Is debt like money?

It’s a fun little intellectual exercise to puzzle this one out. On the one hand, you have most economists who say it isn’t money because the transaction adds to zero: for every dollar one man owes there is a dollar owed to another. On the other hand, there are the people who say debt is money because we treat it exactly the same way: a store will immediately sell you goods in exchange for debt on your credit card. I managed to convince myself that debt acts like money in the short term using the following argument.

Imagine that you’re purchasing a screwdriver from a hardware store for a dollar. If you use cash, the transaction happens according to classical economics, give or take your personal philosophy of value. I subscribe to the subjective theory of value, so I say you have X dollars, and you’d prefer to have X-1 dollars and a screwdriver. Vice versa for the hardware store.

If you use your credit card instead, nearly the same process transpires for you. Most people intend to pay their credit card bills, although some don’t (a case that needs to be treated separately). So for you, the question whether to buy the screwdriver reduces to its equivalent above: do you prefer X dollars or X-1 dollars and a screwdriver?

But there’s a small additional complexity. Why use credit cards in the first place? There’s the convenience of course, but the existence of debit cards rules that out. The only other reason to use credit/debt is because it increases your purchasing power while your net worth remains the same. It’s hard to start a business on your own dime, whereas a loan can get you started.

And it’s a little comforting to know that if you hit a run of bad luck you don’t really have to pay those bills, morally. Maybe someone in the family gets sick; No one blames you if you defer the debt for a while.

So in that way having money plus credit/debt is like having more money, including the tendency to spend your money just a little more freely. In an economics model, this means we should treat them the same. But that’s just the short term, and I haven’t gotten around to that case when, for whatever reason, a person borrows on credit with no intention of repaying.

To be continued, in other words.

About Aeoli Pera

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2 Responses to Is debt like money?

  1. Heaviside says:

    Even “non-fiat” currencies backed by a commodity are ultimately fiat in that they are based on the promise that they will be exchangeable for whatever goods that they are supposedly backed by. There is no difference between the government promising you it will give you an ounce of gold for your dollar and the government promising to keep inflation low enough a dollar will buy an ounce of gold. Not only is all debt money, but all money is debt.

    Ultimately, the exchange value of anything(nominal as opposed to intrinsic value, which economics can’t measure), is only as good as the trustworthiness of the exchangees.

    Taking the philosophical principles of Austrian economics to their logical conclusion leads you to believe MEFO bills are the best form of currency, if you have as much faith in der fuhrer as I do.

    All exchanges are a form of manipulation. You can be selling penny stocks or tractor-trailers or gold or iphones or a party or an ideology or a religion, all money is a tool for modifying the behavior of other people. You wouldn’t care for a hundred dollar bill if waving it around didn’t change the behavior of people around you. A debt is an obligation to behave a certain way. The price of every single security listed on the NASDAQ is the product of manipulation.

    In an irreligious world, control of money is the control of religion.

    In economics, there is no such thing as intrinsic value:

    “There is no such thing as a product. Don’t ever think there is. There is only sex. Everything is sex.”

    Sex is money is time.

  2. Pingback: He’s got it | Aeoli Pera

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