Date: 2015-06-25
Thought on the leveraged system
This issue has been in my mind for a long time. This is an important topic to understand. So I felt the need for sitting and writing it out, to organize my thought. So I did that, as I was getting increasingly concerned about the level of leverage around the world, while investors seem to get increasingly numbed by it. For this sort of writing, I tend to just sit quietly and think alone. The downside of this approach is: the reasoning lacks presentable numerical basis due to my poor memory, not to mention the unreliability of my memory, but the mechanical links between the premises that constitute the conclusion are strong, this way. Also, none of the key variables are neglected because I am not distracted by noises. Despite the rockets that enable humans to escape from earth, it makes practical sense to view humans as beings living in a closed system called earth. Factors in the outer space, notably sun and moon, affect every one of us; Massive chemical and physical changes occur thanks to them, but humans' economic activities occur within this closed system, and so do the transactions. As far as investments are concerned, I consider the argument that humans’ economic activities occur in an essentially closed system as a valid one. Due to this premise, some makes a mistake of not considering the time axis of the contracts which involve lenders and borrowers. Yet, because time dimension plays a key role here, it is important to see the current situation with a particular attention to the time dimension. This is because it is misleading to think as if the current leverage problem is cross-sectionally (because of the term structures) and/or four dimensional-ly (because debts are artificial and negotiable) a zero-sum one. So then, when the current system owes much to the future system, what is going to happen? When productivity improvement is not guaranteed, we should consider the credit created to finance projects speculative. In my view, the idea of guarantee is one of the most problematic ones in the investment arena; the absoluteness of the concept appeals to the investors because investors are humans and hence vulnerable. However, perfect viability of guarantee is only an idea, and the reality can deviate significantly from that idea. For this reason, I consider credit creation as always speculative in nature, just at varying degrees. In the same chain of reasoning, I view the failures of debt payment or receipt as failed speculation of one or both parties. Legal system has so far been protective of the lenders’ right to be paid, but it is uncertain how the bargaining power will shift in future. I would not be surprised if the lenders end up paying for the price of their predatory lending. In such a scenario, lenders' business model is likely to be dismantled at least for a little while, and the lenders may even turn into zombies for a very long time. Finally, people are likely to come to the notion that the concept of credit and debt is in fact artificial, and the public could collectively argue that ‘unfair’ enforcements had been a norm. The bargaining power of borrowers is likely to grow in rate negotiations or debt restructuring. Politics will probably support the borrowers, not the lenders, although this is uncertain. For the countries where commercial banks act like public utilities, this phenomenon is likely to be accentuated. Essentially, there can only be one of the two styles of solutions to the current situation. (1) New form of social class system which puts lenders on the top of borrowers permanently is a possibility. And (2) rebalancing of the bargaining power of lenders and borrowers is another possibility. For the time being, I foresee that the real endgame is likely to be the second scenario. This is because the first scenario is likely to be way too unstable and segregating. Collectively speaking, once the bargaining power rebalancing is in place, a grand debt forgiveness of the present (past) self by the future (present) self is most likely. As noted earlier, the concept of lending and borrowing is artificial, and the concept of the borrowers' having to pay the lenders back has been broken down numerous times in history, in special situations. In this particular case, because it takes a form of self-forgiveness collectively, the possibility of this scenario coming true seems high. Under such circumstances, The financial institutions are likely to greatly miss their performance projections, as this whole sector is the sole loser of this massive movement. Because convention, scale, united incentives, and lobbying power favor the banks, there may be some serious frictions, but I would think that the system is smart enough not to hand a signed-perpetual slavery contract of the rest of system to the lenders. But then.. who knows? Anything is possible. Even though savers are major losers and they did all the right things in the past, it will be hard to win this fight against the borrowers, because there is a clash-of-class element in this historic fight. I expect the whole world to discuss the true meaning of debt and credit in a meaningful way. The legality and the social orders around this issue are likely to confuse people, and the confusion is likely to create lots of unhappiness and opportunities. At the moment, this could appear as a very odd view. This is so far distanced from the conventional morals of the world. But people tend to do what they want to do, if they can do it. Even so, some things remain the same. Companies that benefit people's lives are going to survive. It is uncertain which forms of profit these companies will enjoy, but the profit will be there. Focus on productivity rather than on profitability will probably be rewarded in any case.