Can you explain more your affinity for virtue ethics, e.g., was there a golden age in history, that you read about, where a group of people ran on virtue ethics and it worked out really well? I’m trying to understand why you seem to like it a lot more than I do.
Re government debt, I think that is actually driven more by increasing demand for a “risk-free” asset, with the supply going up more or less passively (what politician is going to refuse to increase debt and spending, as long as people are willing to keep buying it at a low interest rate). And from this perspective it’s not really a problem except for everyone getting used to the higher spending when some of the processes increasing the demand for government debt might only be temporary.
AI written explanation of how financialization causes increased demand for government debt
Financialization isn’t a vague blob; it’s a set of specific, concrete processes, each of which acts like a powerful vacuum cleaner sucking up government debt.
Let’s trace four of the most important mechanisms in detail.
1. The Derivatives Market: The Collateral Multiplier
Derivatives (options, futures, swaps) are essentially financial side-bets on the movement of an underlying asset. The total “notional” value of these bets is in the hundreds of trillions, dwarfing the real economy.
The Problem: If you make a bet with someone, you need to ensure they can pay you if you win. To solve this, both parties post collateral (or “margin”), which is a high-quality asset held by a third party (a clearinghouse). If someone defaults, their collateral is seized.
The Specific Mechanism: What is the best possible collateral? An asset that is universally trusted, easy to price, and can be sold instantly for cash. This is, by definition, a government bond. It is the gold standard of collateral.
How it Drives Demand: The growth of the derivatives market creates a leveraged demand for collateral. A single real-world asset (like a barrel of oil) can have dozens of derivative contracts layered on top of it. Each layer of betting requires a new layer of collateral to secure it. As the volume and complexity of financial trading grows, the demand for pristine collateral to backstop all these bets grows exponentially. This is a huge, structural source of demand that is completely detached from the need to fund real-world projects.
Analogy: A giant, global casino. The more tables and higher-stakes games the casino runs (financialization), the more high-quality security chips (government bonds) it needs to hold in its vault to ensure all winnings can be paid out.
2. Banking Regulation: The Regulatory Mandate for Safety
After the 2008 financial crisis, global regulators (through frameworks like Basel III) sought to make banks safer. They did this by forcing them to hold more “safe stuff” against their risky assets.
The Problem: Banks make money by taking short-term deposits and making long-term, risky loans. This makes them inherently fragile.
The Specific Mechanism: Regulations created the concept of High-Quality Liquid Assets (HQLA). Banks are legally required to hold a certain amount of HQLA that they could sell instantly to cover their obligations in a crisis. The regulations are very specific about what counts as HQLA. The highest tier (Level 1 HQLA), which has no restrictions, is almost exclusively comprised of cash and government bonds.
How it Drives Demand: This creates a legally mandated, non-negotiable demand for government debt. For a bank to grow its business (i.e., make more loans), it must simultaneously purchase more government bonds to satisfy its HQLA requirements. This directly links the growth of private credit in the economy to a mandatory increase in the demand for public debt.
Analogy: A building code for banks. The regulators say, “For every floor of risky office space you build (loans), you must add a corresponding amount of steel-reinforced concrete to the foundation (government bonds).” To build a taller skyscraper, you have no choice but to buy more concrete.
3. The Asset Management Industry: The Rise of Liability-Driven Investing (LDI)
The pool of professionally managed money (pensions, insurance funds, endowments) has exploded. These institutions have very specific, long-term promises to keep.
The Problem: A pension fund needs to be able to pay a 65-year-old a fixed income for the next 30 years. They cannot rely on the volatile stock market for this guaranteed cash flow.
The Specific Mechanism: This led to the strategy of Liability-Driven Investing (LDI). The goal is to own assets whose cash flows perfectly match your future liabilities. A 30-year government bond, which pays a fixed coupon every six months and repays principal in 30 years, is the perfect instrument for this. It is a contractual promise of cash flow that can be precisely matched against the contractual promise to a retiree.
How it Drives Demand: As the global population ages and the pool of retirement savings grows, the total value of these long-term liabilities skyrockets. This creates a massive, structural, and relatively price-insensitive demand for long-duration government bonds from the largest pools of capital in the world. They aren’t buying them for speculation; they are buying them to defease their promises.
Analogy: A pre-order system for future cash. An insurance company is like a business that has accepted millions of pre-orders for cash to be delivered in 20, 30, and 40 years. To guarantee they can fulfill those orders, they go to the most reliable supplier (the government) and place their own pre-orders for cash (by buying bonds) that will arrive on the exact same dates.
4. The Globalization of Finance: The Search for a Universal Safe Haven
Finance is no longer national; it is a single, interconnected global system. This system requires a neutral, trusted asset for settling international balances and storing wealth.
The Problem: A Chinese exporter earns dollars, or a Saudi sovereign wealth fund earns euros. Where do they store this foreign currency wealth safely and in a liquid form? They cannot hold billions in a retail bank account, and they may not want the risk of corporate stocks.
The Specific Mechanism: The US Treasury bond has become the de facto global reserve asset. It is the ultimate safe haven for foreign central banks, corporations, and investors. Its liquidity and the military/political backing of the US government make it the world’s default savings vehicle.
How it Drives Demand: Every time global trade grows, it creates larger trade surpluses in countries like China, Japan, and Germany. These surpluses are recycled into US Treasury bonds. Every time there is a global crisis (a European debt crisis, an emerging market collapse), capital flees from the periphery to the perceived safety of the core, which means a rush to buy US government debt. This makes the demand for Treasuries reflexive: the more unstable the world gets, the higher the demand for them becomes.
An analogy I like is with China’s Land Finance (土地财政), where the government funded a large part of its spending by continuously selling urban land to real estate developers to build apartments and offices on, which was fine as long as urbanization was ongoing but is now causing problems as that process slows down (along with a bunch of other issues/complications). I think of government debt as a similarly useful resource or asset, that in part enables more complex financial products to be built on top, but may cause a problem one day if demand for it slows down.
ETA: To make my point another way, I think the modern monetary system (with a mix of various money and money-like assets serving somewhat different purposes, including fiat money, regulated bank deposits, government debt) has its own internal logic, and while distortions exist, they are inevitable under any system (only second-best solutions are possible, due to bounded rationality and principal-agent problems). If you want to criticize it I think you have to go beyond “debt that will never be repaid” (which sounds like you’re trying to import intuitions for household/interpersonal finances, where it’s clearly bad to never pay one’s debts, to a very different situation), and talk about what specific distortions you’re worried about, how the alternative is actually better (taking into account its own distortions), and/or how/why the system is causing erosion of virtue ethics.
Can you explain more your affinity for virtue ethics, e.g., was there a golden age in history, that you read about, where a group of people ran on virtue ethics and it worked out really well? I’m trying to understand why you seem to like it a lot more than I do.
Re government debt, I think that is actually driven more by increasing demand for a “risk-free” asset, with the supply going up more or less passively (what politician is going to refuse to increase debt and spending, as long as people are willing to keep buying it at a low interest rate). And from this perspective it’s not really a problem except for everyone getting used to the higher spending when some of the processes increasing the demand for government debt might only be temporary.
AI written explanation of how financialization causes increased demand for government debt
How it Drives Demand: Every time global trade grows, it creates larger trade surpluses in countries like China, Japan, and Germany. These surpluses are recycled into US Treasury bonds. Every time there is a global crisis (a European debt crisis, an emerging market collapse), capital flees from the periphery to the perceived safety of the core, which means a rush to buy US government debt. This makes the demand for Treasuries reflexive: the more unstable the world gets, the higher the demand for them becomes.Financialization isn’t a vague blob; it’s a set of specific, concrete processes, each of which acts like a powerful vacuum cleaner sucking up government debt.
Let’s trace four of the most important mechanisms in detail.
1. The Derivatives Market: The Collateral Multiplier
Derivatives (options, futures, swaps) are essentially financial side-bets on the movement of an underlying asset. The total “notional” value of these bets is in the hundreds of trillions, dwarfing the real economy.
The Problem: If you make a bet with someone, you need to ensure they can pay you if you win. To solve this, both parties post collateral (or “margin”), which is a high-quality asset held by a third party (a clearinghouse). If someone defaults, their collateral is seized.
The Specific Mechanism: What is the best possible collateral? An asset that is universally trusted, easy to price, and can be sold instantly for cash. This is, by definition, a government bond. It is the gold standard of collateral.
How it Drives Demand: The growth of the derivatives market creates a leveraged demand for collateral. A single real-world asset (like a barrel of oil) can have dozens of derivative contracts layered on top of it. Each layer of betting requires a new layer of collateral to secure it. As the volume and complexity of financial trading grows, the demand for pristine collateral to backstop all these bets grows exponentially. This is a huge, structural source of demand that is completely detached from the need to fund real-world projects.
Analogy: A giant, global casino. The more tables and higher-stakes games the casino runs (financialization), the more high-quality security chips (government bonds) it needs to hold in its vault to ensure all winnings can be paid out.
2. Banking Regulation: The Regulatory Mandate for Safety
After the 2008 financial crisis, global regulators (through frameworks like Basel III) sought to make banks safer. They did this by forcing them to hold more “safe stuff” against their risky assets.
The Problem: Banks make money by taking short-term deposits and making long-term, risky loans. This makes them inherently fragile.
The Specific Mechanism: Regulations created the concept of High-Quality Liquid Assets (HQLA). Banks are legally required to hold a certain amount of HQLA that they could sell instantly to cover their obligations in a crisis. The regulations are very specific about what counts as HQLA. The highest tier (Level 1 HQLA), which has no restrictions, is almost exclusively comprised of cash and government bonds.
How it Drives Demand: This creates a legally mandated, non-negotiable demand for government debt. For a bank to grow its business (i.e., make more loans), it must simultaneously purchase more government bonds to satisfy its HQLA requirements. This directly links the growth of private credit in the economy to a mandatory increase in the demand for public debt.
Analogy: A building code for banks. The regulators say, “For every floor of risky office space you build (loans), you must add a corresponding amount of steel-reinforced concrete to the foundation (government bonds).” To build a taller skyscraper, you have no choice but to buy more concrete.
3. The Asset Management Industry: The Rise of Liability-Driven Investing (LDI)
The pool of professionally managed money (pensions, insurance funds, endowments) has exploded. These institutions have very specific, long-term promises to keep.
The Problem: A pension fund needs to be able to pay a 65-year-old a fixed income for the next 30 years. They cannot rely on the volatile stock market for this guaranteed cash flow.
The Specific Mechanism: This led to the strategy of Liability-Driven Investing (LDI). The goal is to own assets whose cash flows perfectly match your future liabilities. A 30-year government bond, which pays a fixed coupon every six months and repays principal in 30 years, is the perfect instrument for this. It is a contractual promise of cash flow that can be precisely matched against the contractual promise to a retiree.
How it Drives Demand: As the global population ages and the pool of retirement savings grows, the total value of these long-term liabilities skyrockets. This creates a massive, structural, and relatively price-insensitive demand for long-duration government bonds from the largest pools of capital in the world. They aren’t buying them for speculation; they are buying them to defease their promises.
Analogy: A pre-order system for future cash. An insurance company is like a business that has accepted millions of pre-orders for cash to be delivered in 20, 30, and 40 years. To guarantee they can fulfill those orders, they go to the most reliable supplier (the government) and place their own pre-orders for cash (by buying bonds) that will arrive on the exact same dates.
4. The Globalization of Finance: The Search for a Universal Safe Haven
Finance is no longer national; it is a single, interconnected global system. This system requires a neutral, trusted asset for settling international balances and storing wealth.
The Problem: A Chinese exporter earns dollars, or a Saudi sovereign wealth fund earns euros. Where do they store this foreign currency wealth safely and in a liquid form? They cannot hold billions in a retail bank account, and they may not want the risk of corporate stocks.
The Specific Mechanism: The US Treasury bond has become the de facto global reserve asset. It is the ultimate safe haven for foreign central banks, corporations, and investors. Its liquidity and the military/political backing of the US government make it the world’s default savings vehicle.
An analogy I like is with China’s Land Finance (土地财政), where the government funded a large part of its spending by continuously selling urban land to real estate developers to build apartments and offices on, which was fine as long as urbanization was ongoing but is now causing problems as that process slows down (along with a bunch of other issues/complications). I think of government debt as a similarly useful resource or asset, that in part enables more complex financial products to be built on top, but may cause a problem one day if demand for it slows down.
ETA: To make my point another way, I think the modern monetary system (with a mix of various money and money-like assets serving somewhat different purposes, including fiat money, regulated bank deposits, government debt) has its own internal logic, and while distortions exist, they are inevitable under any system (only second-best solutions are possible, due to bounded rationality and principal-agent problems). If you want to criticize it I think you have to go beyond “debt that will never be repaid” (which sounds like you’re trying to import intuitions for household/interpersonal finances, where it’s clearly bad to never pay one’s debts, to a very different situation), and talk about what specific distortions you’re worried about, how the alternative is actually better (taking into account its own distortions), and/or how/why the system is causing erosion of virtue ethics.