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Growth and Debt: Is there a Tradeoff?
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Thread: Growth and Debt: Is there a Tradeoff?

  1. #1
    akak Guest

    Default Growth and Debt: Is there a Tradeoff?

    I am curious if anyone on this forum who has read this article can possibly explain to me what Dr. Fekete is talking about with his Theory of "Liquidation Value of Debt"? I have tried to read his prior articles discussing this subject, and must admit to being completely perplexed -- he seems to imply that the burden of debt RISES as the interest rate on that debt FALLS, which seems contrary to logic to me. Am I missing something, or has he just explained this theory very poorly?

    Note the following excerpt in particular; does this make sense to anyone?

    "The liquidation value of debt is the amount that would liquidate it here and now. It obviously depends on the rate of interest. The liquidation value of total debt is inversely proportional to the prevailing rate of interest. In particular, halving the rate of interest by the central bank is equivalent to doubling the liquidation value of total debt.

    I have been writing about this Iron Law of the Burden of the Debt for many a year and have met with an almost total lack of understanding, judging by the feedback from readers. The lack is due to the reluctance of the mind to admit that cutting interest rates increases the burden of debt contracted in the past, because it contradicts one’s intuitive expectation that it should decrease the burden of debt to be contracted in the future. To be sure, cutting interest rates does increase the burden of debt contracted in the past because liquidation value is calculated by capitalizing the stream of future interest payments. Since at the lower rate the present value of that stream is smaller, a shortfall is created that has to be amortized upon liquidation."

    Last edited by akak; 12th February 2009 at 23:51.

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