Debt Incurs Fragility
Fragility: easily damaged by insults
Robustness: able to withstand insults
Evolution has designed the human body with robustness. The liver and spleen, both somewhat delicate organs, are protected behind the bottom of our ribcage. Peripheral nerves can regenerate. The most vital organ in the body--the brain--is encased in hard bone. The organs that probably suffer the greatest violent insults--bones--can heal to near baseline strength after breaking. The peripheral arteries are located very deep within the tissue of our limbs.
Another way the human body achieves robustness is via redundancy. We have two kidneys. Should you receive a spear to one kidney (and somehow manage to survive the insult), your other kidney will take up the slack. In modern times, this is how people can donate a kidney and do just fine. There's redundancy.
We also have two lungs, two eyes, two ears, two testicles/ovaries, etc. One of the most redundant systems in the body is the superficial venous system. You can knock off lots and lots of superficial veins and other veins will take over the return of blood flow to the heart, which is the basis of the treatment of varicose veins.
Consider a person who has donated a kidney. Now that system no longer has redundancy. If that one kidney fails, he's in deep trouble. So he has to really watch his health--monitor his blood pressure, avoid getting Type II diabetes, and avoid major trauma. His body is now more fragile.
Consider a person whose kidneys no longer work. Now he's on dialysis. His body is extremely fragile. He's dependent on an artificial kidney (dialysis machine) which only approximates the real thing to an imperfect degree. Patients can sometimes live a long time on dialysis, but in general, their life expectancy is limited compared to someone with one or two kidneys.
Let's consider that you have $100,000 saved up. Divide that into ten portions, or "aliquots", of $10,000. Let's say you invest one of those $10,000 portions. If that investment fails, you still have nine more portions--$90,000--left. This strategy of only investing one out of ten portions is not that risky. Why? Because it's redundant. Just like you have two kidneys, you have ten portions.
Let's say you invest five of those portions, i.e., $50,000. If that investment fails, you still have $50,000 left. Still pretty good, but potentially half of your savings could be wiped out. That would be analogous to losing one kidney. The system, initially redundant and hence robust, is now fragile.
Perhaps we can assign a "redundancy factor" of 9 to the first scenario (nine portions saved to one portion invested). That would mean a redundancy factor of 1 to the second scenario (five portions saved to five portions invested).
Let's say you invest nine of those portions, i.e., $90,000. If that investment fails, you only have $10,000 left. Our redundancy factor would be 0.11 (one portion saved to nine portions invested). You're getting more and more risky with your money. If your investment fails, you only have a little bit of savings left. Your net worth is fragile.
Now let's consider that you don't have any savings. Instead you borrow some "portions" from other people. Let's say you borrow $10,000 from someone else. If your investment goes bad, that borrowed portion goes bad, and you owe another $10,000 to the person you borrowed from. You'd probably have to sell your other possessions in order to pay it back.
This is a very precarious situation. The redundancy factor is now negative. I'm not sure the proper way to calculate it-- perhaps -1 (one portion borrowed against one portion needed to be liquidated in case of investment failure). Regardless, I don't want to get into any argument about this redundancy factor that I made up. It's simply a conceptual exercise.
As we move along the various scenarios, one thing becomes clear: the less redundancy you have, and the more debt you take on, the more it becomes paramount that your investment is a success. You have to get it right. You have to make a sound judgment about the economy, your competition, people's preferences, your enterprise, etc. You have to get it right. The more you borrow, the more vital it is that you perform. This is fragility. Any small mistake can ruin the whole thing.
In an economy in which people, corporations, and the govt are taking on massive amounts of debt, you have fragility. Everyone taking on debt has to be extremely accurate about the future or else they're in deep, deep trouble.
The amount of debt has increased since 2008. We now have greater fragility in the system than 2008. Going into more debt is no solution--it's throwing gasoline on the fire.
This post was inspired by the writings and interviews of Nassim Nicholas Taleb, though I'm not sure he'd agree with all of it.