The answer lies in the fact that in gambling one assets a man's work in a situation where there is no legal recourse. A trust has been extended to which one must respond.
Beware the gentleman’s agreement
Though both sexes could attend, the salon was the only social club where is was permissible for ladies to attend. The salon was a haven for those who craved intellectual conversation but the best salons were the ones that were frequented by those of exemplary manners. Gillenormand lived in the Rue Sirvandoni, he frequented several very good and highly noble salons. Although a bourgeois, M. Gillenormand was welcome in them, and as he had a twofold stock of wit, namely, that which he had and that attributed to him, he was sought after and made much of.
Moreover, when it comes to GDP growth, it's the total economy that grows, and it's the total debt that impacts the economy in some way.
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So, total debt is what matters, not just private or public debt. Consider the graph of total debt by quarter in the United States through , below. Go ahead. That's trillion with a "T. No problem, I'll wait a moment while you try to wrap your mind around it.
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I know you are still a little light-headed now, but we must move on. Now let's think about what that debt means? By itself? So, here's debt relative to the size of the economy. Yeah, but how much did the increase in debt itself boost GDP? Let's start with "who. Borrowers come in three categories: businesses, consumers, and government.
Businesses borrow money for lots of reasons. Chief among them are to build or expand infrastructure, to grow either organically or by acquisition , or to meet operational cash flow needs. Naturally, they also borrow to replace depleted or worn out capital to simply maintain the status quo. Likewise, consumers borrow to purchase longer-term assets like homes and cars.
Like businesses, consumers borrow to repair or replace worn out capital e.
Unlike many businesses, consumers also have a nasty little habit of borrowing just to consume i. Businesses and consumers together are known as the private sector. The private sector will be the basis of our analysis. Lastly, the government borrows.
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Governments borrow to finance fiscal deficits and - in Keynesian theory - grow the economy. So what is the net benefit of all this borrowing? How much does leverage amplify historical growth? And what is in store for the future? In economics, all the interesting stuff happens on the margin. So, let's look at the absolute change in total debt over time and compare that with the absolute change in GDP for the United States on a rolling five-year basis. However, the change in debt captures the net change over that time period, while the change in GDP captures only the increase in GDP segment E in the following exhibit , so it is an apples-to-oranges comparison.
Because the incremental debt is used, at least in part, to make investments and because it can flow through GDP in any of the years segments A, B, C, D , not just the last year segment E , I computed a variable called incremental GDP Flow which is the summation of all the incremental changes in GDP during each five-year period. Then comparing incremental GDP flow to the absolute change in debt, we can examine how efficiently the debt flows through the economy.
This "efficiency ratio" shows the proportion of total debt that flowed through the economy not to be confused with the efficiency ratio commonly used by banks in examining their fixed costs. Of course, it is possible that debt accumulated in a particular period - across the entire economy - went solely into replacing worn out capital or was simply held on balance sheets thereby offering no long-run contribution to GDP growth. But wouldn't we have been reading endless headlines about the Great Capital Replacement Cycle? Wouldn't we have seen a dearth of investment activity?
In fact, we haven't.
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So, such potential criticisms seem implausible. Moreover, the fact that debt has interest costs, albeit at low rates right now, sees to it that debt doesn't sit idle on balance sheets for very long. Actually, that's the point of the analysis: We want to capture the net effect of adding debt over long periods, which also captures the capital replacement cycle as well.
Alarmingly, it continues to worsen.
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Next, let's look at the role, if any, the Federal Reserve has played in stimulating debt and the GDP by setting interest rates. Fed Funds vs. The reason to highlight these two rate environments is that one might expect growth in debt to be more sensitive to interest rate changes in more extreme rate environments. To confirm this, I then performed an event study on rates and debt growth over the past 40 years.
I expected growth in debt to move in the opposite direction of interest rates in general and to be more pronounced in the extreme rate environments. Here is what I found.
The study turned out as expected. At the extremes, movements in Fed Funds rates do have a big impact on total debt growth. But, as noted earlier, debt efficiency is declining markedly. And we are currently in an extreme low rate environment. Consequently, one might expect debt consumption to accelerate. However, what we observe is that government debt consumption is accelerating, while private-sector debt consumption is essentially flat. So, given today's extraordinarily low rate environment, why isn't private debt growing like gangbusters?