Understanding Debt
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I don't like how mainstream economists tend to portray deflation: that it's a terrible thing that necessarily leads to depression. I mean, is the average man on the street going have more money to spend if the stuff he needs (food, energy, etc) costs 5% more than it did last year? I'm not saying deflation is always a good thing, but particularly in times of declining incomes, I find it hard to believe it's the scary monster mainstream economists make it out to be.
And I particularly don't like how Krugman is always so quick to defend large debt loads. He keeps advocating to borrow borrow borrow, with seemingly no restraint. Is that really sustainable?
> America has actually been borrowing less from abroad since 2008 than it did before
Ya, because we're printing the rest. That is NOT a good thing.
But of course, Krugman won't say that, or consequences that result from such policies.
Deflation is a bad thing for borrowers. It's a good thing for people who have no loans. I think the idea is that deflation is bad for the country because it's bad for banks and large multi-national companies. It would squeeze consumers who have mortgages and credit card debt and student loan debt. Thus this would contract the economy. As I understand these things. I'm not an economist.
That $4T didn't exist until the Fed conjured it up. Through a middleman, it was handed to the US Treasury.
No, it was. Literally. The Fed can and does create money and then buy assets with that new money.
http://research.stlouisfed.org/fred2/series/M1
You can see where is starts to really skyrocket, which is where 16 trillion was given to the banks in the bailouts (or $53,000 for every person in the USA for scale). This money hasn't even made it into M2 yet.
So in what way would you have money production occur, if not "out of thin air"?
If you want money to be a store of value there's no replacement to something that can't be faked. Personally I like the idea of my money holding value but from what I hear that's somewhere between "old fashioned" and "retardedly luddite" these days.
Did it really? Perhaps you should refer to the original definition of "debasement".
>I like the idea of my money holding value but from what I hear that's somewhere between "old fashioned" and "retardedly luddite" these days.
Hah, I wouldn't define it as such, but I do question: why? We live in a capitalist society that benefits from capital being put to work. There are many places you can put your money that will benefit you and others financially.
You're right of course. I was speaking in broad generalities rather than specifics. Yes the money was debased. But there was some kind of anchor on value because the dilutions had to be small.
From what I remember in history the government didn't go from 99% silver to 1% silver in a single re-issuance of money, it took many reissues over many generations to go from 99% to 50% (or something like that) which actually shows an incredible amount of restraint. I'd be rather pleased if that was the kind of debasement we were seeing in recent history but sadly it isn't.
The fact that you had to put SOME metal in the coins was what kept debasing "reasonable" but there are no such restrictions on money creation today. Even if you had to literally PRINT the money the Fed can make $100 bills for a few cents. With computers the marginal cost of creation falls further. There is no restraint save but what those in charge put on themselves.
> Hah, I wouldn't define it as such, but I do question: why? We live in a capitalist society that benefits from capital being put to work. There are many places you can put your money that will benefit you and others financially.
I agree and I do make efforts to put my money to work for exactly the reasons you've mentioned. I guess it boils down to my idealistic nature; I don't think there should be a "stupidity" tax whereby if you're not savvy enough to understand how finance and compound interest works, your life savings can slowly evaporate.
The reason for this in my mind is that everyone has expertise and it's a huge drain on the workings of the world that everyone has to spend who knows how much time every year trying to make sure that their savings don't slowly vanish. I think we would all be better off if people could focus on their field fully rather than having to try and be an expert in both their field and finance.
Same goes for money printing. How will we ever have money if not printing it out of thin air? Well I don't know but I do know the sentence "print money out of thin air" sounds like a very bad idea from the start. No wonder we've pressed the reset button every 40 years. With all debasement problems at least the precious metals system lasted thousands of years.
It's pretty evident how we can pick cotton without slavery. We do it every day.
On the other hand, you want to expend resources digging a heavy, precious metal out of the ground to use as a glorified record-keeper of transactions. Seems like a huge waste.
Why not create it "out of thin air" as it is needed, and use the metals (and resources required to dig them up) on something else?
The error comes from thinking that money = wealth.
>With all debasement problems at least the precious metals system lasted thousands of years.
I don't think there's a country on the planet that will accept gold for financial transactions without converting to currency. So, no, it hasn't "lasted thousands of years"; it's gone.
>No wonder we've pressed the reset button every 40 years.
Pretty sure if you're anywhere in the First World you're part of the wealthiest, healthiest society that there ever has been.
We haven't eliminated slavery from cotton farming so I'm not sure we can claim to pick cotton without slavery. We pick some cotton without slavery.
http://www.theguardian.com/environment/2013/oct/27/cotton-pr...
The morality of it wasn't evident to slave owners in the past, it seems. Like the morality of printing money isn't evident to most nowadays.
I'm not going to defend gold specifically here because what matters is that there not be a group of people that can issue money. The problem with creating it out of thin air is precisely that some people will be in control of printing it, and will get corrupted by it, endangering the health of that system and of its participants.
I'm also not going to defend gold because someone that is against slavery need not defend and explain ad nauseam how machines will eventually take on agricultural work and blah blah blah. Slavery is immoral because it impinges on people's freedoms. Same goes for printing money.
> I don't think there's a country on the planet that will accept gold for financial transactions without converting to currency. So, no, it hasn't "lasted thousands of years"; it's gone.
You're being intellectually dishonest. The world cared about gold until 1971. It seems to me the world still does care about gold, or central banks wouldn't hoard it like there's no tomorrow, and keep transporting it back and forth. Why do they not keep diamonds? Why not keep Platinum? Why not keep famous artwork? Somehow they seem to love that gold. But you say it's "gone".
It's no more or less moral than any tax that the Fed could levy.
Money (currency) is a shared delusion. Gold is not worth its price as a store of real value. Something like oil is.
And the Federal Reserve is buying a lot of those treasury securities with printed money.
" The term "printing money" often refers to a situation in which the central bank is effectively financing the deficit of the federal government on a permanent basis by issuing large amounts of currency. This situation does not exist in the United States."
http://www.federalreserve.gov/faqs/money_12853.htm
Perhaps they are lying about what is really going on but I think transparency is of primary importance for the functioning of the bond market and I'm assuming they aren't lying.
The Federal Reserve does not want to do QE forever. But they have been doing that almost nonstop since 2008.
The Fed does not consider quantitative easing as just printing money. I think if it were just printing money then people would not have faith in Treasury securities and thus the interest rate would be a lot, lot higher than it is now.
EDIT: From the link supplied above:
"Global demand for Treasury securities has remained strong, and the Treasury has been able to finance large deficits without difficulty. In addition, U.S. currency has expanded at only a moderate pace in recent years, and the Federal Reserve has indicated that it will return its securities holdings to a more normal level over time, as the economy recovers and the current monetary accommodation is unwound."
But government bonds are issued by the government as a form of govt debt to finance the federal government deficit.
So doesn't that mean that money IS being printed to finance government deficit? It's just that it goes through a slightly convoluted path to get there?
Right, which the Fed is then buying with the money being printed. Government debt is being monetized by the Fed however you slice it.
> Deflation is a bad thing for borrowers.
I understand what you're saying, and in theory, it's true. Practically, it's flawed. Why? Because when I'm on a fixed income, I don't care about the value of my money that's going toward paying down debts. I care about the value of the money I have left over.
Say I earn $1000 a month. $600 goes to loans. $400 is left over to spend on food. With deflation, sure, that $600 is really worth more than otherwise. But it's a sunk cost to me. That $400 is what matters to me, as a consumer, and with deflation, it buys me more food!
That's a longer-term trend that I don't think we'd see with a shorter-term 3-5 year deflation.
The payment was unchanged, but there was a massive loss of flexibility as people could not sell under water houses.
Now expand that to the rest of the economy while lot's of leveraged companies and investments fail.
Do you think that the rest of the economy is a bubble like the 2008 housing bubble?
Hypothetically, if a disease kills off 25% of the population housing prices nationally are going to fall like a rock. They might not have been overvalued, but there suddenly worth less money. Deflation is less gruesome, but you still end up with house value < outstanding loan.
The important thing from an economic perspective is simply value of asset vs debt.
I think the key issue is that deflation makes borrowing a really bad idea (as each year you effectively owe 5% more) and much of our economy depends on consumer debt (cars, housing, college degrees) but I'm willing to accept that a programmer's mind isn't well suited for grokking economics.
As long as the interest remains smaller than inflation, yes.
It isn't really complicated. First, when the value of holding cash gives a positive return, then it changes investment allocations. People often argue that "I won't change my spending habits!" Well, if you were economically rational, you would. But let's be realistic, no one cares about you putting off buying a TV. The concern is for the global financial system as a whole, who suddenly have incentive to hold money rather than circulate it.
Second, incomes are part of the deflation equation. It's one thing when technological progress allows for manufacturing processes to make items cheaper and we get cheaper computers. It's another when massive price deflation (ie oil) causes a sharp decrease in wages and mass unemployment.
Third, debtors are harmed during deflation, as the absolute value of their debts increases. That means your average household gets into trouble.
>That is NOT a good thing.
Prove it. Seriously. If you can, I'm sure you've got a Nobel in your future. I'm not being facetious. Nobody really knows how this ends, good or bad.
Unfortunately, Economics can't run experiments. You apply theory, make a best guess, implement the policy, and hope for the best.
1) I seriously doubt investors will prefer to hold US dollars for meager deflation gains instead of investing in other financial assets projecting far greater return (stocks, bonds, real estate, etc).
2) Wages are sticky. Yes, 20 years of deflation would send wages down. I don't think a short period of deflation would do too much.
3) See my comment below. I printed an abridged version of it here:
When I'm on a fixed income, I don't care much about the value of my money that's going toward paying down debts. I care about the value of the money I have left over.
Say I earn $1000 a month. $600 goes to loans. $400 is left over to spend on food. With deflation, sure, that $600 is really worth more than otherwise. But it's a sunk cost to me. That $400 is what matters to me, as a consumer, and with deflation, it buys me more food.
I appreciate your points, but I still think deflation fears are overblown.
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EDIT: to comment on your last remark about proving the unfavorable effects of money-printing...I don't need to run tests. I have history. Money printing is the genesis of hyperinflation, a well-documented historical phenomenon.
http://en.wikipedia.org/wiki/Hyperinflation
Printing paper money to monetize debts NEVER ends well. Show me a case in which it does, and I'll award you a paper Nobel Prize.
Well, with all due respect, what you doubt doesn't really matter. We're watching it happen. Why would I buy bonds with a negative real yield when I can hold appreciating dollars risk free? Again, this concerns the system as a whole. Don't underestimate how important the V in MV = PT is.
>Wages are sticky.
Right. So people get fired to bring costs down, instead of everyone taking a little less.
>When I'm on a fixed income,
If you're on a fixed income with no debt, then you love deflation. Your dollars buy more goods.
>Money printing is the genesis of hyperinflation
Excess money printing is the genesis of hyperinflation. So, again, the problem is determining where that "excess" line is. One indicator of that is rising prices, which we don't see.
Are you calling for hyperinflation? If so, when?
You're right, so let me back up my position from a market-based perspective: security. That's why negative yields can exist in the first place.
An appreciating dollar doesn't matter if the dollar can't be trusted.
> So people get fired to bring costs down, instead of everyone taking a little less.
Fair point. Like I said, this is a longer-term issue with deflation. Remember, the economy moves in 3-5 year cycles. Nothing lasts forever, neither inflation nor deflation.
> If you're on a fixed income with no debt, then you love deflation.
Even if you have debt, I argue you'd still love deflation, as illustrated in my last comment.
> One indicator of that is rising prices, which we don't see.
O RLY? Do you pay for food, energy, and...stuff, in general? Are prices going up, or are they going down? Gas is down for now, but it'll be right back up in no time.
Don't look at the official numbers. They changed the method of calculating inflation to make it seem lower. Look at reality.
And remember, this increase in prices is happening IN SPITE of gains in productivity (which is deflationary).
Look, I agree "excessive" isn't easy to define on the topic of money-printing. As you said, there's no model to tell us what's right or wrong.
But I don't know how it can be considered appropriate to create money out of thin air to fund the vast majority of your obligations (well over 50% of US debt is monetized). The economic benefits that have been proposed as a result of this policy haven't appeared. Yet they keep pushing forward with more and more.
It just isn't right. That might sound like a weak statement, but take it as a statement grounded in the unflappable strength of morality.
They change the method, then retroactively recalculate the values, because our basket of consumed goods changes over time.
The way the CPI numbers are calculated are free for anyone to look at, and they closely match the Billion Price Project. There is no conspiracy.
>The economic benefits that have been proposed as a result of this policy haven't appeared
I'm not sure how you can say that. If you ask me, the policy has been successful, despite massive political pushback. Again, that's the tough part of economics; it's very hard to separate all the conflating effects of a specific policy.
Pff, is that the issue? That's easy peasy, price people's salaries in terms of purchasing power. Or in terms of baskets of goods. Wow this is such an easy problem to solve. I could go on and on. I'm not even joking. Just use an indirection. Isn't that how we solve all problems in programming? It's certainly my favorite tool.
Nothing in economics short of trivial tautologies can be proved or else economics would be just like physics and we'd understand it all already.
http://en.wikipedia.org/wiki/Fiat_money
"The first use of fiat money was recorded in China around 1000 AD. Since then, it has been used continuously by various countries, concurrently with commodity currencies."
> ...or else economics would be just like physics and we'd understand it all already.
So you think physicists understand all about physics? I've got a bridge to sell you...
Okay, so which country is that and from/to which dates? I see a generalized statement that it's been done but no specifics. You'll forgive me I hope if I'd like a little more information than "well this wikipedia article says..."
Let me clarify further that I'm not talking about paper money in general, but a particular paper money system. In other words, just because people have been trading paper for a thousand years doesn't mean it's been the same paper and that you could have successfully stored that value all the way from "back then" up until the current day, strictly in paper. Gold does that to some degree, though the exchange rate of gold to goods has varied pretty substantially historically. To my knowledge there's no paper which has held value for anywhere near as long.
Does my question make sense? Maybe the UK unhinged the Pound from silver in 1205 AD and it's been non-convertible since but it's held value so that would qualify (I know it's not true but it's an example).
> So you think physicists understand all about physics? I've got a bridge to sell you...
We understand physics well enough that we can build GPS which necessitates and understanding of relativity or else airplanes would be miles off of their autopilot at the end of a trans-oceanic flight.
But I'd love to be wrong, it'd be great if we knew things about economics to that level of precision. Life would be so much easier because then we could just DO THE RIGHT THING instead of arguing about it ENDLESSLY. As an engineer that holds tremendous appeal since the majority of the stuff I do has a spectrum of right answers and perhaps a few optimal answers and a spectrum of wrong answers.
I feel the level of maturity of economics is late stone age or early bronze age re: engineering. We've got some ideas about how things work and can even bend a few to our will but there's no precision calculation, just experts making gut calls.
Don't you think economists wish the same? It just isn't the way it works.
>We've got some ideas about how things work and can even bend a few to our will but there's no precision calculation, just experts making gut calls.
Absolutely true. Should we give up? Of course not.
It seems rather backwards to me to have historically well tested methods of storing value and to throw those at the wayside because we "know better" now. If you can't prove it's better, don't change it.
I realize that it's incredibly unlikely that we'd ever go back to a gold (or silver) standard but in my personal opinion the positive value that such a standard has far outweighs the negative. You may well disagree with me on the relative values of the benefits and downsides and that's OK. But it doesn't make me wrong either.
When so much of society values things differently (some people find Audi to be worth the money, others BMW, others Ford or Jag or whatever!) it's kind of crazy to assume that one person KNOWS that paper money is better.
Maybe a bunch of people would choose to transact in other currencies given the choice. A recent attempt was made to do so; the Federal government did not welcome the competition: http://en.wikipedia.org/wiki/Liberty_Dollar
So nothing can ever exist going forward that hasn't existed already in history?
>just like physics and we'd understand it all already.
You think we understand "all of physics"?
Not at all. Just that new solutions to old problems probably aren't much better than the old solutions, and perhaps worse.
How much have forks evolved, or chairs? Money is an old problem and has very old and well worn solutions. Modernity has made fantastic technologies, I'm not sure that the money we have is a breakthrough.
Efficient market theory is based on the fact that when you leave people to their own devices, they tend to do a far better job and be better off than if you try to help them. Basically everyone agrees on that.
So why do we accept efficient market theory for basically everything, yet when it comes to currency someone has decided that we need elaborate schemes of variable government decreed micromanagement in order for things to work?
In terms of keeping things simple and letting the market decide, the perfect currency would be global, unable to be printed or manipulated, of a fixed amount, so that external interference is impossible, and people knew exactly what they were dealing with at all times. The closest we have is gold (and maybe bitcoin).
Money is a commodity, and the demand for it changes over time. Do you really believe that we should have the same "amount" in circulation as we did 200 years ago?
>unable to be printed or manipulated
Think of money as a concept. It's a means to perform financial transactions, nothing more. My ability to perform such transactions shouldn't be constrained because we haven't "cut down enough trees make paper", or "dug enough metal out of the ground" or "solved enough mathematical puzzles".
Why is that a good system? Why should people who happened to be here before our time have an inherent economic advantage by owning land? Wouldn't the world be a better place if we could cheaply create all the land we wanted?
Oh yes, of course. Some individuals did some rather bad, questionable things to get an advantage in this world. But until you can prove that all "well-off" individuals did that, you have no moral ground to stand on.
I have no idea what you're talking about.
Are you telling me that if we had the technological wherewithal to "create land" at will, you wouldn't use it? That you'd recommend we continue to deal with land scarcity? If not, why would you recommend those same actions when it comes to money?
Ask me which parts you're confused about.
>"Are you telling me that if we had the technological wherewithal to "create land" at will, you wouldn't use it?"
See, land is not the same as money when discussing inflation. But most of my comment was directly discussing plain money-printing or inflation, not land-creation. And if you really must know: if we had some magical-fairy-powers to create a physical resource out of thin nothing (with no cost/effort), then I think land ownership would be the last thing we'd have to worry about. You've effectively created a post-scarcity economy.
>"If not, why would you recommend those same actions when it comes to money?"
Please re-read my initial comment. Your entire argument rested on individuals having an unfair advantage simply because they were "be there before" us. And I basically told you that you'd be stealing from honest, hard-working peoples' children by devaluing the value of their possessions.
Why would it? You simple sub-divide each unit until you have the necessary precision (this works for physical currency, too). I'm really curious why you think a lack of growth in the money supply would hinder you from making a transaction?
Really, government-mandated inflation is nothing more than obfuscated stealing (or wealth transfer). Think about it: If it were simply a matter of "we need more physical(or virtual) money in circulation so that the transactions will flow" then the logical (and fair) solution to that would be to simply apportion some sort of "income" to each individual based on their current capital. But that's not how they designed it, and based on that, it shouldn't surprise anyone that there are many out there who feel that inflation is unfair to a large majority of people.
Since businesses cannot cut salaries (wrecks productivity, due to the morale hit), they hire less or lay off people. And in a depression many enterprises must to one of these things to remain profitable (they cannot increase prices, obviously). This right now has a bigger effect on family incomes than the small gain from lower prices on goods. If productivity is rising rapidly and there is more or less full employment, the opposite case would be true. Inflation is good in such cases, because if wages don't change in dollar terms, whey will be cut in real terms, allowing for more employment.
Debt is part of capitalism, just like steel is used as building material. Talking about debt in moral terms as good, bad or whether there is a right amount (for whom?) isn't productive. Speaking about government debt, right now Eurozone countries have to pay very low interest rates; once they rise too much or full employment is reached, Krugman has said many times that he will advocate restraint.
When conducting monetary policy the Fed buys government securities from the public, not from the Treasury; it pays market prices for it. There is still huge demand for US government bonds (mostly in the USA, thats why "money we owe ourselves". It does remit its profits to the Treasury, but that is a very small percent of the government budget. When the expansion of the Fed balance sheet is so big that it becomes a price setter for government bonds (in dollar terms of course!), then you could say it is printing money to cover deficits. It did that from 1945 to 1951 to pay for WWII and inflation did rise to 25%. So everyone will notice if when the Fed starts "printing money to cover deficits".
Of course. If I spoke of debt in absolute terms, I didn't mean to.
> Speaking about government debt, right now Eurozone countries have to pay very low interest rates; once they rise too much or full employment is reached, Krugman has said many times that he will advocate restraint.
The problem is Krugman tries to have it both ways. Back in 2012 when borrowing rates were MUCH higher, he STILL criticized austerity.
http://www.nytimes.com/2012/09/28/opinion/krugman-europes-au...
When economies are good, governments should spend more, because, why not? And when economies are bad, governments should spend more, because, it's the only way out. I've never seen him advocate restraint on government spending.
If you can recall evidence to prove that wrong, I'd genuinely love to see it.
> There is still huge demand for US government bonds (mostly in the USA, thats why "money we owe ourselves".
Agreed. But this won't last forever. Let's take China for example, one of the largest foreign buyers of our debt. They have to buy large quantities of it because they're pegged to the USD. What happens when they decide to remove that peg? I doubt they'll warn us.
Remember what happened with the Swiss Franc?
This rational only works if you're thinking about the economy in collective terms. If the U.S. government borrows money from future taxpayers and gives it to the poor today, yes, collectively it's a wash. But there are winners and losers individually: the lender got an interest payment, the poor person got some free money, and the future tax payer paid more taxes to cover both.
Telling the future tax payer, "hey, don't worry, it was an economic wash since we just owe the debt to ourselves!" would be cold comfort as he or she is clearly poorer due to the increased tax burden.
In a sense a modern form of oligarchy...bread and games go a long way.
Thus, it's hard to see how it's possible for the world as a whole to "borrow" from the future in any meaningful sense. How much you tax vs. how much debt you run up does matter, but not in the same way people think.
Guess who will be paying for that? Future consumers and taxpayers.
Not all debt leads to this. Debt which is incurred responsibly and paid off in a timely fashion promotes growth. But there are examples (Greece is one) where debt is used by those in power to sustain their own power structure rather than dealing with economic problems under their watch. To the extent that economic changes negatively affect the ruling elite, those in power will avoid making those changes. If those changes happen to be necessary to preserve future economic stability, then it will be future generations who pay for it.
In 2008-2009, there was an opportunity to take apart big banks after their gross misallocation of capital. Instead those very banks and bankers were fortified and rewarded to continue onwards.
I still haven't figured out how this phase will end.
So what models apply and why?
"So you're saying government debt doesn't matter? What about Zimbawe, Argentina, Japan, Pre-WWII Germany?"
First, I'm not saying that Government debt doesn't matter. Like all things, there are limits. What I am saying (and MMT says) is that there are conditions under which increasing national debt make sense - notably high unemployment and underemployment. ONLY the Government can kickstart an economy in this scenario. In those hyperinflation cases, you saw Governments whose debt was denominated by foreign currencies and they tried to print their way to solvency, which of course failed.
MMT advocates the government directly printing money for stimulus, instead of going through the charade of creating debt and letting banks print money for themselves, and gets a little wacky by hinting that you can print money without inflation.
Fiat currency debt is just printing money. The nation isn't borrowing sheep or wood, the banks just increase some numbers in a digital file ("fractional reserve" banking, where someone else gets to spend money that is in your account at the bank)
"an amount of money that you owe to a person, bank, company, etc. the state of owing money to someone or something"
Debt is a wonderful thing. It means you can buy an expensive good like a house or a car now and pay for it later. As opposed to saving for years and then getting the car. However, either way you pay. I fail to see how national debt is any different. Governments want money now, so they go into debt often by selling bonds.
If the debt was acquired during my generation, but the bill comes due during the next generation, then that seems to be pretty close to stealing from the next generation. Today's debt is tomorrow's taxation.
To argue that government debt is the not any different from household debt is to ignore all of those things.
Taking your points one at a time:
> the government operates a central bank, prints its own currency
This is one method governments use to skirt paying the full value of what they owe. They can borrow a fixed number of dollars today, then print money and use the printed money to pay what they owe. By doing so they are paying back the dollars they owe, but because each dollar is worth less, they are never paying back the value they owe. And they will pay the price with a higher interest rate next time.
> does not have to apply for credit
Applying for credit for normal people is a way of offering evidence that you're likely to pay back what people loan you. The more trustworthy you seem, the less risk for the lender, and therefore the less demanded interest. Governments are the same way. The more the perceived chance that a government will not make good on its debts, the greater the interest it must pay to borrow money.
> passes the laws that specify the terms of the debt it owes
This is another method of skirting paying back what they government has borrowed. Drastic changes or changes which modify the rules on existing debt will have an effect on the government to borrow more money in the future.
> in the case of the United States, the national debt is in the form of one of the safest and most widely held investment vehicles in the world
Yes, but I think that is true because the US usually doesn't play the games that are in the earlier points. Traditionally, the US has not drastically increased its money supply and has not changed the law on existing debt. If they started doing these tricks more, I think we'll see the high regard fade for US treasuries.
One last point: these are methods governments use to avoid repaying debt, but individuals in most countries have their own methods. They can default on a loan or declare bankruptcy entirely. But just like governments, that will make it harder to borrow in the future. The mechanics are different but the core ideas are the same.
What about debt to build businesses or infrastructure that creates real wealth?
I personally value a planet where my kids can enjoy a clean environment.
Firstly Prof. Krugman writes: "Why is deleveraging a problem? Because my spending is your income, and your spending is my income, so if everyone slashes spending at the same time, incomes go down around the world."
This model entirely ignores capital theory. It creates a simple closed system where if spending goes up, everyone is better off, and if spending goes down, everyone is worse off (because they have less income). But this has almost no relation to whether more or less wealth is being created. Are there more cars, iphones, loaves of bread, new medical technologies? It is the creation of new capital that makes everyone better off, and increases the standard of living, not more spending (although more spending often follows the creation of new goods)
Secondly Prof Krugman writes:
"You can see that misunderstanding at work every time someone rails against deficits with slogans like “Stop stealing from our kids.” It sounds right, if you don’t think about it: Families who run up debts make themselves poorer, so isn’t that true when we look at overall national debt?
No, it isn’t. An indebted family owes money to other people; the world economy as a whole owes money to itself. And while it’s true that countries can borrow from other countries, America has actually been borrowing less from abroad since 2008 than it did before, and Europe is a net lender to the rest of the world.
Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer)"
The problem isn't who the debt is owed to, the problem is whether the debt is serviceable or not and is used to create new wealth. This all gets confused by the introduction of money into the discussion. But imagine a situation where person A loans person B a shovel with the understanding they will receive the shovel back in a week, along with 10 potatoes. This is a loan that is likely to be serviceable. Now instead imagine a loan where person A loans person B a shovel with the understanding that person B will return the shovel along with some produce. Now instead of digging up vegetables, person B uses his shovel to excavate some rocks on his property to create a nice looking rock garden. Person B is now going to get into trouble paying back his loan. The debt he has incurred has been used to work on a project that is unlikely to be profitable. This is akin to people going into debt during the housing bubble to fund their consumption (big house, fast cars, big TV etc) rather than fund more production. That is the kind of debt that is not going to be serviceable and will eventually need to be written down, or in the case of the US, handed over to the taxpayer.
We ARE better off writing down that debt because, in general, we want people to use debt to work on projects that generate new wealth and capital over time, and if we do not write that debt down, people will continue to work on unproductive, unprofitable projects.
[1]:http://www.zerohedge.com/news/2015-02-09/stunning-chart-day-...
My question is this: how does this edifice collapse?
> the world economy as a whole owes money to itself.
> debt is money we owe to ourselves
Why don't we just collectively forget/forgive our debts, then?
Folks, if you think this astrologist/alchemist Krugman is doing scientific work in Economics, please stop and think: can you come up with a falsifiable statement for Keynesian Economics? I can come up with several for Evolution, which is why Evolution is a Science.
Just like he didn't see the 2008-2009 crisis, his models cannot see the current distortions and where they mar or may not lead.
His record on other topics is significantly better than that of most 'economic experts.'
And he has at least one more econo-Nobel than (I'm guessing) you do.
He's been saying for a long time now that austerity is self-defeating. And he is, by any sane evidence-based standard, utterly right.
So your ad hominems are entirely off-point.
Meanwhile the neo-liberal school has made any number of claims that are often repeated even after they've been falsified by fact.
Laffer Curve? Boom. Dead. Utter rubbish. Totally falsified.
http://www.brookings.edu/~/media/Projects/BPEA/Fall%201999/1...
Trickle down? Self-serving nonsense. No evidence for it at all.
http://www.businessinsider.com/study-tax-cuts-dont-lead-to-g...
Don't tax corporations so they can create jobs? Boom. Dead. Corporations mostly just give the money to executives and hoard the rest.
See above, among others.
Don't allow governments to spend tax money on infrastructure, innovation, and public education? Excellent! You've strangled the research that led to the beginnings of the Internet, and one or two other important projects too.
And so on.
The truth here is that facts are not on your side. Name-calling is a poor substitute for being evidence-based, intelligent, and scientifically informed.
If anything, bubble economics is his forte.
See here: http://www.businessinsider.com/krugman-in-02-greenspan-needs...
It may not be perfect, but to say utter rubbish is ridiculous. At its core, the Laffer Curve claims tax revenue is elastic with respect to tax rates. In other words, the revenue derived from taxes is not always proportionate to the tax rate.
The classic curve shows 0 revenue at a 0% tax rate -- obviously true since 0% times any number is 0 -- and 0 revenue at 100% tax rate -- because why would anyone work if 100% of it would be taken in taxes. Therefore, there exists a tax rate that provides the maximum amount of revenue between 0% and 100%.
The exact shape of the curve is wildly debated and some claim revenue doesn't truly drop to 0 at a 100% tax rate, but those don't change the point that it is possible to lower tax rates and receive more tax revenue.
Correct calls in the Euro-debacle, what calls?
Appeals to an authority that selected an individual who did nothing more than present a slideshow or be elected President of the United States are not empirical examples from which to denigrate others. Also, Mr. Krugman has an economic text-book when he was a professor showing the downsides of minimum wage in an economic system, but later on, when writing for the New York Times disregards a number of his propositions. His articles in the New Yorks times are reviewed and inflated for incendiary material by his wife.
"...austerity is self-defeating, sane evidence-based standard..."
Assuming you are referring to Greece, the country is over leveraged in debt obligations, it readily admits they only have a few weeks of cash on hand (granted this may be a negotiating tactic), any move to try and reign in any of the million programs within the country was defeated. There was no austerity, just an appearance of austerity.
Assuming you are referring to the U.S. of A., the country's austerity measures are being seen as effecting economic recovery in a positive manner.
Your pointing to the Brookings Institute's report from Austen Goolsbee, he is a gun-for-hire economist to match whatever political whim that is needed. He served within the current administration and along with Christina Romer, sold their economic literacy souls to pass the stimulus. Which, you can point to as having worked, pushing unemployment down, but do not; real full-time unemployment has cratered.
Your Business Insider article admits that there is no correlation between trickle down, but also no demonstrable correlation with tax increases; all things being equal, policy should be for the populace to keep their monies.
"Corporations mostly just give the money to executives and hoard the rest."
Corporations do not hoard money unless there are financial incentives, corporate tax rates on bring money back to America means that many companies are investing abroad or simply placing it in off-shore accounts. If there is an activist shareholder on the board, they will lobby significantly to get a dividend, as Apple has done, or move to break up the company into profitable and unprofitable sections, as HP and its printing division keeps trying to get lopped off. The executives go out and try to make more money by investing it into return projects, look at Silicon Valley, the rich there take their earnings, set up an angel fund and then fund the next big thing. An economy does not end when the executive takes their money home.
"Don't allow governments to spend tax money on infrastructure, innovation, and public education? Excellent! You've strangled the research that led to the beginnings of the Internet..."
The Internet sprang up from a DARPA intiative through the Department of Defense to mitigate issues from a nuclear fall out through distributive services (http://www.internetsociety.org/internet/what-internet/histor...). The take-off of the internet that we know today occurred through private investments.
Innovation within in the government is minimal to non-existent, the government engages in rent-seeking habits that create projects that appear to innovate, but simply funnel taxes from the government to well connected "innovators" who fail quickly.
Public education should not be included in this as that is a state matter, not a federal policy matter; but public education could be accomplished better for students from a private side approach. Change could actually occur and administrators would be able to adjust curriculum faster.
Please point me to some (yet-unfalsified) falsifiable statements in Mainstream Economics.
Thank you.
I know, right? I mean, why don't I just throw these BofA bonds I own, paying 6.5% annually, into the trash because I don't like money. In the meantime, why doesn't Ford just give me the car I financed?
>Folks, if you think this astrologist/alchemist Krugman is doing scientific work in Economics, please stop and think
Don't project your financial ignorance on other people, just because you don't understand how a balance sheet works. Someone's debt is another's asset; someone's income is another's expense.
His politics aside, Krugman is right in pointing out a fallacy that I see over and over again in the mainstream. That is, looking at only one side of the sheet. For example, the US households have so much debt! Well, guess how much value they have in assets?
After the housing bubble collapse? Many of them have fewer assets than debt leading to bankruptcy. Assets aren't required to go up along with debt as a law of nature. Some people do a good job of buying undervalued things, other don't.
I see you cut my quote halfway so you didn't have to present a case that mainstream economics is scientific, which I'm yet to see.
Please show some yet-unfalsified falsifiable statements in mainstream Economics so that it can be shown that it is scientific and true. Don't give me a run around with lots of words and no proof.