[NSG Senate] Lobby-ing a Scimitar

[Belmaria]

I would consider it a net increase, as they are spending money within the national economy, and thus planting some capital of their own within the nation.

I'd have thought that, but consider that the capital account (by definition the reverse of the current account aka trade balance) being positive represents a shrinking economy importing more than it exports, and the wikipedia page does define the capital account as equal to the Change in Foreign Ownership of Domestic Assets minus the Change in Domestic Ownership of Foreign Assets. So exporting more than you're importing represents more domestic claims on foreign assets and the inverse means foreigners are acquiring claims on domestic assets. I can't see this meaning more net investment, which is reinforced by page from the World Bank which asserts that statement.

The problem with this sentiment is that the world has finite monetary resources, and it's not feasible for a small nation to expect to have trade or payment balance; particularly if said small nation has few natural resources or skilled laborers. Third world nations must, therefore, encourage foreign investment as a means of attracting capital to their economies. Regardless of the robust nature of economic superpowers like Europe, Russia, China, the USA, and others, money is money, and if a small nation can acquire it from a foreign source (assuming it stays within the economy) such procurement will result in a net gain economically.

[Arkolon]

I'd have thought that, but consider that the capital account (by definition the reverse of the current account aka trade balance) being positive represents a shrinking economy importing more than it exports, and the wikipedia page does define the capital account as equal to the Change in Foreign Ownership of Domestic Assets minus the Change in Domestic Ownership of Foreign Assets. So exporting more than you're importing represents more domestic claims on foreign assets and the inverse means foreigners are acquiring claims on domestic assets. I can't see this meaning more net investment, which is reinforced by page from the World Bank which asserts that statement.

The problem with this sentiment is that the world has finite monetary resources, and it's not feasible for a small nation to expect to have trade or payment balance; particularly if said small nation has few natural resources or skilled laborers. Third world nations must, therefore, encourage foreign investment as a means of attracting capital to their economies. Regardless of the robust nature of economic superpowers like Europe, Russia, China, the USA, and others, money is money, and if a small nation can acquire it from a foreign source (assuming it stays within the economy) such procurement will result in a net gain economically.

Monetary resources definitely aren't finite and this post assumes FDI means capital accumulation, whereas sources I've seen seem to indicate that it isn't new capital formation but rather a changing nature of the ownership of this capital. Again I think it's a better idea to put what we'd consider FDI in the current account (under net income from abroad), but not necessarily have this lead to the accumulation of capital - a process which is reserved to public and private investment.

[Belmaria]

The problem with this sentiment is that the world has finite monetary resources, and it's not feasible for a small nation to expect to have trade or payment balance; particularly if said small nation has few natural resources or skilled laborers. Third world nations must, therefore, encourage foreign investment as a means of attracting capital to their economies. Regardless of the robust nature of economic superpowers like Europe, Russia, China, the USA, and others, money is money, and if a small nation can acquire it from a foreign source (assuming it stays within the economy) such procurement will result in a net gain economically.

Monetary resources definitely aren't finite and this post assumes FDI means capital accumulation, whereas sources I've seen seem to indicate that it isn't new capital formation but rather a changing nature of the ownership of this capital. Again I think it's a better idea to put what we'd consider FDI in the current account (under net income from abroad), but not necessarily have this lead to the accumulation of capital - a process which is reserved to public and private investment.

Ultimately, monetary resources are nothing more than a representation of tangible and abstract assets. If an economy lacks said assets, the economy will lack monetary strength. That's why you can't just print more money to stimulate growth.

[Arkolon]

Monetary resources definitely aren't finite and this post assumes FDI means capital accumulation, whereas sources I've seen seem to indicate that it isn't new capital formation but rather a changing nature of the ownership of this capital. Again I think it's a better idea to put what we'd consider FDI in the current account (under net income from abroad), but not necessarily have this lead to the accumulation of capital - a process which is reserved to public and private investment.

Ultimately, monetary resources are nothing more than a representation of tangible and abstract assets. If an economy lacks said assets, the economy will lack monetary strength. That's why you can't just print more money to stimulate growth.

Money is just a medium of exchange, it doesn't by definition represent a fraction of a physical economy, it just allows you to access it. Printing money does stimulate growth, people do it all the time, it's how a bank loan works. Give a man money to buy a tractor and a field and his output stimulates growth, all from money that came out of thin air. Printing money and dropping it out of helicopters literally is a real idea and will stimulate people to spend more money, thus giving companies greater profit margins and signalling them to increase output, ie growth. It can be inflationary but that's almost the point.

[Belmaria]

Ultimately, monetary resources are nothing more than a representation of tangible and abstract assets. If an economy lacks said assets, the economy will lack monetary strength. That's why you can't just print more money to stimulate growth.

Money is just a medium of exchange, it doesn't by definition represent a fraction of a physical economy, it just allows you to access it. Printing money does stimulate growth, people do it all the time, it's how a bank loan works. Give a man money to buy a tractor and a field and his output stimulates growth, all from money that came out of thin air. Printing money and dropping it out of helicopters literally is a real idea and will stimulate people to spend more money, thus giving companies greater profit margins and signalling them to increase output, ie growth. It can be inflationary but that's almost the point.

That's the problem with the idea that printing more money will just solve an economic crisis. Debasement of currency is a serious problem, and if you think even for a moment that the basic principles of supply and demand don't apply to monetary supply, you have a poor understanding of money. Regardless of what the Keynesian professor that taught you all that you know about economics told you in class, you can't just print more money.

[Arkolon]

Money is just a medium of exchange, it doesn't by definition represent a fraction of a physical economy, it just allows you to access it. Printing money does stimulate growth, people do it all the time, it's how a bank loan works. Give a man money to buy a tractor and a field and his output stimulates growth, all from money that came out of thin air. Printing money and dropping it out of helicopters literally is a real idea and will stimulate people to spend more money, thus giving companies greater profit margins and signalling them to increase output, ie growth. It can be inflationary but that's almost the point.

That's the problem with the idea that printing more money will just solve an economic crisis. Debasement of currency is a serious problem, and if you think even for a moment that the basic principles of supply and demand don't apply to monetary supply, you have a poor understanding of money. Regardless of what the Keynesian professor that taught you all that you know about economics told you in class, you can't just print more money.

Milton Friedman was a monetarist, an anti-Keynesian basically, but whatever. Inflation is a monetary phenomenon but hyperinflation is a political phenomenon: it's an outright, psychological rejection of a currency. It doesn't have to do with the printing of money per se. Recall the Russian ruble after the dissolution of the USSR, for example. If you want an understanding of money, since you don't seem to believe in even the most basic quantity theory of money (that there is a demand and supply of money) or even that money is (mostly) credit, try this paper from the Bank of England and this paper from one of the financial analysts that, correctly, predicted that QE won't incur much if any inflation. You'll thank me later.

[Malgrave]

so why are we talking about economics? >_>

[Arkolon]

so why are we talking about economics? >_>

Implying it isn't the subject of the gods.

[Collatis]

so why are we talking about economics? >_>

Amen to that

[Belmaria]

That's the problem with the idea that printing more money will just solve an economic crisis. Debasement of currency is a serious problem, and if you think even for a moment that the basic principles of supply and demand don't apply to monetary supply, you have a poor understanding of money. Regardless of what the Keynesian professor that taught you all that you know about economics told you in class, you can't just print more money.

Milton Friedman was a monetarist, an anti-Keynesian basically, but whatever. Inflation is a monetary phenomenon but hyperinflation is a political phenomenon: it's an outright, psychological rejection of a currency. It doesn't have to do with the printing of money per se. Recall the Russian ruble after the dissolution of the USSR, for example. If you want an understanding of money, since you don't seem to believe in even the most basic quantity theory of money (that there is a demand and supply of money) or even that money is (mostly) credit, try this paper from the Bank of England and this paper from one of the financial analysts that, correctly, predicted that QE won't incur much if any inflation. You'll thank me later.

More Keynesian kerfuffle. If our monetary system is nothing more than a system of trust in government-administered mints, we are doomed.

[Arkolon]

Milton Friedman was a monetarist, an anti-Keynesian basically, but whatever. Inflation is a monetary phenomenon but hyperinflation is a political phenomenon: it's an outright, psychological rejection of a currency. It doesn't have to do with the printing of money per se. Recall the Russian ruble after the dissolution of the USSR, for example. If you want an understanding of money, since you don't seem to believe in even the most basic quantity theory of money (that there is a demand and supply of money) or even that money is (mostly) credit, try this paper from the Bank of England and this paper from one of the financial analysts that, correctly, predicted that QE won't incur much if any inflation. You'll thank me later.

More Keynesian kerfuffle. If our monetary system is nothing more than a system of trust in government-administered mints, we are doomed.

That's what happened in every country that experienced hyperinflation it seems: no one trusted the government-administered mints. Luckily, we live in a part of the world with generally responsible governments and independent central banks. What's more, the US dollar is the de facto reserve currency all around the world - every country seems to value the US dollar a lot, so the damage literally printing billions of US dollars could have is really minimal. All the better for everyone who makes payments in US dollars around the world, actually, since they get a greater supply of dollars to work with.

[Belmaria]

More Keynesian kerfuffle. If our monetary system is nothing more than a system of trust in government-administered mints, we are doomed.

That's what happened in every country that experienced hyperinflation it seems: no one trusted the government-administered mints. Luckily, we live in a part of the world with generally responsible governments and independent central banks. What's more, the US dollar is the de facto reserve currency all around the world - every country seems to value the US dollar a lot, so the damage literally printing billions of US dollars could have is really minimal. All the better for everyone who makes payments in US dollars around the world, actually, since they get a greater supply of dollars to work with.

But for every dollar printed, it has to be inherently worth less than the last. I still don't understand how supply/demand don't apply to monetary policy like they do in the private sector. It's almost as if the de-facto excuse that Keynesians give is similar to that of die-hard Harry Potter fans when there are plot holes in their favorite work: A wizard (government mint) did it.

[Arkolon]

That's what happened in every country that experienced hyperinflation it seems: no one trusted the government-administered mints. Luckily, we live in a part of the world with generally responsible governments and independent central banks. What's more, the US dollar is the de facto reserve currency all around the world - every country seems to value the US dollar a lot, so the damage literally printing billions of US dollars could have is really minimal. All the better for everyone who makes payments in US dollars around the world, actually, since they get a greater supply of dollars to work with.

But for every dollar printed, it has to be inherently worth less than the last. I still don't understand how supply/demand don't apply to monetary policy like they do in the private sector. It's almost as if the de-facto excuse that Keynesians give is similar to that of die-hard Harry Potter fans when there are plot holes in their favorite work: A wizard (government mint) did it.

If we printed trillions of dollars, but kept it inside a vault and it never entered the economy and most people didn't even know it was there, why would prices change? In another extreme, if we printed money out of thin air (which is basically what happens when you take a loan out of a bank) and this money was used for productive activity that generated more output, how is this negative for the economy? Price changes also aren't instantaneous: one early indicator of inflation is wages with respect to productivity. People are paid more in a competitive job market (low unemployment) and to attract workers companies pay them more than they otherwise would. This leads to higher wages but the same amount of goods are produced; after a while, shops realise people have so much money (maybe they realise labour costs got too high) so they raise prices, ie consumer price inflation. Same goes for printing money and handing it out to people: it takes a while to trickle into price rises, and if managed properly (eg not printing money to repay foreign currency-denominated debt, not issuing loads of non-performing loans) it can lead to - and is supposed to lead to - productive activity along the way.

[Belmaria]

But for every dollar printed, it has to be inherently worth less than the last. I still don't understand how supply/demand don't apply to monetary policy like they do in the private sector. It's almost as if the de-facto excuse that Keynesians give is similar to that of die-hard Harry Potter fans when there are plot holes in their favorite work: A wizard (government mint) did it.

If we printed trillions of dollars, but kept it inside a vault and it never entered the economy and most people didn't even know it was there, why would prices change? In another extreme, if we printed money out of thin air (which is basically what happens when you take a loan out of a bank) and this money was used for productive activity that generated more output, how is this negative for the economy? Price changes also aren't instantaneous: one early indicator of inflation is wages with respect to productivity. People are paid more in a competitive job market (low unemployment) and to attract workers companies pay them more than they otherwise would. This leads to higher wages but the same amount of goods are produced; after a while, shops realise people have so much money (maybe they realise labour costs got too high) so they raise prices, ie consumer price inflation. Same goes for printing money and handing it out to people: it takes a while to trickle into price rises, and if managed properly (eg not printing money to repay foreign currency-denominated debt, not issuing loads of non-performing loans) it can lead to - and is supposed to lead to - productive activity along the way.

The problem is that there is no safe way to issue loans in this fashion. There is no assured indication of which loans will pay off, which loans (when issued in large quantities) will cause bubbles, and which loans will just be plain counter-productive. We can use heuristic analysis and rule sets to determine the likelihood of a loan contributing to our economy, but said analysis is performed by humans who are, by definition, fallible creatures. See: 2007 housing collapse.

[Arkolon]

If we printed trillions of dollars, but kept it inside a vault and it never entered the economy and most people didn't even know it was there, why would prices change? In another extreme, if we printed money out of thin air (which is basically what happens when you take a loan out of a bank) and this money was used for productive activity that generated more output, how is this negative for the economy? Price changes also aren't instantaneous: one early indicator of inflation is wages with respect to productivity. People are paid more in a competitive job market (low unemployment) and to attract workers companies pay them more than they otherwise would. This leads to higher wages but the same amount of goods are produced; after a while, shops realise people have so much money (maybe they realise labour costs got too high) so they raise prices, ie consumer price inflation. Same goes for printing money and handing it out to people: it takes a while to trickle into price rises, and if managed properly (eg not printing money to repay foreign currency-denominated debt, not issuing loads of non-performing loans) it can lead to - and is supposed to lead to - productive activity along the way.

The problem is that there is no safe way to issue loans in this fashion. There is no assured indication of which loans will pay off, which loans (when issued in large quantities) will cause bubbles, and which loans will just be plain counter-productive. We can use heuristic analysis and rule sets to determine the likelihood of a loan contributing to our economy, but said analysis is performed by humans who are, by definition, fallible creatures. See: 2007 housing collapse.

Every loan is essentially a bet, yes, and things wouldn't work much differently in any other economic system. If you nationalised the money creation process or, worse, tied it to a resource limited in number, you'd essentially get rid of credit in the way we know it today and would stunt growth by drastically limiting the loan creation process and tying the money supply to that finite resource (by extension also requiring that growth can only be achieved through exports - a net inflow of this resource - and since imports/exports are a zero-sum game...). Anyway, since every loan is a bet, we need important regulation on banks to make sure they can overcome shocks to their assets. These regulations were known as the Basel I, Basel II, and (importantly) Basel III accords and limit the money creation process by regulating bank capital. From where we stand today, they look pretty adequate.

[Belmaria]

The problem is that there is no safe way to issue loans in this fashion. There is no assured indication of which loans will pay off, which loans (when issued in large quantities) will cause bubbles, and which loans will just be plain counter-productive. We can use heuristic analysis and rule sets to determine the likelihood of a loan contributing to our economy, but said analysis is performed by humans who are, by definition, fallible creatures. See: 2007 housing collapse.

Every loan is essentially a bet, yes, and things wouldn't work much differently in any other economic system. If you nationalised the money creation process or, worse, tied it to a resource limited in number, you'd essentially get rid of credit in the way we know it today and would stunt growth by drastically limiting the loan creation process and tying the money supply to that finite resource (by extension also requiring that growth can only be achieved through exports - a net inflow of this resource - and since imports/exports are a zero-sum game...). Anyway, since every loan is a bet, we need important regulation on banks to make sure they can overcome shocks to their assets. These regulations were known as the Basel I, Basel II, and (importantly) Basel III accords and limit the money creation process by regulating bank capital. From where we stand today, they look pretty adequate.

Let me ask you this: It's obvious that most people don't understand the monetary system, and that the concept of fiat currency is unknown by most people. Do you think the people of the world would continue to have faith in our system if they knew how it worked? And if not, why should we depend on a monetary system that depends on the ignorance of people?

[Arkolon]

Every loan is essentially a bet, yes, and things wouldn't work much differently in any other economic system. If you nationalised the money creation process or, worse, tied it to a resource limited in number, you'd essentially get rid of credit in the way we know it today and would stunt growth by drastically limiting the loan creation process and tying the money supply to that finite resource (by extension also requiring that growth can only be achieved through exports - a net inflow of this resource - and since imports/exports are a zero-sum game...). Anyway, since every loan is a bet, we need important regulation on banks to make sure they can overcome shocks to their assets. These regulations were known as the Basel I, Basel II, and (importantly) Basel III accords and limit the money creation process by regulating bank capital. From where we stand today, they look pretty adequate.

Let me ask you this: It's obvious that most people don't understand the monetary system, and that the concept of fiat currency is unknown by most people. Do you think the people of the world would continue to have faith in our system if they knew how it worked? And if not, why should we depend on a monetary system that depends on the ignorance of people.

Why wouldn't they like this system? It's now infinitely easier to buy a car, a house, or buy stocks on margin. Private and public debt, financed by money coming out of thin air, has allowed institutions to embark on great projects they otherwise wouldn't have been able to. I wouldn't say the system relies on the ignorance of people: many central banks publish bulletins and PDFs destined to let people know how the system works. It just seems as if not that many people care about monetary economics. I think it makes more sense the other way around: it's not that people are ignorant that we have this complicated system, it's that people are ignorant because the system is so complicated. It was only two years ago that the BoE (in the paper I linked you) openly admits that textbook monetary economics was grossly incorrect and far too simple in explaining the money creation process - and all this time has elapsed since people have studied those textbooks!

[Belmaria]

Let me ask you this: It's obvious that most people don't understand the monetary system, and that the concept of fiat currency is unknown by most people. Do you think the people of the world would continue to have faith in our system if they knew how it worked? And if not, why should we depend on a monetary system that depends on the ignorance of people.

Why wouldn't they like this system? It's now infinitely easier to buy a car, a house, or buy stocks on margin. Private and public debt, financed by money coming out of thin air, has allowed institutions to embark on great projects they otherwise wouldn't have been able to. I wouldn't say the system relies on the ignorance of people: many central banks publish bulletins and PDFs destined to let people know how the system works. It just seems as if not that many people care about monetary economics. I think it makes more sense the other way around: it's not that people are ignorant that we have this complicated system, it's that people are ignorant because the system is so complicated. It was only two years ago that the BoE (in the paper I linked you) openly admits that textbook monetary economics was grossly incorrect and far too simple in explaining the money creation process - and all this time has elapsed since people have studied those textbooks!

It could be argued that since our entire economy is based on debt, prices are artificially high, and that resources would be just as affordable or almost as affordable, when adjusted for deflation, if our entire monetary system weren't built upon the concept of indebted consumers with extra capital to spend in the short term. Therefore, said debt is an unnecessary burden on consumers and the economy as a whole.

[Arkolon]

Why wouldn't they like this system? It's now infinitely easier to buy a car, a house, or buy stocks on margin. Private and public debt, financed by money coming out of thin air, has allowed institutions to embark on great projects they otherwise wouldn't have been able to. I wouldn't say the system relies on the ignorance of people: many central banks publish bulletins and PDFs destined to let people know how the system works. It just seems as if not that many people care about monetary economics. I think it makes more sense the other way around: it's not that people are ignorant that we have this complicated system, it's that people are ignorant because the system is so complicated. It was only two years ago that the BoE (in the paper I linked you) openly admits that textbook monetary economics was grossly incorrect and far too simple in explaining the money creation process - and all this time has elapsed since people have studied those textbooks!

It could be argued that since our entire economy is based on debt, prices are artificially high, and that resources would be just as affordable or almost as affordable, when adjusted for deflation, if our entire monetary system weren't built upon the concept of indebted consumers with extra capital to spend in the short term. Therefore, said debt is an unnecessary burden on consumers and the economy as a whole.

Prices being artificially high compared to what? I mean, as I said, loans tend to lead to productive output. They kind of have to, especially if you're expected to pay interest on the loan. If loans financed slothful activity (and they were therefore non-performing) you'd have an inflation problem (and the bank would have its own big problems). I'm not seeing this system as being negative, especially since it's by and large being used quite properly, and its benefits are pretty immense. Imagine trying to get a loan under a gold standard with depleting gold reserves! I mean, isn't this system the pinnacle of liberal capitalism: private banks control the money supply, only regulated by the state and watched over by a glorified clearing-house?

[Belmaria]

It could be argued that since our entire economy is based on debt, prices are artificially high, and that resources would be just as affordable or almost as affordable, when adjusted for deflation, if our entire monetary system weren't built upon the concept of indebted consumers with extra capital to spend in the short term. Therefore, said debt is an unnecessary burden on consumers and the economy as a whole.

Prices being artificially high compared to what? I mean, as I said, loans tend to lead to productive output. They kind of have to, especially if you're expected to pay interest on the loan. If loans financed slothful activity (and they were therefore non-performing) you'd have an inflation problem (and the bank would have its own big problems). I'm not seeing this system as being negative, especially since it's by and large being used quite properly, and its benefits are pretty immense. Imagine trying to get a loan under a gold standard with depleting gold reserves! I mean, isn't this system the pinnacle of liberal capitalism: private banks control the money supply, only regulated by the state and watched over by a glorified clearing-house?

I don't think you understand the premise of my argument. My argument is that when consumers have more money to spend, demand increases, and so does the price of goods and services. With the elimination of extra capital in the short run through the elimination of a majority of loans, supply would be adjusted and prices would stay the same. Consumer access to expensive goods may be moderately impacted, but for the most part, people would survive without huge mountains of debt.

[Arkolon]

Prices being artificially high compared to what? I mean, as I said, loans tend to lead to productive output. They kind of have to, especially if you're expected to pay interest on the loan. If loans financed slothful activity (and they were therefore non-performing) you'd have an inflation problem (and the bank would have its own big problems). I'm not seeing this system as being negative, especially since it's by and large being used quite properly, and its benefits are pretty immense. Imagine trying to get a loan under a gold standard with depleting gold reserves! I mean, isn't this system the pinnacle of liberal capitalism: private banks control the money supply, only regulated by the state and watched over by a glorified clearing-house?

I don't think you understand the premise of my argument. My argument is that when consumers have more money to spend, demand increases, and so does the price of goods and services. With the elimination of extra capital in the short run through the elimination of a majority of loans, supply would be adjusted and prices would stay the same. Consumer access to expensive goods may be moderately impacted, but for the most part, people would survive without huge mountains of debt.

And you're ignoring that, as I've said, loans lead to productive activity. Taking a loan at 5% APR can't finance your consumption, it doesn't give consumers greater demand for consumer goods, it's impossible for you to repay a loan by just spending all that money on short-term consumption. When you take a loan out, especially with an interest rate, you spend that money building a factory or expanding your company or investing in capital - things that would lead to more output, to growth. This doesn't make consumer prices "artificially high" since it doesn't (or rather, shouldn't) finance consumption. Consider for example a government spending in deficit: if it spends on, say, paying people to dig up a hole and fill it back up again (ie nothing productive) then this spending will be inflationary because there will be more money (people's wages) chasing the same amount of goods (productive activity stayed the same). If, however, the government used the money to put people back into productive work, this isn't necessarily inflationary since there's more money chasing more goods. If loans finance productive activity, why would consumers face higher prices?

[Belmaria]

I don't think you understand the premise of my argument. My argument is that when consumers have more money to spend, demand increases, and so does the price of goods and services. With the elimination of extra capital in the short run through the elimination of a majority of loans, supply would be adjusted and prices would stay the same. Consumer access to expensive goods may be moderately impacted, but for the most part, people would survive without huge mountains of debt.

And you're ignoring that, as I've said, loans lead to productive activity. Taking a loan at 5% APR can't finance your consumption, it doesn't give consumers greater demand for consumer goods, it's impossible for you to repay a loan by just spending all that money on short-term consumption. When you take a loan out, especially with an interest rate, you spend that money building a factory or expanding your company or investing in capital - things that would lead to more output, to growth. This doesn't make consumer prices "artificially high" since it doesn't (or rather, shouldn't) finance consumption. Consider for example a government spending in deficit: if it spends on, say, paying people to dig up a hole and fill it back up again (ie nothing productive) then this spending will be inflationary because there will be more money (people's wages) chasing the same amount of goods (productive activity stayed the same). If, however, the government used the money to put people back into productive work, this isn't necessarily inflationary since there's more money chasing more goods. If loans finance productive activity, why would consumers face higher prices?

Because not all loans finance productive activity, and mortgages in particular do very little to increase productivity, while placing our entire system at risk of collapse due to subprime lending. Even now, after the 2007 collapse, lenders are using many of the same tactics that were in use before the collapse. You could argue that regulation would solve this problem, but in reality, the system itself is flawed, and the resultant collapse in housing that will follow (yet again) will once again solidify this fact.

Also, this.

[Arkolon]

And you're ignoring that, as I've said, loans lead to productive activity. Taking a loan at 5% APR can't finance your consumption, it doesn't give consumers greater demand for consumer goods, it's impossible for you to repay a loan by just spending all that money on short-term consumption. When you take a loan out, especially with an interest rate, you spend that money building a factory or expanding your company or investing in capital - things that would lead to more output, to growth. This doesn't make consumer prices "artificially high" since it doesn't (or rather, shouldn't) finance consumption. Consider for example a government spending in deficit: if it spends on, say, paying people to dig up a hole and fill it back up again (ie nothing productive) then this spending will be inflationary because there will be more money (people's wages) chasing the same amount of goods (productive activity stayed the same). If, however, the government used the money to put people back into productive work, this isn't necessarily inflationary since there's more money chasing more goods. If loans finance productive activity, why would consumers face higher prices?

Because not all loans finance productive activity, and mortgages in particular do very little to increase productivity, while placing our entire system at risk of collapse due to subprime lending. Even now, after the 2007 collapse, lenders are using many of the same tactics that were in use before the collapse. You could argue that regulation would solve this problem, but in reality, the system itself is flawed, and the resultant collapse in housing that will follow (yet again) will once again solidify this fact.

Also, this.

Property is important collateral, usually finances the future of upwardly mobile people, and subprime lending isn't inherently bad. Banks didn't have adequate capital buffers at the time and what happened in the years preceding the crisis was arguably fraudulent. Subprime loans have subpar credit rating; when they're sold at Aaa status and the bubble pops, of course things go haywire. People commit themselves to subprime lending all the time, it only became a 'toxic' word after the GFC, but there's no need to worry about less-advantaged people taking out high-interest-bearing loans so that they too can finance investments, not just the already-rich who have high-income jobs or large amounts of collateral. Especially if banks have adequate capital buffers.

[Electrum]

Who needs Economics anyways?

[Malgrave]

so why are we talking about economics? >_>

Amen to that

can I put them in the gulags?