Friday, August 26, 2011

Technical Debt - Lessons from Economic Crisis

I was reading an article titled UBS' Andy Lees on Why the US Economy Is, All Else Equal, Doomed on Zerohedge.I would recommend the article to anyone who wants to make some sense of what is happening all around us on the economic front.

While the whole article is interesting, the following captured my attention.

We are in this mess because of excessive leverage and excessive consumption, financed by excessively cheap real capital – (not just Bernanke; Greenspan but further back to the end of the gold standard, and in fact even before that as it was this misallocation of capital that forced us off the gold standard in the first place). If capital had been allocated productively, then by definition debt would fall as a percentage of GDP. Total debt may rise, but efficient allocation of capital would always mean the economy would grow faster than the debt as it means you are making a positive rather than negative real return on that capital.
Whichever way you look at it, capital has been massively misallocated for years.
Until the debt is cleared and capital starts to be properly allocated, economic growth per unit of additional debt will continue to sour.

When i think of the above, i can't but think of the concept called Technical Debt used in Software Engineering. I do believe whatever written above also holds true for Technical Debt. You run up a lot of technical debt when you dont properly use the capital (time and people) to build the application. And when you run a lot of bad debt, the return on the invested capital is lower as more capital has to be spent to get the same level of returns ( ROI from the application). This continues till the time we service the (technical) debt.

For more reading on the concept of Technical Debt, please refer here and here.

The Zerohedge article is available here (http://www.zerohedge.com/print/436397)

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