What have a growing economy and West Ham supporters in common?
Debt is going out of fashion. "Neither a borrower nor a lender be," said Shakespeare's Lord Polonius. It is a popular quote with today’s older generation. Perhaps it was even more so with their parents. It is not so popular with the baby boomers and their children.
But post credit crunch, debt is losing popularity.
Nassim Taleb, author of ’The Black Swan’, has written a new book about it called ‘Anti-fragile’. He says nature does not like leverage, and that’s why we have two kidneys, and two lungs. We get a back-up. He said that if god had worked in private equity he would have given us one lung to share among a dozen or so people.
And so we get a backlash against debt. Some say we need to look at Sharia banking, in which banks provide money in exchange for a share in profits.
Such arguments have merit. As far as lending to entrepreneurs is concerned, it is possible that the conventional banking model based on debt can never be fit for purpose, and only a Sharia type approach can work. This begs the question of course: why did the industrial revolution, funded by banks using debt, occur in the UK first?
Then again consider this. Imagine that across the entire economy output equals demand, which is not an unreasonable assumption. Imagine that thanks to an innovation all companies produce more. How is it possible then for demand to equal output? The only way demand can rise is if consumers have more money. This can only happen if all companies pay their staff and shareholders more money out of anticipated revenue.
In a perfect world this would not be a problem. Companies would pay for their inputs the moment they occur, and then sell them immediately, thus the money would exist to demand the products they produce.
But in the real world we have this thing called money. In the equation demand equals supply, but how can demand and supply rise without debt?
This is a very simple way of describing one of the views of the economist Hyman Minsky.
Maybe growth cannot occur without debt.
And since debt inevitably leads to bubbles, maybe the economy cannot grow without the risk of bubbles.
What have a growing economy and West Ham supporters in common? Answer: they are forever blowing bubbles.
© Investment & Business News 2013