Nick Szabo  🔑

Trillions of dollars worth of collateralized loans are made every year: mortgages, ship loans, car loans, airplanes, etc. Both sides of each of these apparently think it is productive.

You are using a colloquial definition for productivity. Production requires capital that can be spent. Where do you get the capital to collateralize your debt?

Collateralized loans are quite often used to fund capital investments in plant, equipment, real estate, etc. I don't know what planet you are living on or what language you are talking in, but until you want to start making sense, muted.

This is the problem with empirical economics. Observation leads one to false conclusions. If a company that raises investment and uses that money to collateralize a loan, that money is entirely non-productive. All interest earned is offset by that paid.

This is why the interest earned on secured debt is lower than that earned on unsecured debt. The portion that is secured is not earning any interest. Net of all costs of liquidating the collateral, this is a simple formulation, as expressed in the cash collateral scenario above.

Note that the observation of common use doesn't attempt to refute the statement that the collateralized portion is non-productive.

I spent some time on this today, and I realized that @NickSzabo4 and I are talking past each other. From the comments above it should be clear that I'm talking about collateral as money taken out of productive use, as with a "loan" under covenant (linked above) or a money-cert...