Sunday, March 15, 2009

Good and bad borrowing

Karl Denninger covers a lot of ground - perhaps too much in one posting - in his attempt to clarify fractional reserve banking and its consequences.

What seems to me a major point in his conspectus, is the difference between borrowing for production, and borrowing for consumption. If you borrow at 5% to get a machine that makes you 10% profit, that's fine; but borrowing for a private house to live in, a car for personal use, music and TV, alcohol and weekly groceries - madness.

4 comments:

AntiCitizenOne said...

Businesses borrow to raise their profitability but people borrow to raise their utility (joie de vive)*.

I don't think KD understands that completely.



*As long as they understand their possible lowering of utility though servicing the debt. This is why I thought of debt licensing on my blog, you must show you can do the maths before you borrow.

Sackerson said...

I'm all for jdv, but looks like the maths went skewiff.

daringme said...

Borrowing to time-shift is perfectly sensible as long as you can pay the interest in the interim. I cleared lots of debts with my pension's tax-free lump sum - in fact that was the method of repaying my mortgage that I agreed with the Building Society years ago.

Sackerson said...

You're developing more avatars than a Hindu god, DM.