How Richard Vague Discovered Gravity: An Interview + Book Review of A Brief History of Doom: Two Hundred Years of Financial Crises

Yves here. As John Siman describes below, Richard Vague, who has done considerable work on the economic damage done by high levels of private debt, extended it by making an in-depth study of financial crises. Vague documents that private debt growth over time exceeds GDP growth, creating the need for writeoffs. If they don’t come voluntarily or through state-mediated processes like bankruptcy, they come involuntarily, via crises.

By John Siman

 

I do not doubt the existence of God, nor that of money.

On the other hand, I suspect that the learned neoclassical economists of our time, like the learned theologians of yesteryear, who at one point, I am told, aspired to formulate sophisticated mathematical models predictive of the number of angels likely to be found dancing upon the head of any given pin, tend, perhaps by virtue of their  exclusive and recondite training, to produce wizardry that upholds the providential rightness of the status quo and their employers’ exalted status in it. It is unsurprising, then, that they generally lack the time or curiosity to entertain questions about what happens to those billions of wage-earners and debt-slaves who labor and sweat in the earth’s various vineyards.

These learned neoclassical economists uphold dogmas like the Infallibility of the Market and so teach the eschatological inevitability of economic equilibrium: to question such orthodoxy is heresy.  Moreover, it is “the special purview” as Richard Vague observes in this book, of the economic hierophants who are “… in power at the time of a financial crisis to later assert that crises cannot be predicted or prevented and that when a crisis happens, we are in the grip of economic complexities that we can neither foresee nor prevent nor entirely understand” (p. 5).

But what if their arcane doctrines were the economic equivalent of geocentric models of the universe?

What if financial crises could be predicted?

And what if some good-natured but very shrewd down-home guy from Texas rounded up a bunch of diligent young mathematicians and library-science nerds and dared to argue publicly that the official geocentric model was just plain wrong, and then proceeded to compile the data, the facts and figures, to show that the sun does not go around the earth, no, not at all, but that instead there is in nature a quantifiable force of universal gravitation, which can be used to describe — and then predict— the true orbital motions of all celestial bodies? What then?

Well, I would suggest that it is not in the least preposterous for us to try to re-imagine the clarity unveiled by the Copernican and Newtonian Revolutions in order to place in an economic-historical context the magnitude of the accomplishment of Richard Vague, who has discovered with a similar “causal elegance” that we can understand the performance of any modern economy through changes in the ratio of privatedebt to GDP (see his crisis data at https://bankingcrisis.org/) and that private“overlending is the necessary and sufficient explanation for a majority of financial crises…” (p. 44).

In A Brief History of Doom Vague has pulled together a history of all the major financial crises in the largest countries over the last two centuries, presenting detailed and often previously missing financial data on each. “This book,” Vague writes, “… emphasizes in particular the rapid growth in loans — which we refer to as private debt — that [have] preceded [these major financial crises]. It concludes that almost all financial crises follow a simple if ultimately agonizing equation: widespread overlending leads to widespread overcapacity that leads to widespread bad loans and bank (and other lender) failures. This is the essence of a financial crisis” (p. 4).

Vague continues: “The formula is straightforward: overlending leads to overcapacity, which makes those loans bad. It’s never subtle. There have to be far, far too many houses or office buildings or some other ‘something’ built for a crisis to ensue. Overbuilding and overcapacity are at the very heart of a financial crisis because vast overbuilding and overcapacity are possible only through an equally vast amount of overlending. It almost always occurs in a few short years” (p. 4).

Furthermore, Vague writes, “Notably, the government (or public) debt of major, advanced economies has not been much of a factor in financial crises [italics mine] until after the collapse” (p. 5).

So runaway private debt is not only the single outstanding cause of financial crises — like the railroad crisis of 1857 (the first truly global financial crisis), like the Great Depression which began in 1929, like the Great Recession which began in 2008 — a lending boom in the economy is also, if you have the data in hand, as easy to spot, Vague told me when I went to meet him at his office in Philadelphia, as a drunk guy in a boardroom. “[F]inancial crises,” he writes, “across time or place, have measurable prerequisites and a predictive indicator — once we start to pay attention to lending” (p. 5).                                          *               *               *

It certainly does seem incumbent upon all of us then, given Richard Vague’s potentially revolutionary discoveries, to start paying attention to lending, to private lending, to private lending booms and the runaway debt which seems to follow them inevitably: to reconsider the history of economics from the time of François Quesnay and Adam Smith and see for ourselves whether each of the financial crises of the modern era was indeed predictable, and therefore, in theory at least, preventable. This is what I have been doing this summer! After Richard Vague invited me to interview him at Gabriel Investments at the beginning of July, he graciously carried on an extensive email correspondence with me, and so I have edited the exchange that follows to combine, as seems most useful to the reader, both his oral and written replies to questions I asked him over the course of several weeks.

JS: Could the unprecedented economic growth of the last quarter-millennium have been possible without lending booms? — i.e. are lending booms the sine qua non of fantastical economic growth, from the railroads of the 19th century to the China of today?

Richard Vague:I would differentiate between lending growth and lending booms. Lending almost always outpaces GDP growth (lending growth), but it can do so without causing a financial crisis if that lending growth never becomes excessive in a short period (a lending boom). For example, a boom and bust would likely occur if private debt to GDP grew 20% in years 1 through 5 (the boom), which would be followed by a bust/crash in which private debt to GDP shrinks by 8% in years 6 through 10, followed by growth of a more normal 5% in years 11 through 15. Couldn’t, with better oversight, it have instead grown 5% to GDP in each of these three five year periods? In both cases, the result is about 16% growth to GDP over 15 years. But in the second case, you don’t have a financial crisis.

I call it the whole phenomenon “the paradox of debt.” Debt, mainly private debt, is indispensable and necessary in commercial economies. A number of economists have pointed to the difference in the development of India and China over the last 30 or so years as evidence of this—they both started at a similar level and China, through debt, has achieved a much higher growth. The paradox of debt is this: Private debt can be very beneficial—UNLESS it grows too fast or gets too high.

I would add to this I believe one of the most profound aspects of modern economies is the fact that, absent calamity, debt, mainly private debt, always outgrows GDP. It is a constant, irrevocable march that has lasted over 200 years, punctuated only by epoch-making calamities such as the Great Depression. This fact begs for certain new mechanisms, such as oversight mechanisms to make sure it doesn’t grow to fast, and better mechanisms for restructuring excess private debt along the way (swaying the balance more in favor of borrowers).

JS: If the governments of the USA and the UK etc. had understood all along your principle of runaway private debt as the primary cause of financial crises (as physicists had understood all along exactly how gravity causes physical objects to come crashing down), could they have averted or at least mitigated the many financial crises that followed the lending booms? Could they have, in other words, taken the metaphorical punch bowl away, again and again, with such precise financial timing as to have consistently prevented runaway private debt while still having encouraged the huge levels of productive lending necessary for modern economic growth?

Richard Vague: My answer is yes, if sufficient political will could be mustered. The guidelines for determining excessive growth are not hard to establish. And the egregious departures in sound lending practices are not hard to spot. But political will is a tricky thing, and it may be too optimistic to think it could be maintained in the face of the riches a boom always brings.

JS: Does the likelihood of the failure of political entail a need for modern-day jubilees? As I understand the matter, such “jubilees” (= programs of large-scale debt forgiveness) become necessary because the leaders of a political economy, whether out of corruption or greed or incompetence, have failed to avert financial crisis. So after a crash has occurred, it becomes both economically shrewd and morally right to find a way to restructure the debts of the millions of people who face financial disaster. So we should work out the details for modern-day jubilees now so that we will be ready, to the extent that we will fail to get future lending sprees under control, to help the victims of inevitable future financial crises. Do you agree? 

Richard Vague: Absolutely! If we can get anybody to pay attention and agree. Frankly, a big part of “jubilee” could take the form of much more borrower-friendly bankruptcy laws. I’ve long felt that more lenient bankruptcy laws alone would make lenders much more careful to begin with, and make the shedding of unproductive debt easier. It’s all part of what I intended by my earlier phrase “better mechanisms for restructuring excess private debt along the way.” Those mechanisms could, in essence, be a built-in form of jubilee.

JS: But if, on the other hand, good and farsighted leaders spot — and then stop — runaway debt and excessive growth in a timely fashion, there would be, ideally, no crashes and therefore no need for jubilees. Do you agree?

Richard Vague: Not quite. Here’s the catch. Even if the growth in private debt to GDP is smooth and thus financial crises are avoided, the fact remains that in developed economies, total debt to GDP, which is typically largely private debt, marches ever higher, except when there are catastrophic events. (The most studied catastrophic event, the Great Depression, was at its heart a massive deleveraging event). The exceptions are few, far between, and temporary. So economies inevitably and inexorably accumulate an excessive burden of debt, which is another way of saying highly leveraged businesses and households—and that eventually bogs an economy down.

It’s really a two-fold problem. Private debt is a problem if it grows too fast or gets too high. And while private debt usually gets too high because of a period of rampant lending growth, it can and will inevitably get there even without such a period. Preventing short bursts of excessive loan growth does not mean that loan growth won’t inevitably creep to levels that are so high that they overburden the private sector and start adversely impacting GDP growth.

Which brings us back to the need for structural jubilee discussed above.

JS: You have got me thinking about what economics — political economy — was originally supposed to be: a liberation from feudalism, from greedy rentiers and so the freedom for the common man to enjoy the fruits of his own labor and for the enterprising man to undertake great business projects. We should tax only unearnedincome! — that’s what the classical economists taught, right? So my deep worry: Are our academic neoclassical economists really latter-day medieval theologians, using arcane learning to uphold the privileges —specifically, to protect the unearned income — of a corrupt elite? After two or three centuries is the Enlightenment over as we enter a new feudalism? (It seems to me that we are already in a new Gilded Age.) This to me would justify your publisher’s enthusiasm for the word Doomin your title.

Richard Vague: Great question. I think you are on to something—so I’ll give you a partial yes. I think a subset of economists is very definitely under the sway of big business (though as in most disciplines, most economists simply adhere to the predominant theories.) For the most part, I don’t view this as inherently nefarious. Most businesses act in their own interests (I’m lumping the “elite” in with big business), and since they have the most resources, there is always a lot of money moving in support of those interests.

A large cohort of big businesses benefit from neoclassical economic theory—the theory that markets are efficient and best left alone. Greenspan’s work for the financial industry is a pronounced example of this, such as when he was hired by Charles Keating to recruit senators to intervene with regulators on his behalf, and when he warned Brooksley Born not to increase regulation of derivatives. During most of my business career, all this was simply taken as a given, and we lauded assertive theorists like Milton Friedman who made that case. My good fortune was being able to step away from business and focus on this virtually full time for the last decade—providing me the opportunity to deeply examine these beliefs.

And it was not easy. For example, in 2009, when I started to research the private debt buildup in the 1920s to see if it contributed to the crash, I thought it would take a day or two. Instead it took months—and years. In some respects I still haven’t finished the job.

For me, the two big sins of orthodox economists are faith in markets and the omission of private debt as a central, crucial determinant of economic outcomes. Those two sins come crashing together in financial crises. Since they have come crashing together in a financial crisis over forty times in world’s six largest countries over the past two hundred years, I have almost come to the opposite conclusion—at least for financial markets. Left to their own devices, financial markets almost always lead to excess. And that is almost always a function of excessive lending.

A brief digression: A couple of years ago, I was lamenting the fact that the U.S. did not have an industrial policy of the sort China now has and the U.S. itself has had in the past in efforts like the construction of railroads and canals. I was lamenting the lack of significantly stepped up government support for areas like 5G, high tech manufacturing, genetic engineering, and artificial intelligence, and expressed fear that China would surpass us in those areas as Japan had in automobiles in the 1980s. A friend quickly corrected me, saying that the U.S. most definitely had an industrial policy, even though it was largely unstated: namely, support for the financial and real estate sectors. That support is manifested in tax laws, regulation, and a host of other ways.

A light bulb went off, since his statement was in lockstep with what I had been finding in my research. Bit by bit, by hook and by crook, there has been a disproportionate accumulation of policy support for these two industries—the very two industries I had come to view as the “swing sectors” in the economy, the most frequent source of booms and busts. And they are wed together—it is increased leverage that directly results in increased asset values. And orthodox economics, both by commission and omission, has facilitated this.

And that gets directly back to your question. Through government policies and actions, in symbiosis with economists and these sectors, we find ourselves at this point. Asset values (which is akin to saying unearned income) are increasing faster than salaries, which brings greater inequality, which has quickly become one of the defining issues of our age.

As to your “medieval theologian” comparison—I kind of like that, though the economists I’ve dealt with are by and large very good folks (as is the case in any industry). Nevertheless, when I read a highly detailed economic paper from a neoclassical economist, replete with dense mathematical formulas, I’m reminded of blood-letting in the medical profession in the 18th century, and the pre-Copernican belief that the planets orbited the earth. In both cases, there were very learned tomes, expounding in great detail on which vein to let for which disease, or the precise route of Mars’s orbit around the earth. Lengthy, impressively detailed, exact, solemn-toned, and wildly incorrect.

That’s my view of neoclassical economics.

 JS: A little more about that word Doom. You told me it was your publisher’s decision to put it in the title, not your own. Was it maybe a little alarmist/dishonest for the publisher to do that?

Richard Vague: Perhaps! Like I said, my bright idea was to use Bagehot’s phrase and title it A Failure of Credit by Intrinsic Defect. But alas, the one thing the publisher reserved for themselves was selecting the title. (That’s typically been true of articles I’ve published as well!). However, the book is a HISTORY of doom, not a forecast, and I think many of the crises I wrote about had a devastating impact on thousands and sometimes millions of lives—often including death as was the case for so many in the Great Depression—and lasted for years and years.

JS: So what is in store for us in the USA? I just read that our economy has grown for 121 — or is it 122? — consecutive months. This is supposed to be the longest economic expansion in American history. To me this news is just surreal. Back in October of last year, for example, I saw David Stockman give a presentation in NYC, and he was sounding all sorts of alarms about 111 consecutive months of growth. But Stockman ended up seeming like the boy who cried wolf. What is wrong with this picture? 

Richard Vague: I’ve never put much stock into “length of expansion” type analysis because it ignores so many factors, especially differences in the conditions at the beginning of the expansion. In this case, 2008 was the second biggest economic collapse in the last hundred years, so circumstances were drastically different at the beginning of our current expansion versus all those it is compared against.

I prefer to consider the whole set of circumstances in a given period, and forecast based on those—and ignore the inherently specious metric of length of expansion.

Now that I’ve finished the book, my team and I are now refocusing on the present instead of the distant past— and we do plan on developing a set of ongoing forecasts for the top twenty countries. We haven’t completed our analysis yet, but from our work so far it is reasonable to expect a U.S. slowdown or recession in the next year or two. If so it will be a regular slowdown or recession, of the type we have experienced many times in my life, but NOT of the type experienced in 2008. My concern for more significant near-term economic trouble relates mainly to Asia.

JS: I think that’s basically good news — because you have given us a metric so we know we don’t have to panic and can take a step back and listen to the doomsters’ prophecies with a grain of salt. On the other hand, in the long run, to paraphrase Keynes, we are all doomed!

Print Friendly, PDF & Email

35 comments

  1. Sound of the Suburbs

    What was the problem with Classical Economics?

    The Classical Economists soon noticed those at the top don’t do anything economically productive, but maintained themselves in luxury and leisure through the hard work of everyone else.

    They couldn’t miss it as the European aristocracy never did a stroke of real work.

    “The labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.” Adam Smith

    Economics was a big problem for the powerful vested interests of the 19th century and it was always far too dangerous to be allowed to reveal the truth about the economy.

    How can we protect those powerful vested interests at the top of society?

    The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and they conflated “land” with “capital”.

    They took the focus off the cost of living that had been so important to the Classical Economists to hide the effects of rentier activity in the economy.

    The landowners, landlords and usurers were now just productive members of society again.

    William White (BIS, OECD) talks about how economics really changed over one hundred years ago as classical economics was replaced by neoclassical economics.

    https://www.youtube.com/watch?v=g6iXBQ33pBo&t=2485s

    He thinks we have been on the wrong path for one hundred years.

    This was the old switcheroo.

    Economics, the time line:

    Classical economics – observations and deductions from the world of small state, unregulated capitalism around them

    Neoclassical economics – Where did that come from?

    Keynesian economics – observations, deductions and fixes for the problems of neoclassical economics

    Neoclassical economics – Why is that back?

    We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics.

    On bringing it back again, we had lost everything that had been learned in the 1930s and 1940s, by which time it had already demonstrated its flaws.

    Reply
    1. Sound of the Suburbs

      In the second half of the 20th century, the Mont Pelerin society developed the neoliberal ideology from neoclassical economics, under the impression that capitalism was a self-stabilising system that doesn’t need regulation.

      Their expectations were rather different from the small state, unregulated capitalism that had been observed and documented by the Classical Economists in the 19th Century.

      “The interest of the landlords is always opposed to the interest of every other class in the community” Ricardo 1815 / Classical Economist

      “But the rate of profit does not, like rent and wages, rise with the prosperity and fall with the declension of the society. On the contrary, it is naturally low in rich and high in poor countries, and it is always highest in the countries which are going fastest to ruin.” Adam Smith / Classical Economist

      Their belief in the markets came from neoclassical economics, which doesn’t consider the elements that ensures markets don’t reach stable equilibriums; debt and the money creation of bank loans.

      Richard Vague has studied many of those 19th century financial crises in his book “A Brief History of Doom” and charts the rollercoaster progress of 19th century small state, unregulated capitalism.

      A self-stabilising system it is not.

      Reply
  2. Sound of the Suburbs

    Why do policymakers think debt isn’t a problem?

    Ben Bernanke is famous for his study of the Great Depression and here it is discussed in the Wall Street Journal.

    https://www.wsj.com/articles/SB113392265577715881

    “Theoretically, neither deflation nor inflation ought to affect long-run growth or employment. After a while, people and businesses get used to changing prices. If prices fall, eventually so will wages, and the impact on profits, employment and purchasing power will be neutral. Borrowers suffer during deflation because their debts are fixed in value, but creditors benefit because the dollars they get back will buy more. For the economy as a whole, deflation ought to be a wash.”

    What has Ben Bernanke got wrong?
    He thinks banks are financial intermediaries.

    Our knowledge of privately created money has been going backwards since 1856.

    Credit creation theory -> fractional reserve theory -> financial intermediation theory

    “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner
    http://www.sciencedirect.com/science/article/pii/S1057521915001477

    It went backwards between Milton Freidman and Ben Bernanke.

    Milton Freidman used fractional reserve theory, which was better than financial intermediation theory, but still wrong.

    This is why his Monetarism didn’t work.

    He though banks lending and the moony supply were controlled by central bank reserves, but they aren’t.

    Reply
  3. Brooklin Bridge

    I like the title. Also, this is one of those cases where the interviewer brings quite a lot to the table as well as the author. An excellent introduction and a well carried/developed near metaphor as in, nail on the is a head.

    Reply
  4. Daniel Romig

    That was a logical thesis to investigate. It seems strange that it has remained out of sight for so long until Mr. Vague’s research and analysis.

    The student debt in the USA is currently at $1.5 trillion. That is about 7% of GDP – and growing. I wonder how this may affect the economy in the US going forward.

    As Yogi Berra reminds us, “You can observe a lot by watching.”

    Thank you for observing, Mr. Vague.

    Reply
    1. Samuel Conner

      I don’t think it has been “out of sight” so much as “in sight, but ignored”. The relation of private debt to economic downturns has been noticed by others. Irving Fisher in the 20th Century, Steve Keen today come to mind.

      The connection between “over-capacity” and “inability to service” may be new.

      I would like to see analysis like this subjected to peer review; I think that there must be at least a few journals sympathetic to heterodox approaches to economics that would give a new synthesis like this a fair review process. Going “directly to the people” via popular writing raises a small concern in my mind.

      Reply
      1. Telee

        Steve Keen mathematized the Minsky Hypothesis. The results could be displayed in three dimensions. The graphs showed that when private debt was included in the calculations, the recession in 2007 was accurately predicted. Interestingly, there is a period of moderation which is followed by a rapid crash. During this period of moderation Bernanke was saying that all the indicators showed that the economy was in good shape. Of course he didn’t consider private debt.

        Reply
  5. Steve H.

    Some points of discussion, I’m not mad if disproven:

    : Is the 2.5 Quadrillion dollars in derivatives considered debt? Or is the ability to create derivatives what drives the excess lending?

    : Is the ability to generate excess debt a function of the fractional reserve system, and thus mostly a benefit for robbers who own banks? The Templars couldn’t generate excess debt, they needed gold on hand to pay the notes, but wasn’t there increased trade from their system, and thus general benefit?

    Reply
    1. vlade

      No.
      The stupid sums on derivatives are notional principals, and usually grossed up. If I have a swap with 10m notional with you, it could be worth anything (and most likely the only debt exposure is any margin-call amount, which would be on 10m swap trivial), but would add 20m to that dumb number.

      I can easily enough generate almost any number for the notional principal w/o increasing the risk to the system (for example by creating any number of equal-but-opposite trades between two parties which have a netting agreement)

      I can equally (a bit harder, as it requires some thinking) do a few “well placed” derivatives with notionals in say few billions (but nicely levered) that can sink the whole system.

      No.
      In a full reserve system there’s no debt, hence no question of “excess debt”. As an aside, “fractional reserve system is a myth”. Bank lending is constrained only by capital, not by any reserves (cf number of banking systems that don’t even have any rules on reserves).

      Reply
  6. Thorstein's Ghost

    I have not read Mr. Vague’s book. However, I am curious as to whether he adds anything to the work of Steve Keen, who predicted the 2007-09 financial crisis, and Hyman Minsky. See, for example, Keen’s “Can We Avoid Another Financial Crisis?” (2017).

    Reply
    1. Adam Eran

      Looks like a nice validation of Keen’s (and Michael Hudson’s) work. That’s fine with me, although a nod in their direction certainly looks warranted since private debt was what led Keen to predict the Great Recession (and win the Revere Prize for doing so).

      Hudson’s work on ancient debt jubilees exactly parallels Vague’s.

      Reply
  7. vlade

    I can’t remember where I wrote it before.

    Debt is the only working time machine mankind invented. But the conservation-over-time still holds.

    Technically, for any individual, over their lifetime integral of (income + debt destruction) >= integral(expenses+ debt creation) [I’m ignoring cases where debt can be inherited]

    So are we heading for a crisis? Right now I(income + debt destruction) < I(expenses + debt creation) for a large number of indivduals over their lifetime. So unless their income raises dramatically (expenses for them are often way less discretionary), yes we are, as the debt destruction will have to compensate.

    But to guess the timing – well, that very much depends on the aggregate of those individuals.A trigger that would further reduce income or increase expense (across the population) would make it more probable. A small but not sufficient increase in income (across the population) would postpone it.

    Reply
  8. John

    “The student debt in the USA is currently at $1.5 trillion.”
    Thanks to some skillful intervention with the somnolent Congress this debt cannot be discharged in bankruptcy. That seems to fly in the face of Mr. Vague’s conclusions while redounding to the benefit of the rentier financial class.

    Reply
    1. Carla

      @ John — Please make everyone you know aware that Democrat candidate for president Joe Biden holds a great deal of responsibility for student debt not being dischargeable in bankruptcy. This is only one of his high crimes and misdemeanors. Don’t let anyone forget!

      Reply
      1. Telee

        Biden also strongly supported the Iraq War preventing any opposition views to testify in his committee. Also a strong supporter of NAFTA anf the TTTP. ( Trump will hammer on this if he runs against Biden.) His cooperation with southern segregationists resulted in the unequal drug penalties that fed the prison industrial complex he supported. He had mutiple committee meeting to rail against black crime when it was expedient. He threw Anita Hill under the bus and thus aided in putting Clarence Thomas on the Supreme Court. He says he’s a union man as he goes to Comcast, a union buster, for financial aid. He is known as a representative working for the credit card companies. etc. What’s not to like if you’re a corporate democrat?

        Reply
    2. Steve Ruis

      Duh. That was exactly the purpose. That bankruptcy exempt law for student loans was passed based upon falsehoods. Its actual purpose was to enslave the college educated youth (make them debt slaves) so that they don’t go on a rampage like they did in the 1960’s and 70’s vis-a-vis the Vietnam War.

      Reply
  9. John Merryman.

    I think part of the problem is that we treat money as a store of value, as well as a medium of exchange.
    As a medium, it is a contract, with one side an asset and the other a debt, so in order to store the asset, similar amounts of debt have to be created.
    This results in a centripedial effect, as positive feedback draws the asset to the center of the system, while negative feedback pushes the debt to the edges.
    Since money and finance serve as the value circulation mechanism, this is like the heart telling the hands and feet to go suck dirt, because they don’t get any blood.
    A medium and a store are distinct functions. Blood is a medium, fat is a store. Roads are a medium, parking lots are a store.
    As a medium, we own money like we own the section of road we are using, or the beer passing through our bodies. It’s functionality is in its fungibility.
    If we store value in healthy communities, we wouldn’t need banks to mediate every relationship.
    The irony of our individualistic culture, is it leaves us in our atomized cocoons, allowing more effective top down control and a parasitic feedback mechanism. Sort of like The Matrix.

    Reply
    1. susan the other`

      good description of the way an ME and a SoV work against each other; I can never think through what I’m sure is this very contradiction in terms. thanks.

      Reply
  10. Bobby Gladd

    Sound like an interesting book. Just ordered it. I am reminded of “This Time is Different: 700 years of financial folly.”

    I worked in subprime risk modeling & mgmt during 2000 – 2005. We made successive record profits every year of my tenure.

    I quit to go back to health care analytics. It was too slimy. I knew it was not gonna end well.

    Reply
  11. Chauncey Gardiner

    Appears to build on the work of economists Hyman Minsky and Steve Keen. Not as concerned with developments in “Asia” (China), as there seems to be a policy willingness there to substitute state money for private sector debt, and to allow currency depreciation as an adjustment mechanism for the implicit debt writedowns. The policy also plays into China’s exports-driven macro model. Similar to the US government and central bank “foaming the runway” for the banks and large corporations in the aftermath of the 2008 financial crisis.

    Contemplating the role of compound interest in private sector debt growth in a period of low economic growth. Recent rapid growth of leveraged loans and junk bonds to fund corporate stock buybacks, negative real interest rates to push up financial asset and real estate prices/collateral values, and a lax regulatory environment appear to support an intentional policy of excessive growth in private sector debt. Whether the GFC is entirely in the rearview mirror or is till unfolding in terms of ultimately leading to systemic change also remains open IMO, although neoliberal policies remain firmly entrenched at this time.

    Reply
  12. Summer

    The part about the financial sector, including housing, being the main components of US “industrial policy” shows the country as whole isn’t taking the first advice financial advisors usually give for stability: DIVERSIFY…..

    And yet again…here is another book/article on the US economy that says nothing about defense spending.

    Reply
    1. Synoia

      US Defense spending is not debt. The MMT discussions state that clearly.

      One test for “debt” is a simple question: Who can demand the debt be paid?

      In the case of USG spending, the only party who could “call the debt” is the USG, and a single party cannot be both debtor and creditor on a debt, that is: cannot owe oneself money.

      Reply
      1. Adam Eran

        Well…all government spending is debt if it spends currency. The dollars are debt. Your checking account is debt too…to the bank. When you write a check, you’re assigning a portion of the bank’s debt to the payee. Dollars are just checks made out to “cash” in fixed amounts. They appear in the Fed’s books a liability, too.

        What are we owed for a dollar? Answer: relief from a dollar’s worth of (inevitable) tax liability.

        Back to the original post: It’s even ambiguous whether defense spending is consumption. After all, the internet is a product of DARPA (the “D” is for “Defense”). Marianna Mazzucato has a nice TED talk about government as innovator.

        Reply
  13. tegnost

    ” In both cases, the result is about 16% growth to GDP over 15 years. But in the second case, you don’t have a financial crisis.”

    also in the second case there are not foreclosures and repossessions whereby concentrated financial power confiscates what they sold so they can sell it again…by the way where does that activity (repos and foreclosures) go in the calculation of GDP

    Reply
  14. Susan the other`

    Gosh. Where has Mr. Vague been? If this isn’t the understatement of the century, I don’t know what is. Even dear old Ordoliberal Wolfgang Schaeuble said right up front: “We are overbanked.” Steve Keen is still fighting with Krugman about the significance of private debt. And to imply that we have an unspoken “industrial policy” that uses real estate to get us out of a slow patch begs the question. It is not industrial policy, it is the blatant chickenshit avoidance of industrial policy. But never mind all that, the sea change Mr. Vague is avoiding is that industrial manufacturing is being drastically trimmed back, limited, maybe even rationed by country for all we know. To forgive debts won’t really cut it. Not that we shouldn’t do it. We should simply because debt service is nearly impossible these days. We need to have massive fiscal infusions; money spent wisely to improve civilization and save the environment. Please Mr. Vague. You’re more like Mr. Vacuous.

    Reply
    1. Another Amateur Economist

      No. It is the “Destruction of Industry Policy.” Why make and build, when institutionalized theft, graft, and fraud have become more profitable?

      Reply
  15. p. Fitzsimon

    ” ……….industrial policy, even though it was largely unstated: namely, support for the financial and real estate sectors”
    I would add the agricultural sector to government supported industry.

    Reply
  16. Generalfeldmarschall von Hindenburg

    The brother needs to have a look a Portland, Oregon. Overcapacity, a housing bubble and a homeless crisis all at once. It’s bound to crash. Yet there’re so many boomers retiring from the first wave of the Tech Era (the folks whose awesome ideas and disruption gave us Dot-Bomb. So they’ve run up the price of beer in a town famous for craft brewing to unaffordability. They never seem to pay the price.

    Reply
  17. Tim

    Bush Junior tightened the Bankruptcy laws in his final term…before the great recession. I still don’t think that was coincidence.

    The smart people with all the money DO know this is how economics works, and execute their strategies on their behalf accordingly. The rest of us, get the idiot’s guide to the galaxy to work with.

    Reply
  18. none

    “Debt, the first 5000 years” by David Graeber is on my list of probably-good books that I’m unlikely to get around to reading. Is that similar to this one?

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *