We call it a lot things: bonds, debt, paper, loans. I prefer to call it fixed income in part because that’s what its called in the analyst community and in part because that its most salient feature. In all cases, however, what it seems to be to most people is confusing.
I can distinctly remember reading as a younger man “the corporate bond market is no place amateurs.” At the time that made it sound really elite and sexy. I wanted to learn more.
As I did, however, it seemed like there wasn’t a lot there, there. The formulas could get tedious at times but the basic concepts were bone simple. People agree to pay you a certain amount of money in the future. There is some chance they wont. There is some chance you’ll wish you had bought something else. That’s about the long and the short of it.
I filed it away as intellectually unimportant. Along with a lot of monetary economics by the way. But, that’s another story.
I went on with life.
Along the way I had friends who had problems with debt. I never really paid much attention to it, however. I loaned a few money when I thought I’d get it back. A loaned others money when I knew I wouldn’t.
However, I had never actually been in debt and the extent to which it haunted many of my friends never sunk in. More a reflection of my denseness than anything else.
I didn’t understood how most of the world sees debt until I got into long term relationships and my significant others would worry about it. A lot.
Why? I would ask, autisticly. Zero is just a number.
By that I meant that liabilities were simply negative assets. To have $3000 in assets is better than to have $1000 in assets. Likewise to have $1000 in assets is better than to have $1000 in liabilities. Yet, I didn’t see any distinction between those two positions. Debt is just negative assets. You cross zero, but so what? Zero is just a number. You don’t get all bent out of shape when you cross 37.
What’s so special about zero?
I’ve talked to a lot of people since then. And, I know that you are supposed to respect zero. I know that it is emotionally important for almost everyone. Sadly, I still can’t say that I really understand. Not in the way people seem to understand each other.
I tell myself little stories like “well zero is a meaningful amount of food or water to have, and so maybe this is like some sort evolutionary hold over” But, that doesn’t really mean anything. Its Ev-Psych story telling and it only serves to help me pretend like I can identify.
I’ve considered the fact that maybe I am just missing something in the analysis, something about the money itself. The problem is all the people I talk to seem to be horrible with fixed income. They don’t understand that you can make money by borrowing it. They don’t understand the significance of carry. They are consistently paying interest out of their nose for no reason and seem to have to think a minute before realizing that paying less interest and being paid interest are equally profitable.
And, to be quite frank, I wound up with a lot more money than them simply by playing with debt.
If I were a better man I might spend more time focusing on teaching financial literacy. But, to be honest, its hard enough for me to understand what my friends and family are talking about; to wrap my mind around their emotional connection to negative numbers.
I have to get better on this though, because of the way its warping our politics and becoming a national obsession. I see people arguing as if debt were obviously the biggest evil. And, then I see others saying, no unemployment is more evil.
No one, that I know, is salivating over a 0,9% carry on cash for five years and no liquidity constraints. That in a world where inflation expectations are much below it. Its like facing a the female cast of Nine, after they’ve chased you down to investigate rumors of your unparalleled virility
I understand the government is supposed to be an honest and chaste broker but good man are you completely immune to temptation. You a sell a trillion in bonds, you buy a trillion in real yielding capital and you just milk the crap out of it for free money.
Even if there is no specific financier to benefit it seems like such a tragedy to leave the deed undone. As if Marion Cotillard were crying herself to sleep for lack of company, its simply something a just god would never allow in a just world.
It’s a license to steal and only one agent on planet earth has been granted it – the US government. Yet, that government sits impotent, unable to see the bounty laid before it. And, the beauty sheds tears for a lover who can’t grasp that she pines for him.

19 comments
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Saturday ~ August 20th, 2011 at 1:50 pm
Curt Doolittle
Perhaps you lack that understanding, that empathy, because you have never been poor enough that you might become a slave to debt; never taken enough risk to fulfill a vision whose failure would mean your ruin; never aspired to that which you lack the resources to obtain; never had to choose between food and soap; never faced the possibility that you would have little to offer in exchange. Positives mean the ability to size opportunity. Negatives mean must watch those opportunities pass.
Monday ~ August 22nd, 2011 at 10:33 am
Gepap
Except that become a “slave” to debt is a social constraint placed upon individuals. Either an individual has internalized a socially constructed moral code in which they will feel bad for defaulting on another individual, or they face a socially constructed legal system in whcih force will be used against them on behalf of the creditor.
Its funny that ancient moral constraints again lending with interest have falled by the wayside, but moral constraints on debtors walking away when debt ‘enslaves’ them remain strong.
Saturday ~ August 20th, 2011 at 1:52 pm
Curt Doolittle
(That said, you keep this up and you’ll be the best blogger out there.)
Your post is elegant.
Saturday ~ August 20th, 2011 at 1:52 pm
Kevin Broughton
Hey Karl. I’m not sure the government can issue immense amounts of debt without moving the needle much. Yields on 5 year Treasuries are low, in part, because people view the political landscape as being unfriendly to deficit spending and thus less bond issuance on a relative basis. It’s also true that corporates are generally sitting on large piles of cash and aren’t looking to issue as much as they have in other, more exuberant, times. I don’t disagree that the Government could go out and buy real yielding capital with that money, but what if the capital they bought, through corruption or mismanagement or bad luck did not yield over the .9% required for them to receive ‘carry’.
The importance of zero, really, is a utility argument it seems. A lot of people, rightly or wrongly, view having to go through bankruptcy or ask their friends for money as a supremely negative outcome. A much worse outcome than is being able to lend others money. From a utility aspect, -100k assets probably has a much larger negative utility than +100k assets has in positive utility to the vast majority of people. Why? It’s probably that owning 100k in assets doesn’t get you much these days, but bankruptcy gets you potentially years of harassing human interactions with creditors, personal shame, and an inability to get credit at reasonable rates in the future. Now, as GBS said ‘Shame is pride’s cloak’.. but expecting people to shed their pride is not likely. It is their pride and the threat of bankruptcy, that the money lenders lean on to make you pay them back.
Saturday ~ August 20th, 2011 at 2:45 pm
Benny Lava
Let me help you out:
If you have debt, and you cannot pay it, the consequences can be severe. If you don’t pay your rent you will be evicted. If you have an eviction you cannot rent an apartment for 7 years. So you will either be homeless and die on the streets or forced to move in with relatives. I’m not sure which is worse.
If you have money banks will be quick to offer high yield savings accounts. It you have debt you won’t be able to open an account. If you take a loan for a car your interest rates, and thus monthly payments, will be higher. So you will fall further and further behind.
It is really simple but if you have never been poor you might not understand that you will pay more and get less, and that banks might not offer you the same services, or any service at all. That your monthly bills will be higher and you will have less ability to save.
You are a smart person so perhaps think about this information a bit.
Saturday ~ August 20th, 2011 at 4:44 pm
Fmb
Lots of projects require coordination between you and some collateral. Easy if you have it, harder if not.
Or, similarly, you fear having a highly inelastic demand combined with a seriously binding budget constraint. As Curt says, it sucks to choose food or soap. It also sucks to have a great opportunity be un-exploitable. Zero is a pretty important threshold for these things.
Though probably you’ll (correctly) say that liquidity is more important, and it’s possible to be in debt but liquid, or debt free and illiquid. But zero is still a decent heuristic.
Saturday ~ August 20th, 2011 at 5:56 pm
Lord
It is the consumer mentality. They may work, but they work to consume. They may borrow, but they borrow to consume. As a result, the math is all unfavorable to them. They know what they make but have little control over increasing it. The only control they have is over what they consume. You may tell them to think like a producer, but their experience with that is limited. They are too focused on doing their jobs and keeping them to deal with increasing their production and their returns. The best they hope for is a raise but it is of little benefit when they have already decided how to spend it or have already spent it. They think in the present. The debts they take on decrease their cash flow. They have probably heard of the producer mentality, but it makes little sense to them as know little about how to make it work for them. Consumption takes their income. They have nothing to invest nor the knowledge of how. It requires learning a new language and a new trade when all their time and attention is devoted to their current one. Meanwhile they know they are getting older, their options fewer, their time more limited, their income more spoken for, their chances of increasing it dimmer, and their risk of losing most or a significant portion of it greater. If they are already in a great deal of debt by the time they realize this, they may be constrained by it and all those options of what to do with it as illusory as those things they know they have no means to afford.
Saturday ~ August 20th, 2011 at 7:28 pm
q
not so much debt vs assets but _negative liquid net_ worth means that you are close – just a small amount of bad news to suffering. i think that’s what people get confused about, they conflate this with “debt.”
Saturday ~ August 20th, 2011 at 7:46 pm
Khal Mojo (@KhalMojo)
I think people here are missing the point. The federal government can make money right now… by borrowing. Buyers are PAYING the government to hold their money. That’s what Karl is talking about, where you can make money by borrowing – and the US government is the single entity in this entire planet who has the trillions of dollars to borrow and make billions more.
Karl is saying that the US government should take Marion Cotillard to bed, have its way with her and not call her in the morning. Just like the good hustler it should be right now.
Because it’d make money. Loads of it.
Saturday ~ August 20th, 2011 at 7:48 pm
Khal Mojo (@KhalMojo)
And, btw, as eloquent as this piece is, I can see why Ms Cotillard is ready and willing.
Saturday ~ August 20th, 2011 at 9:54 pm
RickRussellTX
@Lord — And I think you raise an excellent point. The constraint on typical citizens is time. The are few useful capital investments that can save time. As an individual, I don’t have time to run a side business or spin up new labor and capital resources the way a business would. My wife wouldn’t appreciate it if I subcontracted my husbandly duties to an illegal immigrant at $7/hr so I could get a phd while holding down my FT job. Or maybe she would. TMI!
So it’s hard for a regular Joe to make money on debt without taking massive risk.
Sunday ~ August 21st, 2011 at 8:06 am
rjs
this is an important post, if anyone reads it…
Sunday ~ August 21st, 2011 at 10:43 pm
Johnnie Linn
Does the zero datum include normal profits? Maybe for long-term consumers, normal profit is negative.
Monday ~ August 22nd, 2011 at 9:40 am
SRBAC
Being right or left of zero means where you are when all the transactions are completed. I get the idea you don’t intend to ever complete the transactions.
Monday ~ August 22nd, 2011 at 10:40 am
Gepap
This situation is a perfect example of the fact that human beings are not simply rational self-interested actors. The issue here is not the number zero, but the notion of having an obligation to another person. Human groups work based on our beliefs about each other – we feel the need to meet our obligations because a failure to do so marks someone as untrustworthy, someone who might not be there for the group when it matters. Such individuals are to be ostracized, and being driven from the group is a huge fear for humans as it generally meant death back in our formative millenia. That is why people get hung up on debt.
It takes a good understanding of our modern system and how much it has changed the relation between individuals to be able to realize that to some extent monetary debt acquired by a participant in a complex web of credit is different from being on the hook to the strong man in some small village, and even that fancy rationalization doesn’t make the gut feeling go away.
Monday ~ August 22nd, 2011 at 12:31 pm
Craig
Sometimes zero is just a number: from one degree Fahrenheit to minus one really doesn’t count for a hill of beans. But let’s do a quick experiment. Fill your kitchen sink with water at a comfortable temperature. Hold your face one inch above the surface of the water. Now hold it one inch below. Spot the difference?
I am not an anti-debt zealot. I’ve taken on loads of debt for good reasons, and done well by it. But debt is like fire and government: a troublesome servant and a fearful master. Is it any surprise that people have a hard time relating to debt in a sane way?
Wednesday ~ August 24th, 2011 at 11:44 am
Credit Market Sniffs, Pundits Declare Pneumonia | Condor Options
[...] on both continents have the political will to do the right thing (in the U.S.: to take advantage of the bounty laid before us, instead of autistically obsessing about the meaning of zero), and so on. Yes, economic conditions [...]
Wednesday ~ September 14th, 2011 at 4:22 am
JakeS
People are worried about debt – correctly – because they live in a system that f*s debtors over. With a pine tree.
Or, more correctly, it f*s the little guy with a pine tree, and debt is the favourite instrument for doing that (I didn’t see any of the disgusting excuses for members of the human species at the AIG CDS division get perp-walked, but maybe I missed that part).
What they tend to miss vis-a-vis the federal government is that the government’s soft-currency “creditors” can’t rape the government (hard currency is a different sort of story). For the same reason 5 year old kids on a temper tantrum rarely kill armed cops.
Ultima ratio regum and all that.
- Jake
Friday ~ November 4th, 2011 at 4:48 pm
Saving Europe with sovereign equity | longterm-disability-insurance.info
[...] a good idea is because it does what obviously needs to be done in Europe, which is to eliminate the tyranny of zero. Suppose that Germany’s net financial position (however you want to compute that) is [...]