The "national debt" means money spent into the economy but not taxed back out.

That's it. That's all. It is not "borrowed." It is not "owed" to anyone. It does not have to be "repaid."

The use of the word "debt" is a legacy from days when kings had to round up gold.

#debt #money #MMT

It’s really striking to compare the two big crises of the last two decades.

The Global Financial Crisis beginning in 2007 was purely a matter of book entries in computers.

No actual physical capital was destroyed, nobody died.

By contrast, the COVID-19 pandemic beginning in 2020 was a massive blow to productive capacity
– millions of people died,
buildings were rendered unusable.

But it was the first of these two crises that led to massive scarring and a prolonged global recession, not the second.

Why?

It might be said that the reason why is that if you consider the world economy as an organism,
the pandemic attacked its muscles and sinews
while the financial crisis attacked its brain.

The global financial services industry is a crucial part of the distributed decision-making system of the world,
and its core component is a very old, but still surprisingly poorly understood technology
called #debt.

In the strictest, purest sense,
debt is an “#information #technology”

– it’s one of the mechanisms human beings have invented to handle information.

By structuring an investment in someone else’s project as a debt,
you immediately reduce the space of possible outcomes to two
– you get paid back, or you don’t.

There are a lot of other information-processing techniques that banks and investors use,
from statistical credit scoring to modern portfolio theory,
but this is the big one.

It allows a modern bank to keep track of vastly more financial investments than would ever have been possible for a medieval merchant in the first days of double-entry book-keeping.

Rather than having to preserve face-to-face relationships with every single borrower,
you can rely on the fact that 99% of mortgage loans get paid back in full and on time,
and concentrate your attention on managing the 1% of cases where something goes wrong.

🔥The trouble is that if you build a business on this basis, what happens when it turns out that there’s a small variance❓

Unfortunately, a small variance in the proportion of good loans from 99% to 97% means a tripling in the number of bad loans❗️

and consequently a huge excess load on the systems that are meant to deal with them.

Faced with this massive cognitive overload,
the system froze.

And even more unfortunately,
in a world in which trillions of dollars need to be rolled over and refinanced every day,
the one thing that the financial sector cannot do is stop for a moment to regain its bearings.

If information processing was free and the bankruptcy process frictionless,
the Global Financial Crisis would have been over in a month.

As it was, all the information which had been attenuated by the use of multiple layers of secured debt came back,
suddenly unattenuated and needing to be dealt with.

That’s the “cybernetic history” of the debt crisis which I outline in my book,
and I think it’s a useful alternative perspective to the economic one,
and one which makes it more comprehensible that a relatively small market for synthetic CDOs turned into a continental crisis.

But this might not even have been the most pernicious use of debt seen in our lifetimes.

(2/3)

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#criminogenic #organisation #Stafford #Beer #Barry #Clemson #accountability #sink #Boeing #737MAX #Boeing #merger #McDonnell #Douglas #engineering #culture #cost #control #Ricardian #Fallacy #hard #data #culture #best #practice

The Unaccountability Machine - Profile Books

^{Profile Books}

Another aspect of debt,
considered as an information technology,
is that if affects the information environment of the borrower.

If you are managing a company which has borrowed money,
making your payments becomes one of the survival conditions for that company.

At low levels of debt, generating short term cash flow is one priority among others,
but for a highly indebted company it becomes a signal which swamps all others.

You might want to change the world, but if you don’t meet the coupon payments, you’ll never get the chance to see if your other strategic priorities would have worked.

Consequently, a company with lots of debt cannot help but have a bias toward the short term.

Which might be considered problematic,
as the last few decades in the Western capitalist world have seen the rise of an industry
(leveraged buyouts, or “private equity”)

which has made it part of its fundamental operating strategy to load companies up with debt.

Considered in this light, debt is a technology of control as well as of information
– it’s a means of exerting discipline on management teams who might otherwise be tempted to follow priorities other than short-term financial returns.

This is, as far as I can tell, the real meaning behind the populist critiques of “#financialisation” in the economy.

There’s really nothing particularly bad about the growth of the financial sector,
even to the extent that it’s outstripped the growth of the “real” economy.

Quite simple mathematics ought to be enough to convince us that as the economy grows,
the number of links and relationships between producers, consumers and investors will grow at a faster rate,
and so you’d expect the parts of the economy in which decision making and information processing take place to grow faster than the “real” economy.

It’s the same logic by which the brains of primates take up proportionally more energy than those of rodents;

finance is part of the real economy, just like the cerebellum is a real organ.

What’s bad about “financialisation” is neither more nor less than the over-use of debt.

Modern corporations do often behave badly,
and they make systematically worse decisions than they used to,
this isn’t a delusion of age.

They do this partly because they have outsourced key functions
(cutting themselves off from important sources of information),

and partly because their priorities are warped by the need to generate short term cash flow.

Both of these problems can in large part be traced back to the private equity industry,
working either as a direct driver of excess leverage,
or as a constant threat which makes managers behave as if they were already subject to its discipline.

#Management #science and #cybernetic #history is all about things which began as solutions,
💥then turned into problems because the world changed.

Once upon a time, back in the 1970s,
private equity and LBOs were the solution to a problem of lazy, sclerotic incumbent management teams,
self-dealing and failing to make tough decisions.

But it’s now the 2020s, and private equity may itself be the biggest problem in our global information processing system.

The way that corporate history progresses is that we try to keep up with the ever-increasing complexity of the world,
♦️and then when this is no longer possible, we have a crisis and reorganise.

We’ve had the crisis
– or perhaps we are still going through it
– and now it’s time to think about how to reorganise.

(3/3)

amazon.com/stores/Dan-Davies/a…

#debt #information #technology #criminogenic #organisation #Stafford #Beer #Barry #Clemson #accountability #sink #Boeing #737MAX #Boeing #merger #McDonnell #Douglas #engineering #culture #cost #control #Ricardian #Fallacy #hard #data #culture #best #practice