Monday, November 21, 2011

Marshall Auerback: The more you deflate, the bigger the debt problem gets

Cross-posted from Credit Writedowns

Marshall Auerback was on Fox Business last week talking about the European sovereign debt crisis. He said he is very concerned not just about the national solvency problem in the euro zone but also about the debt deflationary policy remedies now being implemented across the whole of the euro zone. He notes grimly, “the more you deflate these economies, the bigger the public debt problem is going to become.”

The deflationary impact of fiscal tightening after the deficit ‘Supercommittee’ failure will only begin to hit the United States in a major way beginning in 2012.

Video below

Topics: Economic fundamentals, Guest Post, Macroeconomic policy, The destruction of the middle class

Email This Post Email This Post Posted by Edward Harrison at 8:35 am

106 Comments » Links to this post

106 Comments:

  • YankeeFrank says:
    November 21, 2011 at 8:48 am

    Wow, Fox Business actually featured accurate analysis; undoubtedly for the first and last time ;).

    • Susan the other says:
      November 21, 2011 at 10:34 am

      Marshall Auerback ( a few months ago) was calling for Germany to leave the EU on the same premise – that Germany’s economy is inflated by a subsidy from the PIIGS in the form of a devalued Euro for trade and so skews the entire EU monetary enterprise. Germany believes their prosperousness is something they achieved virtuously and on their own, so they whine that they are not going to pay up to back ECB bonds for the PIIGS. Nevermind that in truth France, Belgium, & maybe the Netherlands can now be classififed as at least having some piggyness. And if the EU breaks up who knows what will happen to Germany. It might prosper with its new ties to Russia but if it stays in the EU none of the EU solutions will work until the subsidy to Germany is taken away.

      Question: Why is it that a Benz is worth more than a truckload of blood oranges?

      • Paul Tioxon says:
        November 21, 2011 at 10:59 am

        Funny you should mention Mercedes Benz.

        Mercedes manager from Germany arrested under immigration law

        TUSCALOOSA | A German manager with Mercedes-Benz is free after being arrested for not having a driver’s license with him under Alabama’s new law targeting illegal immigrants, authorities said Friday, in an otherwise routine case that drew the attention of Gov. Robert Bentley.

        http://www.tuscaloosanews.com/article/20111119/NEWS/111119512/1291/FRONTPAGE

        • LeonovaBalletRusse says:
          November 21, 2011 at 1:06 pm

          Ah, Alabama: From Huntsville to Tuscaloosa to the *top out of sight* suburbs of Birmingham, the Aryan “NOBILITY” yet rules. And “That’s what [they] like about the [Deep *Anglo-American*] South.” The Confederacy is *complex* in the now global arrangement.

          • Paul Tioxon says:
            November 21, 2011 at 9:51 pm

            Speaking of Aryan, we finally get to ask a German for his papers and arrest him for not having them. Oh, mama, can this really be the end, to be stuck inside of Mobile with the Memphis blues again?

      • Anonymoous Comment says:
        November 21, 2011 at 12:15 pm

        To answer you question in short form: component parts.

      • Jim says:
        November 21, 2011 at 4:25 pm

        Germany can continue to have an undervalued Mark, just as China has continued to have an undervalued Yuan, notwithstanding the “criticism” from the Obama administration.

      • Jim says:
        November 21, 2011 at 4:32 pm

        Germany can continue to have an undervalued Mark, just as China has continued to have an undervalued Yuan. Southern European nations may not like it, but the US doesn’t like the undervalued yuan, either. In both cases, there is little that can be done.

    • KnotRP says:
      November 21, 2011 at 2:42 pm

      What conservative doesn’t have an affinity for the global equivalent of Debtor’s Prison? Sinners. They *deserve* austerity. Good and hard. And recorded, uh, for personal uses. Yep, that’s the conservative way.

      When conservatives realize they’ve been cleaned out of their life savings by an equally bad form of self-delusion, by not paying attention to the details of with whom and where they hold their money, will they deserve their self-imposed austerity too, or will they do a 180 degree turn and demand punishment on those who sold them a pig in a poke? Clearly, it won’t be their fault that they gambled and lost on an empty poke, right? right.

      If self-delusion is a punishable offense, the conservatives
      better get in line…

  • Hondo says:
    November 21, 2011 at 9:08 am

    Inflating is not the solution. It only helps the money elite and destroys everyone else and continues the irresponsible behavior of the investing class with taxpayer bailouts.

    • Seth says:
      November 21, 2011 at 9:30 am

      No. Deflation helps the money elite, not inflation.

      Moreover, the threat of inflation drives people and institutions with cash to seek investment opportunities to avoid having their wealth shrink. Those investments tend to be more stimulative than simply sitting on a pile of cash.

      • John in CB says:
        November 21, 2011 at 9:37 am

        Anything that serves the status quo serves the money elite. Deflation or Inflation both maintain the corruption. I tend to think the revolution is more likely to start under deflation.

      • john says:
        November 21, 2011 at 10:33 am

        Wait doesn’t inflation best serve asset holders first/foremost?

        • rotter says:
          November 21, 2011 at 1:00 pm

          Im sure its not as simple as “this is an orange and this is a mango”, but the relationship between inflation, deflation and the classes of society is usually evaluated by its effect on debt. Inflation wipes out the value of previous debt and so “favors” the class of people who are in debt to the rentier class.

          • LeonovaBalletRusse says:
            November 21, 2011 at 1:18 pm

            rotter, for complete understanding of the *visible and the invisible* consult the genius of Guido Giacomo Preparata at http://guidopreparata.net. Many of his articles are available at the site. He is author of “CONJURING HITLER” and “THE IDEOLOGY OF TYRANNY”, and is not likely to be quoted by the Washington Post, or to be invited to speak as an *expert* through mass media.

            He is an expert on the *netherland* marked by the nexus of politics, economics, and crime. He will *explain it all for you*: the necessity of fraud by the 1%, as well as to their *white collar* agents rising to the 1%, and so on down the scale of success through unbridled (laisser faire)*Capitalism*, now in *Late Stage* crash & burn phase.

            I discovered him by chance, and my eyes were opened.

    • Greg Marquez says:
      November 21, 2011 at 11:55 am

      @Hondo
      When you decrease the quantity of something, in this case money, the price of that something goes up. Deflation increases the price of currency and debts. So if you want to “follow the money” look for people who are holding lots of cash or are owed lots of money and you’ll find the people who are in favor of deflation.

      • digi_owl says:
        November 23, 2011 at 4:22 pm

        Indeed. Inflation and deflation is basically a symptom of the amount of money flowing thru the economy. Inflation is basically a rain filled river going over its normal level, while deflation is the same river drying up. If one take this one step further, debt becomes a borrowed bottle of water with a promise to replay in kind. With a overflowing river, filling a bottle and handing it back will be easy. But doing so when the river is dried up is downright impossible.

  • Knut says:
    November 21, 2011 at 9:43 am

    Who’d have ever thought that deflation might transfer real income and wealth from debtors owing a fixed nominal debt to creditors who own it?

  • docG says:
    November 21, 2011 at 9:57 am

    Interesting how now we are seeing so much pressure from just about every quarter for an “ECB solution,” i.e.: print more money, otherwise known as: print literally trillions of Euros and keep it up until the pain goes away.

    Am I the only one (besides Angela Merkel, natch) who sees the folly in this? How could what amounts to an accounting trick solve a problem in the real economy? Isn’t this the sort of solution all those smart guys at Enron came up with?

    As I see it, the “unlikelihood of inflation” is beside the point. The problem was caused by the blowing of a Ponzi bubble, so how is further inflation of that bubble going to solve anything? Sooner or later the bubble has to burst. So it seems to me the ONLY solution is to actually let it burst sooner, rather than later. I think most if not all the political leaders understand this in the abstract. But in the real world it would mean the end of their careers and also their personal fortunes, so they are going to fight tooth and nail to prevent that. And if the ECB “solution” is the only way, then you can be sure that this very drastic, dangerous, unethical, immoral and stupid measure will, sooner or later, be taken.

    All the pundits, such as Mr. Auerback, will, of course, be overjoyed. For about one month. Until the reality of such a foolish course sinks in. For more on the folly of such a course, see http://amoleintheground.blogspot.com/2009/06/ponzi-economics.html

    • LeonovaBalletRusse says:
      November 21, 2011 at 1:25 pm

      Good thinking, docG. The Bush Dynasty had their fingers in the *big three* pies of *disappeared money* for some: The S&L scandal, Enron, and the real estate banking scam leading to TARP.

      Bill Black connected these dots frankly, and said/wrote this publically. Is this why *other voices* in *Economics* at the University of Kansas City have trumped that of Bill Black?

      It’s a black hole owned by the 1%, sucking everything *Down, down, down*. Certain persons are *sacred cows*.

    • digi_owl says:
      November 23, 2011 at 4:24 pm

      Strictly speaking, the money have already been printed by way of the various loans.

  • Philip Stive says:
    November 21, 2011 at 9:58 am

    The solution most not be sought in either inflation or deflation only. The solution lies in a combination of debt relief (which is per definition deflationary) and structural reforms, coupled with a big change to the financial system.

    I just wrote an article together with my colleague Dennis Buitendijk. It makes the argument against printing by the ECB to solve the current problems, and offers the solution in a combination of debt relief (default), reforming the financial system and implementing structural reforms. Please find the article at: http://pstive.posterous.com/europe-needs-debt-relief-and-structural-refor

    • Tempus says:
      November 21, 2011 at 10:09 am

      Change that from debt “relief” to “debt forgiveness”. What we need is a debt jubilee. What’s old is new again and it is funny how ancient remedies seem to be the best/only REAL solution. Debt FORGIVENESS followed by utter annihilation of the current financial dictatorship system and its rebuilding as a MINOR part of the economy with very VERY tight rules and regulations…no NO forebearance for ANY violations.

      • Philip Stive says:
        November 21, 2011 at 10:52 am

        That is actually what we propose in the article, except we use a more subtle vocabulary ;)

        • Economic Maverick says:
          November 21, 2011 at 12:25 pm

          debt jubilee, debt forgiveness, debt relief, debt writedowns, credit writedowns, debt restructuring

          how about “Debt strike! walk away from your debt and F*ck the creditors”?

          • LeonovaBalletRusse says:
            November 21, 2011 at 1:28 pm

            Econ Maverick, since it is unlikely that a true *Jubilee* will be forthcoming, your suggestion is wise for the 99%.

          • ebear says:
            November 21, 2011 at 2:38 pm

            But…. but… I don’t have any debts!

            Damn! I’m gonna miss all the fun!

            ebear

            “I got a rock” — Charles Brown

          • Stephen Nightingale says:
            November 21, 2011 at 7:46 pm

            >EconomicMaverick: how about “Debt strike! walk away from your debt and F*ck the creditors”?

            Per this: why wouldn’t it be a good idea for Greece to: revert to the drachma; nationalize all property; redistribute it to all those who want to be Greeks, not Swiss or Cayman Islanders; then issue bonds in drachmas to get immediate working capital? The Greeks can surely run their own country. They really don’t need to dispossess too many dozens of people.

        • abelenkpe says:
          November 21, 2011 at 1:27 pm

          Thank you! Debt Jubilee and breaking up of monopoly banks and financial institutions seems to be the most humane way to deal with this crisis. My worry is that if we pursue any other solution it will lead to chaos or war resulting in death and deprivation of many. Who wants that?

  • Eric says:
    November 21, 2011 at 12:29 pm

    Marshall Auerback is right to point out that debt ponzi schemes become a problem when you deflate them.

  • F. Beard says:
    November 21, 2011 at 1:09 pm

    Steve Keen recommends a general bailout of both borrowers AND savers:

    But by increasing the quantity of fiat money, Keen says this process could be circumvented. What should happen, he says, is that governments should give the public a big dollop of cash. Those that had debts would be obliged to use the money to pay them down; those that didn’t would be able to spend the money however they wished. The result would be lower debt levels and greater spending power.

    A more radical version of this idea would be a debt amnesty for those gulled into borrowing more than they could afford during the bubble years.

    This, though, is not a realistic option: it would be seen as unfair by those who did not get into debt and it would be strongly opposed by the banks, many of which would go bust as a consequence. from http://www.guardian.co.uk/business/economics-blog/2011/nov/20/recession-sovereign-private-debt-recovery [bold added]

    • abelenkpe says:
      November 21, 2011 at 1:29 pm

      I did not take on debt during the bubble years, don’t have any now and would not be upset if those who are in debt were freed from it.

      • spacecabooie says:
        November 21, 2011 at 3:39 pm

        The line involving “borrowers not taking on debt they that could not afford” is obuscation – and yet feels right even to those of us who agree with principal reduction arguments.

        Obfuscation, I say, because the current unaffordability of debt acquired in a bubble (which may not have been transparent to everyone in all cases) says little about the debt’s affordability when it was acquired.

        A valid argument against principle reductions could perhaps be based on expected further leg(s) down.

        I am perplexed at the absence of these considerations in public arguments on pribciple reduction. You only hear that “the unfairness” has already gone too far.

        • spacecabooie says:
          November 21, 2011 at 3:47 pm

          Ah, I see F. Beard, just below, has cut through the obfuscation, with the “just restitution” label.

          —– but should we ever expect a critical mass of politicians, their appointees, and the MMM to internalize such concepts ?

          • MyLessThanPrimeBeef says:
            November 21, 2011 at 4:24 pm

            Just don’t borrow.

          • William Shakespeare says:
            November 21, 2011 at 5:56 pm

            Neither a borrower nor a lender be,
            For loan oft loses both itself and friend,
            And borrowing dulls the edge of husbandry.

            Hamlet Act 1, scene 3, 75–77

          • F. Beard says:
            November 22, 2011 at 4:04 am

            He does not put out his money at interest, nor does he take a bribe against the innocent. He who does these things will never be shaken. Psalm 15:5 New American Standard Bible (NASB)

            All day long he is gracious and lends, and his descendants are a blessing. Psalm 37:26

            It is well with the man who is gracious and lends; he will maintain his cause in judgment. Psalm 112:5

    • LeonovaBalletRusse says:
      November 21, 2011 at 1:30 pm

      Isn’t this the same as the *dropping money from helicopters* bold stratagem of Ben?

      • F. Beard says:
        November 21, 2011 at 2:20 pm

        Yes, except a central bank cannot give away money (at least not to non-banks and even then it has to be done in a sneaky manner.)

        In essence a general bailout would constitute a rising tide that would lift debtors out of debt but without disadvantaging savers.

    • MyLessThanPrimeBeef says:
      November 21, 2011 at 2:18 pm

      Should the government jsut give a big dollop of cash to the publice every, say, other day?

      Is there a practical limit to this scheme?

      • F. Beard says:
        November 21, 2011 at 2:27 pm

        1) Just restitution is not a scheme; it is a moral and practical necessity.

        2) Once all credit debt is paid off there should be no further need for the program except perhaps for an additional 20% penalty.

    • R Foreman says:
      November 21, 2011 at 2:41 pm

      Giving away a ‘big dollop of cash’ would be inflationary, would it not? Resulting price increases would mostly negate any beneficial effects of the windfall itself.

      They just need to default all the money created via fractional lending during the bubble. These idiots shouldn’t be allowed to lend more than they have anyway. That’s counterfeiting.

    • Dwight says:
      November 21, 2011 at 2:59 pm

      Your bolding seems misleading – it is the more radical proposal of a general debt amnesty, not Keen’s proposal of a money for both debtors and savers – that the article states would be seen as unfair. Keen’s proposal seems fair to me – those without debt have money to spend as they wish, while debtors must pay down their debts.

      • F. Beard says:
        November 21, 2011 at 3:03 pm

        Keen’s proposal seems fair to me – those without debt have money to spend as they wish, while debtors must pay down their debts. Dwight

        I absolutely agree.

        • EmilianoZ says:
          November 21, 2011 at 4:25 pm

          Under Keen’s proposal, should foreigners who own US Treasury bills/notes/bonds be given money too?

          • F. Beard says:
            November 21, 2011 at 4:30 pm

            That sounds just.

            Or the bailout could be combined with a ban on further credit creation and metered to just replace existing credit as it is paid off. That way, the dollar should not lose purchasing power since the total money supply (base money + credit) would not change in size.

          • Stephen Nightingale says:
            November 21, 2011 at 7:56 pm

            The problem with giving Foreigners “money” in exchange for T-bills ($1.2T to China and $900B to Japan for example) is that money and T-bills are both paper. If China and Japan ever want to get value for all the goods they sold us, they HAVE to take goods and services in return. THAT wouldn’t be a bad thing for the economy either.

      • Dwight says:
        November 21, 2011 at 3:04 pm

        Presumably banks would not go bust if debtors were given money to pay down bank debts, so the Guardian article is clearly stating that the general debt amnesty, not Keen’s proposal, is the radical proposal that would be percevied as unfair.

        • F. Beard says:
          November 21, 2011 at 3:08 pm

          A general debt amnesty is unfair – to savers. The banking system has also cheated them – of honest interest rates. Keen’s idea is much better.

        • MyLessThanPrimeBeef says:
          November 21, 2011 at 3:21 pm

          Does Keen’s proposal appply to corporate debtors like Goldman?

        • F. Beard says:
          November 21, 2011 at 3:27 pm

          Does Keen’s proposal appply to corporate debtors like Goldman? MLTPB

          LOL! Good question. Is Goldman now a person? But even if it did receiver bailout payments the amount would be no more than what a real person would receive.

          • MyLessThanPrimeBeef says:
            November 21, 2011 at 4:21 pm

            Unfortunatel, in the City of London, they have the pureset form of ‘No Taxation Without Representation!’

            Corporations can vote there, I understand.

            Imagine that…they have that without having to go through a revolution.

          • Stephen Nightingale says:
            November 21, 2011 at 8:02 pm

            Yes but I understand the franchise in the City of London is a fair one. The few thousand actual residents of the City each get one vote. The few thousand Corporations in the City each get one vote PER EMPLOYEE. It is not recorded whether those employees get to cast their own votes, or whether their wise leaders get to cast them all.

    • EmilianoZ says:
      November 21, 2011 at 5:36 pm

      In 5000 years of human history, has Keen’s solution ever been applied?

  • kharris says:
    November 21, 2011 at 1:49 pm

    When thinking about whether inflation or deflation helps the rich or the poor most, there are risks to simply looking at historic results. Prior episodes of inflation tended to raise wages at a small lag to prices, while the real value of debt fell. An indebted household could come out better as wage growth outstripped debt by enough to make up for lagging prices.

    Nowadays, the lag between prices and wages appears to be very, very long. If prices rise enough faster than wages, then the amount of income available to pay off debt can shrink. Households can be impoverished by debt under inflation, if wages don’t keep pace.

    Deflation naturally raises the “real” value of debt, but with wages historically more sticky downward than upward, deflation can leave more in household budgets for debt service. Except deflation is very, very likely to mean job loss. So there is a considerable risk that rising “real” debt costs will hurt households, and a considerable risk that job loss will hurt households.

    What happened? Is this just another “on the one hand – on the other hand” economist’s tale? Nope. The shift toward less market power for labor is having effects that slop over into other considerations. Choosing between inflation and deflation was once an important distributional issue. If it has become ambiguous, it’s because of a shift in power in the labor market away from workers. If you don’t have any power, then change in the inflationary environment, or even no change, can be bad for you. What’s needed is an increase in market power for workers. Then, inflation would unambiguously reduce the burden on household debt, but that would be just one among a number of issues that would improve for workers.

  • MyLessThanPrimeBeef says:
    November 21, 2011 at 2:16 pm

    One could try to avoid as much debt as possible in the first place.

    • F. Beard says:
      November 21, 2011 at 2:23 pm

      Not practical given the government backed counterfeiting cartel, the banking system. Those who do not borrow are priced out of the market by those who do borrow. It is a “Tragedy of the Commons” situation.

      • MyLessThanPrimeBeef says:
        November 21, 2011 at 2:43 pm

        That’s why there needs to be solidarity.

        When we all don’t borrow from banks, they go away.

        • F. Beard says:
          November 21, 2011 at 3:06 pm

          When we all don’t borrow from banks, they go away. MyLessThanPrimeBeef

          That won’t happen – short of a miracle. Instead we should reduce banking to the inherently risky business it is and then borrowing (and the resulting price inflation such as in housing) will go away.

          • MyLessThanPrimeBeef says:
            November 21, 2011 at 3:13 pm

            Easy-money chasing, bad bankers will.

          • F. Beard says:
            November 21, 2011 at 3:20 pm

            There are no good bankers under our current system.

          • MyLessThanPrimeBeef says:
            November 21, 2011 at 3:23 pm

            Because we let them.

          • F. Beard says:
            November 21, 2011 at 3:48 pm

            Yep, that was a big mistake as Woodrow Wilson supposedly lamented:

            “I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by
            conviction and the vote of the majority, but a government by
            the opinion and duress of a small group of dominant men.”             Wodrow Wilson (attributed)

  • R Foreman says:
    November 21, 2011 at 2:25 pm

    “the more you deflate these economies, the bigger the public debt problem is going to become.”

    The destruction of debt-money makes the debt problem worse? I think Marshall’s been smoking too much of that smelly weed. They need to default and write off the bad debt. This of course will demolish the sovereign bond-holders, but hey, that’s where all the insoluable debt is at, and THEY KNEW THIS WOULD HAPPEN WHEN THEY INSTITUTED GOVERNMENT BACKSTOPS. Let the bankruptcies begin. :)

  • Lew Glendenning says:
    November 21, 2011 at 3:57 pm

    Anyone who uses ‘deflate’ or ‘debt deflation’ to mean ‘downside of the business cycle’ is seriously confused, certainly can’t contribute to a rational discussion.

    First, fractional reserve banking does not create money, contrary to nearly everyone’s assumptions. Indeed, it increases M1 because of the definition of M1, but the actual real (OK, real entries in a computer) spendable dollars are merely divided across the saver and the borrower. Banks cannot create money : double-entry bookkeeping could not work otherwise.

    Second, “The deflationary impact of fiscal tightening” can only have meaning as ‘relatively lower inflation’ in the case that the Fed is buying bonds that the Treasury sells, thus increasing the money supply.

    Otherwise, the Treasury receives dollars that could have been spent, there is no net change in dollars in circulation.

    • F. Beard says:
      November 21, 2011 at 4:05 pm

      Banks cannot create money : double-entry bookkeeping could not work otherwise. Lew Glendenning

      Wrong. That is how banks do create money. In exchange for a promise to repay plus interest (the “asset”) the bank creates a loan (the “liability”).

      Just because that money is temporary does not mean the bank did not create money.

    • Jim says:
      November 21, 2011 at 4:40 pm

      You are confused. The creation of bank “money” (really, bank liabilities) IS double-entry bookeeping. And there’s nothing magical about it either – it’s just a liability denominated in the unit of account. An IOU scrawled on a bar napkin is fundamentally the same thing, only not as generally acceptable.

      • F. Beard says:
        November 21, 2011 at 4:50 pm

        An IOU scrawled on a bar napkin is fundamentally the same thing, only not as generally acceptable. Jim

        Bingo! And if banking was truly a private endeavor then bank checks would be a lot less acceptable too (assuming they could not be instantly cleared).

        Actually, if banking was truly private, few would wish to have accounts with them.

        • aet says:
          November 21, 2011 at 6:05 pm

          Accounting ( and legal) fictions do exist, but they don’t work quite the same way as other things which are also said to exist: like the zero (or negative numbers) in number systems, as distinguished from the quantities denoted.

          There is the also the always-live question as to the precise and proper rate of conversion, of specie or scrip to fuel, or to other goods – or services – comestible.

          When the rubber hits the road, so to speak, there has to be some actual production of material goods and services – or else there could be no economic traction whatsoever.

        • aet says:
          November 21, 2011 at 6:08 pm

          It all depends precisely on whose “John Hancock” graces the said IOU. Assuming no questions as to authenticity, that is.

    • greg says:
      November 21, 2011 at 4:48 pm

      Google “Debt as Money” and watch the movie.

  • greg says:
    November 21, 2011 at 5:01 pm

    Keens plan would be (somewhat) inflationary, but that would be OK. As long as the government didn’t borrow the money, which would just change private debt into public debt, and just printed the money. But the real problem is the distribution of money. What we see is what we get with the massive wealth inequality we are experiencing: The gradual destruction of the market. So it should be paid for with taxes on the rich. They can easily afford another Trillion dollars or so in taxes. Which would make Keen’s dollop more than about $4000 or $5000 per citizen. Give real value to citizenship, instead of what it is now, a contract for debt.

    Won’t happen though. The bankers want their foreclosures, and the depressed prices of a depression will give anyone with cash, ie the rich, a killing in buying up the real assets of this country. That is why we are all getting screwed. It’s all a scam.

    • Stephen Nightingale says:
      November 21, 2011 at 11:18 pm

      >Which would make Keen’s dollop more than about $4000 or $5000 per citizen.

      Only four or five thousand??? I need 50,000 to recoup the lost savings that went into bailing out the wife’s underwater mortgage.

      • greg says:
        November 22, 2011 at 1:47 am

        One Trillion, or maybe two,if the govt decides to print one up, in the hands of the people, will go far to rescuing the housing market. Maybe you won’t be under water any more.

  • Fiver says:
    November 21, 2011 at 5:04 pm

    Ah. Another voice to the deafening call for “PRINT NO MATTER WHAT!!”

    Which happens to be exactly what all the biggest (mostly failed) banks and money centers want. This notion that printing/inflating away the debt is good for the little guy in debt vs creditors just kills me, as it is members of the top quintile (and to some extent the 2nd – 80% of new debt taken on from 2000 to 2007 in the US was from these 2 groups) that constitute both sides of the equation. They have the bulk of the debt and the bulk of the “assets” and are also able to take full advantage of all the means available to move that money around in a way that preserves/enhances its value. Inflating saves people with real money far more than the majority of the public, who either will have ONLY significantly less real purchasing power, or for lower and middle income earners able to simply save, lower PP AND savaged savings.

    The “print” solution is the favored option for preserving the status quo for elites that completely fuck up – and especially so since banks/money men get first crack.

    Keen’s idea is in the right direction, but I wouldn’t give out money. What we need is a formula that extinguishes debt either top down, or bottom up, but in a manner that is proportional to an individual or household ability to pay or absorb the loss. This will blow apart TBTF banks. So what. We simply must come to terms with the truth of the matter, which is that this financial system and the corporatism it supports is now a monstrosity, that propping it up a la Bernanke merely ensures greater pain and an even bigger collapse down the road the longer we go on like this.

    • F. Beard says:
      November 21, 2011 at 5:19 pm

      But what about savers? How does debt forgiveness help them? It doesn’t.

      • RSDallas says:
        November 21, 2011 at 6:11 pm

        What’s wrong with the simple solution of allowing the over indebted to go bankrupt?

        • F. Beard says:
          November 21, 2011 at 6:23 pm

          Because banking drives people into debt with their own stolen purchasing power. Because banking cheats savers too. Because the economy does not work very well in reverse.

          • RSDallas says:
            November 21, 2011 at 7:06 pm

            No, because a society can’t operate like a fairy tale Beard. You have to have winners and losers. They motivate each other. Remove the losers and you create welfare. We have convinced over 40 million people (excluding the truly needy people) that it’s far more productive to give up on the American Dream and get your basic needs from the government. We have unlawfully convinced millions of people that the government should be the “health care provider of choice” when they retire. We have unlawfully tricked millions of people to think that Social Security is secure and that their money will be there when they retire. We have unlawfully grown our government into a fascist entity that solely supports the needs of the largest and most profitable corporations.

            I don’t know about everybody else, but it seems to me that this fairy tale is turning out to be a very scary horror movie.

          • F. Beard says:
            November 21, 2011 at 8:02 pm

            You have to have winners and losers. RSDallas

            But instead we have thieves and their victims.

          • F. Beard says:
            November 21, 2011 at 8:05 pm

            We have unlawfully tricked millions of people to think that Social Security is secure and that their money will be there when they retire. RSDallas

            Of course it will be there. We are not under a gold-standard or did you not notice? The US Government can create money at will from nothing.

      • Fiver says:
        November 21, 2011 at 6:59 pm

        Note I specifically stated a proportionality to ability to either pay or absorb the loss.

        I’m a democratic socialist, and have been all of my adult life. Ditto an environmentalist. If I had my druthers we’d dispense with capitalism and its completely twisted version of God-mandated, Darwinian-sanctioned “meritocracy” entirely.

        I simply don’t buy the idea that “printing” is the only option or the “lesser of 2 evils” or any of the other stuff that provides cover to keep things as is, when the truth nobody wants to admit is that the only way to resolve this in a fair and decent manner is for ALL THOSE WITH SOME MONEY up to and including the FILTHY RICH to take a significant hit. That means me. That means a lot of pensioners. That means professionals, the highly skilled, the coupon clippers, the WS and Washington lizards, the WORKS. This entire system was set up for THEIR benefit. What THEY “earned” they for the most part owe to that system, and it’s way, way past time to rectify the grotesque injustice inflicted on the bulk of populations everywhere.

        This has the not-to-be-sneezed-at side benefit of being an absolutely necessary condition for our survival AT ALL given we already cannot properly support half the people now living, let alone the billions coming over the next 30 years without destroying half of humanity and/or the entire bioshpere.

    • aet says:
      November 21, 2011 at 6:37 pm

      The important thing is to keep the economy moving. Velocity of circulation, not the absolute levels of accounting balances, is what counts.

      Accumulations of capital, huge piles of dead un-circulating money piled in sleeping accounts, while there’s a lack of demand due to a lack of income : that’s the problem.

      Those that need money have not the means to earn any, while those that have it – sit on it. Or worse, purposely gamble with it.

      It almost seems as if there’s too much “capitol” (that is, piles of accumulated cash) chasing too few opportunities: as a society, we are imho choking on our success.

      But “morality” has nothing to do with money, not essentially. Money itself is “all business”. It is rather when people decide what to do with their money, or on how they may seek to gain their income , that any question of the “morality” of money could arise.

      Money in and of itself is as morally neutral as a hammer or saw or firearm. It’s just a tool; neither a blessing nor a curse.

      • Fiver says:
        November 21, 2011 at 7:00 pm

        See my reply to F. Beard.

        • aet says:
          November 21, 2011 at 7:07 pm

          Indeed.

          Hey while we’re talking money, this is of interest (no pun intended!)….it’s all about money, (and how!) but in a swell info-graphic form:

          https://www.xkcd.com/980/

          It pays sometimes to visualize things in detail and then compare them, I guess.

          • Fiver says:
            November 21, 2011 at 10:21 pm

            When I first opened it, I clicked on the bottom first, and got lost in cartoons. THEN I found what you meant for me to see. That is QUITE the chart. Thanks a lot.

      • RSDallas says:
        November 21, 2011 at 7:12 pm

        “It almost seems as if there’s too much “capitol” (that is, piles of accumulated cash) chasing too few opportunities”

        So you can see what miss-allocated debt can do to a society. miss-used debt is a charlatan in the night stealing tomorrows dreams. Shame on those who extend the bad debt and equally shame on those who accept it.

  • Jim says:
    November 21, 2011 at 8:20 pm

    On Fractional Reserve Banking:

    Here are a few quotes from Steve Keen “Debunking Economics: The Naked Emperor Dethroned” pgs. 307-309.

    “The money multiplier model assumes that banks need excess reserves before they can make loans. The model process is that first deposits are made, creating excess reserves, and then these excess reserves allow loans to be made, which create more deposits.”

    “But in reality,…,banks create loans first, which simultaneously creates deposits.”

    “In the real world, banks extend credit, creating deposits in the process and look for reserves later.”

    “With causation actually running from bank lending and the deposits it creates to reserve creation, the changes in credit money should therefore precede changes in fiat money.”

    “The supply of money is not exogenous–set by the government–but endogenous–determined by the workings of the market economy.”

    I believe there are major theoretical differences between Keen and MMT on the overemphasis (from Keen’s perspective)that most MMT’ers put on the role of fiat money in our economy.

  • Tim says:
    November 21, 2011 at 8:21 pm

    Are people still talking about growing our way out of these problems over time? I mean really. Demographics and resource constraints show that is not a viable solution especially when you consider the current economic GDP size is based on spending more than we make.

    Without growth, undoubtably austerity is part of the solution when you are spending large fractions more than you make. You shouldn’t do it overnight like Europe is trying to do and you shouldn’t do it prior to default like europe is trying to do. So clearly their execution is all wrong, but I don’t see a problem with measured austerity.

    • Hugh says:
      November 22, 2011 at 2:02 am

      We have both a society and an industrial base to rebuild. This is not so much about growth but a more equitable and sustainable redistribution of our resources. Austerity and scarcity in today’s context are just tools of the kleptocrats to loot and justify that looting. Overpopulation and resource depletion are existential concerns but in order to address them we need to get the country back on the right track first, and that is a big enough problem in itself.


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