Good debt and bad debt

by Davide Gionco

Anthropologist David Graeber had devoted an entire essay ( Debt. The first 5000 years ) to the role of debt in the history of humanity, from the first Mesopotamian civilizations of which we know up to the Lehman Brothers crisis of 2008.
Debt is the main engine of the economy and, probably, also of the history of humanity. To give an example, we had already dealt with the fundamental importance of loans from foreign banks in the history of the unification of Italy under the crown of the Savoy. Without the debts contracted by the Kingdom of Sardinia to the banks, there would have been no funds to finance the wars of independence and the course of the history of Italy would have been different from what we know.
Without debt, most of the houses we live in would not have been built.
But it is also true that without debt many Third World countries would not be reduced to poverty and probably there would be no migratory flows from the South of the world to the North of the world.
There are people ruined by debts, but also people who have built their fortunes on debt.

When is a debt "good" and when is a debt "bad"?

Debt is not something that exists in nature, it is something that arises from human relationships. The concept of debt obviously precedes the economy. Every time we give our word by promising something, we get into debt towards the other person, in the sense that we undertake to give that person what we have agreed: an object we own, a little of our time and our work or our everlasting love.

The judgment on the goodness of the debt is given starting from the consequences on the real life of people. Was I right to promise that person eternal love? What have I gained from it?
Was I right to borrow money to buy that machine or to take a house in the city center?

Economic debt, in itself, is only an abstract accounting entry, deriving from an economic contract, the commitment to return a certain sum of money in exchange for a real good received (purchase) or a loan received. They are pieces of paper, numbers on computers.
Whether the debt incurred is a good thing or a bad thing can only be judged by the consequences on people's real life. An ethical approach such as "never get into debt" is not correct, because without debt the world would stop.
You could not, for example, order a car: I owe € 20,000 to the dealer, but the dealer owes me a car.
You could not enter into a rental contract: I owe the rent monthly, the landlord owes me in granting the use of his apartment for a month.
An employment contract could not be stipulated: I owe my work to the company that hired me for 21 days a month, the company owes me the monthly salary.

One could discuss the desirability of borrowing money, for example from a bank. If I borrow a credit of 150 thousand euros for the purchase of the house where I live, which involves the payment of a monthly payment of 400 euros and my work allows me to easily live and pay the mortgage payments, the contracted debt is a good thing, as it allows me to buy a house to live in, which has real value. In essence, that debt was the tool to trade my work capacity for the house I bought.
Obviously, if the house I bought was not a good deal, in the sense that it was in a very bad state, in need of renovation, in a neighborhood full of crime and without services, it was not a good deal. In this case, however, the fault lies not with the debt instrument, but with my mistake in choosing the house to buy.

The problems related to debt contraction occur when the debt is unsustainable , so the repayment commitment leads us to deprive ourselves of vital things. Debt begins to be a problem if, to put together the 400 euros per month of the mortgage payment, I find myself forced to give up the non-essential expenses that make up my well-being. But debt becomes a real ("bad") problem when to repay it I have to deprive myself of essential goods for mime existence, such as the house to live in, clothes, food and, perhaps, the priceless debt plunges me into a human situation which makes me lose even the dearest affections.
In ancient times, the failure to repay the debt could lead not only to the loss of all one's assets, but also to the enslavement of the debtor, with his wife and children, until, working, they had not repaid what was due. Today the consequences of non-payment of the debt not reached these levels. It all depends on how the matter is handled on a legal level.

The central issue of debt is therefore sustainability .
When the debt is not sustainable, it always leads the debtor to fall into humanly unacceptable situations: poverty, even extreme, and forms of slavery.
As far as the creditor is concerned, in some cases he will also suffer consequences due to the non-repayment, which will entail at least financial losses (money lent and not returned), but also more serious consequences if that money lent was in turn be returned to others. In these cases the debtor's insolvency spreads by involving the chain of creditors.

There are also cases in which the creditor is not afraid of non-repayment, either because he has large reserves of wealth, or because he has the legal right to create out of nothing , under certain conditions, the money he lends to debtors.
A classic case is that of usurers, loan sharks, who have a lot of money, which they lend to debtors at particularly advantageous conditions for the creditor and disadvantageous for the debtor, who does not have sufficient contractual power to demand more acceptable conditions.
A person who absolutely needs money to survive will always be willing to accept halter conditions and also to turn to lenders who operate outside the legal framework or from the protections that the law recognizes to debtors against creditors. These are situations in which those who have the money to lend have the contractual power to impose conditions that are legally and humanly unacceptable. For example, the condition that if the debt is not repaid, physical damage is expected to the debtor and his family members.
A similar situation occurs even when the lenders are the banks that operate (at least they should) within the current legal framework. If the debtor is a small craftsman who needs credit to pay the too many taxes imposed on him by the tax authorities, it is very likely that the bank will also take advantage of the situation as much as possible, given that that debtor has low bargaining power.
If, on the other hand, the person asking for credit is a large national or international company, of which the bank may own large shares of the share package, you can be sure that the credit conditions will be much easier, as the debtor has strong bargaining power .

Since the world began, small debts have always been repaid or have led to situations of exploitation, while large debts have always been renegotiated, refinanced, possibly discharged onto weaker subjects (small savers, think of the case of Tango Bonds ) or possibly discharged into the cauldron of public debt (think of the case of Monte dei Paschi di Siena ).

When a debt owed by weak subjects, with low bargaining power, is priceless and the creditor does not need to be repaid (because he does not need money), the creditor will use his bargaining power to derive other economic advantages, trying to transform a momentary situation of insolvency into a permanent and perpetual situation of power over the debtor, by imposing conditions on him for the renewal of the debt . The debtor will have no choice, not being able to repay the debt incurred
The typical case is that of many Third World countries, which in the past decades have received loans from the International Monetary Fund, the World Bank or from managers of large international investment funds. When the due date cannot be repaid, the creditors renew it under the following conditions:
1) That at the next maturity the debt is certainly not repayable, an objective that is achieved by imposing sufficiently high interest rates.
2) That the debtor takes actions that will allow creditors to derive other types of profits, such as: privatization of public services and exclusive concessions on natural resources (mining, agricultural, tourism, etc.)
In this world the creditor-debtor relationship ceases to be a relationship of economic cooperation (case of "good" debt in which the loan leads to development) and becomes a mechanism of perennial exploitation by the (few) creditors against the (many) debtors.

The problem has been known since the dawn of human societies. The Sumerian king of Lagash had already dealt with it around 1700 BC with the AMA-GI law which freed all debtors from creditors, restoring their freedom. The ancient Israelites had already taken care of it, whose laws provided for the Jubilee every 50 years or the cancellation of all debts. The tribune of the plebs Licinius Sextio also dealt with this in the ancient Republic of Rome, when the debt mechanism was what allowed the rich patricians to constantly impose their interests on those of the poor plebeians.
It would be good that even today we dealt with the issue in a human and intelligent way, remembering that the money lent is not a value in itself, while a value in itself is people's lives. The cancellation of debts, under certain conditions, is a solution to be considered, if these have become a mechanism of exploitation of the few against the many, knowing that those few do not need that money at all to live.
We are not talking about "social justice", but we are talking about humanity in social relationships, in which exploitation must never be allowed, not even if the creditor has legal reasons, since people's right to life is more important (also economically speaking) of the rights of creditors towards debtors.

We mentioned above about creditors who have the power, under certain conditions, to create the money they lend out of nothing. This is the case with commercial banks which, today, can create the money they lend against certain guarantees presented to the central bank and, of course, against certain guarantees that the money lent will be returned. If the money created is returned, it disappears from the balance sheet, leaving only the profits, which are interest, to the lender. It is a mechanism similar to that represented by the comedian Erminio Macario in one of his famous sketches .
The important thing is that the repayment of the loan is guaranteed. Or, if it is not fully guaranteed, that the imposition of subsequent debt renewal conditions (for example the exploitation of mineral resources for one's own advantage) will allow the lender to repay the capital lent together with profits.

This mechanism of perennial debt is at the basis of the major forms of exploitation existing on the planet today, both towards the poor sections of the population (the rich exploit the poor, from the time of the king of Lagash to today), and towards the poor nations of the world.

In this article we have not dealt with the issues related to public debt, we will talk about it in a future article.

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The article Good debt and bad debt comes from ScenariEconomici.it .

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This is a machine translation of a post published on Scenari Economici at the URL https://scenarieconomici.it/il-debito-buono-e-il-debito-cattivo/ on Mon, 28 Dec 2020 10:34:20 +0000.