds", which dates back to a time when you could actually exchange the notes themselves for gold.
> If you have a 20$ bill that means essentially that the government owes you the equivalent in value
As the book delves into, it may actually be the opposite. A bank borrows the original 20$ from the government. This allows the bank to create a 20$ bank note to be loaned out, and as long the government doesn't demand their money back, it can continue circulating in the economy. The bank notes get traded and becomes the currency, which is how many paper money currencies was created according to the book. The problem arrives then when a single nation has bank notes from several different banks, so in order to solve that problem the government then grants a single bank, let's call it a central bank, the monopoly of borrowing money from the government from which all the other banks then borrow from.
A key point here is that the central bank can not be part of government in this scheme since then it would be the government borrowing money from itself. When people talk about money as an illusion, this is one of the larger aspects to it.
They could (think of it: a bank could just tell government that it has more money in the bank now, or tell another bank that they transferred an x amount to the government’s account there), but regulations forbid it and various controls work hard to prevent it.
”Because banks hold reserves in amounts that are less than the amounts of their deposit liabilities, and because the deposit liabilities are considered money in their own right, fractional-reserve banking permits the money supply to grow beyond the amount of the underlying base money originally created by the central bank.”
The amount by which a bank can do that is regulated, and, in the end, under control of the central bank. The central bank won’t be involved in every minor fluctuation of the amount of money in circulation, though.
Currency is physical tokens of value for trading money. Money is a system that fulfills several criteria: unit of account, medium of exchange and store of value. Not debt in any meaningful sense, apart from systems that lack trust for store of value or stability for unit of account, in which case explicitly linking to another less easily gamed asset is supposed to increase trust.
Debt can be money if the legal system is sound. But money doesn't need to be debt if the money issuer is trusted not to debase the currency.
A owes $100 to B. B owes $80 to C. C owes $80 to D. D owes $90 to E. Total debt is $350.
A pays $100 to B. B keeps $20 and pays $80 to C. C pays $80 to D. D adds $10 of his own money to pay $90 to E. Everyone's debt has been repaid, but only $110 of currency is needed for all these transactions to take place -- assuming all debts are paid in cash. All you need is sufficient liquidity.
I could loan you five quadrillion dollars provided that you also loan me five quadrillion dollars. No currency has changed hands, but we've just increased the world's total outstanding debt by ten quadrillion dollars!
Or society works because people do things for others without expecting repayment and there’s enough social pressure for the vast majority to not exploit that system.
Problems really only arise if debt is systemically expected, like a housing market that works only on a foundation of mortgages.
Currency is just a fungible way of trading value. It means you don't need to use barter. A government could easily print enough currency to represent all the debt available, but they'd want to own the corresponding assets and income streams in return.
The answers are very complex. In the book, Graeber shows that debt is as much a cultural/social norm as any other abstract, social construct we've invented throughout history. What debt meant in early Buddhist Nepal or Sumeria or aboriginal Australia, and what it means in modern western economies is completely tied in with governmental/religious/familial etc. structures that existed in the given time. He goes into great detail about many forms which debt has taken and - where it's known - gives some relevant context to help understand it.
One thing he does point out, however, is that in recent decades, much of our debt has seemed to shift from a more useful tool for robust modern economies - as it was used in early 20th century for Keynesian stimulus and the likes - to more of a tool for subjugation, through new forms of debt peonage - e.g. with student debt in the USA or financial aid packages to former colonies - very similar to what we've seen in earlier times.
I think it's a fantastic book, offering a very compelling narrative of how our social systems have evolved around these notions of debt since civilisation began. Also, if anyone wants to dig into the book right away, there are free versions of the book online[0], including an audiobook[1]. Since Graeber is an anarchist, I'm sure he doesn't mind if not everyone is paying for it ;)
One of those examples of debt as a social construct is in my opinion the following, which shows that even in Western economies there can be a different meaning for this concept.
In English language there's a clear separation between debt and guilt. Debt is used for money, guilt for (e.g.) the legal system when talking about criminal activities. Those are 2 different words with 2 different meanings.
But in Dutch language we don't have different words for debt and guilt. Both concepts are essentially translated to the Dutch word for guilt ("schuld") which has a much more negative connotation than debt when talking about money. The same is true for the German language for example. And this might impact policies when dealing with debt, see: https://www.ft.com/content/a2c51e14-1ded-11e0-badd-00144feab...
> and ask her to contemplate
the justice of insisting that the lenders be repaid, not by the dictator,
or even by his cronies, but by literally taking food from the mouths of
hungry children.
I'm still willing to give this book a chance, but it's not a good look when the third page already contains an emotionally manipulative and gross misuse of "literally".
I mean, this predatory lending did lead to a lot of starvation. That is not controversial. He may be using exaggerated narrative (and that part is only the introduction, setting the scene) but he is quite clear in the text about what the known or suspected facts are and what we might deduce from them.
I forgive the author for mixing some emotion into it -- he's trying to write a book about debt that will appeal to a general audience. Like the sibling said, it's still quite rigorous in its citations.
Or you could say it's dual to money - creating debt creates money, paying debt destroys money. There's literally less money in the world when you make your mortgage payment (bank just sends much of your payment to /dev/null), and there's literally more money in the world when you take a mortgage (bank pulls it out of thin air).
If all debt would be repaid then almost all of the money as we know it today would disappear.
What is the relationship to money and wealth or money and productivity? Surely we wouldn’t say that incurring debt increases wealth and paying debt destroys it? Also, does “creating money” via incurring debt drive inflation (more money in the system)?
My view on this is that wealth is something real that actually impacts people's lives. At the same time money is not, it's the story told around wealth so that we can all agree on how one "wealth" compares to another. The goal is to not let this story go wild (e.g. into super-inflation) so that people don't lose trust in money.
Keeping those two in check is the main goal of any central bank, ever since the gold standard was generally abandoned and money became entirely abstract. In my opinion no one really knows how to do it (although it's been okay-ish so far), the FED for example often uses national unemployment rate to decide how much dollars should be thrown at the system.
That’s not really how it works. The bank takes savings deposited and issues most of it as loans keeping enough on hand to issue to people withdrawing their savings (fractional reserve banking). The interest on the loans pays the interest on the savings (which is why one tracks the other). They also borrow money from the markets (or the central bank) at low interest rates to reissue as higher-interest loans. Nowhere in that system do they create money out of thin air or send money to /dev/null (although I get the impression they do some of that in derivatives markets).
Actually, the GP's explanation is closer to true than yours is. I was taught the same explanation you gave, but it doesn't fit the facts on the ground. Banks don't base the loans they issue on deposits (the closest to this they come are the capital requirements regulators impose on them), they base them on models of the borrower's ability to repay and on models of the ability to resell the loan (aka 'securitization', though less so since that practice helped drive the financial crisis). If the models fit, the loan amount is credited to the seller, and debited to the buyer, essentially creating money 'out of thin air.' The economist Steve Keen is perhaps one of the more vocal advocates of this view (http://www.debtdeflation.com/blogs/).
This is how the system works. There's a limit to that practice (the money multiplier), which is one of the reasons why banks need to rotate money as you said (another being cross-bank transfers). See this link:
https://en.wikipedia.org/wiki/Money_creation#Credit_theory_o...
Mortgages make MBS, mortgaged backed securities, which are traded around. You can buy these, or SLABs, student loan backed securities.
Neither are money. M0 money can only be made by the US Fed. M1 or M2 money can be made by banks out of savings accounts or checking accounts, due to the fractional reserve system.
By lending money to a bank through the savings account mechanism, the bank owes YOU money, because the bank spends roughly 80% of it on other things.
That's why there is a distinction from M0 pure cash, and the M1 or M2 virtual 'nearly money' in the system. I think credit cards are a higher order of money as well...
To be fair, he directed people to a >500 page book on the subject as a good introduction to some of these ideas. Do you expect him to effectively summarize a massive text in a single HN comment?
I feel this way every time someone recommends a study or a book to me. If you can't summarize it for a 5 year old, then you are either lazy or don't understand it yourself.
For example, instead of telling me to read a 500 page book, you can say "the Big Bang is this really crazy but suprisingly plausible theory that our universe just suddenly exploded from nothing into this really hot and dense and chaotic realm, and now everything is expanding and cooling down and getting farther apart but also clumping together because of gravity. Check it out!"
Becuase at least then you can say "oh wow, why is it clumping together? how do we know gravity is a thing?"
The two-sentence summary is ”Cultures around the world (historical and current) have an incredible variety and richness of traditions/practices related to debt. Debt is of central importance in every human society, predates and provides the conceptual foundation for economic exchange and property rights and many other cultural practices/institutions, and the culture-specific details are fascinating to read about.”
Ability and willingness to oversimplify nuanced text does not imply understanding. Unwillingness to deal with details and nuance of long more accurate text is lazy too.
Calling someone lazy and not understanding, because you want explanation for 5 year old and are not willing to engage with longer text and want him to do the work is hypocrisy and manipulation at its best.
As someone working in cosmological astrophysics, I think that is a very misleading summary of what the big bang theory is... However, luckily for us, people who go around misunderstanding the big bang theory because of bad tweet-length explanations (by experts or non-experts) are not a great danger to the rest of us. They aren't basing their politics or personal finance decisions on that misunderstanding.
The thing with topics like the ones covered in Debt, is that they have been weaponised by our leaders to facilitate social stratification and very unjust economic disparities. I believe this has largely been made possible through simplification of these concepts and making bite-sized claims about how "basic economics" works, where all the detail and nuance has been thrown out. These kinds of 3 sentence summaries can be very dangerous.
Lol then continue to keep your topic of study less accessible.
"A car is a small vehicle that has a motor that turns energy into motion".
"Ummm well ackshually there are smaller vehicles than that, and cars can be electric or oil, so clearly you don't understand the topic unless you start with the factory blueprints first instead of the dictionary definition."
That depends on the person on the receiving end. For an expert on the topic, it may be misleading. For average Joe on the street, it is completely fine.
Do you have a better 5-sentence explanation for what Big Bang is? Joe isn't going to read a book about it.
>If you can't summarize it for a 5 year old, then you are either lazy or don't understand it yourself.
I... kinda feel the opposite? if you feel like you can summarize something complex in 5 sentences to a person without any background, I think you probably aren't fully understanding the thing you are summarizing.
I think this is especially true in fields like economics where even the people at the top of the field who have studied for years don't 100% understand everything.
Everyone is entitled to their own use-case of course, but let me phrase it a little differently:
If you recommend me a dish from a restaurant, but you can't describe the flavors, texture, and quantity in a few sentences, then why are you recommending it?
"It's awesome, the flavor is spicy, salty, and smokey. It is charred on the outside and greasey and chewy inside. It is a very hearty and filling dish."
Actually, I think that's a really good example; I hang out with a lot of foodies, and that's another thing where I'm not very educated. I can understand 'Yeah, you'd probably like it' or "this is like that other thing"
but... when they start going on about the various flavors? Yeah, I have a really hard time translating that into what a thing tastes like, because I lack the background, I lack the education.
Explain the Riemann hypothesis to me, including the contexts and the current work, without using technical language, to a general audience, in three sentences or less. What about the Japanese language? The history of Israeli-Palestine relations maybe?
Some things are complicated and take 200 pages. There's nothing more to it.
"The Japanese language is a very interesting and unique human language. With over 250m speakers and a rich linguistic history, everything from its orthography to grammar to pronunciation provides interesting areas to explore further."
At least now the reader can ask, "what makes the orthography so interesting"? To which a deeper conversation can be had about its symbolic writing method and efforts to romanize and digitize it efficiently.
Now the reader has more reason to check out the book with just 4 or 5 sentences of info. Its like an outline vs a headline.
Me too. I gave up after a couple hundred pages. At times interesting, but too unfocused, not to mention daunting due to the extreme length. Note that none of the commenters here have been able to supply a much more thorough synopsis than “debt has taken lots of different forms in different societies throughout history, including our own today.”
By contrast, I found Graeber’s follow up collection “The Utopia of Rules” startlingly provocative and a super fun read - one of my favorite books. I think Graeber’s divergent writing style and argumentative form work better in the essay format.
I liked his talks as Morea easily digestible, but the book was full of useful tidbits. As an alternative to the real way debt is used today though, I suggest John Perkins books and The Tower of Basel
Since this subthread is about personal anecdotes of reading experience, mine was completely different. I had no problem finishing the book in record time and I'm glad I bought (and read) it.
I am not sure if some of the ideas about debt that Graeber argues are correct, but he does discuss a lot of interesting examples of debt from societies throughout history.
https://www.mhpbooks.com/books/debt/
https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years