Hoover’s Great Depression

From the August 1932 Republican Nomination Acceptance Speech by Herbert Hoover:

Before the storm broke we were steadily gaining in prosperity. Our wounds from the war were rapidly healing. Advances in science and invention had opened vast vistas of new progress. Being prosperous, we became optimistic–all of us. From optimism some of us went to overexpansion in anticipation of the future, and from overexpansion to reckless speculation. In the soil poisoned by speculation grew those ugly weeds of waste, exploitation, and abuse of financial power. In this overproduction and speculative mania we marched with the rest of the whole world. Then 3 years ago came retribution by the inevitable worldwide slump in the consumption of goods, in prices, and employment. At that juncture it was the normal penalty for a reckless boom such as we have witnessed a score of times in our national history. Through such depressions we have always passed safely after a relatively short period of losses, of hardship, and of adjustment. We have adopted policies in the Government which were fitting to the situation. Gradually the country began to right itself. Eighteen months ago there was a solid basis for hope that recovery was in sight.

Then, there came to us a new calamity, a blow from abroad of such dangerous character as to strike at the very safety of the Republic. The countries of Europe proved unable to withstand the stress of the depression. The memories of the world had ignored the fact that the insidious diseases left by the Great War had not been cured. The skill and intelligence of millions in Europe had been blotted out by battle, by disease, and by starvation. Stupendous burdens of national debt had been built up. Poisoned springs of political instability lay in the treaties which closed the war. Fear and hates held armament to double those before the great conflict. Governments were fallaciously seeking to build back by enlarged borrowing, by subsidizing industry and employment from taxes that slowly sapped the savings upon which industry and rejuvenated commerce must be built. Under these strains the financial systems of foreign countries crashed one by one…

Two courses were open to us.We might have done nothing. That would have been utter ruin. Instead, we met the situation with proposals to private business and to the Congress of the most gigantic program of economic defense and counterattack ever evolved in the history of the Republic. We put that program in action

Our emergency measures of the last 3 years form a definite strategy dominated in the background by these American principles and ideals, forming a continuous campaign waged against the forces of destruction on an ever-widening and a constantly shifting front.

Thus we have held that the Federal Government should in the presence of great national danger use its powers to give leadership to the initiative, the courage, and the fortitude of the people themselves, but that it must insist upon individual, community, and State responsibility.

I highlighted the key passage I want to focus on. I strongly suggest you read the whole thing here. It is a sobering address, especially as it contrasts to the Republican acceptance speech he gave in 1928 which I highlighted last week.

I will be short on commentary. The only comment I wish to make here concerns how Hoover is depicted in history. In the average person’s mind, Hoover has a laissez-faire reputation. But, if you read this address in its entirety its pretty clear –at least to me – that Hoover is taking an extremely statist rhetorical approach, especially as compared to his 1928 address.

What’s going on here? Hoover saw the “invading forces of destruction that we have been compelled to meet in the last 18 months” and was compelled to act. It’s as simple as that.

Now, if you are an interventionist, you would see this as a good thing and suggest Hoover should have acted in 1929 instead of much later. If you are a non-interventionist, you would see this as a bad thing and suggest Hoover should have relented and let the depression run its course. Should policymakers have acted sooner or relented?

This is the same dilemma policymakers today face.

Actually, let me more. Here’s my view.

First, it is clear that depressionary credit crises lead to political dysfunction and a worsening fiscal picture that results from the conflicting priorities which emanate from that dysfunction. This was true during the Great Depression. We have witnessed it in Japan in the last twenty years and we are certainly witnessing it again in the US and Western Europe.

The middle path that Hoover ploughed and that Obama is ploughing owes to this dysfunction and conflicting priorities. Remember that Roosevelt ran against Hoover in 1932 on a fiscal responsibility platform, much as I anticipate Republicans will against Obama.

Second, no amount of government spending is going to allow this credit system to grow its way out of debt. The problem isn’t ‘fixable’ without significant deleveraging.

I have said it before, but it bears repeating here:

There are four ways to reduce real debt burdens:

  1. by paying down debts via accumulated savings.
  2. by inflating away the value of money.
  3. by reneging in part or full on the promise to repay by defaulting
  4. by reneging in part on the promise to repay through debt forgiveness

Right now, everyone is fixated on the first path to reducing (both public and private sector) debt. I do not believe this private sector balance sheet recession can be successfully tackled via collective public sector deficit spending balanced by a private sector deleveraging. The sovereign debt crisis in Greece tells you that. More likely, the western world’s collective public sectors will attempt to pull this off. But, at some point debt revulsion will force a public sector deleveraging as well.

And unfortunately, a collective debt reduction across a wide swathe of countries cannot occur indefinitely under smooth glide-path scenarios. This is an outcome which lowers incomes, which lowers GDP, which lowers the ability to repay. We will have a sovereign debt crisis. The weakest debtors will default and haircuts will be taken. The question still up for debate is regarding systemic risk, contagion, and economic nationalism because when the first large sovereign default occurs, that’s when systemic risk will re-emerge globally.

It’s the debt; it is simply too high. We are definitely going to see a lot more of 3 and 4. in reducing the real debt burdens going forward. That’s the point I was trying to get across with the first Roach post on debt forgiveness. I doubt we are going to see wide scale debt forgiveness until defaults and debt deflation have taken center stage. That’s the experience of previous depressions and certainly what we saw during the Great Depression. That’s also the point I was trying to get across with the second Roach post on debt forgiveness.

I would also argue that deficit fatigue is inevitable.

Now intellectually, you can make all sorts of arguments about the US’s being the sovereign issuer of currency or how the government is not like households or how we need to increase aggregate demand or how the government’s deficit is the non-government sector’s surplus. I certainly do. You can make these arguments until the cows come home. It’s not going to work.

I’m just being realistic here. The reality is that people think more about charts and illustrations like this. And what they see is reckless and out of control spending that must be brought to heel. Now, as I mentioned in the deficit fatigue post, “that is certainly why I advised a more aggressive policy response early both on stimulus and recognition of bad debt. A more aggressive response on these two fronts would have dealt with both structural and cyclical causes of recession.” An aggressive response would have been much more effective in holding deficit fatigue at bay. But that is water under the bridge. We’re here now.

Sorry, that was a lot more commentary than I anticipated. I just thought some of it needed to be said. Comments appreciated

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward http://www.creditwritedowns.com


      1. Nathanael


        (2), inflation, is the way to go. Massive public spending *financed by printing* is a very smooth way to get out of depression — no public debt crisis, transfer of wealth to the poor, it all works, it works smoothly and equitably.

        I would like to know why you expect (3) and (4) to be performed rather than (2). It’s an important question.

        (A side point is that none of the four solutions will work while the rule of law is absent and rampant criminality by banks is tolerated and encouraged, but you know that.)

        1. Jib

          FWIW,I dont think (2) will work. It is the most painless option and the FED is trying but igniting inflation is not as easy as people think. The Fed can dump money into the economy, that will lead to prices rising in some sectors, commodities in this case but unless wages rise, you dont get an inflation spiral.

          If wages stay the same and the price of required consumables like energy and food rise then the people have no choice but to spend more on the higher price items by spending less on everything else. So demand for ‘everything else’ drops and the prices for those items drop also.

          Basically the Fed dropping money into the economy that does not result in wage increases actually creates a deflationary spiral down. Granted with some funky results in some sectors with asset inflation but the long term result is still demand destruction for non-essential spending.

          I dont see how with unemployment so high you are going to get wage increases. Unless the Fed can get the money directly into the hands of the consumer, like say an actual helo drop, I dont see how they can get inflation kicked off.

          In the 70’s when inflation took off, the economy was actually running at a high level. Capacity utilization was very high, higher than it has been any time since, even during the boom times in the 90’s. Unemployment was high due to a series of supply shocks and a structural shift was starting that meant lost jobs in manufacturing were never coming back but the high capacity utilias those may

    1. pebird

      How did they get a picture of a Volkswagen Bug in 1932?

      BTW, I think Hoover is the exact opposite of Obama. Hoover tried everything he could think of and continually fought a Republican Congress. His historical reward was being tagged as the America father of the Great Depression.

      Obama is trying nothing that has already been proven to work and works arm-in-arm with the Republican Congress. I can’t imagine what his historical reward will be.

      1. ScottS

        It’s probably a De Soto, which the Bug was a derivative of style-wise. I doubt they were going to use a German car on a jingoistic poster.

  1. F. Beard

    There are four ways to reduce real debt burdens:
    1. by paying down debts via accumulated savings.
    2. by inflating away the value of money.
    3. by reneging in part or full on the promise to repay by defaulting
    4. by reneging in part on the promise to repay through debt forgiveness
    Edward Harrison

    There is another way:

    1) Forbid any further credit creation pending fundamental reform. This would be massively deflationary by itself as existing credit was paid off with no new credit to replace it.
    2) Send monthly and equal bailout checks to every US adult citizen equal in total to the amount of credit paid off the previous month. Continue for as long as desired.

    The above would bailout the entire population without changing the size of the money supply. It would simply replace credit with vertical money from the US Treasury.

    So a bailout is possible without diluting the value of the dollar.

    1. cwaltz

      Wouldn’t your number one decimate small businesses and accelerate unemployment problems since most small businesses require short term credit usage to create a profit and 80% of business is small business? That isn’t even including what it would do to innovation or the concept of competition only larger international players would be left standing.

      And wouldn’t number 2 “reward” people who utilized credit extensively while penalizing people who aren’t borrowers and who chose to pay for products upfront?

      No I don’t see these as viable anymore than 1 (when the average American only has 5% worth of savings and median networth is $91,304 based on 2009 numbers in article by Thomas Stanley? That means about 50% of the country would have less than $5000 at their disposal.)

      2 seems somewhat what Bernanke and his Fed cohorts seems to be playing with and kicking around as an idea.

      3 seems to be what many Americans are deciding in both voluntary and involuntary scenarios(We have been looking at houses and the stories of people using their savings to try and save their credit and praying for a short sale is heartbreaking.)

      Number 4 seems to be the most efficient but would require the Powers That Be to take a haircut and politically seems to be a non starter for our best government that money can buy(look at what they did to the notion of cramdowns to see how that worked out.)

      We are so screwed.

      1. F. Beard

        Wouldn’t your number one decimate small businesses and accelerate unemployment problems since most small businesses require short term credit usage to create a profit and 80% of business is small business? cwaltz

        No. It would not since genuine lending of existing funds would be allowed. Remember, the size of the money supply would not change. There would be plenty of actual money to lend to small business and should it turn out that interest rates were too high then the size of the bailout checks could be increased.

        And wouldn’t number 2 “reward” people who utilized credit extensively while penalizing people who aren’t borrowers and who chose to pay for products upfront? cwaltz

        No because savers and consumers would receive equal bailout checks too.

        We are so screwed. cwaltz

        No we are not unless we choose to be. Periodic debt forgiveness is commanded in Deuteronomy 15. However, since the banking system cheats everyone, a universal bailout is more appropriate.

          1. Toby

            Agreed, there is no silver bullet, but debt forgiveness is an inescapable part of moving out of this insanity. As to the other things that need to accompany a debt jubilee, I like Charles Eisenstein’s plan, which is laid out in detail in “Sacred Economics”.

            Perhaps he should be interviewed at this site. A very interesting man.

          2. Skippy

            I wish some one with more grammatical expertise than me, would formulate the proper phraseology to describe, forgiving fraudsters with out pointing the gun in the wrong direction ie victim confusion….debt forgiveness[????].

            Skippy…how about royal we don’t gitmo your bankster ass, bull room mate option attached to lack of recalcitrance.

          3. F. Beard

            Yes, fundamental reform is needed. The chief thing we need to do (besides the bailout) is abolish the money monopoly for private debts. Then, non-usury forms of money would be able to compete. And since it is usury that requires exponential growth, a lot of environmental concerns would be addressed at the same time.

          4. kjmclark

            “Skippy…this ain’t 2,000 years ago, in fact what we are experiencing…has never occurred before…in this planets history.”

            Um, if you’re talking about debt-based financial crisis, that’s happened many times in the past. If you’re talking about hitting resource constraints, that too has happened many times in the past. If you’re talking about backing down the fossil fuel boom, you’re right, that hasn’t happened before. That may well be a problem. You should make clear which one you’re talking about.

          5. skippy

            @kjmclark, yes many of these things have occurred before, but, not on this scale, not at so many places globally, all at the same time.

            Financials are just a fraction of the total problem. Historically (check it out) whence human social system are all ready under stress from pushing the envelope (physical, political, etc) our planets dynamic energy distribution system has a nasty habit of throwing a wrench in our affairs. In my book there is a risk off moment with activity’s, sadly the big boys in towers always think more is always better, short term up trend is proof of success.

            Skippy…thermodynamics and physics…300kw incoming, 400kw out going per sq meter, water is the biggest greenhouse agent, 150 years ago the worlds Co2 could be viewed as 2 meters thick, its now 3 meters. Friends company now mines the bottom of the seas, geovents, copper, gold and exotics. Ore is transported up to control ship and off loaded to barges next stop is china. I casually asked what mitigation protocols they used, thought his brain malfunctioned (aneurysm) but gave the standard industrial SOP and hay if one Island nation gives them a hard time they just move to a new one….rinse replete. Bottom of the ocean man, no eyes, no inspection, no clue of impact, good times….eh.

        1. Toby

          This is my second attempt to reply.

          Over at Zero Hedge there is an article on debt forgiveness. Here’s the intro:

          “Finally serious economists are considering a position I have been maintaining and writing about since the 2008 financial meltdown. Whatever its name— erasure, repudiation, abolishment, cancellation, jubilee—debt forgiveness, will have to eventually emerge forefront in global efforts to solve an ongoing systemic financial crisis.”

          The title of the article is: “Endgame: When Debt is Fraud, Debt Forgiveness is the Last and Only Remedy”.

          (Maybe the link to Zero Hedge caused NC filters to kick in…)

        2. cwaltz

          I think I get what your saying but am having trouble grasping how initial outset would occur.

          I do find the idea of extending a “credit” monthly to each consumer contingent on that money being placed back into the economy each month (say $1000)for a period of time (say a year) somewhat intriguing. Although the cost of such a program would not be a net zero since you’d need to consider the cost to the treasury of cutting the checks and mailing them out as well as insuring against fraud. Again I don’t see it happening because it would be something that would benefit the bottom 80% and it would have costs that would have the GOP screaming socialism and redistributing wealth at the top of their lungs. They’d much rather continue the backdoor redistribution that benefits the Jamie Dimons of the country(with plans of allowing them to bulk buy up foreclosures and rent them back to the people now occupying them.)

          1. F. Beard

            Since everyone would receive the bailout checks, politically it would be unstoppable, imo. And remember, Bush established a precedent with his stimulus checks.

      2. attempter

        Number 4 seems to be the most efficient but would require the Powers That Be to take a haircut and politically seems to be a non starter for our best government that money can buy(look at what they did to the notion of cramdowns to see how that worked out.)

        #3, if it means bottom-up self-jubilation, is certainly the most efficient, as it’s the only thing that can work.

        #4 can’t possibly be efficient from any point of view since, as you say, it’s impossible. (But the continued dreaming of it on the part of so many of the oppressed is very “efficient” from the point of view of the kleptocracy.)

        Just to clarify, bottom-up debt self-cancellation isn’t to “renege” on anything. (I refer to all system debts – debts to banks, corporations, government, student loansharks, etc.) Any social contract that may have existed was unilaterally broken from the top down. 100% of reneging was on the part of the “elites”.

        1. cwaltz

          It’s absolutely astounding to me how many people are bankrupting themselves in my area to keep some arbitrary lending score from depreciating. I would so not be spending my savings to save something I was no longer occupying and knew I was inevitably going to lose and yet today I viewed 2 short sells with exactly that story(using their savings to stave off foreclosure after a layoff occured
          on a property they vacated.)

          My household only fits the “oppressed” label loosely. Our household owns a modest singlewide that is paid for as well as one form of transport outright. Granted, we pay for our food and conveniences like electricity through the graces of our corporate overlords but for the most part I could pick up any minimum wage job and maintain our lifestyle as it stands presently. :)

        2. ambrit

          Dear attempter;
          I wholeheartedly concur. My take on it is that the long standing project to shift the tax burden from ‘Wealth’ to the lower stratas of society is at the root of it all. This brings up the question, whom does ‘Debt Relief’ benefit? It is possible to argue that the QE programs of recent memory are ‘debt relief’ programs for the top tier financial crowd. Just another shifting of the burdens of governance onto those least able to bear said burdens. If we assume that ‘Balance’ is the optimum condition for any society, we are in for some seismic ‘adjustments’ soon.
          My Mantra is: “Greed Is Stupidity.”

  2. Paul Tioxon

    Desperate times call for desperate measures. Just how desperate are the times, the crushing weight of societal failure with attendant suffering, violence and utter ruin of lives on every measurable level. Not enough yet. Apparently, the writing is on the wall, but the walls have yet to be stormed.

    If the president and the republicans were even close to realizing that they are not insulated by buffers from the dissolution of the social order, would we see some radical propositions such as this one:

    As the commander in chief of the armed forces, the president issues the executive order to the US Navy to go into the off shore oil drilling business. The money made from the liquid gold will go to pay down the Federal deficit. This will give the Navy something useful to do with all of the money, manpower and hardware they have been supplied with. The contracts for drilling in Alaska and up North where the ice is melting due to global warming will now be the job of the Sea Bees to construct drilling platforms and escort convoys of oil tankers to China to pay our current account balance and Federal Deficit. So far, the Navy seems to be able to handle floating nuclear power plants above and below the oceans. Drilling a hole in seabed and making sure it does not blow up show come as second nature to them. American Oil for Americans. Not BP. Or SHell. Or who ever.

    1. ambrit

      Mr Tioxon;
      Unfortunately for us, the buffering going on in the halls of Congress is all in the heads of the governing elites. We are already tobogganing down the ‘slipery slope.’ The ever expanding reliance on the ‘Forces of Violent Coercion’ has led everywhere and everywhen to all sorts of disasters and calamities. We ‘Crossed the Rubicon’ when we made the American Army a professional full time occupation for all troops. After a while, the ‘Troops’ become a Caste, and the Caste becomes a Power. We’re halfway there now. God help us.

    2. Rodger Malcolm Mitchell

      Paul says,

      “The money made from the liquid gold will go to pay down the Federal deficit.”

      Reducing the deficit historically has led to recessions and depressions. So, why reduce it? It is no burden to the government and is not related to taxes. (See: http://rodgermmitchell.wordpress.com/2011/06/20/why-a-dollar-bill-is-not-a-dollar-and-other-economic-craziness/)

      We are in a recession and nowhere near inflation. So again, why reduce growth in the money supply?

      Rodger Malcolm Mitchell

  3. eightnine2718281828mu5

    And what they see is reckless and out of control spending that must be brought to heel.

    The best way to have dealt with the current mess was to have screamed bloody murder when Bush and the Republicans cut taxes in the face of two expensive wars and the medicare prescription program.

    It would be nice to be able to say that the corporate press is absolutely useless, but they are far from benign.

    Especially the business press; they missed the bubble in 2000 and they missed the financial crisis; they were too distracted cashing checks and currying favor with wall street to do their jobs. But I guess in the cnbc newsroom they’re convinced that that *is* their job.

    I heard Carl Quintanilla (sp?) on cnbc today say that the denial of the AT&T/T-Mobile merger showed that the administration wasn’t serious about jobs.

    Apparently Mr. Quintanilla, being a business journalist, isn’t aware that layoffs follow acquisitions like the night follows day. In AT&T’s case it was all about oligopoly and the twinkle in management’s eye when they thought about all the little ‘redundancies’ they could send home with pink slips.

  4. Pragmatic Realist

    I am here reading this and listening to a album of Franke Harte singing songs of old Ireland in the famine times, and every song is about the landlord foreclosing on the farmers who could no longer pay the rent and their debt. An economist might analyze the situation in terms of trade and debt and money. But the fact is that it was due to a process of a powerful class of entitled people using the law to draw out all the wealth distributed among the people and then to force the people off the land and separate them from the means of security and survival. Back then it was cabins with thatched roofs. Now it is McMansions in estate developments. But is still debt and foreclosure and people dispossessed and separated from the means of survival. Back then, the people could go to America, but now where is there to go?

      1. joebhed

        Either that, or here – to a new money system, not based on debt-issuance.

        That’s the problem with Ed’s analysis and a lot of comments – the kind of intellectual inability to see that the problem is systemic in nature, and that structural flaw requires the examination of the system’s architecture.

        As a system, because all money is created as a debt, we have reached the point of debt-saturation for our economic units of households and businesses.
        We need a non-debt-based money system.
        Simple as that.

        Debt-forgiveness sounds good but it is like Mr. Dressup used to say, time to begin again.
        The great-grandkids will be right back here.

        Either we fix the system, or we end up in the streets.
        Where they are ready.
        And awaiting with a global IMF-based solution.
        All you have to do is to give up your sovereignty.

          1. joebhed

            I’m a little surprised at the tone of your comment here.
            From ‘intellectual inability’ to ‘rubbish’ in one fell swoop.

            Having said that, I have NEVER seen any commentary at CreditWritedowns that gets to the architecture of the money system – what is money, how is it created, WHY is there so much debt, etc.
            But I promise another look.

            Your comment that you saw the system – point blank – as the cause is emblematic of your intellectual blinders here, Ed.
            It is not the CREDIT SYSTEM which is at fault, it is the MONEY SYSTEM, and the essential fact that it is based on debt-issuance in order to have a national means of exchange.
            Until you – and others – get THAT FACT down in the cause, your solutions may appear to have depth, but they never get to the root cause.


            Thus, your menu of solutions appear comprehensive, but lack substance.

            More later, Ed.

          2. joebhed

            Ed, I just read through your polemic, linked above.
            I had missed that..
            And, if you can believe this, I first had replied to Susantheother’s comment below.

            Interesting how my point there was that the ultimate choice will be between monetary sovereignty manifested through nationalization of the money system, and the suggestion from your polemic – that of the opposite, a complete loss of monetary sovereignty through an IMF-induced supra-macro-prudential-based global liquidity solution. (BanCor)

            If you take the time to understand Dr. Bernd Senf’s lecture on the Deeper Roots of the Global Financial Crisis that I provided above, you can see why I say that you do NOT understand the nature of the debt-based system of money.
            The only thing the BanCor will do is to have us all indebted to the international bankcorparation through the IMF, rather than directly through our present banking relationships.
            No solution at all, Ed.
            It seems to me that your intellectual curiosity flows FROM your anti-government bias, as you explained in your opening comment at the Fiscal Sustainability Teach-In back in DC last year.
            You have definitely opened up to the MMTers way of thinking about ‘functional-finance’ over that time, for which I congratulate you.
            But your ‘intellectual inability’ to understand the ‘deeper-roots’ of our debt problem remains.
            It’s the money-system itself, it is not the credit system, as you say.
            That inability is not rubbish on your part, nor mine.

        1. Susan the other

          Your links to Kucinich have kept my sanity. I think the clear reasoning about private money v. sovereign control of sovereign money can’t be argued. So when the gears slip a little and a lesser solution is proposed, I get nervous all over again. The word “nationalization” is the one I thought applied. But there are arguments against nationalizing because it doesn’t necessarily regulate strictly enough. I should think that if the country takes over its own sovereign currency and eliminates the private banks’ ability to create money out of an electronic switch, it would solve 90% of the problems without further regulation. I really don’t think anyone thinks private banks are our friend. Why coddle them?

          1. joebhed

            You have obviously grasped an essential reality of the sovereign money solution.
            it is that by nationalizing the monetary system – that of issuance and control of money – we are able to solve the problems that moral hazard creates in the present private debt-based money system – those that require such broad, even so-called macro-prudential, regulatory attempts to neutralize the immorality.
            Thus with a public money system, regulation of banks will be minimal – limited to fraud prevention and protecting democratic entry into the system, such as cooperative and other limited purpose banking.
            At some point in our financial-monetary play, all bets will be in.
            Free banking Austrianism will lose out.
            The test will be between the essential sovereign money solution of the Kucinich Bill and the IMF-imposed solution, where monetary sovereignty falls by the wayside.
            Stay tuned.

    1. Linus Huber

      Best go to the most corrupted country with the lowest standard of living. At least there you know and it is official that there is corruption and no pretence.

      1. ambrit

        Mr Huber;
        All snark aside, why must we settle for either? Even corrupt regiemes can ‘do the right thing’ once in awhile. What we need is a nominally ‘pure’ regieme that recognizes the utility of a strong middle class and semi-equitable distribution of income. Something like the Eisenhower Republicans. Every time a reactionary type pulls out the old ‘Founding Fathers’ arguement or somesuch, I now throw Eisenhower and his tax rates back in their face. You would be gratified to see the ensuing confusion.

  5. Pragmatic Realist

    Let me ask one very serious and earnest question here, and I am sure that it is also absurd and naive. What really bad thing would happen if the debt was just cancelled? Most of it is debt based on the ballooned prices of real estate and artificial instruments based on the mortgages borrowed to pay those prices. It was all imaginary, so why don’t we just admit that the Emperor has no clothes and admit the value of it all is really zero? Who besides the bankers and gamblers will go homeless and starve and suffer untreated illness and disease?

    1. ambrit

      Dear P. R.;
      The problem here is that few of us want to consider the case that those ‘in positions of responsibility’ are suffering from what is manifestly a form of Mental Illness. They have constructed an ‘imaginary world’ in which they rule, and are mightily battling to ignore ‘reality’ in favour of their version of same. If there were a Twelve Step Program for Banker Junkies these folks haven’t even called to find out where the meetings are held yet.

      1. Nathanael

        Absolutely right. There is some sort of mental defect in the behavior of the top banksters and their political cronies. They simply cannot recognize reality.

  6. Because

    Hoover did nothing essentially before the creditanstalt event. Matter of fact, the creditanstalt crisis is a lost and missing key event behind the “great contraction”. Before it, it was just another depression. With that event, it became “THE” depression. This contraction isn’t even as deep as the pre-creditanstalt contraction. Unemployment, simply, isn’t that bad. Nor is the deficit that huge compared to the size of the economy and time it takes to recover from a finanical injury.

    After the creditanstalts event Hoover finally began to move on public works and other government projects, many of which FDR used as the basis for the New Deal.

    Fact is, US public debt is completely tied toward DoD and public transfers. Get rid of them and you get rid of the debt, especially if the Bush Tax cuts are ended. But that also leaves a smaller economy yet as nominal spending and industrial production drops more, leaving continuing public debt problems and corporate oversavings. Hence, the only answer is a expanded government workforce. One expanded to replace the gap in private hiring, the other needed to build infrastructure for the new economy. With that hiring, transfers would fall and global wars would end. The debt would plunge.

    One way is national socialism and repatrioting all capital back to the US(as would the other countries). Global trade would end and the US would develope everything for itself and labor would CBA with the bosses by the law. TV’s,Frig’s,building products, everything. Isolationism isn’t a bad thing for the US. We don’t need much of what the rest of the world has outside maybe oil, and that can be replaced much more easily than you may expect. Then DoD would be a completely domestic force, overseeing foreign threats. Multi-nationals would dissolve and domestic business would replace it(CBAing with labor as noted above). Capital would be decentralized helping finance new business. As you expect, financially, the current model would be abandoned.

    It obviously would make international capitalists and foreign countries angry, but there are “ways” to deal with those idiots. Ways that would silence them forever and break the ‘bloodlines’ problem.

    1. Susan the other

      All of our wars have been a disaster. And here we are again. I bet the current war, going on 10 years now, has already cost us 6 or 7 trillion. Much of it completely wasted. There is an erratic pattern here: Investment begins to have diminishing returns. We look for a better return. One good way is to get cheap raw materials. Pillage the earth. Or steal what we want. We cajole two-bit dictators. They get uppity. We set up an invasion and call it liberating women from their burkas. We spend multiple times the amount we would have spent had we just gotten our economic house in order in the first place. The war ends. We claim victory. Pyrrhic victory. And now the entire system has been broken.

  7. Brick

    In a way I cannot help but agree that more positive action early on would have set us on a recovery process earlier than the extend and pretend we have now. The problem with debt is that many of us own it through pensions or savings, through reduced taxes and municipal debt. Writing off bad debt is not that straight forward.
    Through the links on this site recently we have seen how defence spending wastes 12 million a day, how CEO’s earn more money than the company pays in tax and yet one set of politicians seem set to shower more money like confetti in the same areas. In contrast we see others suggesting more debt especially for the consumer is the solution.
    How about government actually spends their money wisely. Does it continue to tax firms that are not making money, does it really try to tackle escallating pharmaceutical costs, does it really try to curtail defence spending, does it encourage firms to retrain employees, does it encourage firms to do aprenticeships, does it make allowance for firms which invest in communities, does it really try to listen to the voters instead of the lobbyists, does it really encourage captial to be deployed productively. Political and spending reform neglect is part of the problem.
    Confidence in an economy is also something a government can spend unwisely, and by doing so can constrain itself so that it cannot tackle problems like unemployment. Ultimately those who own the govenrment debt need to be continually convinced that the politcal process works to increase the return on debt even if it means taking a hit now. The focus should have been growth, unemployment, a quick turn around to recovery, instead there are years more of abject misery for millions. The US has a window of confidence left mostly by nature of other economic regions doing the same extend and pretend game where by it can address these problems, through refocusing of spending, a greater deficit if needs be and a cast iron plan to reduce the deficit longer term. Unfortunately it does not look like it is going to happen, due to general apathy, dogmatic politics, and big business profits. Its a sad indictment of a once proud people.

  8. chris

    We are now 1/5 of the way to matching Japan’s 20 year recession. The politicians and bankers are ok with a 20 year long stagnation as long as they get there share. The banks have had plenty of time to release the economy but they would rather hold the country hostage so they have leverage for their next bailout.

  9. Wyntunnel

    Back in the 70s in my hometown it took a teacher running over a student in the school parking lot before someone figured out it would be a good idea to put a fence between the parking lot and the school yard. ‘nuf said.

  10. Rodger Malcolm Mitchell

    . . . no amount of government spending is going to allow this credit system to grow its way out of debt. The problem isn’t ‘fixable’ without significant deleveraging. . . There are four ways to reduce real debt burdens:

    1. by paying down debts via accumulated savings.
    2. by inflating away the value of money.
    3. by reneging in part or full on the promise to repay by defaulting
    4. by reneging in part on the promise to repay through debt forgiveness

    This reflects an abysmal ignorance of Monetary Sovereignty (http://rodgermmitchell.wordpress.com/2010/08/13/monetarily-sovereign-the-key-to-understanding-economics/) In not differentiating between the federal government (Monetarily Sovereign) and private debtors (monetarily non-sovereign), the author provides solutions for one that do not apply to the other.

    Solution #1 does not apply to a Monetarily Sovereign nation, as such a nation does not service debts with “savings.”

    Solution #2 also does not apply to a Monetarily Sovereign nation, as such a nation does not service debts with money value, but rather with money. If the federal government owed $1 trillion, and annual inflation were 100%, the federal government would pay its debt by crediting the bank accounts of its creditors for exactly $1 trillion, regardless of the purchasing power of that money.

    Solutions #3 and #4 are unnecessary for a Monetarily Sovereign nation.

    All four of the above solutions could apply to private debt, which is monetarily non-sovereign, but the statement “. . . no amount of government spending is going to allow this credit system to grow its way out of debt,” is not correct. In fact, federal spending is exactly what is needed.

    Attention debt-hawks: Federal spending is limited only by inflation (which we are nowhere near and which easily is prevented/cured), not by taxes or borrowing.

    It truly is terrible when “experts” comment on economics without understanding Monetary Sovereignty, the basis for all modern economics.

    Rodger Malcolm Mitchell

    1. Brick

      Your article explains well the concept of monetary sovereignty and that the only threat of default is a voluntary one. I would take issue with your argument that we are nowhere near spending being limited by inflation. Your argument is that there is no evidence in US history about the amount of debt being linked to inflation. Its a valid argument but the past is not always a good indicator of the future and in reality if there is a tipping point where it does become an issue I would most likely be guessing about it.
      For me there is a perception or confidence loss point where if you are perceived to create too much money (whether or not it is true), then your currency value begins to move more rapidly against other currencies. We tend to see the oposite of this with the Japanese Yen and Swiss Franc today (perception of safety). We saw this when the IMF intervened in the UK when sterling started to move rapidly. These suggest to me that currency movements can be subject to confidence and perception (whether for the right or wrong reasons). The US is dependant on imported oil and this can drive inflation especially as the US share of the market shrinks compared to the rest of the world.In my view it is medium term volatility in currency values and inflation which damages the economy which could create a further confidence loss, creating even more volatility.
      I guess it concerns me that you use US debt to inflation correlation only to forward your argument when some other sovereigns have shown periods when the correlation does become apparent.Nowhere near seems a bold claim when other economists have suggested that there is a level of government spending (notice I don’t say debt) to GDP that can cause a confidence loss in a currency or a perception that a currency is being devalued(whether or not it is).

      1. Granite Stater

        Using inflation at some point in the future, distant or not, as a barrier to reducing suffering and pain among citizens of the wealthiest nation on the planet seems callous and immoral to me.

        You write that economists link federal spending (as a percentage of GDP) to inflation. Can you provide a source or two for those claims?

        Professor L. Randall Wray has a terrific book out – Understanding Modern Money, that addresses this issue specifically. He is also in the middle of three part explanation on this very subject. Even though you might not agree with his perspective, I think you might understand Roger’s point better if you read this.


      1. alex

        “PRIVATE sector debt”

        While I understood that, perhaps you should emphasize that in your posts. People have been so primed (brainwashed) to think of government debt as the big problem that they assume any macro discussion of debt problems is about government debt. As you point out private sector debt (both business and household) is a far bigger problem.

    2. Nathanael

      Rodger, the problem *is* private debt, not government “debt”, so I read the article as listing the four ways of addressing the problem, accurately.

      You may or may not be right that the author doesn’t understand the fact that the currency issuer is *different* — but in that paragraph I believe the author was talking about private debt. Period.

  11. Rodger Malcolm Mitchell

    Now intellectually, you can make all sorts of arguments about the US’s being the sovereign issuer of currency or how the government is not like households or how we need to increase aggregate demand or how the government’s deficit is the non-government sector’s surplus. I certainly do. You can make these arguments until the cows come home. It’s not going to work.

    Sad. You dismiss economic fact with “It’s not going to work.” Well, yes, it won’t work if you ignore the facts. It won’t work if you pretend the facts don’t exist.

    This is the worst example of intentional blindness I ever have seen posted in Naked Capitalism.

    Rodger Malcolm Mitchell

    1. Edward Harrison Post author

      Your interpretation of my statement is incorrect.

      The logic is as follows.

      1. Present a rational discussion of currency sovereignty often, hoping its centrality to the euro crisis is evident
      2. Recognize that present dogma will LIKELY make these vain attempts – but do it anyway.
      3. Make predictions on the LIKELY economic outcome which emanates from a continued adherence to mainstream dogma

      Using your example, I would say instead

      “We know the world is round, but people think it’s flat. So there is every reason to argue with what people erroneously believe. Rather than just telling them the truth and believing it will be accepted, we should be realistic and prepare for worst case scenario in which people like our leaders freely decide not to sail too far west.”

  12. Rodger Malcolm Mitchell

    In essence what Yves means is:

    We know the world is round, but people think it’s flat. So there is no reason to argue with what people erroneously believe. Rather than telling them the truth, we should act as though the world is flat, and agree not to sail too far west.

    Shame on you, Yves.

    Rodger Malcolm Mitchell

  13. chris

    Monetary sovereignity is economic horseshit when no one buys the paper the sovereign is generating.

    There is no quantifiable proof that there are any purchasers of U.S. Treasuries except for high frequency trading platforms and the primary dealer network which can manipulate treasury sales (and interest rates) in any manner they choose through their trillions of dollars of interest rate swaps (like all of the paper derivatives created in the last ten years by Wall Street and the bankers) which have no real world assets or tangible property backing them up (Lehman Brothers functionally died when the rest of NYC’s banking houses accepted that Lehman could not meet collateral calls with tangible assets).

    It is an MMT delusion that the sovereign whose paper is backed by nothing but insolvency is actually in demand.

    1. F. Beard

      It is an MMT delusion that the sovereign whose paper is backed by nothing but insolvency is actually in demand. Chris

      Even if nothing else backed the dollar, taxes are required in it. That is a rock-bottom backing that gold can only dream of.

      1. chris

        Except gold (and to a lesser extent silver) basks in the noon day sun while paper currencies which can bleed their economies and citzenry dry through taxes (to perpetuate themselves, impoverish the citizens of the sovereign, glorify the ultra-rich, or any other foolish and banal spending the sovereign decrees) wither and die.

        1. F. Beard

          Silver and gold should be allowed as private money forms along with anything else. But government money must remain cheap fiat for ethical and other reasons.

        2. Rodger Malcolm Mitchell


          Paper currencies have nothing to do with taxes. In fact a gold standard, which is monetarily non-sovereign does require taxes, while the U.S. federal government, which is Monetarily Sovereign does not. So you have it backwards.

          There is no relationship between government spending and government taxes in a Monetarily Sovereign nation. Whether taxes fell to $0 or rose to $100 trillion, neither event would affect the federal government’s ability to spend.

          Those who do not understand Monetary Sovereignty do not understand economics.

          Rodger Malcolm Mitchell

      2. attempter

        IOW, monetary sovereignty is a contradiction in terms, since the only thing backing it up* is taxation, that is an illegitimate imposition upon the people’s political sovereignty by an alien elite.

        *Sovereignty, by definition, is an irreducible monad. Thus the famous “solecism” of imperium in imperio, “sovereignty within sovereignty”, sovereignty divided against itself. So anything that needs further backing cannot be sovereign.

          1. F. Beard

            The federal government neither needs nor uses tax money to pay its bills. Rodger Malcolm Mitchell

            That would be an interesting experiment; to abolish all taxation and fund all government spending with seigniorage. It might work; old habits die hard.

          2. Nathanael

            It would be an interesting experiment. It’s not a good *idea*, for at least three reasons:
            (1) Seignorage at that level might actually cause runaway inflation. It’s good to be able to contract the money supply through taxation.
            (2) Taxation is necessary for redistributive purposes — a pure-seignorage government has no way of breaking up or even preventing the creation of the money power of the Koch Brothers and their Congressman-purchasing system.
            (3) Taxation is desirable for Pigovian tax reasons (internalizing externalities — pollution taxes).

          3. attempter

            So you agree, there’s no reason the dollar-poor dispossessed (who obviously should renounce all faith in the government) should continue to recognize dollars at all. We should switch to an alternative forthwith.

            I recommend time dollars as part of a transition to full economic democracy.

      1. chris

        And pretending that an economy can run in perpetuity on computer generated noise and the creation of hundreds of trillions of whatever (dollars, euros, yen) is delusional.

        So, theorize why so many unbacked currencies failed throughout say the last 100 years? And why will this not happen to computer-generated trillions produced by the folls in the U.S. Government?

        1. Rodger Malcolm Mitchell

          chris, currencies don’t fail; countries fail. The Great Depression occurred while we were on a gold standard.

          Every form of money actually is a form of debt. The value of any debt is supported by collateral. The collateral for the dollar is the full faith and credit of the U.S. government. To learn what full faith and credit really means (no, you don’t already know), see: http://rodgermmitchell.wordpress.com/2011/06/20/why-a-dollar-bill-is-not-a-dollar-and-other-economic-craziness/

          Rodger Malcolm Mitchell

  14. davver

    Rodger Malcolm Mitchell,

    You never add anything to the debate ever. Yes, inflation is the only restraint on government. You know what, inflation sucks. People don’t like it. I don’t want to experience runaway inflation to pay for bailing out banks. Issuing debt is just another way of putting of inflation till later.

    We get it, if you don’t care about the value of your own currency debt isn’t a problem. We do care so it is a problem.

    1. F. Beard

      You know what, inflation sucks. davver

      Not if you are the first one to get the new money. But that is irrelevant. A universal bailout could be done without increasing the size of the money supply if new credit creation was forbidden at the same time and the bailout checks were metered to just replace existing credit as it is paid off.

      It turns out that reform and a bailout allow each other to smoothly occur.

    2. Rodger Malcolm Mitchell

      Yes, excessive inflation sucks. So where is the inflation? Today we remain in a recession, with inflation nowhere in sight. So which makes more sense, taking action against a non-existent inflation or taking action against a real recession?

      If inflation ever does arrive, the Fed will do what it has done successfully for many years: Raise interest rates and cure the inflation.

      You remind me of the guy with heart disease who wants to eat lots of fats, so he can avoid starvation. Suggestion: Treat the heart disease (recession)now, and worry about starvation (inflation) if it ever comes.

      Rodger Malcolm Mitchell

      1. chris

        Where is the inflation?

        In the form of shrinking food containers (charging the same price for 64 ounces or orange when the carton is reduced to 59 ounces).

        But, just pretend there is no inflation because the government does not wish to give COLA increases to seniors/pensioners.

          1. chris


            Do you accept the government as fully honest and not likely to manipulate data or do you ever purchase orange juice?

            Actually, the shrinking of the carton of orange juice occurred early this year and the price went down.

            But, you want to hand out a theory so I guess real world observations are as good a reason as any to dismiss reality.

            You get zero points for credibility on the theory you push if you just accept that the government is fully honest.

          2. chris

            Actually, the price decline was less than 7.8% decline in the amount of product in the carton.

            But, real world observations are not what you would accept.

        1. F. Beard

          In the form of shrinking food containers (charging the same price for 64 ounces or orange when the carton is reduced to 59 ounces). chris

          Yep, that is called “hidden inflation”. I would bet the problem is not new money per se but that it is going to the wrong people, banks and food speculators, instead of the victims, the debt slaves and savers who have been cheated of honest interest rates.

          New money is the solution but only if it is given to the right people.

          1. chris

            F. Beard,

            But we are told there is not inflation (especially by dudes with a theory they cling to).

            I’m shocked, shocked!

          2. F. Beard

            But we are told there is not inflation … chris

            There is a great deal of subjectivity in measuring price inflation. The most elegant solution I know of is to allow private currencies so that the private sector can escape government money mismanagement should it occur. And there is a great deal of government money mismanagement currently as government attempts to prop up the filthy counterfeiting cartel.

            The above solution – separate government and private money supplies – was given nearly 2000 years ago in Matthew 22:16-22 (“Render to Caesar …”).

          3. Rodger Malcolm Mitchell

            No, I don’t think the government is completely honest, nor do I think your personal observation of the price of orange juice in your store, in your city, in your state, represents the true rate of inflation in America.

            Actually, inflation is very difficult to calculate, because products change. So a phone today is very different from a phone of 10 years ago. We have to go with the best data we have, and while imperfect and politically nudged, the best data is CPI, which as you can see from this graph, bears no relationship to federal spending.


            I know this is counter-intuitive, but those are the facts. Or, you can just use orange juice.

            Rodger Malcolm Mitchell

          4. chris

            F. Beard,

            We could dismiss the moneychangers and declare a debt jubilee but, it might severely upset said moneychangers.


            There was something called the Billion Price Project run by M.I.T. that was more of broad-based measure of inflation earlier this year. I do not know if it still exists.

            Thanks for the conversation. It’s time for lunch and stimulating the economy of local restaurants. Hope you both have a nice holiday weekend.

          5. F. Beard

            We could dismiss the moneychangers and declare a debt jubilee but, it might severely upset said moneychangers. chris

            A universal bailout (including savers!) would fix the banks too in nominal terms and need not hurt them in real terms if further credit creation was forbidden and if the bailout checks were metered to just replace existing credit as it was paid off.

            There is no real need for anyone to suffer except sadists.

      2. davver

        I’m employed, have savings and no debt, and don’t own a house. Where do you think I stand on inflation? Where do you think most responsible people who sat out the housing bubble and rented stand on inflation?

        More inflation isn’t necessarily going to make the world a better place. It’ll enrich bankers, and people who get the money first and people connected to politicians that get stimulus contracts. For the rest of us it sucks.

        1. Nathanael

          Um, no. Inflation generally hurts bankers. Unless they get the money first. (Which is why they shouldn’t get the money first.)

  15. Safcraker

    Most of us probably all agree on one thing which is the choices for the next president are very depressing. This country desperately needs a great leader with the conviction of an Abraham Lincoln, Thomas Jefferson or George Washington to name a few off of a very short list. I have never before seen such contempt for the status quo as what I witness now on a daily basis. Problem is, all the praying and wishful thinking is not going to right the course that this ship is on. We have been off course for so long people don’t even know what course we’re supposed to be on anymore because we have drifted so far off of the course our forefathers laid out for us. The big question is what are you going to do about it?

    If you think any of the available candidates are going to match up reality with your imagination then you most likely aren’t planning on doing anything about it, just more complaining. It’s going to take more than lip service and a vote to get the type of change that equals or even resembles what our forefathers envisioned for everyone one of us. They succeeded in changing everything they despised by sacrificing countless lives, then went so far as to even warn us about everything that this government has become but no one took the time to read the warnings, probably never even knew they existed for that matter. If our forefathers knew that this was going to be the result of all their sacrifice, they wouldn’t have bothered.

    Everyone one of us need to be ashamed for being the cowards that we are. A bunch of arm chair big mouths that were only concerned about ourselves instead of each other and what we meant together as a country as well as what we thought we stood for. As rebellious as it sounds our forefathers made sure it was the right of every citizen in this country to own a firearm not because they wanted to make sure you could feed yourself or protect ourselves from each other. They gave you that right because they wanted you to be prepared to take your country back from the government that they knew could easily manifest itself into what we have now, and they expected you to stand up and fight for what they left you, to never settle for anything less, period. Google up “famous quotes by our forefathers”, it may surprise you what you learn.

    That is obviously a worst case scenario and last resort only to be used after all other methods are exhausted first, but never think for a moment that there is a guarantee that any of those other methods will work. You know, if the revolutionary war would have went the other way, people like George Washington would have been labeled as one of the most despicable people you could imagine, but instead, even though he obviously did those things that fit the bill of what a killer and tyrant would do if you were the opposition, he helped win our freedom and our undeniable right to cherish our God given rights which made him our hero and father of this country. That’s what you call sacrifice, a willingness and determination to win….or die for what you believe in. You can wish for all you want, but just remember…..if wishes were horses, beggars would ride.

    To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude .I place economy among the first and most important of republican virtues, and public debt as the greatest of the dangers to be feared. – President Thomas Jefferson

    The spirit of resistance to government is so valuable on certain occasions, that I wish it to be always kept alive. It will often be exercised when wrong but better so than not to be exercised at all. I like a little rebellion now and then. – Thomas Jefferson (1743-1846), U.S. President, Letter to Abigail Adams, 22 February 1787

    I sincerely believe that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.
    Thomas Jefferson

    On every question of construction, let us carry ourselves back to the time when the Constitution was adopted, recollect the spirit manifested in the debates, and instead of trying what meaning may be squeezed out of the text, or invented against it, conform to the probable one in which it was passed. – Thomas Jefferson

    1. chris


      Well said.

      History records that the moneychangers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and issuance.- James Madison


      Teach a politician how to create fire, keep them warm for a night. Set a politician on fire, keep them warm for the rest of their life.- unattributed

  16. Safcraker

    Single acts of tyranny may be ascribed to the accidental opinion of a day. But a series of oppressions, begun at a distinguished period, and pursued unalterably through every change of ministers, too plainly proves a deliberate systematic plan of reducing us to slavery. – Thomas Jefferson

  17. Stratos

    Hear ,Hear, Safcraker! Now do you have a plan? What can average citizens do to start a massive pushback against the power centers (Financial Sector, Political Elites and Military) that have strangled our democracy?

    Fancy quotes, hand wringing, wailing, snarky comments and loud gnashing of teeth have no effect on the criminals who continue to steal our jobs, homes, money and freedoms. They could care less. The only things they care about is concerted and organized ACTION on the part of the “rabble” (that would be us) and a loss of profits. Any non-violent ideas?

  18. allis

    Can anyone answer the following question for me? If I declare bankruptcy, owning nothing and owing nothing except $5000 to a bank which created that money when I borrowed it, the bank’s asset (my loan) “disappears,” but does the $5000 that I have spent into the economy also disappear? It seems to me that this $5000 is “unbound (to any debt) money” and stays in the economy, similar to “unbound money” from the past which had, for example, been backed by gold or silver, or monies that had been unbound by previous bankruptcies. However, lately I’ve been told I’m wrong. Does anyone know whether the $5000 disappears when I am bankrupt or keeps circulating in the economy?

    1. F. Beard

      Does anyone know whether the $5000 disappears when I am bankrupt or keeps circulating in the economy? allis

      It keeps circulating. However, the bank’s ability to create further money would be impaired by a loss of equity.

    2. Nathanael

      Yep, it’s unbound money and it stays in the economy.

      The catch is whether the bank contracts its money supply due to writing off the debt. It may contract its money supply in reaction (which would cancel out the aggregate monetary effects your bankruptcy). Or it may not.

      Traditional bank regulation would have required it to, but banks have been peddling fraudulent accounting for decades, so God knows what they’re doing right now.

    3. Calgacus

      It stays in the economy and keeps circulating. The bankruptcy is a hit to the bank’s equity as F Beard says.
      But it is not “unbound money” because there is no such thing. Money is always somebody’s debt. It remains a debt of the bank – to whoever received the $5000 from you, say your dentist, saying he uses the same bank.

      It does not change the economy’s “Net Financial Assets” beloved by MMT, the closest thing to “unbound money” – which may be what you mean by “unbound money”, because it nets to zero in the private economy. The dentist account holder’s “money in the bank” is offset by the bank’s debt to the dentist. Your bankruptcy doesn’t affect that, or change anything about the $5000 running around the economy, or make the $5000 more or less “unbound”.

      1. allis

        Thank you for your helpful comments. I am having a difficult time understanding how money works in our economy, and appreciate any help you or anyone else can give.
        Your comments indicate that I did not make clear what I called unbound money. To look at it another way, if I did not go bankrupt, over the next months I would be paying the bank $5000. So, I would call the money I earned during that time “bound” money; it was bound for payment of my debt. However, if I did go bankrupt, that money I earned was no longer bound and I could spend it into the economy. This $5000 which before bankruptcy had been destined to be paid to the bank, after bankruptcy is now unbound and able to be circulated in the goods & services sector.
        Perhaps I asked the wrong question. Maybe the real questions are 1) if I had not gone bankrupt and had paid the bank the $5000, would that money stay in M1 or would it vanish into the bank’s reserves? equity? Some posting I read said that the money did NOT vanish (even if no new loans were made). Is it possible that if I took $5000 out of my earnings/the economy to pay off the loan the $5000 doesn’t vanish? Or does it just vanish from M1 and become part of the bank reserves M0 and will still counted as “money.” (Maybe that’s it?) But how does money in reserves do anything to help employment or consumers? It’s not part of M1 or M2, is it?
        Question 2) Suppose before going bankrupt, I paid the dentist the $5000 and he deposited it in the bank. This $5000 may be a liability of the bank, but isn’t this particular liability matched by reserves that the bank gained when the dentist made his deposit? What kind of debt could the bank owe to the dentist except to let him withdraw his own $5000 deposit when he wants?
        If the bank created my demand deposit “out of thin air” by crediting my account in return for my IOU, why does the bank loose anything if I don’t pay back the loan? (Maybe it didn’t create the whole $5000, but say only 90% a la “fractional banking”?) Except possibly for owing some “borrowed” reserves (?), how is the bank any worse off than before the loan and demand deposit were created, even if I do go bankrupt? There’s obviously something I’m not understanding. Can anyone help?

        1. allis

          Oops! Goes to show how foolish one can be when one mixes up concepts. Of course, bank reserves and bank capital are two separate things. Were they ever identical?

  19. Hugh

    There are four ways to reduce real debt burdens:

    1.by paying down debts via accumulated savings.
    2.by inflating away the value of money.
    3.by reneging in part or full on the promise to repay by defaulting
    4.by reneging in part on the promise to repay through debt forgiveness

    We live in a kleptocracy, the point of such a system is to loot the many. The goal is never to reduce the burden of debt but rather to use it to increase the size and scope of the looting. So your 4 alternatives are irrelevant.

  20. jason wong

    Debt cannot be dealt with by “paying down debts via accumulated savings.” We have a fractional reserve banking system so accumulated savings is only a small fraction of outstanding debt.

    1. joebhed

      Thanks for that.
      And I’m not sure it’s not even worse than you say.

      All money is created as debt.
      All money in existence is a debt.
      Money equals debt – at best.
      No debt equals no money.

      Debt-service payments due are also debts.
      But there’s not enough money to make them.

      The end(*) of the debt-based system of money arrives when we – the money-issuing national economy – are incapable of creating enough new money – as a debt – to make the debt-service payments due on the (DEBT) money already out there.

      When it comes to the debt-based fractional-reserve banking system, We are here(*).

  21. frank revelo

    “paying down debts via accumulated savings” should be rewritten as “paying down debts via accumulated credits”. Debt is the flip-side of credit. For every dollar of debt, there is a dollar of credit out there. Rich people own those credits, that is why they are called rich. The reason deleveraging via paying down debts isn’t working in Greece is that the burden of payment is placed, not on the people who own all the credits (the rich) but on the people who don’t own that many credits (the middle-class and poor). Tax the rich, reduce taxes on the middle-class and poor so that the middle class can rebuild their balance sheets. This will hurts the balance sheets of the rich, and thus cause them to reduce spending, but that doesn’t matter. The spending of the rich is miniscule compared to the spending of the middle-class and poor.

    To the extent we consider not just debt per se, but also promises to pay pensions in the future, then, in addition to shifting the tax burden from middle-class and poor to rich, a solution would also involve shifting from spending too much on the elderly to reducing taxes on the working age population. The most obvious way to do this is by simply raising the retirement age.

    1. Rodger Malcolm Mitchell


      Unlike the Monetarily Sovereign U.S., which has the unlimited ability to pay its bills, the euro nations are monetarily non-sovereign, so must pay their bills with money from taxing, borrowing or exporting.

      Unfortunately, taxing and borrowing have limits, with the former causing recessions and the later running into a dearth of lenders. Exporting also has limits, since not every nation can be a net exporter.

      So, there remain but two long-term solutions for the PIIGS and PIIGS-like nations. Either:

      1. Quit the euro and return to a sovereign currency
      2. Form a true United States of Europe, in which the EU provides euros to the nations.

      All other “solutions” are temporary Band-Aids.

      Rodger Malcolm Mitchell

  22. allis

    F. Beard and Nathanael,
    Thanks for your confirmations. The creation of unbound money had always seemed to me the way most excess debt is destroyed. (I was surprised anyone thought otherwise.) Of course, such debt destruction implies corresponding asset destruction.
    It seems that this country has always come out of panics/depressions/recessions via the creation of unbound money via bankruptcies (debt and asset destruction.) (One possible exception: the 1970’s Great Inflation, but even that was followed by extensive bankruptcies in the 1980’s)
    However, now the government has the power to prevent such asset destruction (with bailouts, etc), and so the corresponding debts are not being wiped out.
    Is it possible to ever have a recovery without the creation of unbound money (from bankruptcies) and the corresponding destruction of assets?
    I noticed today that Steve Waldman has an interesting post on a possible method of creating unbound money without bankruptcies and without creating additional debts, albeit with possible inflation:

    1. Rodger Malcolm Mitchell

      Since 1971, the end of the gold standard, there has been no relationship between federal deficit growth and inflation. See: http://rodgermmitchell.wordpress.com/2010/04/06/more-thoughts-on-inflation/

      The best way to stimulate the economy is by what you might call “helicopter drops:”

      –Eliminate the FICA tax
      –Increase the standard tax deduction substantially each year
      –Increase Social Security benefits
      –Medicare for all

      Each of these would put more money into the pockets of the middle and poor classes, increasing purchases, which would stimulate business, who would hire more people. If inflation ever became a problem, the Fed would do what it always does to fight inflation: Increase interest rates.

      Or we can pursue austerity, thereby guaranteeing a depression.

      Rodger Malcolm Mitchell

    2. Calgacus

      Replied above about how bankruptcies do not create “unbound money” if you mean “NFA”/ base money / government debt. They are not “helicopter drops” – as in the Interfluidity article. Government spending is much preferable to bankruptcy/ debt-deflation to get out of a depression.

    3. F. Beard

      My vote is for more US Federal deficit spending too but let’s direct it to the victims of the banking cartel, the general population – EVERY US adult citizen. That would be simple, just and politically doable. Who could complain about receiving EQUAL bailout checks? As for price inflation, that could be precluded by forbidding horizontal money creation and metering the bailout checks to just replace existing credit as it is paid off. Since the money supply would remain constant then price inflation should not be a serious risk.

  23. don

    I encourage all to view this video on debt, which focuses on Greece and then evolves beyond that to include debt forgiveness. The video interviews many thinkers close to the situation in Greece, Europe . . . critical of the existing finance and debt driven economy.


  24. Fiver

    What seems lacking in this piece, and more so in many comments (particularly the “just inflate it away” MMT voices), is a recognition of how intensely political, as in how completely intertwined POWER is with the properties and dynamics of existing wealth no matter what the monetary system is, that any discussion aiming to be taken seriously must deal with that reality-based, fundamental fact. You might just as well be theorizing about the existence of an infinite number of universes we cannot detect (as is now held by some physicists)by advocating policy “x” according to theory “blah, blah” when, if the real existing alignment means there is no chance whatever of it being realized.

    In other words, there is an assumption that the current elite, the one which actually owns and operates the US (and global) economy is in any way unhappy with the current environment, and will respond by changing politically.

    But what evidence is there at all to believe that is the case given the clear direction of the last 30 years of “Management”? There is no structural reason not to continue evolving this value perversion, this obscenely lopsided, criminogenic-cum-neo-fascist,economy for decades more with increasing poverty and public goods decay while the corporatist elite hum all the day away because they now believe at bottom that they’ve finally rid themselves of their dependence on, therefore interest in or responsibility to/for the multitude who sell their labour.

    And why expect differently when the globalized Corporate State in its Medusa form has immensely more power to maintain its own “order” with means both non-violent and violent than in the now-ancient Depression, or ’70’s for that matter. Consider how remarkably feeble the public response has been given the enormity of damage and pain inflicted. Even the rioting in Greece appears tepid when one considers a broad array of popular responses to less severe crises three or four decades prior throughout the Western world.

    I see no real solution to any of this that is not also a radical solution – even an elemental return to lawfulness is now very difficult to imagine actually taking place given the riot of fraud and corruption that led to the current crisis was so richly rewarded by all arms of Government, not very severely punished.

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