Philip Pilkington: Debt, public or private?: The necessity of debt for economic growth

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By Philip Pilkington. Journalist, writer, economic anti-moralist and aficionado of political theatre

‘Tis not due yet; I would be loath to pay him before
his day. What need I be so forward with him that
calls not on me? – Falstaff, ‘Henry VII’

The Anxieties of Government and Debt

Apart from debt, there is perhaps one other economic phenomenon that generates exceptionally large amounts of emotive nonsense both on the internet and in real life – and that is government. So it’s quite unsurprising that when government debt is the discussion of the day, passions flare, accusations are hurled and the coming apocalypse is invoked.

It would be interesting to undertake a psychological study of modern man’s aversion to government and to debt. If I were to guess I would say that many people tend to associate government with authority and debt with obligation. Authority and obligation – surely in our era of selfish hedonism no other potential restraints are so terrifying to so many. These phenomena intrude rudely on one of our most cherished contemporary ideological myths: individualism. More specifically, that outlandish individualism conjured up by marketing men to flog their wares and crystallised in novels and narratives written by lonely and isolated individuals like Ayn Rand. It is, of course, a fantasy individualism; one that few truly adhere to in their day-to-day lives – but it is, like the religions of days gone by, an important determinate in the messages people choose to accept and those they choose to reject.

To put the questions of individualism and of liberty aside though, from an economic point-of-view debt is inevitable. It always has been. Even in the most primitive economies debt is absolutely necessary for activity to expand beyond simple barter. In our advanced state-capitalist economies, even the idea that debt could be done away with altogether is beyond absurd.

The only real question that we can ask is: who should hold the debt? Should government hold the debt, or should the private-sector?

Consider the nonsense that has sprung up around the Eurozone crisis. Whenever the Eurocrisis comes up in discussion some smart-alec always chimes in claiming that at its roots are the nefarious public sector workers of the Eurozone periphery; profligate scum who have had access to the teat of government for too long. “Those lousy moochers don’t do anything,” your petit-bourgeois friend will say. “They just slack off, engorging themselves as government debt amasses skyward.”

Such a narrative is quite incredible – an almost perfect sleight of hand. After all, haven’t a number of countries just experienced a massive economic contraction due to private sector debt meltdowns? And aren’t some of these countries in the Eurozone? If this is the case how on earth can public sector workers be to blame for… well… everything?

Sectoral Balances – A Primer

Before we take a closer look at this – for there is an irony embedded in this narrative that is truly fantastic – we need to first understand how debt is incurred by various institutions in society. This is called the ‘Sectoral Financial Balances of Aggregate Demand’ model and I know of no clearer demonstration the article ‘Sectoral Financial Balances of Aggregate Demand – Revised’ by Scott Fullwiler over at New Economics Perspectives.

I must apologise to Scott in advance for the thorough butchery I am about to subject his argument to. I do this only so that it will be easier to follow my argument in what follows.

What I will now present is the most simplified and boiled down version of Mr. Fullwiler’s arguments I can present. I strongly suggest that readers interested in the real mechanics of the argument refer to the original article as linked to above.

The basic argument of the sectoral balances approach is that there are three distinct sectors which make up a modern economy: the government sector; the private sector and the external sector.
First we have the government sector. The government sector is made up of all those institutions that are funded by government spending (e.g. the civil service, social welfare etc.). The government sector is unique insofar as it is the only sector that can issue ‘new money’ on demand. This, of course, is because the government sector has control over what passes for legal currency. In the old days we might have said that the government has control over the printing press – today it would be more apt to say that the government has control over the central bank computer system.

Then we have the external sector. The external sector is made up of all the goods that flow across national borders. The external sector then is made up of imports and exports. The external sector can either be in a deficit or a surplus. If there are more exports flowing out of the country than there are imports flowing in, the external sector is referred to as being in ‘surplus’ (if the opposite is the case, it is referred to as being in ‘deficit’). The aggregate of these flows is referred to as a country’s ‘current account’. We usually hear about ‘trade surpluses’ and ‘trade deficits’ in the media (more often the latter as it makes for a better story). These are the same thing.

Finally we have the private sector. The private sector is made up of all those institutions that are not directly controlled and funded by the government (e.g. businesses, households etc.). This sector relies on the other sectors for new cash inflows as it cannot issue new currency and so must accrue it through transactions with the other two sectors. It can also, as we will see, borrow in order to spend money.

Now the basic premise behind the sectoral balances approach is that surpluses and deficits across the sectors of a single national economy must all net to zero. This is quite nicely illustrated in the following chart from Fullwiler’s piece, which tracks the private and public sectors in the US for around half a century.

Note that up until around 1980 private sector saving – that is, private sector surpluses – were essentially ‘cancelled out’ by government spending – that is, public sector deficits. This began to diverge because the current account – that is, the trade balance – began to fall into deficit in the Reagan era, which generally resulted in higher public sector deficits and larger amounts of private debt.

The key point here is that when the private sector decided to save, all else being equal, the government had to offset this by running deficits. To put this another way – and in keeping with our previous discussion – when the private sector was less interested in taking on debt, the government had to step in and do so instead.

Similarly, when the public sector wished to run a budget surplus – as they did in the Clinton years – the private sector had to take on an awful lot more debt in order for GDP to continue growing.

(As an aside, it should be noted that it’s not just the MMTers that are emphasising the importance of the sectoral balances approach. A blogger over at the Financial Times voted a similar graph the most important of the year in 2010 – scroll down in the comments section and you’ll see Martin Wolf agree. The author however, who otherwise gets it right, doesn’t seem to understand how the US government funds its deficits).

Anyway, back to our presentation. Fullwiler provides an excellent graph showing that the level of debt by each sector was a necessary consequence of the US ‘New Economy’ expansion that took place during the 1990s. I’ve altered the graph significantly and greatly oversimplified the dynamics in order to make my point as clearly as possible. Once again, for those who wish to understand the true dynamics of this, read the original article.

So, rewind back to the mid-90s. Think ‘Friends’, Windows 95 and Britpop. We start at point (A). As we can see from the diagram, there is a government deficit together with a non-government surplus. The non-government sector – that is, the private sector and the external sector – is saving. For this to be possible the government must spend. So in order for the non-government sector to save, the government have to ratchet up their debt-load.

The economy moves to point (B) when the Asian crisis hits in 1997. The weakened Asian economies led to a lowered US trade balance which could have – were nothing else to counteract it – led to a decrease in overall GDP growth. On the graph we see this represented by point (B) being further down the blue ‘GDP arrow’ than point (A).

At around the same time as the Asian crisis was working itself out, the Clinton administration decided that government spending should be cut. This move brought the economy to point (C) which is even further down the blue ‘GDP arrow’ than point (B). By weakening the total amount of spending within the economy, this should have produced a drag on overall GDP growth.
But instead the non-government moved into deficit – which is what we see at point (D). Point (D), as we can see, is even further up the ‘GDP arrow’ than point (A), where we started. This indicates that GDP was growing at a fairly rapid pace.

Why did this happen? Simple – because the private sector was willing to pile on debt. This was the 90s, after all; the era of private sector leverage. And leverage it did. Of course, we now know the long-term effect of such a move: stock bubble, housing bubble – crash.

So, what’s the point to all this? Well, unless a country is producing significant amounts of exports and importing little (i.e. unless a country is running a large trade surplus), in order for the government to run surpluses, the private sector must go into debt.

If, on the other hand, policymakers want to ensure that the private sector doesn’t leverage itself up to the gills – and create the asset bubbles that generally follow such leveraging – then, all else being equal, the government must run a deficit.

And so we come back to the key point: debt is necessary. It’s simply a case of who is going to hold it.

Commentators then simply can’t have it both ways. Given that a country is not usually running a massive trade surplus, if commentators don’t like private debt and its fallout, they must support government deficits. If, on the other hand, they are strongly averse to government deficits – as so many are at the moment – then they must be implicitly advocating a highly leveraged private sector. If they like neither of these and still continue to comment, then they’re cranks – plain and simple – and should be politely ignored and perhaps, if they continue to wail, given a soother.

Debt Island

Now that we’ve established all of that, let’s turn our attention to Ireland – purr Oyer-land.
So, yeah, as we were saying at the beginning, it’s an internet/dinner table commonplace that the Eurozone’s woes are all caused by vile public sector workers taking on too much nasty debt.

“That,” your angry interlocutor will tell you as he kicks a prole, “is why the government debts are so high in the PIIGS countries.” That is also why the crisis can be solved by kicking as many proles as possible – after all, it’s their fault we’re in this mess and even if a good prole-kicking doesn’t solve the crisis, it’s almost certainly in order.

The problem with this argument is simple: it’s not true – not even remotely. Some of the periphery countries, like Greece, did indeed load up on public debt. But others, like Ireland, did no such thing.

The Irish government actually ran surpluses for most of the ‘good years’ of economic growth, as the following chart shows.

As we can see, it was only around 2008 when the government began running in the red. Why? Well, everyone knows the story – even if they forget it when it’s convenient. The banks melted down due to overextending their leverage and got taken onto the government balance sheets. This was exacerbated by a sharp recession and a rise in unemployment which forced the government to run larger deficits (i.e. to pick up the tab for unemployment claims and the like – ‘automatic stabalisers’ to speak economese).

The key point here is that because the Irish government ran surpluses while the economy grew at a fairly substantial rate, this caused the private sector to become highly leveraged. (We won’t go into the Irish current account, which has been up and down. In recent years it has swayed toward consumption rather than production; deficits rather than surpluses – hence requiring even greater private sector borrowing).

Just like the US in the 90s, keeping the budget balanced meant that the private sector had to take on an inordinate level of debt. We now know that Ireland has the highest level of private sector debt in Europe. So it’s not really hugely surprising that the whole thing melted down.
So, where’s that beautiful irony I spoke of earlier? Right here: Much of the debt ended up on the government balance sheets anyway!

The very attempt to ensure that the government was austere during the boom years led to a private debt load that proved so great that the government eventually had to step in and take it on. The government and the international agencies were so concerned about running budget surpluses that they didn’t think for a moment that the amassing private sector debt would largely fall on the government’s shoulders. But fall it did.

This should raise serious questions about the other Eurozone countries; I mean of course those whose main problem today is government debt pure and simple. If they hadn’t taken on this government debt but had wished to grow at a decent pace would the private sector have simply stepped in to fill the gap? And, more importantly, would much of this private debt have been taken onto the government balance sheet anyway?

The reality is that the Ireland could not have experienced high levels of growth and low rates of unemployment had it not been for the private sector taking on huge amounts of debt. Because the government was unwilling to take on debt at the time, the private sector had to do so. The end result was – from an accounting point-of-view – much the same; the government ended up with a load of debt on its books.

The only alternative to these two models would have been a miraculously large trade surplus. Lacking some sort of wizard who could magic this wonder-economy out of thin air, the only other option would have been a low growth economy; and this would have been inconceivable during the boom years.

Anxieties Overcome

And so, we’re back to where we started: the necessity of debt. Debt is absolutely necessary for a modern economy to grow and function. It’s simply a question of where this debt should come from. Personally, I favour government debt – as long as it’s issued by a central bank and not subject to the whims of the bond vigilantes, as is the case with the Eurozone countries today. Government debt is cheaper, more sustainable (there shouldn’t be a risk of default as long as a central bank is willing to facilitate it indefinitely) and less volatile.

My preferences aside, the key point is that there is simply no avoiding debt accumulation in a modern economy. Those who moan about debt indeterminably – and they are legion – need to be called out on this until the point is driven home to the majority: there is no getting around debt.
If folks complain about government debt they need to be asked if they favour private sector debt – and all the implications that may arise there from; warts, bubbles and all. If they don’t like private debt either they need to be asked if they favour economic stagnation plain and simple.

These are two simple and straightforward questions. But if policymakers were asked them every time they made a statement regarding government spending, what a difference they might make.

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194 comments

    1. Philip Pilkington

      Ha! I drive by them all the time. I’ll tell you what… I’ll give you €50 for one of them. No more, no less.

  1. Al Bundy

    Isn’t the author making wrong deductions? First explaining, that for the government sector to run a surplus, the private sector must be running a deficit (let’s assume external sector is 0) – and then saying that without additional leverage by the private sector there wouldn’t have been GDP growth? As much as I understand of economics, the GDP growth could be achieved without additional debt – all one needs is productivity and/or work-force growth. US’ GDP would have grown since 80’s anyway – only without additional debt levels, the growth rate would have been closer to productivity-work force growth rate. The same applies to the Ireland example as well – the private sector did not have to become so leveraged as they did for just to keep the gov-private-external sector balanced.
    One does not need to increase government debt to decrease private debt – in extreme private debt could be shrunk to 0 through bankruptcies without any impact on government debt level.

    1. jayackroyd

      The author’s reply to that argument is in the post:

      The only alternative to these two models would have been a miraculously large trade surplus. Lacking some sort of wizard who could magic this wonder-economy out of thin air, the only other option would have been a low growth economy; and this would have been inconceivable during the boom years

      Debt and leverage are essential to both capitalism, and growth. If you force entrepreneurs to operate on a cash basis you hamstring them. See The Mystery of Capital by Hernando de Soto. He also points out that a private sector system of reliable debt/credit cannot exist without a well maintained cadastre, the chain of ownership of real property. Worth noting that one side effect of driving the aughts growth through hyperleveraging the real property market also entailed damaging the cadastre, through MERS and other mechanisms that circumvented the time and expense of validating deed transfers for securitized mortgages.

      1. tts

        Yes he makes a good argument for having some debt in the economy but doesn’t address the reality we (the US) live in at all or at least some of the PIIGS (ie. Greece).

        That reality is that the gov. deficit spent during the supposed good times, and by quite a bit, while the private sector also got in way over its head in debt with the housing and credit bubble that financed it. Then our government (US, but to some extent this is true for the PIIGS as well) doubled down on stupid and bailed out the fraudulent debt the banks had, which privatized profits and socialized losses and surprise surprise the economy still has not recovered here or in the EU. Keynesian economics only works out in a recession if the gov. has some sort “savings”, in the form of excess tax income or high rates to cut, to work with.

        There is such a thing as too much debt, even for governments that can issue debt in their own currency, and the consequences can be just as bad as doing nothing at all.

        1. Philip Pilkington

          “There is such a thing as too much debt, even for governments that can issue debt in their own currency, and the consequences can be just as bad as doing nothing at all.”

          I fail to see those consequences. Could you please tell me what they are?

          1. Skippy

            Dear Sir Pilkington, games have rules, did we misplace the copy?

            Skippy…with out rules there is no game, but, advantage unrestricted.

          2. tts

            Depends on how far they’re (the US government) willing to go exactly, best case scenario IMO is decade plus stagflation while the nation’s infrastructure and standard of living goes into decline. Think something like the rust belt but extending out all across the country outside of some of the major cities.

            If they go full retard and try to print out trillions or tens of trillions plus per year then hyperinflation cannot be ruled out.

          3. Philip Pilkington

            Stagflation cannot be caused by government deficits. It’s usually caused by wage-price spirals which are institutional.

            Hyperinflation, it is now recognised, cannot be caused by government debt issuance either (as there has to be a demand for funds). There’s extensive work done on this — here’s some of it:

            http://bilbo.economicoutlook.net/blog/?p=3773

            http://www.agorafinancial.com/richebachersociety/pdfs/RCH_0609.pdf (scroll down to the ‘Hyperinflation’ section)

            And here’s a video presentation summing up the two above studies by Marshall Auerback:

            http://bit.ly/9ltzpF

          4. tts

            And just to be clear here, in the article are you insinuating that you can reap all the benefits of Keynesian economics, without you know, actually doing Keynesian economics? Or are you really going to argue that there is no such thing as too much debt in the real world, even for the US?

            Yes we all know that in theory the US can just print up $100 trillion dollars, but this isn’t economics 101 where overly simplistic ivory tower examples are used to demonstrate ideas and concepts, this is the real world where things actually have to work and make sense. So if the US did print up $100 trillion, or $50 trillion, or even a mere $10 trillion dollars tomorrow would you say there would be no consequences or what?

          5. tts

            “Stagflation cannot be caused by government deficits. It’s usually caused by wage-price spirals which are institutional.”
            You’re really gonna argue that neo-liberal trash that Greenspan and his ilk used to spout?

            “Hyperinflation, it is now recognised, cannot be caused by government debt issuance either (as there has to be a demand for funds).”
            Hahahahahah sure buddy.

            You heard it here folks, governments can do whatever the hell they want with their economies and debt and suffer no consequences.

          6. Philip Pilkington

            “So if the US did print up $100 trillion, or $50 trillion, or even a mere $10 trillion dollars tomorrow would you say there would be no consequences or what?”

            It all depends how they allocate it. Didn’t they just create money for the QE projects? Nothing really happened there — except MAYBE an increase in stock and commodity prices.

            The true Keynesian point is that governments and central banks do not have control over the money-supply. The money-supply is endogenous, not exogenous — if the crisis has shown one thing, it’s shown that.

            Think about this carefully. The above article argues that government deficits offset the need for private-sector leverage. The point here is that, since the money-supply is endogenous, even if the government pull back spending, if they want a certain amount of economic growth, the private sector will have to increase the money-supply themselves. If they don’t GDP growth will lag.

            So, government debt issuance all depends on circumstances (resource utilisation, infltaion levels etc.).

          7. Philip Pilkington

            “You heard it here folks, governments can do whatever the hell they want with their economies and debt and suffer no consequences.”

            That’s absolutely not what I said.

            And no. Simply creating money cannot cause hyperinflation. It’s doubtful that even government spending on steroids could — although it would cause huge inflation and wreck the economy.

          8. tts

            “That’s absolutely not what I said.”

            Did you say that word for word? You’re correct, you did not. De facto? You’re wrong, that is the exact out come if what you said is true.

            Politician: “We need to finance Medicare part E, F, and G but we can’t raise taxes and no one will buy the bonds, what are we gonna do?!”
            Economist: “Print it up silly! ;D”

            Politician: “Our various wars in the middle east are going badly AND for far longer than we thought, we need trillions more than we ever said to bribe various foreign officals to stay on our side and to pay for weapons as well! Raising taxes…would go badly right about now and are foreign allies are barely keeping their chin above water, they can’t afford to buy all those bonds! What are we gonna do??!”
            Economists: “One sec boss. *presses 1 and mashes the zero button for a minute straight* All done!! ;D”

            Politician: “Damn this pesky war on drugs! We spent all those billions and not only did we hardly make a dent its also caused this embarrassing blow back on our southern border. Why its practically a war zone down there!! Beheadings left and right, you think we would’ve trained those Zetas to be more discrete right? Oh well… We need to give those fools down south heaps of cash to bribe their own officials not to defect to the drug dealers and to keep their military from working for the drug lords too. Economist!!”
            Economist: “Sir!”
            Politician: “Do your duty!”
            Economist: *does a single click*
            Politician: “What no mashing?”
            Economist: “Oh I got one of those programs that automates the whole thing now, its great, here give it a try!! ;D”
            Politician: “ooooo”

            “And no. Simply creating money cannot cause hyperinflation. It’s doubtful that even government spending on steroids could — although it would cause huge inflation and wreck the economy.”

            You know technically hyperinflation could be considered merely “huge inflation” if you wanted to be pedantic about it.

          9. Philip Pilkington

            All those are political decisions and they would have consequences. But they would not necessarily cause inflation or wreck the economy — although they might.

            You’re pushing my argument to an extreme which is silly — it’s also a sign that you have some emotional investment in discrediting it, but we won’t go into that…

            You have to take these one by one and weigh up the consequences. Government deficit spending is no panacea and I never said it was. But used correctly it is a far better way of running an economy than (a) sending the private sector into deficit or (b) allowing economic stagnation and massive unemployment.

            “You know technically hyperinflation could be considered merely “huge inflation” if you wanted to be pedantic about it.”

            I don’t think that’s an adequate definition. Hyperinflation is inflation measured by the day or by the week rather than by the month. I’d say you’d want % increases by the day in order to truly have hyperinflation.

          10. tts

            “All those are political decisions and they would have consequences.”
            All the consequences are tied up in the human and economic cost, but money buys anything especially these days, so the human end could be papered over with enough cash. Which has happened before.

            “You’re pushing my argument to an extreme which is silly — ”
            The “dialog”, such as it, was the only silly part of that and it was mostly spent describing real problems that our government has. Otherwise that “solution” of mashing the 1 with a bunch of zeros after it is pretty much exactly what we are doing right now in the middle east and with our own economy.

            “it’s also a sign that you have some emotional investment in discrediting it,”

            Anyone with some sense and morals who is paying attention would have more than a little emotional investment in all this, so I’m going to take that as a compliment.

            “but we won’t go into that…”

            We’re gonna need a rolleyes .gif the size of the early for that quote.

            “Government deficit spending is no panacea and I never said it was.”

            No you didn’t, but it is the natural outcome if what you were saying were true which is what what you’re saying is so obviously not true.

            “But used correctly it is a far better way of running an economy than (a) sending the private sector into deficit or (b) allowing economic stagnation and massive unemployment.”

            Current efforts by our government and economists have created an economy where the government is massively in deficit, an teeny tiny percentage of the private sector is doing fantastic who BTW just happen to be the rich, and the vast overwhelming majority of the population is still heavily in debt and poorer than they were 10 years ago. I think its safe to say the economists have really got it wrong.

            “I don’t think that’s an adequate definition. Hyperinflation is inflation measured by the day or by the week rather than by the month. I’d say you’d want % increases by the day in order to truly have hyperinflation.”

            $100 or $50 trillion would certainly do that job then.

          11. Philip Pilkington

            “No you didn’t, but it is the natural outcome if what you were saying were true which is what what you’re saying is so obviously not true.”

            A good epistemologist would interrogate the meaning of the word ‘natural’ in that sentence. They would probably conclude that you didn’t believe in political action and assume that ideas automatically lead to certain consequences.

            Consequently they might accuse you of not believing in the existence of politics.

          12. tts

            I would say that right now we don’t have politics, we have kabuki theater played with actors who just happen to be US congressmen and the president.

          13. alex

            Philip Pilkington: “It all depends how they allocate it.”

            Please give an example of how $100T in freshly printed money could be distributed so that it didn’t cause severe inflation or other problems. That sort of hyperbole is exactly what causes people to be dismissive of MMT.

            Philip Pilkington: “The above article argues that government deficits offset the need for private-sector leverage.”

            No, it argues that net government debt offsets net private savings. Agreed. But it says nothing about gross private debt, which was the cause of our Minsky Moment.

          14. Fed Up

            “To put the questions of individualism and of liberty aside though, from an economic point-of-view debt is inevitable. It always has been. Even in the most primitive economies debt is absolutely necessary for activity to expand beyond simple barter. In our advanced state-capitalist economies, even the idea that debt could be done away with altogether is beyond absurd.”

            Utter and complete nonsense. To go beyond simple barter all that is needed is a medium of exchange. Can you explain the difference between currency with no bond attached and the demand deposits from debt?

          15. Fed Up

            “The basic argument of the sectoral balances approach is that there are three distinct sectors which make up a modern economy: the government sector; the private sector and the external sector.”

            Your public sector/private sector is too simplistic and assumes all new medium of exchange should be the demand deposits from debt.

            It is more realistic to look at it this way:

            savings of the rich = dissavings of the gov’t plus dissavings of the lower and middle class

            I believe you can add the foreign sector too.

            IMO, it should be savings of the rich plus savings of the lower and middle class = dissavings of the currency printing entity with currency and no bond attached plus the balanced budget(s) of the various level(s) of gov’t. This should give the best chance of distributing productivity gains and other things equally between the major economic entities and distributed evenly in time.

          16. Fed Up

            “The very attempt to ensure that the government was austere during the boom years led to a private debt load that proved so great that the government eventually had to step in and take it on. The government and the international agencies were so concerned about running budget surpluses that they didn’t think for a moment that the amassing private sector debt would largely fall on the government’s shoulders. But fall it did.”

            That along with the Greece and Ireland bit make a good case for a basically all currency with no bond attached economy.

            No debt, no debt defaults, and no spending now and hoping to earn it later with interest.

      2. tts

        Also savings isn’t what it used to be. Our (US) government defines paying down debt as savings now, but that sort of change isn’t reflected in his chart nor does he mention that at all in the article above. Comparing savings now vs savings say 20 years ago is an apples to oranges comparison. He is effectively using juked numbers with or without knowing it and you can’t do that and get accurate results.

        1. Philip Pilkington

          “Our (US) government defines paying down debt as savings now, but that sort of change isn’t reflected in his chart nor does he mention that at all in the article above.”

          Debt is just negative saving. I don’t see any problem with conflating the two. Should make things easier for directing macroeconomic policy.

          1. tts

            There is a huge difference, even though they can be spent on the same things debt has interest against it, which is variable and has all sorts of legal stipulations to it that complicate things _vastly_. Also savings _earn_ interest and can be spent far more easily since no agreement has to be worked out prior to getting or spending it.

            Interestingly on an individual level people are still advised to save around 10-20% of their yearly income (though almost no one can seem to do this) for retirement or life’s little surprises, but according to today’s economists this is a _bad_ thing, since of course the economy would tank if people did that. Of course they don’t mention word one about what those people will do for retirement. Or for a home payment or to buy a car. Everything is assumed to be paid for with debt.

            Yet there was a time when people were able to save up 10-20% for retirement or at least a down payment on a car or home, before they were 30 even. All while having only 1 wage earner in the home… Impossible times I guess right?

          2. Philip Pilkington

            “Yet there was a time when people were able to save up 10-20% for retirement or at least a down payment on a car or home, before they were 30 even. All while having only 1 wage earner in the home… Impossible times I guess right?”

            To a large extent that is because governments were willing to offset private sector net saving with government deficits. It’s not impossible, it’s just good economic policy.

          3. tts

            Yet the deficit/gov. spending was far lower in the 50’s, 60’s and early to mid 70’s than it was in the 80’s and AFAIK onwards.

            Its after the 70’s that real wages started to decline and the dual income earner family became The Way Forward. Of course that didn’t work out in the end either did it?

          4. Philip Pilkington

            “Yet the deficit/gov. spending was far lower in the 50′s, 60′s and early to mid 70′s than it was in the 80′s and AFAIK onwards.”

            This is going to get far too complicated far too quickly, so I’ll make this brief.

            (1) Government spending also depends on how you allocate it. Reagan’s policies were idiotic — I won’t deny that.

            (2) I think that the ‘Golden Age’ growth had a lot to do with the MASSIVE deficits ran during WWII. These led to substantial savings and gave the economy viable balance for the next two or three decades. I’d advocate something like this now.

            (3) We also have to take into account the development of financial instability ala Minsky in the post-war years if we want to understand why increasing deficits were necessary.

            (4) Finally, there’s the trade balance.

            All this is VERY complicated and far beyond the gambit of the above article. As I said, I’m not offering you the Holy Grail — just a point about sectoral balances that should be learned from the crisis, especially the Eurocrisis.

          5. tts

            “This is going to get far too complicated far too quickly, so I’ll make this brief.”

            Fair enough this stuff does get pretty complex.

            “(2) I think that the ‘Golden Age’ growth had a lot to do with the MASSIVE deficits ran during WWII. These led to substantial savings and gave the economy viable balance for the next two or three decades. I’d advocate something like this now.

            (3) We also have to take into account the development of financial instability ala Minsky in the post-war years if we want to understand why increasing deficits were necessary.

            (4) Finally, there’s the trade balance.”

            Its good that we can agree on Regan and I would agree on points 3 and 4 giving the US a significant economic advantage post WWII, but only up to perhaps to the late 50’s or early 60’s. Europe had largely rebuilt by then AFAIK. I would largely disagree with point 2 though. I would say the domestic savings + Europe getting trashed in the war made it possible for us to get away with the WWII deficits. No one could call in our debts and get away with it and we were the only game in town.

            I would also point out that pre WWII it was still common to have one wage earner to pay for a home and family, though there were various social pressures and issues at play there that makes a comparison to modern times difficult at best. You could certainly point out that the economy was far less managed than it was now, especially pre 1900’s in the US, and tended to boom and bust. But then we seem to be going through the same boom bust cycle now, and it started in the late 90’s.

    2. Philip Pilkington

      “As much as I understand of economics, the GDP growth could be achieved without additional debt – all one needs is productivity and/or work-force growth.”

      The above model is based on demand. Without additional demand the economy cannot grow. To put it crudely: if there’s no-one to buy anything, inventories will simply pile up.

      You’re arguing for additions to the supply-side (which, I assume would necessitate investment — which, in turn, would be predicated on adequate aggregate demand). Think about it.

      If productivity increases, for example, the company then needs to SELL whatever has been produced. If aggregate demand hasn’t increased how can they sell the product without engaging in cost-cutting?

      Okay, realistically they’d sell it to the external sector. As happens in China — since domestic demand cannot soak up all the plastic dolls and the like, the US buys them all. But this adds to the trade surplus — which I dealt with.

      So, yes, if you could get increases in productivity, you would get increased GDP. But, all else being equal internally, this would be sold to the external sector and the trade balance would move toward surplus. As jayackroyd pointed out above, this would have been the ‘wonder economy’ that came out of nowhere (my point here is that productivity increases cannot be influenced, to a large extent, by macroeceonomic policy [i.e. government running surpluses or deficits] which is the only real policy tool — in my opinion — available to them).

      If there was an overall increase in the workforce GDP would rise. But again: who’s buying the products? It couldn’t just be the new workers themselves at their level of wages — otherwise the investment would be unprofitable. So, domestic workers would have to go into debt; or the government; or the trade surplus would have to rise.

      You’re looking at all this from a supply-side point-of-view — i.e. a neoclassical point-of-view. I think this is a flawed way of looking at the economy as it misses so much on the demand side (and misses the key point made in the above article about debt levels).

    3. Philip Pilkington

      “One does not need to increase government debt to decrease private debt – in extreme private debt could be shrunk to 0 through bankruptcies without any impact on government debt level.”

      I missed this. I’m not too good on bankruptcies, but as far as I understand it bankruptcies punch holes in other private sector balance sheets — i.e. those of private sector banks.

      If the banks then cannot deal with these, they request a bailout. The alternative, in a modern system, would be financial and economic meltdown. So, the government takes on the debts anyway.

      Pretty sure this is what happened in Ireland. NAMA — which is sort of like TARP — holds the bad debts of a load of bankrupt property developers and it’s supported on the government balance sheet.

      1. DownSouth

        Philip Pilkington said:

        I’m not too good on bankruptcies, but as far as I understand it bankruptcies punch holes in other private sector balance sheets — i.e. those of private sector banks.

        If the banks then cannot deal with these, they request a bailout. The alternative, in a modern system, would be financial and economic meltdown. So, the government takes on the debts anyway.

        You make it all sound so easy. But where have we heard this argument before?

        Oh I remember now!

        That same week AIG owed $13 billion to holders of credit default swaps and it didn’t have the money.

        On September 17 AIG is taken over by the government and one day later Paulson and Bernanke ask Congress for $700 billion to bail out the banks. They warn that the alternative would be a catastrophic financial collapse.
        Inside Job, the movie, minute 01:09:45

        Of course there’s quite a bit more to the story, as Inside Job goes on to explain:

        Henry Paulson: I am playing the hand that was dealt me. A lot of what I’m dealing with, I’m dealing with the consequences of things that were done often many years ago.

        Interviewer: He was the senior advocate for prohibiting the regulation of credit default swaps and also lifting the leverage limits on the investment banks. Does he mention those things? I never heard him mention those things.

        Moderator: When AIG was bailed out, the owners of its credit default swaps, the most prominent of which was Goldman Sachs, were paid $61 billion the next day. Paulson, Bernanke and Geithner forced AIG to pay 100 cents on the dollar, rather than negotiate lower prices. Eventually the AIG bailout cost taxpayers more than $150 billion.

        Interviewer: Isn’t there a problem when the person in charge of dealing with this crisis is the former CEO of Goldman Sachs, who had a major role in creating it?

        Philip, give me one good reason why I shouldn’t mark you up in the same column as Paulson, Bernanke and Geithner?

        You certainly put forth the same arguments.

        1. Philip Pilkington

          “Philip, give me one good reason why I shouldn’t mark you up in the same column as Paulson, Bernanke and Geithner?”

          Because I’m not a neo-liberal and I loath neoclassical economics. If I were running things the banking sector would be heavily regulated and few people would be taking on private debt.

          There’s a difference between strongly regulating a banking sector and letting it burn to the ground. The latter is inadvisable — unless, of course, you like eating out of bins.

    4. GCL

      Of course he is making wrong deductions, but not for the reason you stated. This article is the equivalent of a Jedi mind trick. I quote below the three paragraphs where the mind trick is being played:

      So, what’s the point to all this? Well, unless a country is producing significant amounts of exports and importing little (i.e. unless a country is running a large trade surplus), in order for the government to run surpluses, the private sector must go into debt.

      If, on the other hand, policymakers want to ensure that the private sector doesn’t leverage itself up to the gills – and create the asset bubbles that generally follow such leveraging – then, all else being equal, the government must run a deficit.

      And so we come back to the key point: debt is necessary. It’s simply a case of who is going to hold it.

      Here are the hidden untenable assumptions in the above article.

      1. That countries with perpetual external deficits are entitled to the same growth in living standards as countries with perpetual external surpluses. Morally, they are not, as their citizens already consume more than they produce.

      2. That perpetual debt (either government or private) is somehow a better solution for a country with an external deficit than addressing the causes of the external deficit in the first place. On the contrary, I argue that the “easy solution” of debt stands in the way of the tough structural adjustments necessary to raise exports up to the level of the imports which would then render further debt accummulation unnecessary.

      I don’t know anything about the author, but if I were in charge of an astroturf operation tasked to help revive debt-based BAU, and if such an article hadn’t already been written, I would have commissioned its writing without a second thought.

  2. jayackroyd

    The basic argument of the sectoral balances approach is that there are three distinct sectors which make up a modern economy: the government sector; the private sector and the external sector.

    Just want to note that it is hard to make the argument that the money center banks, including, now, Goldman fucking Sachs, are part of the private sector.

    1. Philip Pilkington

      Implicitly, that’s what I’m saying in the article — although I use Ireland as an example rather than the US because its more straight forward.

      If the banks had to be taken onto the government balance sheet this must have, at a macro-level, been because the government sector was not issuing enough debt and the private sector had to go into debt.

      My point is that, in ‘too big to fail’, much of this private sector debt ends up on the government balance sheet anyway. And this so together with a major crash.

      This point needs to be raised in the debate going forward. If the US cut their government deficits they’re only going to be encouraging more private sector borrowing.

  3. attempter

    Is this post supposed to be pandering to the reformists? Because otherwise I don’t understand the exaltation of phony “growth”, government, and debt. Sure, it’s OK to counteract the deficit terrorists, but that doesn’t mean we should affirmatively believe in growth or support the government.

    Authority and obligation – surely in our era of selfish hedonism no other potential restraints are so terrifying to so many.

    I’d say only brain-dead conformism still recognizes government, banks, and corporations as having any “authority”, and sees the people as having any “obligations” to them.

    On the contrary, a true democratic citizen rejects all such notions and seeks the destroy all such fraudulent power.

    As for Philip’s lies about the impossibility of doing away with “debt”, all I’ll ask is Why is that allegedly impossible? Remember, you have to give an answer which doesn’t involve the maintenance of capitalism, since that’s circular logic.

    (Philip gave me the right to ask these questions by calling himself an “anti-moralist”. We’ll see about that. He seems wretchedly pseudo-moral so far. Moraline, as Nietzsche’s translator Kaufmann rendered it.)

    1. Philip Pilkington

      “As for Philip’s lies about the impossibility of doing away with “debt”, all I’ll ask is Why is that allegedly impossible? Remember, you have to give an answer which doesn’t involve the maintenance of capitalism, since that’s circular logic.”

      Debt systems always accompany a certain level of economic growth. Randy Wray goes through this regarding ancient economies in the third chapter of his book ‘Understanding Modern Money’.

      Or consider the following, from ‘Popes and Bankers’ by Jack Cashill:

      “The ethics surrounding credit and debt find expression in the oldest written records, those of the Greeks and the Hebrews.” (p. 1)

      The Soviet Union also operated on a system of debt. As I said in the above, without debt all you can really have is a barter economy.

      1. Skippy

        “without debt all you can really have is a barter economy.”

        Mendācis Extremus…why must we preclude_of our selves_a better opportunity[s], for all living things…in a name of mathematical construct that utilizes leverage of a few, for the few.

      2. attempter

        Debt systems always accompany a certain level of economic growth.

        I said no circular arguments.

        And why should people who are willing to work the land have to go into debt? My friends and I are willing to work right now. The only obstacles are contrived political ones, contrived by worthless, parasitic criminals. Why should “debt’ have to exist at all? Why should there be anything beyond nature and the labor we practice upon it?

        True anti-moralists will find that an interesting question. Moralinists, not so much.

        1. Philip Pilkington

          It’s not a circular argument. It’s a fact. There’s a difference.

          “And why should people who are willing to work the land have to go into debt? My friends and I are willing to work right now.”

          I suggest you set up a commune and issue your own currency. I wish you luck. My guess is that debts will start being incurred within six months.

          P.S. The ‘anti-moralist’ thing was a joke from the last article I ran — the one on the ‘morality play’. Yves ran it again on this one because I forgot to give her a byline. My fault. But don’t take it too seriously.

          1. attempter

            You’re still circling, Mr. Circular. You’re doing nothing but saying “eat cake” where it comes to the existing power dispensation. You haven’t said word one toward rationally defending the existence of “debt”. You merely suck up to it in good Might Makes Right fashion.

          2. tts

            Haw haw haw, he isn’t arguing for communism so good job insulting him for nothing I guess, but he is right.

            Wiping out the debt probably would’ve been the best thing to do. You don’t have to do it all at once, you can put the banks into recievership and slowly make the bondholders eat their losses or at the very least only return their principal and give them no profit.

            Quite a bit of that debt if not most of it was flat out fraudulent, and making the public pay for it just to make rich banker’s richer is amoral. If some rich people lost all their wealth on bad bets then so what? The poor are being made poorer while the middle class is dissappearing right before your eyes through no fault of their own, is it really worth all that to keep some rich people rich or to even make them richer at the vast overwhelming majority’s expense?

          3. attempter

            Funny. What a suck-ass pig you are. You can keep on making fun of the people who want to liberate us. Meanwhile you’ll get no gratitude or pay from the criminals, who can find flunkeys who are less cowardly and more aggressive than you.

            In the end, your type has no future, since “you’re neither hot nor cold, but lukewarm.”

          4. Philip Pilkington

            “Wiping out the debt probably would’ve been the best thing to do. You don’t have to do it all at once, you can put the banks into recievership and slowly make the bondholders eat their losses or at the very least only return their principal and give them no profit.”

            This article wasn’t about the banking sector. I was only approaching it from the losses taken in a sectoral balances model.

            As for the commune jibe, I think it was justified. Our friend wishes to build a Utopia without debt. If he wants to do this, I’m calling his bluff and telling him to try. Him and his buddies can try to do it if they want — they just set up a commune; it’s not hard.

            I suspect, however, that — as much as he may crimp and moan — he rather likes living in our economic system (which needs debt to function) and so he won’t open a commune. I also suspect that if he did open a commune it would soon after construct a primitive debtor-creditor system.

          5. attempter

            he rather likes living in our economic system

            Care to provide even one shred of evidence for this?

            It’s just like the rest of your unevidenced idiot assertions. But like I said about this post and your previous one, it provides evidence about your own collaborationist psychology.

          6. tts

            “This article wasn’t about the banking sector. I was only approaching it from the losses taken in a sectoral balances model.

            As for the commune jibe, I think it was justified. Our friend wishes to build a Utopia without debt.”

            You’re right the article wasn’t about that but I don’t believe he was explicitly saying we should get rid of all debt though he did say this:

            –“Sure, it’s OK to counteract the deficit terrorists, but that doesn’t mean we should affirmatively believe in growth or support the government.”

            I might very well be reading into this statement but he seems to be fine with some sort of deficit spending, and by default some sort of debt, since he is also fine with “counter acting the deficit terrorists”. I read his statement as being re: fraudulent and/or overly onerous debt, which if so I would agree with and was why I gave that comment you quoted. FWIW if I wasn’t clear before I have no problem with _some_ national debt but I do believe there is such a thing as _too much_ national debt too.

          7. attempter

            tts, actually I don’t bother advocating Keynesianism, MMT, etc., since this is a terminal kleptocracy which will never spend money on anything other than corporatism.

            Instead I join the No Taxes call. Anything taxed from us is merely stolen. Meanwhile anything which erodes the legitimacy of the power structure is a progressive step.

            As for the deficit, let ’em run it up. The more the better. It’ll help bring on their collapse.

          8. Calgacus

            I suggest you set up a commune and issue your own currency. I wish you luck. My guess is that debts will start being incurred within six months. This is confused. Debts will be incurred (by the currency-issuer) the instant the currency is issued, because currency/money is a form of debt, as you correctly say elsewhere.

        2. ajax

          Many who read this blog have no doubt read or heard about
          the concept of “odious debts”. This was explained to me
          in the on-line production Debtocracy, which had
          Ecuador ca. 2006 as a case-study of “odious debts” .

          As far as I know, things related to “odious debts” are
          a gray area in international law. One might try to
          frame “odious debts” as a principal-agent question,
          with the principal being the electorate of a given
          country and the agent being a government or succession
          of governments of that country. An immediate
          objection coming from the creditors side would be
          that absent a finding of wrong-doing by a court of
          law, there is no proof of wrong-doing by government
          officials (say as regards allegations of bribe-taking).

          I’d imagine creditors framing allegations of “odious debts”
          as a legal question, whereas the electorate and/or
          activists would be more likely to frame “odious debts”
          as a moral question, right vs. wrong.
          It sure looks like some sort of dilemma.

  4. DownSouth

    Philip,

    I don’t like your analysis. It’s just all too easy, too loaded with assumptions.

    First, there’s the assumption that the only way to achieve acceptable GDP growth is through debt. Then there’s the assumption that perpetual GDP growth , whatever that means, is not only possible, but good. Once these two assumptions are made, the logical conclusion is that perpetual growth of debt is good, even necessary. You sum up these assumptions in this statement:

    The reality is that the Ireland could not have experienced high levels of growth and low rates of unemployment had it not been for the private sector taking on huge amounts of debt. Because the government was unwilling to take on debt at the time, the private sector had to do so. The end result was – from an accounting point-of-view – much the same; the government ended up with a load of debt on its books.
    The only alternative to these two models would have been a miraculously large trade surplus. Lacking some sort of wizard who could magic this wonder-economy out of thin air, the only other option would have been a low growth economy; and this would have been inconceivable during the boom years.

    And once debt becomes an indisputable, uncontestable good, then the only remaining question is whether the debt is to be private or public.

    But the analysis begs all sorts of questions:

    • Is the only way to achieve acceptable GDP growth through debt?
    • Can debt grow to a point where it quashes GDP growth?
    • Is perpetual GDP growth sustainable?
    • Is perpetual debt growth sustainable?
    • Is perpetual GDP growth the quintessential good?
    • Is the definition, what we call “GDP” important?
    • Is the distribution of GDP amongst the population important?

    You state that:

    The very attempt to ensure that the government was austere during the boom years led to a private debt load that proved so great that the government eventually had to step in and take it on. The government and the international agencies were so concerned about running budget surpluses that they didn’t think for a moment that the amassing private sector debt would largely fall on the government’s shoulders. But fall it did.

    It seems like the prudent thing to have done would have been to regulate the private financial sector during the go-go years so as to prevent the explosion of private debt. But once one makes the assumption that debt is a positive good, that’s not a desirable policy option, is it?

    Neoliberalism also encourages the explosion of debt. It cares not a dither whether that debt is public or private, because it knows that through a little neoliberal sleight of hand private debt can be magically transformed into public debt.

    The goal of neoliberalism is to create debt slaves. What is your goal?

    1. Philip Pilkington

      If you want a low-GDP growth economy, that’s a political question. Even in such an economy, I suspect that some debt would still be necessary. The piece I did on Japan a while ago dealt with some of that.

      “The goal of neoliberalism is to create debt slaves. What is your goal?”

      To have governments take on debt so the citizens don’t have to. I want citizens to net save, to have a decent public system and access to employment. To do this the government has to take on debt.

      The above article was less prescriptive than descriptive, however.

      1. DownSouth

        Philip Pilkington said: “To have governments take on debt so the citizens don’t have to.”

        Well that certainly sounds like the neoliberal prescription to me. Debt is sacrosanct.

        I would suggest that just the opposite take place, that Ireland default on its debt, and that its overly indebted private sector also default on its debt. That way debt is eliminated. Tell the slave drivers to go take a hike.

        It’s the triumph of politics over economic theory.

        1. Philip Pilkington

          “That way debt is eliminated.”

          Together with most of the economic system…

          1. DownSouth

            So we’re supposed to eliminate our moral system and our political system so that the economic system can be salvaged at any and all cost?

            The economic system, which has morphed into nothing but a theorietical construct, trumps everything, including reality?

            Debts are nothing but promises, denominated in money and typically recorded in writing.

            But there are promises predicated on moral imperatives.

            There are promises predicated on political imperatives.

            Some of these are explicit and are recorded in writing. Others are implicit, part of an unwritten but very much agreed upon moral order and social contract.

            You seem to have convinced yourself that debt is the end all and be all of human existence, the only thing that matters.

      2. Tao Jonesing

        “To have governments take on debt so the citizens don’t have to.”

        Yeah. Instead of taking on debts, the citizens get to enjoy austerity measures and see their national treasures sold for next to nothing to the banks who the government went into debt so they could bail out those same banks.

        Not all public debt is created equal. Public debt taken on to bail out bad private debts cannot expand the economy.

        1. grandiosity

          Pilkington is brave to try to explain simple accounting concepts to this bunch.

          @Tao – yes, it makes a difference what the money is spent on. In the 2000’s to keep the economy going in the presence of enormous foreign savings by China, the GOV and private sector had to run huge deficits. In the US’s almost complete absence of public sector spending programs (other than war spending) this had to be taken up by another form of debt: mortgages.

          Just think: we had a choice. We could have spent 2T on roads, bridges, water systems, regional rapid transit, airport hubs, etc. Instead we spent it on housing that is now mostly standing empty.

          Yves, your website needs some filtering on a Saturday morning. The bozos are working out their hangovers on poor Phil.

  5. krul

    Basically you are saying net debt for the world is zero, but net debt of sectors can be non-zero. I have seen this argument being made on several blogs lately. I agree with it, and I agree with the fact that many of the “powers that be” don’t know this basic accounting fact. However, I think it’s only the start of the story.

    I think that net debt is not really the issue. It is gross debt. There is an infinite number of distributions of gross debt that have the same net debt as a result.

    Debt needs to serviced. The amount of debt that needs to be serviced is related to gross debt and not to net debt. In case there is a lot of gross debt, the estimated ability of individuals and institutions to service debt depends more and more on their estimates of other people to service debt. This is more art than science, which is why I think that a big problem is gross debt and not net debt.

    (Several reasons exist e.g. for the difficulty of estimating debt servicing ability:
    1) gross debt is difficult to measure due to various accounting treatment (HTM, AFS, HfT etc)
    2) A lot of banks are “hedging” and assuming they are eliminating risk (as are regulators), e.g. fixed rate 10y bonds funded with 1M Libor interbank funds have an interest rate risk. To mitigate this risk, the bank seeks a swap counterparty. This transforms the interest rate risk into a credit risk, because the value of the swap is non-zero when rates move. To mitigate this credit risk, swaps are collateralised. But this creates a liquidity risk, since the collateral will need to be funded. Conclusion: hedging is often transforming risk into some risk that is incorrectly priced, not eliminating risk.
    3) debt servicing relies on income, which relies on job security, which relies on debt servicing ability of employers, which relies on….
    etc etc)

    1. Philip Pilkington

      “Debt needs to serviced. The amount of debt that needs to be serviced is related to gross debt and not to net debt.”

      Well, you have to go into detail here:

      (1) Is this gross debt private?

      If so, I would say that it should be minimised. Servicing private debt is a nuisance — a necessary nuisance, of course, but one that should be minimised. I’d prefer if the government picked up most of the debt tab and allowed the private sector to net save. This leads to…

      (2) Is it public?

      This instantly leads to…

      (3) Is it issued in the domestic currency?

      If so, then servicing it is doesn’t really ‘cost’ anything. It’s just a matter of crediting accounts when it falls due — inclusive of interest payments, of course.

      1. alex

        Philip Pilkington: “servicing it is doesn’t really ‘cost’ anything. It’s just a matter of crediting accounts when it falls due”

        This is the problem I have with MMT (if that’s what you mean by “just crediting accounts”). I’ve no doubt that just printing $X and using it to credit accounts is harmless up to a certain point, but for what value of X is that true? Honest and knowledgeable MMT’ers admit that this is one of the main questions of MMT, but I’ve yet to see it analyzed (rather than merely acknowledged as an issue). Without an intelligent way to estimate X, I can’t have any real faith in this as a practical approach.

        1. Philip Pilkington

          “I’ve no doubt that just printing $X and using it to credit accounts is harmless up to a certain point, but for what value of X is that true?”

          Look, I’ve said it once and I’ll say it again: I’m not offering a policy solution to fix the world in under 3,000 words.

          Anything that resembled that would be bullshit.

          These programs would be complicated and would depend on a million variables. But I believe it’s the right approach.

          P.S. Currency issuance has never been empirically proven to be tied to exchange-rates. This is important. Issuing currency MAY lead to falling exchange-rates — but it also may not. This is NOT a law and so needs to be examined on an empirical level when determining policy.

    2. alex

      “I think that net debt is not really the issue. It is gross debt. … Debt needs to serviced.”

      Excellent point. Steve Keen often mentions this, and takes it into consideration in his analyses.

      “There is an infinite number of distributions of gross debt that have the same net debt as a result.”

      Indeed the Minsky Instability Hypothesis is based on gross rather than net debt. Ignoring gross debt is like the joke that if Bill Gates walks into a bar with nine penniless people then the average net worth of people in that bar is $5B. Similarly, if the economy consists of one creditor who has loaned out $9M and nine debtors, each of who owes $1M, it does not mean the economy is reasonably (or stably) balanced. Note that this situation can occur even with _zero_ net debt.

      The sectoral balances approach is _a_ useful point of view for some purposes, but it can’t tell the whole story. Always remember that the choice of sectors to analyze is arbitrary, and you can choose any set you want (entirely legitimate if done for purposes of intelligent analysis). For example, you could argue that the government sector should be divided into federal and state/local, because only the former can print money. I’ll also note that even the standard sectoral balances approach uses _three_ sectors, but the third one (foreign debt) is often given short shrift. That’s a serious omission for a major debtor country like the US.

      Lastly while I’m no deficit/debt hawk, and I don’t think the federal deficit/debt is the biggest problem facing the country, if allowed to go to extremes it can can be problematic. At some point, if a certain level of government expenditures is desired, it may make more sense to raise taxes rather than increase government debt. That’s hardly a radical notion given the support (outside of DC) for eliminating at least the high end of the Bush tax cuts. It was also a major reason for ending Prohibition – the government wanted the liquor taxes.

      Debt does have to be serviced, so government debt does make a claim on future tax revenues. It will require either higher taxes or lower government spending in the future. Keeping a flat or regressive tax structure while having the government go further into debt means that both principal and interest will have to be paid out of flat or regressive taxes. Guess who benefits? People holding lots of Treasuries.

      Raising taxes (federal tax revenues as a percentage of GDP are at their lowest level in 60 years) by making them more progressive, and commensurately reducing the deficit, reduces potential future debt problems. An additional benefit is the political theater of watching wealthy deficit hawks and their cronies in the government come up with reasons why this is a bad idea. Are your minions ready Mr. Peterson?

      As for the Keynesian stimulus effects of raising taxes, only tax reductions on the low end of the income scale have a multiplier much greater than unity. Hence more progressive taxes have an economic stimulus effect.

  6. Jim the Skeptic

    From the Post: “The key point here is that because the Irish government ran surpluses while the economy grew at a fairly substantial rate, this caused the private sector to become highly leveraged.“

    Common sense requires me to call bull sh*t on the “caused”. This statement requires a level of abstraction that is totally unsatisfactory and unnecessary. Debt is a convenience, not a necessity. And the private sector is not interested in growth for growths sake. If there is demand, industry tries to satisfy it and when the demand falls, industry will reduce its production. Companies that operate otherwise will fail. If your theory were correct then growth would become a dirty word.

    What amazes me most about the current situation with our economy is the theories offered by economists. Almost universally they assume that we have A REAL ECONOMY GRAFTED ONTO THE FINANCIAL SYSTEMS. Amazing!

    In their world the real economy is always subject to control by the financial world or the government. Raise the supply of money, the interest rates or taxes and private industry profits and jobs decrease. Lower the supply of money, the interest rates or taxes and private industry leaps to growth in profits and jobs. Their models show that this is always the case and when it fails, they just add a temporary modifier to the model.

    Actually when the economy is stable and operating within certain limits their theories are helpful. Their negative and positive feedback controls effectively do what they claim.

    But when the economy has been distorted by REAL externals like unbalanced foreign trade then their machinations are ineffective. Reduce taxes and the increased in private profit and jobs leak into the foreign economies instead of recirculating in our economy, and our economists never seem to notice. Stimulate the economy with government spending and the increases in private profit and jobs leak into the foreign economies.

    The basic problem is that they discount “common sense”. Until they recognize the cause of our problems they are very unlikely to find a solution. But they cling to their models as a baby clings to a favorite blanket.

    1. Philip Pilkington

      “Debt is a convenience, not a necessity.”

      That’s just factually incorrect. All money is debt — someone’s debt. That’s not even theory; that’s just accounting.

      “If your theory were correct then growth would become a dirty word.”

      Only if you consider ‘debt’ to be a dirty word. You do, evidently. I don’t. For me it’s a necessity.

      “But when the economy has been distorted by REAL externals like unbalanced foreign trade then their machinations are ineffective.”

      You’re living in a world of epistemological mirrors.

      What makes unbalanced trade any more ‘real’ than government sector debt? Both are just statements on a central bank computer.

      1. Jim the Skeptic

        “That’s just factually incorrect. All money is debt — someone’s debt. That’s not even theory; that’s just accounting.”

        Accounting is just another way to MODEL the real world. In the real world, money is SOMETHING of value which can be exchanged for goods or services. That SOMETHING may be gold, government currency backed by gold, or paper money backed by the full faith and credit of the government.

        “What makes unbalanced trade any more ‘real’ than government sector debt? Both are just statements on a central bank computer.”

        Another economics answer to a REAL world issue. Let me restate the obvious, account books, and computer spreadsheets are not the REAL world, they are models or representations of the real world.

        THE PURPOSE OF GOVERNMENT IS NOT TO PROVIDE FOR THE MOST EFFICIENT ECONOMY! The preamble to the US Constitution does not mention economic efficiency, it speaks of insuring domestic tranquility, and promoting the General Welfare.

        There is just no way to separate a countries economics from it’s politics. When you do, you create inequity, and civil unrest. (Look at Europe and the Euro!) This attempt at a global economy is a recent phenomena and it has caused all sorts of problems for many countries. Specifically it has failed us, and we should return to good old fashioned tariffs.

        Economists do what lawyers do, they take commonly used words and apply some special meaning to it. They STEAL words! :^)

          1. Jim the Skeptic

            I prefer the ‘angry mob carrying torches and surrounding Frankenstein’s castle’ scenario! :^)

    2. ambrit

      Dear ‘Lucky’ Jim;
      That was quite a howler; “discount ‘common sense.'” As you should know, “common sense” is far from common, and when encountered usually not in the posession of those who make decisions. It’s somewhat like the admittedly Liberal Myth of the “Noble Savage.” Looks good on paper, lots of problems in the implimentation.
      As for “leaking into foreign economies,” I would flirt with apostasy and say that the whole earth is now one economy. Labor costs in my field, construction, are slowly approaching Second World levels, due to the conscious importation of Latino workers from “South of the Border.” For the Latino boys and girls, what we would view as ‘slum’ level conditions are actually big improvements. (I’m talking Rurales and Indios here.) They make the perfect neo-feudal proletariat. They work hard, hold to conservative social values, and are already socialized to take massive corruption for granted.
      Hola Jim! Bienvenidos al Republica de Platanos!

      1. Jim the Skeptic

        ambrit said “That was quite a howler; “discount ‘common sense.’”

        I see the humor and I wish I could claim that it was intentional, but I am afraid that was just my Yogi Berra side slipping out. :^)

        I understand that common sense sometimes fails but discounting it completely is just lunacy. We couldn’t go a day without acting on situations with incomplete information, so we regularly use what I call common sense.

        Sometimes common sense fails but how many times was the calendar changed before they got it right? Each time our documented MODEL of time seemed complete and accurate and each time it failed. The current calendar model fails less frequently but it fails.

        As to your “the whole earth is now one economy”, you are indeed a lucky apostate, since heresy is no longer punished by burning at the stake. :^)

        Buenos dias.

    1. alex

      I see many criticisms of MMT, but few or no “MMT’ers are idiots, and they don’t bathe regularly” types of comments. “Ad hominem” is not Latin for “criticism”.

  7. Glassgavin

    I don’t think we’re focusing enough on the purpose or use of the debt. Is the debt for which the debtor is obligated put toward a physical asset that provides the means to pay back the debt over time? Demand is necessary for growth, but it comes about through the new change in economic activity centered around the investment. As long as debt is serviced through income generation, the debtor can apply for more debt for projects in the future thus continuing the cycle. This is how the economy progressively builds itself out. Malinvestment should be avoided because it puts a halt to this cycle, which is applicable in both the private and public space.

    1. Philip Pilkington

      “Demand is necessary for growth, but it comes about through the new change in economic activity centered around the investment.”

      That’s a common misconception. Investment, by definition, can only come through getting access to new currency to spend on said investment. In order to do this, debt needs to be incurred by some party.

      Now, someone will say: “No! It comes from private sector saving.” True — sometimes. But look at the article. Private sector savings are impossible without government debt. So, investment through the use of savings is usually reliant on government debt.

      (Or, this may come through the trade-surplus. But that means a deficit for another country — and hence, more debt).

      1. TC

        PP: you’re reducing Glassgavin’s point to conceptions that simply cannot be separated from the ends to which debt is applied.

        Without discussion of the critical connection between debt incurred and capacity to extinguished it, we find ourselves in monetarist fantasy land where, absent essential, non-linear considerations revolving around the creative capacity of mankind and the positive impact of this, mankind’s natural, elevated state of being, on the productive powers of labor, we have a merely linear discussion of debt dynamics in the framework of interactions within and among sovereign nation states. In other words, what’s missing here is discussion of dynamics making debt “a blessing,” as Alexander Hamilton elaborated it.

        Speaking of Hamilton… his argument for forming a national bank will fast become the framework for restoring the soundness of government debt as the Ponzi scheme to which a large part of sovereign obligations presently are tied invariably collapses. This is to suggest that, those who rail against debt intuitively understand that its placement in support of arrangements diminishing the productive power of labor is a doomed state of affairs (such as is the case with today’s imperialist model operating under the banner of “globalization” and “free trade”).

      2. Ingolf Eide

        Ref: PP at June 4 at 10:12 AM

        “Private sector savings are impossible without government debt. So, investment through the use of savings is usually reliant on government debt.”

        I’m late to this thread, Philip, but I’d guess this belief is at the core of your misconceptions. Sector financial balances are calculated post investment expenditure. They’re simply the residual after total expenditure for a given sector, including investment expenditure, is subtracted from total income. Or, put another way, after gross investment is subtracted from gross savings.

        So, the private sector isn’t at all reliant on government deficit spending to save and invest. What is true, however, is that should it invest more than it saves in a given period, then it’s reliant on some combination of government deficits and/or foreign lending to make up the difference.

        Sectoral financial balances are a useful reminder that 2+2 still equals four, but they don’t tell us much about what’s happening in the economy as a whole. Is it really a revelation that an economy’s total income less total expenditure equals its net relationship with the rest of the world? Hardly. Equally, it ought to be no surprise that if you divide up the economy into sectors, they will (with the exception of the external balance) sum to zero. Government and private sector? Sure. Then again, the division of the private sector into household/non-financial corporate/financial sectors is arguably even more interesting. They’re all just different shorthand ways of looking at the same immensely complex underlying reality.

        Unfortunately, sectoral balances enthusiasts seem to often seize upon this simple, useful tool and try to make it do work it’s simply not capable of doing.

        1. Philip Pilkington

          This is chicken and egg stuff. It’s really irrelevant.

          Governments and institutions run on accounting sheets — not theory.

          That’s all I’ll say on this.

          People seem to mistake economic and accounting arguments for logical and epistemological arguments. I find that extremely unfortunate.

    2. DownSouth

      Glassgavin said: “Malinvestment should be avoided because it puts a halt to this cycle, which is applicable in both the private and public space.”

      That’s an excellent point, but we don’t always know beforehand whether an investment is a “malinvestment” or not, not even for those operating in complete good faith (which, needless to say, is not always the case).

      That’s why debt (leverage) is always dangerous. It magnifies risk and needs to be kept under control. Derivatives, which are used to obscure leverage and risk taking, are also dangerous. Any entity that can destabilize the economic and financial order should be regulated so as to limit leverage and bar it from trading in derivatives.

  8. JP Hochbaum

    To understand private savings one has to understand the commcercial banks and how they borrow. They don’t take depositis and then lend. They lend the money and then borrow from other banks or the federal reserve discount window to meet their reserve requirements.

    So if the government increases spending banks will typically lend less because there is less demand from the Americans who would typically seek a loan, thus the banks don’t increase their net savings.

  9. Dan Kervick

    While accepting his main point, I don’t think we should be as complacent about debt as Philip Pilkington appears to be in this post. Yes, a modern economy can’t function without sizable systems of credit and obligation; and yes, assets and liabilities must sum to zero. But the overall volume of private and public assets and liabilities in both sectors combined, the overall volume of indebtedness in the economy, is a political-economic choice that can and should be managed. Too little debt leads to stagnation; too much debt to bubbles.

    I believe Hyman Minsky’s chief point was that the credit system has a natural tendency to evolve from prudent and productive debt-creation to more speculative debt-creation and then finally to Ponzi debt-creation. There is an addictive, irrational, crack-like component to the debt industry, and therefore a society’s tendency to build and accumulate debt needs to be well regulated, whether the debt is public or private.

    The key points to make, its seems to be, are these: the problem of private sector over-indebtedness is, in 2011, a much, much, much bigger problem than public sector over-indebtedness; and the public sector, due to the government’s monopoly role in base money production, possesses a kind of flexibility and power in dealing with societal deleveraging that the private sector does not possess. And so, we should be embracing public sector expansion as one tool for deleveraging and restructuring the private sector’s debts, and re-starting the private sector’s economic engines.

    1. JP Hochbaum

      What Phillip is saying is that deficits, budgets and debt numbers of a monetarily sovereign nation are incorrect gauges of the health of a nations economy.

      To better judge that health we need to look at inflation numbers and unemployment. More harmful to our nation is unemployment, not inflation. UNemployment has long term effects and inflation is just temporary.

    2. Philip Pilkington

      Agreed — with both of you.

      As for the Minsky hypothesis — which is absolutely true — it’s a separate, but important issue.

      It cannot be dealt with in this article. However, I think Minsky always assumed that governments would run deficits as part of financial reform.

  10. Bev

    Great sites that concentrate on Debt as a failed Monetary System:

    Ellen Brown’s Public Banks site
 http://webofdebt.wordpress.com/


    Bill Still’s
 http://www.secretofoz.com/

    
Byron Dale
 http://www.moneyaswealth.blogspot.com/


    I like the way of thinking suggested by Byron Dale http://www.moneyaswealth.blogspot.com/ to divide all things into either Economic Policy with all its many moving parts so complicated on purpose VERSUS MONETARY Policy, HOW MONEY GETS INTO THE SYSTEM, with its simple choices–DEBT vs WEALTH. And, you can’t get out of DEBT with More DEBT. The following seems so fast and simple to turn things around for everyone’s benefit.

    Where are the politicians now who will do the following to turn things around fast for their people and countries–an accounting change to control money (Monetary Policy) as wealth not debt.


    from:
http://moneyaswealth.blogspot.com/2010/07/focus-on-problem-not-side-issue.html


    Best Political Quote in Over 100 years!


    “If men can create electronic bookkeeping entries representing debt and loan them into circulation, men can surely create electronic bookkeeping entries as a payment and spend them into circulation with no debt. Which do you prefer?”

    – Gregory K. Soderberg, Rep. Candidate MN. Lt. Gov., 2010

    Gold? 
So, You Think You Have A Chance In This Market?


    When a “mystery bank” can move 380 tonnes of gold in one transaction, why would you be so foolish as to think that this is a ‘free market” or that you could base a currency on gold?
Besides, if you allow the banks to lend the gold, as they did here, you’ll be in worse shape than you are now.


    True, we need a wealth based system, but gold is not the answer.


    The answer is to monetize the production of infrastructure with new, debt free money, instead of borrowing, bonding or taxing.


    What They DON’T Understand


    It’s obvious most politicians don’t understand.
The bankers know full well and they are counting on YOU not understanding, too.


    There Is One Way That New Money Is Created or “Born”.


    One Way.


    A Loan.


    That means:


    1. When a loan is made, only the principal is created.

    2. If only the principal is created, then no money is created to pay the interest on the loan.

    3. Therefore there is always more debt than money to pay it.


    A MESSAGE TO “DEMOCRATS”:

    If all money is created as a loan, then taxes are paid with loan principal (borrowed money).
Increasing taxes WILL MAKE THINGS WORSE!


    Why? If taxes are to be paid in money, and all new money is loaned into existence, then somewhere the money collected as taxes had to be borrowed. You cannot borrow your way out of debt. Increasing taxes will place a two-fold burden on the economy (less money to grow the private sector, and an increase in private sector debt) and you will worsen the depression.


    Expect more lay-offs, more inner city decay, decreased revenue as fewer people can find work.


    Oh, and expect voters to blame you.


    A MESSAGE TO “REPUBLICANS”:

    If the principal on a loan payment gets extinguished at the time of payment, then “balancing the budget” WILL MAKE THINGS WORSE!

    
Why?

    If the only source of new money coming into the economy is new loans (government, business or personal) and you slow the new borrowing, while at the same time loan payments are being made (mortgages payments made, car payments made, credit card payments made, government bonds paid, Treasury securities redeemed, student loan payments made) and that principal amount is extinguished from circulation, you will worsen the depression. Study this illustration.
http://moneyaswealth.blogspot.com/2010/05/plumbing-of-global-crisis-and-how-to.html


    Increasing taxes will make things worse.
“Cutting spending” (they should say borrowing) will make things worse.

    
Your ONLY remedy is a wealth based monetary system.


    With a wealth based money system, you could turn this economy around in a flat hurry, launch a full scale, value added infrastructure rebuild, pay off our debts, build a thousand ship ocean clean-up fleet (for oil, toxic chemicals and plastics), bring desalination plants online, rebuild the electric grid, provide jobs, jobs, jobs, and heal the world of this economic cancer called debt money.

    
Or, do as you have been doing and rearrange the deck chairs some more, as this debt money system begins to groan in earnest, rivets popping and our nation taking on water faster then we can bail it out. It will sink. It’s math – you can’t outrun it, no matter how many knobs you turn or switches you flip – you cannot borrow yourself out of debt!


    If the GWP (Gross World Product) is just over $70 Trillion, and the U.S. owes over $250 Trillion, how will raising taxes fix that balance sheet? How will cutting spending fix this when the gross production OF THE ENTIRE WORLD cannot pay what we owe?


    You cannot fix it with the same thinking as created this debt cancer. You need a cure.


    THE
 CURE 
FOR 
DEBT
 IS
 WEALTH!


    Demand a wealth money system, before it’s too late. Here’s how to start.
http://moneyaswealth.blogspot.com/2009/02/breaking-news-minnesota-bill-could-fix.html


    Spread the word.


    The problem is: we use debt for money.


    That means,


    1. No money is created in the lending process to pay the interest due, so there is always more debt than money to pay it.

    
2. Principal payments are “extinguished” from circulation creating a constant draw in the economy.


    3. Our infrastructure is crumbling from beneath us.


    4. It is a 100% Constitutional idea to create money debt free to pay for a comprehensive infrastructure rebuild.


    5. The banking lobby is on the job, every day, making sure that no Senator or Congressman understands that the banks are the the root cause of the problem. These banking lobbyists lie – I have seen it, first hand. They lie so that they can rip you off, loan you phantom digits they create on a computer and require that you work extra hard to pay them back, two or three times the amount they claim to have lent you. They loan you phantom digits and you pay in real property. That, my friends is slavery. You have allowed them to continue and they are not done taking your substance or your liberty. In their eyes, you are asleep. An easy mark. A stooge. And they will continue to do what all predators do – take prey.

    Land of the Free? Home of the Brave? Really? Mostly chest-puffed posing, false bravado and ignorance of the scam they are pulling, while your country is looted, your elderly are mistreated and your children’s future is robbed. Brave? You don’t even know what to fight for, unless they tell you.


    6. You have NO CHANCE of securing your freedoms or hope for lasting economic prosperity, unless you learn these concepts and “fight” for monetary reform. Instead, as Jefferson said: “I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.” Isn’t that what’s happening now? Who did he say would let it happen – you.


    They are fighting to take your “substance”. If you don’t fight, you lose. If you don’t know what to fight for, you will be mislead and used. You will “swing at the air”.


    Initially, the American idea included “Life, Liberty and Property”. Property was changed to “The Pursuit of Happiness”. Too bad. By removing the word “Property”, the current dumbed down generation of Americans has no idea what is meant by ownership of property, property rights or the idea of your time and wealth as your “substance”. Instead they have been reduced to a nation of unknowing serfs and sharecroppers (these two words have real meaning and looking them up and doing a little reading on the meaning wouldn’t hurt). It’s your “stuff”. You have been invaded and they have taken your stuff and your liberty and now all that is left is your life – they have designs on that too.


    ……………
NEWSFLASH:

    The U.S. Government does NOT have to borrow!


    See: U.S. Constitution, Article 1, Section 8.


    Congress has the ability to make its own money; why should it borrow any?


    How It Is Now: First the borrowing —> that creates the debt —> then the spending.


    Don’t let them confuse you by saying that the “spending” creates the debt – it does not.


    Borrowing creates the debt.


    Don’t get the cart before the horse.


    How It Should Be: Eliminate the borrowning! —> no debt —> Congress creates the money to spend for what we need (complete value-added infrastructure rebuild) —> production (the stuff we need) keeps pace with new money entering the system —> no price inflation —> prosperity for Americans.


    It’s as simple as getting rid of the parasitic, debt-based, Ponsi scheme, that they call our monetary system and replacing it with an honest, wealth-based money system that issues final payment, not debt (debt cannot be final payment!).


    Focus On The Problem, Not A Side Issue.


    The Problem: Monetary Policy (how money gets into the economy) The Side Issue: Economic Policy (what happens once money is already in the economy)


    In Short

    
ECONOMIC POLICY


    What happens once money is already in the economy.


    unemployment

    inflation

    savings
    
housing starts

    durable goods

    layoffs

    downsizing

    retirement

    sub-prime mortgages

    stocks, bonds, money markets

    foreclosures

    wages
trade
rate of return, etc.

    
ALL of these things are secondary. ALL OF THEM.

    
MONETARY POLICY


    How money gets into the economy.

    
This is the key to the solution.


    There are only 3 ways money can get into the economy and all 3 have their own set of consequences. Those 3 ways are:


    Gift it in
    
Lend it in

    Earn it in


    Gift It In


    This way promotes many problems, from financial to moral. If you place a flatbed trailer of $100 Federal Reserve Notes at every major intersection and invited people to come grab as much as they could hold in each hand, once per day, a few things would happen for sure.


    First, it would lose its value, not so much because of any “economic rule” of formula, but because I would not want the money in your pocket when I can get my own – and more than I can spend – tomorrow! So if I were a merchant, why would I want your $100 Federal Reserve Notes (FRNs)? They are not hard to come by and they, in no way, represent production – past, present, or future.
Second, There would be few products to buy with your handfuls of FRNs. Why? Because who is going to go to work, when tomorrow they can go down to the corner and get 2 handfuls of $100 FRNs? No work? No products get made (production). No products get made? Nothing to buy with your fist full of FRNs – or with your electronic checkbook money either!


    Lend It In


    There is NO money created in this process to pay interest with – only principal is created when a loan is made. So, it’s unworkable from the start. Looks OK at first – easy money! But, it’s a Ponsi scheme. A Bernie Madoff heist. It institutionalises corruption and criminality and leaves the Nation without a permanent money system while guaranteeing its people eventual economic destruction.

    
Earn It In


    First, this way, there’s no debt. Government would create the money (same as the banks do now) and enter it on their books as an asset, instead of a debt. Contractors get paid for production that we need (infrastructure) and they pay their workers – who buy stuff. No debt, no borrowing, no bonding, no tax increase, no tolls, good modern roads, safe bridges and a huge debt-free stimulus. That means JOBS!


    If You Do Nothing


    The only reason not to learn how this works is either pride and hard-headedness in the face of pure logic, or that you like debt, borrowing, taxes, tolls, corruption, criminality, unpayable interest and ultimately, an economy in ruin. If you like those things and like the international bankers stealing your money by deceiving you, don’t change a thing.


    Make One Small Change


    This could be implemented within 72 hours (maybe less) of passage. The bill is TWO PAGES! Congress could actually read it for a change.

    
Nothing but an accounting procedure needs to change. Oh, and your mind. You have to want the change. If you think you can’t – you can’t. If you think it can’t be done – you’re right.


    Q: What does man do?


    A: Pretty much what he decides to do.


    Simply change your mind, get behind this idea and make it work.


    It will work.


    Don’t let them side-track you by talking economics. It’s about MONETARY POLICY. It’s about how money gets into the economy that matters most.


    1. Bev

      Ellen Brown is building a Public Bank movement, state by state, built on the successful No Debt Money system of North Dakota.

      http://webofdebt.wordpress.com/

      “The Bank of North Dakota: A Model for Massachusetts and Other States?” — Response to the May 2011 Report by the Federal Reserve Bank of Boston
      Posted on June 1, 2011 by Ellen Brown

      Last week, the Federal Reserve Bank of Boston (FRBB) released a report titled “The Bank of North Dakota: A Model for Massachusetts and Other States?” The report confirms that the Bank of North Dakota (BND) is a prudent, well-managed financial institution that serves in partnership with community banks as an effective economic backstop to credit contractions. . . .

      Bill Still
      http://www.secretofoz.com/

      Whose book and video, “The Secret of Oz”, shows that we have won this same battle (Money controlled by government–a Debt Free Monetary system, which several times was backed by silver)…we have won this same battle six times in the past, fought successfully by the likes of George Washington, Abe Lincoln and John F. Kennedy among other Presidents who were then warred against, assassinated, or attempted to be assassinated.

      So, we need to win again for the 7th time, and strongly support all our politicians who support us by turning this economy around fast with a Debt Free Money System, accomplished by making an accounting change.

      ……..

      Even though China has a Public Bank and does not charge itself DEBT in a DEBT MONETARY SYSTEM but uses Money as WEALTH in a WEALTH Monetary System, it is amassing physical gold and silver.


      I thought this was interesting as always from Jim Sinclair:


      The Mathematics Of Gold
      
by Jim Sinclair on May 26, 2011 


      Dear CIGAs,
Little by little, I am passing on ALL that I have learned from Jesse through Bert and Bert’s knowledge to those that read here, every day, in thanks for your support of me and mine.
      
–JEBS (James Edwin Bertram Sinclair)


      Assumption:


      Because gold is held by many central banks, once as a reserve currency but now as an inventory currency, it functions as a swing asset to balance the International Balance sheet of the US.

      
Central banks are sellers of dollars but still hold, by default, large dollar inventories.


      China has hedged its dollar position 50% through commitments to long term dollar commercial agreements, pay in, mineral, and energy deals internationally. That is an act of pure genius.


      We can assume other central banks still hold 90% of their reported dollar positions, on average unhedged by commercial obligation positions.


      In crisis times, the US dollar price of gold ALWAYS seeks to balance the International Balance Sheet of the USA.


      Therefore:


      Take 90% of international US dollar debt less China and then add 50% of the US debt owned by China. Then divide that number by the ounces supposed to be owned by the US Treasury. The result is where gold wants to go.


      URL to article: http://www.jsmineset.com/2011/05/26/the-mathematics-of-gold/


      ……

      Byron Dale
http://www.moneyaswealth.blogspot.com/

      Your Money Is Overseas.


      YOU Were Made To Borrow It, By Congress.


      It Was Paid To Offshore Banks.


      PAY ATTENTION!


      They Stole From You and Made You Pay For It.

      
The banks are destroying your nation, sending production jobs out of the country, keeping your borders open to drive down wages and vote in bigger transfer-of-wealth programs, while stealing your rights and liberties and building a giant police state right under your nose.


      ALL OF THIS
 IS A RESULT OF 
A DEBT BASED MONEY SYSTEM!!


      Monetarily, there is only one way out of this:

      
A WEALTH BASED MONEY SYSTEM brought about by the monetization of the production and rebuild of infrastructure.


      Why infrastructure?

      It benefits everyone.


      Why monetize the production of infrastructure?


      No money is created unless there is production.


      Does this system produce debt?


      No. There is no borrowing or bonding to fund approved projects.


      Does this system provide jobs?


      Yes! Many millions of jobs!


      Are these jobs only in construction?

      
No. The money flows into the economy and produces jobs and investment in all sectors.
      
……

      quoting from Dale Byron’s book:

      http://www.mega.nu:8080/ampp/comingbattle/cbchap3.htm


      CHAPTER III

      
NATIONAL BANKS AND SILVER


      The national bank autocrats saw, in the rich deposits of silver in the Western States, the danger that menaced their power, and they made haste to strike down the silver dollar, which, in their fears, would become the regenerator of the financial condition of the people. Silver dollars meant cash, national bank notes meant credit, and therefore the bond-holders and bankers of London and New York City decreed that silver must die.
      ……

      72 hours after any monetary failure, it could be reversed.

      1. Bev

        interesting

        http://golemxiv-credo.blogspot.com/2011/05/how-to-destroy-web-of-debt.html

        How to destroy the web of Debt

        Here’s a question for you. Why have we heard nothing in the media or parliament about A People’s or a Sovereign Debt Jubilee? Is it because a People’s Debt Jubilee is simply a nice but unworkable fantasy dreamt up by crackpot bloggers like me?

        This is what I have been wondering. And then in response to the Jubilee article, a regular contributor to this blog, Hawkeye, wrote to me and suggested I take a look at “The Great EU Debt Write Off”.

        The web site contains details of a ‘proof of concept’ study of the Jubilee idea done by Professor Anthony  Evans and his colleagues at The ESCP Europe Business School. The study used up to date figures from the IMF and the Bank of International Settlement (BIS) to see what would happen if Portugal, Ireland, Italy, Greece, Spain, Britain, France, and Germany simply cross cancelled all the foreign debt they owed each other – a Sovereign debt jubilee.

        The web of mutually destroying debt they studied looks something like this. The image is from a New York Times article called Europe’s Web of Debt. (The original article has a larger version)

        Professor Evans said what he and his colleagues found “was astounding”.

        • The countries can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58%
        • Six countries – Ireland, Italy, Spain, Britain, France and Germany – can write off more than 50% of their outstanding debt
        • Ireland can reduce its debt from almost 130% of GDP to under 20% of GDP
        • France can virtually eliminate its debt – reducing it to just 0.06% of GDP

        Among the ‘debtor’ nations a Debt Jubilee means Ireland reduces its debt load to from 130% of GDP to under 20%! That would virtually wipe out the crippling cuts being forced upon the Irish. While even among the ‘Creditor’ nations France benefits by nearly eliminating its debt. So the French people too would benefit. Which does beg the question – who is benefiting by enforcing all the debts? I’ll give you one guess.

        Of course there can always be a devil lurking in the detail ready to spoil a happy ending, so I called Professor Evans and asked him about his methods and their limitations.

        First thing he pointed out is that by ‘All Foreign Debt” he included foreign debts held by Private banks. But as he also said, considering that in many countries the Tax Payer owns large chunks of the Private banks in question and so the line between truly sovereign and private bank debt is already blurred and sadly we ‘own’ both.

        Professor Evans said the main limitation they had was not being able to determine the duration or rates of the different bonds for different countries. So he was cancelling debts which although of the same capital amount would have been worth different amounts because of different interest rates and durations. Understandably this makes him wary of making too much of his results. However he did agree that on such large gross amounts, such interest rates and duration differences could be considered marginal. In the grand scheme of the massive debt reductions achieved the differences of rate and duration could be justifiably seen as a small cost to bear for the over all gain.

        So there are grounds for criticizing his findings. BUT the criticisms are not so large that they derail the force of the findings.  The simple fact of the matter is that the PEOPLE of all our nations would be immensely better off. They would not be facing crippling austerity cuts, nor be being forced into selling their National heritage and wealth at Fire Sale prices to the very banks who are the cause of the debt crisis, and who will profit from the fire sales.

        Which brings us back to the reason there has been no discussion at all of a Debt Jubilee. Keeping the debts is going to profit the banks and their bond holders. Not only that, but making sure there is no discussion of mutual debt cancellation, and thereby keeping sovereign debt levels as high as possible,   gives those on the political Right, the perfect crowbar they have wished for but never had, for forcing through a political agenda of privatizing and destroying the social fabric of welfare. An agenda for which they never quite got a mandate through the ballot box.

        That is why the debts are being maintained and why there has been no discussion of any alternative.  Our politicians are ‘protecting’ the debts and those whose will profit from their payment over and above the welfare of the people they are supposed to serve.

        The bankers don’t want any discussion of mutual debt cross cancellation because it would force a necessary deleveraging. The bankers do not want deleveraging because leverage is the secret of how the bankers make their profits and without it they wouldn’t look nearly so smart. The reason debt cancellation would force deleveraging is because much of the debt which would be cancelled is currently being held on bank books as an ‘asset’ serving to underpin yet more loans and debt. So start cancelling debt and the bankers pyramid of leveraged debt begins to crumble. The fact that it has to crumble if we are to recover without being crippled with trying to pay unpayable debts never gets a mention in banker-world.

        more

  11. john

    Philip,
    Excellent work and good job following the threads!

    The implications of this thinking for the trade deficit or the US are interesting as well. The conversion to pure fiat currency for the global reserve currency in 1971 created the opportunity for foreign mercantilists to run accidental Marshal Plans for themselves by purchasing US T bonds.

    1. Philip Pilkington

      Thank you. It’s tiring, but I think people need to understand this stuff — one more hour and I’m going for a pint of stout in the sun.

      The Marshall Plan analogy is a good one. It should also be highlighted that the US — just as they did after WWII — benefited greatly from the trade.

      1. john

        I agree, the US has been the prime beneficiary and sits now with the power to actually dictate solutions to most of its financial problems where it not hostage to an ideology that says economic power in DC is intrinsically evil. Floating fiat money it seems to me is and intrinsically powerful tool for the issuing government, this insight was the reason John Law was able to convince the Regent it was worth the gamble 300 years ago. Yoke it to the world reserve currency and you give the issuer of that currency world power. It is weird and a little scary living in that issuing country and watching it pretend it is powerless to protect the rents of its elite.

        1. john

          meant to say:

          …pretend it is powerless in order to protect the rents of its elite.

          Language perfects the illusion of communication….

        2. Philip Pilkington

          Goddamn! Don’t invoke John Law to support these points!

          That guy was a disaster. He was operating under a gold-standard system and he crashed the whole thing.

          His ideas were spot on — but they were 300 years too early.

          Let’s stick with what’s going on today.

          1. john

            First, I have to say your attention to the comments threads is positively heroic, so again thank you!

            Law was trying to convert France from Gold to fiat currency and very nearly succeeded. Had he done so he would have given the Regent all the powers that our consolidated government sector holds, but the Regent, like China today would have been much less modest about how it used those powers than our befuddled government.

            I guess my real point is that the sovereign issuer of a fiat currency has the tools to manipulate if not control the price level, interest rate and velocity of money within it’s system so long as it retains effective taxing authority: the theoclassical interests in US politics are closing in on degrading that taxing authority through ideology, by lowering rates on the rich and by pushing increasing numbers of Americans into the black market economy where they can be treated as criminals rather than citizens, which the right likes, but degrades the tax base which is a systemic threat to a fiat system.

            While the black market sector is small in GDP terms, with regards to standards of living, it probably benefits half the population in some way and as “austerity” advances will grow in importance. It will be difficult to organize the desperate, demoralized and criminalized into an effective constituency for political change, but the entrenchment of corruption on a scale and level equal to that of the Regency 300 years ago suggests this is likely to be where change originates here in the US, or so it seems to me.

  12. Rodger Malcolm Mitchell

    As I was reading, I thought, “This is an excellent analysis that will not be understood by the great mass of people who do not know the difference between Monetary Sovereignty and monetary non-sovereignty.”

    Then I looked at the comments. Lo and behold, I was right. There were the same “federal-debt-is-too-high” equivalences between federal debt and personal debt.

    Sadly, the media, the politicians and the old-time economists simply cannot seem to divorce federal financing from personal financing. They still think the government can run short of money, and that we are just about to tip into the Wiemar Republic inflation.

    The only solution I can think of is for the University of Chicago, the Ivy League schools and the California schools to begin teaching factual economics rather than the “fresh-water, salt-water” pre-1971 rubbish now being taught. Even then, it probably will take 50 years before the politicians and the media catch up.

    Rodger Malcolm Mitchell

    1. alex

      Your logic seems to be that since most orthodox economics is garbage, then heterodox economics must be correct. Problem: there are many schools in heterodox economics, and MMT is but one. They often don’t agree with each other. MMT is far from proven “factual”.

  13. craazyman

    good stuff Phil. Thanks you for your effort.

    As I’ve contemplated this on the bus, I’ve appreciated that it’s certainly an interesting and provocative analytical framework. As others have commented, the Asset side of this thinking is equally as relevant as the debt side.

    It seems that debt can be either Productive or Unproductive, depending on the asset it pays for. Depending on the position and momentum of a society’s Imagination, infrastructure and energy assets are often productive. Clearly, McMansions and ludicrous LBOs are not. Hard to tell in advance what’s productive or not, but not impossible to tell.

    So if debt money is associated with Productive assets, then things will likely be OK. If Unproductive, then probably heading for the crapper.

    Some folks think the government is unqualified to tell what debt-financed assets are going to be productive. The private sector’s track record is pretty dismal too. So I’d say this one is a theological debate.

    Too much debt destroys the currency, which destroys the value of the assets associated with the debt. So debt in extremis can destroy itself, but more debt can also lubricate economic activity and elevate the value of the assets it is set against, and all other productive assets too. Like so many things in Life, it seems that a certain grace and balance are required for success. Rarely is this found in the hand of man. Usually it’s in a museum or recorded in some historical document for people to marvel at.

    Since social cooperation is a precondition for economic growth in an advanced industrial/information economy, then debt spending to enhance social cooperation can be conceived as “asset-based” lending. The asset is the social cooperation that permits economic growth. But too much of such asset-based lending can thwart the healthy discipline that foments productive self-reliance. There’s always a duality.

    The other thing is the idea of sector balances in relation to private sector. Could divide private sector into 2 sectors — P1) asset/income rich & P2) asset/income poor. It may be that sector P1 can take on more debt to spark economic activity and help P2 reduce debt through savings out of income. So P’s debt might rise, but the complexion of that debt might be evolving in a socially and economically productive way.

    Hard to know, though, what P1 types could buy that they don’t already have to put the P2s to work. It’s a mystery. Personal trainers? Interior decorators? Groundskeepers? Polo lessons? I strain, personally, to think of something. Sometimes money just goes and dies.

    At the beginninng and at the end of all of this is a set of value judgements about what is productive and unproductive. Some people like blunts and rap and drinking beer. Some others want to sit in an office all day and count in their heads by themselves. Some people just want to party. Hard to reconcile that. I’d like a little of all the above. Maybe most people would if they could climb down from their hysteria or delusions. As I always like to say, economics is 16 equations and 19 unknowns.

    1. Philip Pilkington

      “So if debt money is associated with Productive assets, then things will likely be OK. If Unproductive, then probably heading for the crapper.

      Some folks think the government is unqualified to tell what debt-financed assets are going to be productive. The private sector’s track record is pretty dismal too. So I’d say this one is a theological debate.”

      I don’t think economists should deal with this to a large extent. It should be a matter for government policy and private sector investment decisions.

      As you say, when economists do deal with this stuff it’s always a moral judgment. Although I agree with Ed Harrison, to name one that writes for this very blog, on a number of points, I think he commits this error — which he’s inherited from his Austrian background — far too often.

      You allude to it above, but the fact is most of my musician friends are dole-grabbing moochers — at least by the standards of economists. Yet, they find it very hard to earn a living through their art and they use welfare as a means to float their lifestyle. Do I think they’re productive? Hell, yes! They’re certainly more productive — in my mind — than some insurance clerk.

      Or take another example: a friend of mine who is making a TV sitcom independently on a budget of zero. He’s counted as unemployed. But he’s working his ass off organising actors and writing scripts and all sorts of things. A true entrepreneur. And yet, by the assumptions of some, since he’s on the dole and not currently earning income, he’s unproductive.

      Economists should not weigh in on this. They should be concerned ONLY with employment and price-stability. When they overstep these bounds they’re always taking up the mantle of priest — and you can almost always tell it from their tone of voice.

  14. JP Hochbaum

    Roger, I wouldn’t be so negative :). I go onto forums as much as possible and debate econ with many people. 80% I run into ideological walls, but 20% of the time I get people to actually take the time to read up on MMT.

    And we do have the ability to host our own free workshops which I will be doing in the near future.

    Just have to keep on trying and not get frustrated in the process.

  15. eric anderson

    “To put the questions of individualism and of liberty aside…”

    Oh yes, let’s just put those aside. Who cares about such little things?

    Buddy, you sure know how to turn an audience against you before you even begin.

    1. Philip Pilkington

      That is precisely the audience I’d care to avoid. I only want people who can think for themselves to read my stuff — people who buy into that stuff are those that are easily manipulated by those in power.

      “FREEDOM!” cries Robespierre/Lenin/Reagan/Schiff/Hayek — and the crowd follow them like sheep… right off a cliff…

        1. eric anderson

          Who defines extreme? I think making everyone debt slaves is an extreme position. Pilkington’s deity is debt. Debt is father. Debt is mother. Debt is holy and righteous.

          I say that some of us would prefer a difficult liberty to a comfortable slavery. However, this compromise is not necessary. Liberty would be more prosperous, if we could just get the creditors off our backs.

          1. F. Beard

            Liberty would be more prosperous, if we could just get the creditors off our backs. eric anderson

            Indeed and we can!

      1. attempter

        Yes. Robespierre and Reagan were trying to accomplish the same thing. It’s not at all true that Reagan wanted to make the concentrated rich even more concentrated and more rich, while Robespierre wanted economic egalitarianism. Nope, that’s a non-fact, right? Objective Reaganites like you certainly want that mindset to prevail. That’s the best excuse for everyone to cave in and do nothing.

        Stop being such a coward and openly avow your pro-banksterism. I could grudgingly respect an overt criminal.

  16. Paul Tioxon

    Mr P, you are too kind, too patient. Taking the time to explain some economic fundamentals, so a widely reported news story over government debt and counter proposal to cut government spending to account for the profligacy, the austerity movement, is the mirror image of Noblesse Oblige. The privileged are simply under privileged, having no formal education about how the world works. And in between urgent alerts to the citizenry, or yr case, the subjects, how do you put up with a monarchy?, but I digress, there is also the need to educate, to lift up the minds of the foaming at the mouth anger of those who truly believe teachers, cops, firemen, and garbage collectors are running some sort of ponzi scam by collecting paychecks directly funded by their real jobs and their real paychecks provided by real profits from real corporation who do really, really real productive work.

    I am glad you cleared all of that up for them and myself as well, because clarity of thought leads to successful results. But what bothers me most about this debt brew-ha-ha, is the deafening silence about PRIVATE DEBT WHICH IS 4 X AS MUCH AS PUBLIC DEBT. Private debt coming in at around what, $50 TRILLION, is the over leveraged legacy from the Wall St housing bubble, dot com bubble and over all meta-bubble to end all bubbles. But now, that banks aren’t lending, capital is not reinvesting, debt is falling off in the private sector and now they want to enter into an austerity program for the public sector, to reduce debt!! So, where will the capital come from to expand the economy for the 310,000,000 Americans and 15 million non citizens residents who need housing, shopping, offices and factories to work at?

    We need to know when capital will start flowing back into job creating enterprises of a useful nature. Perhaps the external sector can stop exporting finished goods and send us jobs instead? Clever huh, if only I could find a chart for that one, I too could provide clarity of thought to White House Economic advisers and all would on its way to being well once again.

    1. Philip Pilkington

      I’m not sure if you’re being sarcastic or not — but, saint that I am, I’ll take you in good faith.

      “So, where will the capital come from to expand the economy for the 310,000,000 Americans and 15 million non citizens residents who need housing, shopping, offices and factories to work at?”

      The capital comes from government spending. I thought that was pretty clear.

      1. Paul Tioxon

        Philip, yes there is sarcasm, but not directed towards you, but in support of you, I MEAN this sincerely, your kindness in explaining to the promoters of austerity, as if by any chance that reason and dialogue can bypass this coming political conflict over the US debt ceiling. And you are very clear, the money will come from the government deficit spending in the absence of private investment, whether from debt or equity. While the government can print money, it hedges it with debt of the T bills, it can not make profits, accumulate them, then reinvest them into pubic works. Maybe it should start for the sake of political stability. I just find talking to political opponents a waste of time and concentrate on efforts to get elected officials in place that will do for me what I can’t do for myself and my family all alone. All in all, a good job, a clear explanation, maybe some reasonable people on the other side of the argument may change their minds. I am glad you are providing for this effort because at this point in my life, it will not be coming from me.

  17. Philip Pilkington

    Alright, that’s all I can do today. Talk amongst yourselves; post insults that I cannot respond to etc.

  18. F. Beard

    Even in the most primitive economies debt is absolutely necessary for activity to expand beyond simple barter. Philip Pilkington

    Not true. At least two forms of money require no debt: government fiat and common stock.

    In our advanced state-capitalist economies, even the idea that debt could be done away with altogether is beyond absurd. Philip Pilkington

    Wow have you been conditioned! But we all have. Debt-free money is unthinkable to most.

    1. Calgacus

      Not true. At least two forms of money require no debt: government fiat and common stock.

      Government fiat money is a form of debt, government debt. There is no essential difference between a dollar bill and a treasury bond.

      Common stock is not a form of money, but a claim on real wealth.

      Debt-free money is a contradiction in terms. Money is a form of debt, always and everywhere. There are no exceptions, no form of money which has ever existed which is not correctly understood as a form of debt. If it ain’t debt, it ain’t money.

      “Money” is a derivable concept definable in terms of the fundamental concept “debt”. Money is defined as “transferrable, negotiable, assignable debt”, as the old Institutionalists well knew, and was unfortunately later forgotten.

      1. F. Beard

        Government fiat money is a form of debt, government debt. Calgacus

        Then please explain who owes who? Hmmm?

        There is no essential difference between a dollar bill and a treasury bond. Calgacus

        Thomas Edison disagrees with you and so do I.

        “If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays
        nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.”
        Thomas Edison from http://quotes.liberty-tree.ca/quote_blog/Thomas.Edison.Quote.6991

        Common stock is not a form of money, but a claim on real wealth. Calgacus

        Corporations might be forced by economic necessity to spend their common stock as money if the government backed counterfeiting cartel was abolished.

        Debt-free money is a contradiction in terms. Money is a form of debt, always and everywhere. There are no exceptions, no form of money which has ever existed which is not correctly understood as a form of debt. If it ain’t debt, it ain’t money. Calgacus

        Such a strong statement but easily refuted; I have pointed out two counterexamples.

        But even if money were a form of debt (which is arguable ) the fact remains that no third-party debt is required. Hence the banking system is not needed and is instead an expensive parasite.

        “Money” is a derivable concept definable in terms of the fundamental concept “debt”. Money is defined as “transferrable, negotiable, assignable debt”, as the old Institutionalists well knew, and was unfortunately later forgotten.

        1. F. Beard

          “Money” is a derivable concept definable in terms of the fundamental concept “debt”. Money is defined as “transferrable, negotiable, assignable debt”, as the old Institutionalists well knew, and was unfortunately later forgotten. Calgacus

          That definition is false. Even primitive PMs could and have served as debt-free money.

          1. Calgacus

            Government fiat money is a form of debt, government debt. Calgacus

            F. Beard:Then please explain who owes who? Hmmm?
            Fiat money is a form of government debt. The government owes the holder of the money. What does the government owe the holder of fiat money? Knick-knacks at the Smithsonian giftshop, oil-leases, land or seized assets at government sales, in return for payments at the government price. And above all, remission of government imposed tax liabilities.

            There is no essential difference between a dollar bill and a treasury bond. Calgacus

            Thomas Edison disagrees with you and so do I. No, I agree with Edison, and you don’t understand him. Again “It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.” Quite right. Both are promises to pay As I said, there is no essential difference between the two. The kind of distinction between the two the mainstream has confused you into making is “absurd” in Edison’s words. Bonds and currency are both money, both debt, but the bonds tend to be used to fatten usurers.

            Such a strong statement [Money is a form of debt, always and everywhere.] but easily refuted; I have pointed out two counterexamples.No, the first money is a form of debt, as I explain above. The second is not money and has never been used as money.

            F. Beard:That definition [Money is assignable debt] is false. Even primitive PMs could and have served as debt-free money. What is a “primitive PM”? “Debt-free money” is like “Limbless biped”. It is a meaningless contradiction in terms.

          2. F. Beard

            “”Government fiat money is a form of debt, government debt.” Calgacus

            “Then please explain who owes who? Hmmm? ” F. Beard:

            And above all, remission of government imposed tax liabilities. Calgacus

            There is no essential difference between a dollar bill and a treasury bond. Calgacus

            Thomas Edison disagrees with you and so do I. No, I agree with Edison, and you don’t understand him. Again “It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.” Quite right. Both are promises to pay As I said, there is no essential difference between the two. The kind of distinction between the two the mainstream has confused you into making is “absurd” in Edison’s words. Bonds and currency are both money, both debt, but the bonds tend to be used to fatten usurers.

            Such a strong statement [Money is a form of debt, always and everywhere.] but easily refuted; I have pointed out two counterexamples.No, the first money is a form of debt, as I explain above. The second is not money and has never been used as money.

            F. Beard:That definition [Money is assignable debt] is false. Even primitive PMs could and have served as debt-free money. What is a “primitive PM”? “Debt-free money” is like “Limbless biped”. It is a meaningless contradiction in terms.

          3. F. Beard

            In any case, not third party debt is required so neither are bankers. Or do you deny that too?

          4. Calgacus

            In any case, no third party debt is required so neither are bankers. Or do you deny that too? Not sure what you mean by third party debt. A monetary economy must have some kind of banking – the minimum is some royal exchequer counting up tax receipts. MMTers agree that banking is overblown. It is frequently suggested, e.g. by Wray, that the functions of the Fed chairman could be performed by a chimp, and the Fed should be put back into the Treasury department.

            I understand what you mean by banking as a counterfeiting cartel. Bankers make their money by performing a sovereign, state function, money creation. The moral hazard is so big that it should be fanatically regulated and probably should be directly run by the state. Of course recent history has run in the opposite direction, with consequences we all can see.

            Realistically, private debt is not going to disappear, though MMTers suggest more government debt & less private debt. The concept of debt is far more ancient and fundamental than money. Any time you run up a bar tab, you are creating debt & money. Trade debt, bills of exchange, commercial paper, lending for real investment are important to the real economy, not just financial never-never land. So some kind of modern banking is going to go on. We aren’t going to return to an ancient/classical/early medieval economy where the only real, universal money is that of the state. The question is who will be the master, the bankers or everyone else, through the state.

          5. F. Beard

            We aren’t going to return to an ancient/classical/early medieval economy where the only real, universal money is that of the state. The question is who will be the master, the bankers or everyone else, through the state. Calgacus

            Actually, the Lord gave us the answer almost 2000 years ago – separate government and private money supplies per Matthew 22:16-22.

            Isn’t it absurd that government money should be legal tender for PRIVATE debts? Who benefits by that except the bankers?

  19. Tao Jonesing

    @Philip Pilkington,

    I understand what you’re trying to do. I really do.

    I even understand what you’re trying to say. Really.

    I just think you could have said it A LOT better. It’s as if you became so enamored with finding a clever way of crafting a controversial cheer (“yay, public debt!”) that you failed to go back and check if the facts actually supported the assertions you were making to pitch public debt as something that is always a good thing.

    Personally, I believe that public debt can be a good thing. But it also can be a bad thing, even a very bad thing.

    Everything boils down to a single question: what is the purpose of taking on that public debt?

    If the public is borrowing money to cover private debts, to bail out financial institutions that had made bad speculative bets, such borrowing cannot and will not lead to economic growth and is really just a transfer of wealth from the mass of citizens to the wealthy few who should be a lot less wealthy.

    The main thing that I take issue with is the notion that public debt is necessary. No, it isn’t. Public debt is actually a compromise between the government and the rentier class, those roving cavliers of credit who stop lending money to everybody but governments in depressions. A clear alternative would be to tell the rentiers “use it or lose it,” i.e., if you won’t lend it or invest it domestically yourselves, we’ll take it. Now, that sounds a bit like “tyranny,” but when the rentiers are using public debt as a mechanism to stripmine national wealth and line their own pockets, the “use it or lose it” alternative is clearly the lesser of two evils.

    Another way to look at it is that our tax laws, accounting rules and import laws define a set of levers set the mix between real investment in productive capital that creates jobs, on the one hand, and financial speculation, on the other. While the modern U.S. economy is heavily geared towards encouraging financial speculation over real investment, there is no reason why the levers cannot be adjusted to encourage the wealthy to take their money out of the casino that is the secondary equity markets and into domestic businesses. That’s the way the levers were set before Reagan, and we did quite well as a country. And our public debt was much, much, much lower.

    1. Tao Jonesing

      Shorter Philip Pilkington:

      Public debt is the only game in town when it comes to growing the economy, so embrace it as the good thing that it is.

      Shorter Tao Jonesing:

      Public debt is not being used to grow the economy but as a mechanism for dismantling the public sector and transferring wealth from the bottom to the top, so we need to think about changing the game.

      Keynes articulated public debt as the hammer needed to drive the nail of economic growth in down cycles. That made sense when we had a real capitalist market system, but today financialism has fundamentally changed the nature of economic reality. So much so that the hammer you think you see in your hand is really a screwdriver, and it is being used to screw the masses and the public sector itself.

      It doesn’t have to be this way. That hammer could be made a hammer again, in theory. Unfortunately, so many people are focused on hammering a nail (or whether the hammer is the right tool for the job) that they don’t realize they’re holding a screwdriver.

      Both sides of the current public debate are wrong because the debate itself is not the right one.

      1. DownSouth

        That’s certainly the way I see it.

        Somewhere along the way it gets lost that public debt is not some blunt instrument cure-all for every problem that ails mankind, nor is it the feared apocalypse, that it’s just one more instrument in the policymaker’s toolkit. And it is lost because one side needs the other, so that each can inflate its agenda into a chiliastic battle for the soul of economic “science.” Radical MMTer and conservative Austrian are now locked in a full-blown, mutually sustaining folie à deux, and (as this comment thread amply demonstrates) the only person each dislikes more than the other is the one who tells both to lighten up.

        Is this debate between errors, between half-truth and half-truth, constructive? I have my doubts. To borrow a passage from Ralph Ellison:

        Here the basic unity of human experience that assures us of some possibility of empathic and symbolic identification with those of other backgrounds is blasted in the interest of specious political and philosophical conceit. Prefabricated human beings are sketched on sheets of paper and superimposed upon the community; then when someone thrusts his head through the page and yells, “Watch out there, Jack, there’re people living under here,” they are shocked and indignant.

        1. vraie démocratie maintenant


          core of the issue.

          ~~JTFaraday~

          Are there many layers to the core? Could we list the important layers? Are there layers that need corrections? Layers incorrectable? The kernel is alive.

          My perspective of one correctable core layer of fiscal policy is the deal. How does government deal the cards? Ah! Treasury deals bonds to foreigners but deals 1040 forms to its subjects, to its workers, its slaves. Could this be slightly tinkered? Could our rulers tax less from slaves but more from foreigners? Could that policy tinker leave more money in-pocket for slaves to bid for bills, notes and bonds? Could slaves then have interest checks biannually, discounts on bills, compounded interest from roll-overs, and use interest for paying tax further down the road?

          How you gonna tax foreign tax-payers? Ah! Import duties, tariffs, and political contributions if they ever want to see their children graduate from a genuine Ivy similar university. Surcharge on aircraft landing fees? Lots and lots of ways to tax foreigners. Tell me something! Foreigners vote for our senile legislators? Hey! This is our kawntry. Talk turkey to your elected officials. They work for you, not for the king of arabville.

          Got the picture?

          Get it
          !

  20. Ian

    As a past member of 5 different equity/commodity/exchanges, as someone who has run a multi national company and an options derivative hedge fund. Basically I’m saying someone damn well familiar with how markets work and who has proved it.

    I have never posted before but have to say I signed on solely to say that I am now dumber for having read this. I wish I could hire you to fire you.

    1. john

      That you know how to extract rents from the system doe not mean you understand the system, only that you have mastered its flaws.

      1. Ian

        Bankster does not equal Hedge Fund. One does not take anything other than VERY willfully given funds.

        I do not take rents from anyone not very happy to give them, I see things and bet for/against it. I put my money where my mouth is and personally bear predominately all the risks (both benefits and consequences).

        “the financial sector deliberately caused the crisis and resulting depression”

        You give way too much credit to the foresight of those that generally have little. (Bankers are not smart enough).

        Personally I hold both sides responsible as by the age of 5 I knew not to borrow what I could not pay back. So, in my eyes, those that say they succumbed to predatory lending deserve their drivers license removed.

        Simple problem is the banks should have been put to death and private debt never should have been transferred to the public.

        Currently I have no reason to choose sides. I am, and have been, in Brasil building a large agricultural business. I seem to pick places well :-)

        1. craazyman

          Bwaaaaaaaaaak!

          Dig for Gold
          Dig for Gold
          Lucky fellow
          Lucky fellow

          Bwaaaaaaaaaak!

          Professor A.V. Airy, the Bird Brain Who Knows

          from: “Lecture 7 on Fate and Chance: How Even a Bird Brain Knows that Luck Falls from the Sky Like Rain Upon the Just and the Unjust, It’s God’s Little Trick on Man” page 89, loc cit, ibid

          1. Ian

            ROTFLMAO.. I couldn’t agree more.. Luck favors those who dig the most holes. So simple.

        2. Tao Jonesing

          Bankster does not equal Hedge Fund.

          You were a member of the FIRE sector and, thus, a bankster (rhymes with gangster; get it?). The FIRE sector produces nothing. It exists to extract rents (the winnings of what you call bets).

          You give way too much credit to the foresight of those that generally have little. (Bankers are not smart enough).

          You can’t have it both ways. You can’t rely on your alleged credentials as an anonomyous bankster as the basis for accepting what you say (simply because you say it), then turn around and argue that banksters don’t really know what they’re doing.

          I am, and have been, in Brasil building a large agricultural business. I seem to pick places well :-)

          Wait. Don’t tell me. You have built the single largest Narcissus plantation ever, right? Don’t be modest, now.

        3. F. Beard

          So, in my eyes, those that say they succumbed to predatory lending deserve their drivers license removed. Ian

          All new-money-for-debt lending (credit) is predatory since the purchasing power for the so-called “credit” comes from all money holders including and especially the poor. Those who don’t borrow are priced out of the market by those who do borrow. Thus the system drives the entire population into debt.

        4. Tao Jonesing

          as someone who has run . . . an options derivative hedge fund

          by the age of 5 I knew not to borrow what I could not pay back.

          Uh, a basic strategy of hedge funds is to borrow money that they cannot payback (e.g., LTCM). It’s called debt-financed leverage, and it’s how hedge funds can make such outsized gains compared to other market participants. It’s part of the business model, and it is something that you would have done all the time, if you had been a hedge fund manager.

          Either you don’t have the credentials you claim to have, or you have become so divorced from reality that you are unable to discern the truth. Either way, you have no credibility.

          1. Ian

            and Tao you clearly don;t understand they couldn’t model their way out of a paper bag. Academics in the world of reality. That’s how I define LTCM.

            You have all the answers my friend, just wrong ones. Keep telling yourself what you want to hear and go find places to confirm your bias. I have no bias, I’ll just keep making my $’s, easy as can be, since none of you seem to get it at all. Once wages in US hit China and Brasil all will be ok there too. Things simply are what they are, like it or not.

            Tchau!

          2. F. Beard

            Once wages in US hit China and Brasil all will be ok there too. Ian

            So overpaid US workers are the problem, not the fact that their jobs have been automated and outsourced with their own stolen purchasing power?

          3. Ian

            F Beard. Or underpaid foreign workers that want/are raising their standard of living. Spread is coming in very fast though. Cut the dollar in half one more time and you are close to there. Unfortunately you also cut American wealth in half too. There is no easy solution.

            If you can explain why an American engineer deserves 100k and one in S.Korea deserves 20k, and how it stays that way forever, please tell me.

          4. F. Beard

            If you can explain why an American engineer deserves 100k and one in S.Korea deserves 20k, and how it stays that way forever, please tell me. Ian

            Who needs high wages when one has not been cheated out of equity? The corporations and banks have stolen purchasing power from workers via what is essentially a government backed counterfeiting cartel and used that stolen purchasing power to automate and outsource the workers’ jobs away. Then where is the worker’s cut of the increased profits?

            And dare you mention engineers? An engineering degree is much harder than a degree in finance. Then why are engineers paid much less? Exploitation? Indeed, yes.

            The current finance system is a parasite that relies on a government enforced monopoly money supply for private debts and other government privileges for the banks.

            Remedy? Yes, abolish government privileges for banks and bailout the entire population, including savers, with new debt-free fiat.

    2. Tao Jonesing

      Shorter Ian:

      “I was a leading member of the financial sector that sold the toxic swill that tanked the world economy, so I know how the economy works.”

      You claim to be a bankster, and you think that makes you credible? Really? The one saving grace of your choice to stop lurking is that you essentially admit that the financial sector deliberately caused the crisis and resulting depression. I mean, if you know how markets work, then what happened was not a surprise but by design, right? We now have confirmation. Thanks.

      1. Ian

        “the financial sector deliberately caused the crisis and resulting depression”

        This deduction based on nothing I had said explains to me why you see complete logic in the article.

        “I mean, if you know how markets work, then what happened was not a surprise but by design, right?”

        I’m more of a Chaos guy, little ever works as planned. Once again you give to much credit to those for whom it is undeserved.

        Personally I think until global wage arbitrage reaches a near equilibrium things will not improve in the U.S., things are beyond wonderful down here in Rio. I think real estate up almost 800% in US dollar terms since I got here in 05-06. Simply BOOMING!

    3. Philip Pilkington

      “I have never posted before but have to say I signed on solely to say that I am now dumber for having read this. I wish I could hire you to fire you.”

      That someone in such markets could say such a thing is the greatest compliment I could have hoped for.

      Having people like this run the economic system — which they do, essentially — is like having a cannibal run a kitchen.

      I know you’ll think that you’re benefiting everyone and that you’re a thoroughly honest guy — and you probably are — but that doesn’t mean that your methods of economic governance aren’t grossly deranged. They are.

      Thank you. I’d accept your firing any day of the week.

    4. H. Alger

      Ian I believe you.

      I have just written a book detailing my meteoric rise to immense wealth that sounds a lot like yours.

      I was an agricultural worker in Brazil, maybe on your plantation? and earning only $1 a month. After 10 years, I managed to scrape together $50, and used it to make my first stock purchase. Thanks to free introductory online trades, and my own superior intellect, I doubled the money in one day. Then the next day I did it again. I was so happy! I had enough to retire, but I wanted to see if I could with my amazing prescience, double my money again the next day. And I could!

      I kept doubling my money every day for a year until I had enough to start my own hedge fund. The rest is history as they say. You can read all about it in my book.

      I want to encourage everyone like us with an IQ above 200 to seriously consider pulling themselves up by their bootstraps. The money is like ripe fruit on my old plantation (which I now own) just waiting to be picked.

      Horatio

      1. Doug Terpstra

        Slash and burn, baby, slash and burn! Damn the rain forest, the climate, and spaceship Earth; let old Atlas shrug; full speed ahead! There are enormous piles to be made; move on and leave the ashes behind. Burn, baby, burn!

  21. Kevin Egan

    I’d like to post a compliment: I thought this energetic post and your engagement with the critics was highly educational, and it clarified important issues for this non-economist. I come at these things from the side of rhetoric and history, so two remarks: your language is reasonable and welcomes dialogue, while that of many of your critics (not all) showed marks of being ideologically overdetermined–ideologues get sarcastic and then angry very quickly, that’s a well-known defense mechanism.

    From the side of history, your remarks tally nicely with well-known facts of American history: usually when we either have no debt or start paying it down precipitously (Andrew Jackson, latter decades of 19th century, Coolidge and Hoover, Bill Clinton), a catastrophic downturn follows.

    Thanks again! Enjoy that well-earned stout!

    1. alex

      “well-known facts of American history: usually when we either have no debt or start paying it down precipitously … a catastrophic downturn follows”

      So does that mean that if some government debt is good, more government debt is necessarily better? That’s what Pilkington is basically saying. I think it’s more like food – some is good, but there’s such a thing as too much.

    2. Philip Pilkington

      Thank you. For all the opinions that float around this comments section, my only judge is history.

      When someone trudges up some history to counteract my argument I will more than gladly reevaluate. Until then, it’s all crap, as far as I’m concerned. History is all we can learn from. All laws are formed from historical evidence. And everything else is moralism and nonsense.

      1. F. Beard

        History is all we can learn from. Philip Pilkington

        Then those who made history – what did learn from?

        And everything else is moralism and nonsense. Philip Pilkington

        With reasoning like yours, slavery would still be widespread.

        1. Philip Pilkington

          What a load.

          Anti-slave folk looked at history — i.e. the past — to determine that the system was disgusting.

          Without history there is nothing. Nothing but rhetoric, nonchalance and nihilism.

          1. F. Beard

            Without history there is nothing. Philip Pilkington

            Spoken like a true conservative.

            But yes, we should learn from history. So what part of 317+ years of central bank failure don’t you get?

  22. anon48

    Philip- nicely written. Even I could follow your argument. But unfortunately, I’m still not convinced.

    Mainly because I doubt that you can validate your point by focusing only upon the right side of the balance sheet. What about the changes in asset values? How does that fit into your equation? For example, we have a U.S. real estate market that has dropped in value by anywhere between 20-50% depending upon where it is located. How does your theory account for that? The implicit value of the mortgage debt is usually directly related to the value of the underlying collateral, correct? How does this change in value, based ultimately upon the change of people’s perceptions over time, get factored into the equation?

    Also, the following statement contains a level of arrogance that reminds me of my learned dislike for economists (nothing personal).

    “Commentators then simply can’t have it both ways. Given that a country is not usually running a massive trade surplus, if commentators don’t like private debt and its fallout, they must support government deficits. If, on the other hand, they are strongly averse to government deficits – as so many are at the moment – then they must be implicitly advocating a highly leveraged private sector. If they like neither of these and still continue to comment, then they’re cranks – plain and simple – and should be politely ignored and perhaps, if they continue to wail, given a soother…”

    No even though your article is well written, I did not detect a level of empirical evidence included therein that justified the issuance of such a smug statement as above.

    1. Philip Pilkington

      “How does your theory account for that?”

      Housing debt is the result of governments trying to run surpluses — or restrain deficits — while the external sector is running a deficit.

      If you don’t want more bubbles, you need (a) more regulation(b) adequate government deficits and (c) try to bring down your trade deficit [this last one is the least important].

      1. F. Beard

        If you don’t want more bubbles, you need (a) more regulation(b) adequate government deficits and (c) try to bring down your trade deficit [this last one is the least important]. Philip Pilkington

        How about removing the source of “air” for the bubbles – extreme leverage allowed by government privilege for the banking system?

      2. anon48

        “Housing debt is the result of governments trying to run surpluses — or restrain deficits — while the external sector is running a deficit.”

        OK that’s probably true at times. But let’s say in 2003 I liked Florida, had a good credit rating and obtained 100% financing on three separate condos using subprime financing sources. The effect was that I increased aggregate debt without any correlation to the government or external sectors. Multiply this by tens of thousands of data points. How do disprove the possibility that this is also true at times. If you can’t, then your “don’t worry be happy” outlook towards government debt has not been substantiated.

        This is so because it appears that there would be other factors aside from just changes in surpluses and deficits between the three sectors that can impact the aggregate level of debt.

        1. Philip Pilkington

          I cannot guarantee that — although I genuinely think that, given the historical evidence, private debt would be lessened with government deficits.

          However, as I said, you need to REGULATE these sectors. This is key. I have never denied it. Nor do I deny it now.

          Regulate subprime. Regulate the stock market. Regulate commodities… you get the idea.

          1. F. Beard

            Regulate subprime. Philip P

            Yep, only the rich and other “credit-worthies” should have first access to money so they can drive up prices for the poor.

  23. Ian

    “You’re pushing my argument to an extreme which is silly”

    It’s actually the best way to test an argument. I do it constantly. Extremes and shifting scales of size. If it breaks, where and why? It’s almost always how I find my mistakes before I make them. Not that I don’t make a fair share.

    Debt is a liability and must find adequate return as well as its size must be controlled. If you feel no consequence to QE2/ZIRP. Please come shopping in Rio. Oh will you get a taste of how your purchasing power is getting destroyed.

    1. Philip Pilkington

      ““You’re pushing my argument to an extreme which is silly”

      It’s actually the best way to test an argument. I do it constantly.”

      Yes, I can see that quite clearly. You think in black and white. You would make a terrible policymaker and would fair mediocrely/badly in any real world situation.

      “Debt is a liability and must find adequate return as well as its size must be controlled. If you feel no consequence to QE2/ZIRP. Please come shopping in Rio. Oh will you get a taste of how your purchasing power is getting destroyed.”

      If Brazil were running their fiscal policy properly they might not have such a problem. Then, if all else failed, there’s always capital controls.

      But then, that might put guys like you out of business. Right?

      1. Philip Pilkington

        PS I wasn’t actually advocating QE. I was just trying to make a point about money creation. But don’t blame Brazil’s problems on Bernanke — they’re a result of poor economic policy by the Brazilian government.

  24. Toby

    Philip Pilkington: “All money is debt — someone’s debt. That’s not even theory; that’s just accounting.”

    As if that lends any validity or inevitability to money as debt! What a bizarre defense.

    Professor of economics (and an account to boot) Franz Hoermann says of accountancy (my translation):

    “The assignment of revenues to individual components of some activity, such as the production of a good, happens arbitrarily. Every possible theory for explaining this process can be supported by some arguments, but undermined by others. Therefore theories of value can never be falsifiable nor part of any empirical science.

    This situation resembles, quite shockingly, that of medieval theologians hotly debating how many angels could stand on the head of a pin. Viewed through the lens of today’s scientific theory the answer is as clear as day: Because no claim on this matter can be falsified the question itself cannot be said to be scientific. Exactly the same finding applies to accountancy valuations. Bookkeeping and accountancy were discovered in medieval times. Modern scientific theory has never been applied to these antique business methodologies. Were such to happen, the absence of falsifiability would require the immediate discontinuation of their use, to avoid confusion and abuse. For those who recognize this it is no wonder that we see endless reports of financial scandals and their corresponding trials flooding the press. After such events some new law is enacted or an old one tweaked to avoid similar future occurrences. The USA’s Sarbanes-Oxley act, for example, was a consequence of the ENRON scandal. Nevertheless a short time thereafter the same sort of thing happened again, which led to another change in the law, which again could not change anything. Insiders know full well that all these “reforms” are, in truth, utterly ineffective, indeed must be so, because the core problem, the hopelessly outdated and today even damaging double bookkeeping method, is upheld. Only double entry bookkeeping and the accountancy that arises out of it enable the financial elites to perpetuate their medieval shell game, to confuse population and politics alike with their manipulatable, meaningless numbers.”

    attempter and DownSouth have it right. It is hopelessly circular to say we need debt because we need growth, and that growth is good because it is. Anyway, accountancy says so too, and you can’t argue with accountancy! It even exists! Accountancy is a fact!

    The faux challenge to go build a commune is childish, a playground-bully tactic. It is, in essence, Philip Pilkington refusing to consider the circularity of his position.

    Either the perpetual growth debt-money system, i.e. money-creation as demanded by medieval accountancy practices, is sustainable, or it isn’t. That’s the question. If it isn’t sustainable–and how can perpetual growth be sustainable–then we need to do something new. That is our challenge. Meeting that challenge with a meek, “But the system is this way!” is dangerously useless.

    Seriously. This isn’t a game. We’re in a sixth extinction event, brought on by our ‘success’; all living systems are in a state of decline, and the one thing we’re not allowed to change is accountancy!? Please!

    The argument here boils down to this: accountancy stipulates that money is debt, ergo we must keep debt-based money forever. All other considerations are secondary to the ancient and obscure rites of accountancy. Happily–ignoring for a moment that prickly problem of perpetual growth–debt excites economic growth… Thank goodness for that, eh! Just imagine what shape we’d be in if debt deflated the economy! Anyway, we needn’t look at whether or not growth a A Good Thing, because, well, everyone knows Growth Is Good. Case closed.

    One thing Philip Pilkington says is very true. This economy will end when we put a stop to the extortion racket the debt-money system is. But, unlike the loyal and true Mr Pilkington, I, and growing millions of others, economists and accountants included, actively seek that very healthy outcome. Believe it not, ever accelerating consumerism and Growth Growth Growth! are not panaceas. And if you don’t think you’re saying that, you don’t even understand your own position.

    And that what I say must seem like the ravings of a lunatic does not make it so. Professors of physics a hundred years ago wrote books about how flight was impossible. It took the mainstream 4 to 5 years to accept it after the fact. Believe it not, the mainstream is not always right. In fact, change pretty much invariably comes from the fringes, from the loons. By definition actually, since the mainstream is systemically about promoting and perpetuating the status quo. Philip Pilkington, you are squarely in the mainstream, and I don’t think you want to be there. Time to grow a pair. Right now all you have is charm.

    1. Philip Pilkington

      That is the most vacuous thing I have ever read. We get it dude… you’re a rebel. Really cool. Che Guevara t-shirt. Armchair revolution. Have fun.

      1. PianoRacer

        Great post Toby, and very well said.

        This immature response clears one matter up unequivocally: Philip Pilkington is a dick.

      2. Michael H

        What PianoRacer said. This glib response to Toby’s thoughtful message removed any lingering doubts I may have had: Philip Pilkington is an arrogant SOB. It’s a pity Naked Capitalism doesn’t have the Usenet equivalent of a killfile.

        1. Deus-DJ

          Philip gave him a proper response, he deserved no better. It doesn’t take much to be a misinformed critic, and that’s all this Toby is.

          1. Toby

            And this Deus-DJ can prove that this Toby is but a misinformed critic how? By referring to the thoughts and arguments of others who take the opposite view perhaps? Quoting some ‘facts and figures’ maybe? And if this Toby were to respond to those arguments, those ‘facts and figures’ as the output of a misinformed critic, would that make this Toby as cogent a debater as this Deus-DJ is? Is that what it takes to be … respected? Do I have the gravitas for that, sitting in my armchair dreaming of Che Guevara?

            Obviously not.

      3. Toby

        I’m not a rebel, not at all. And as you infer, I am far, far from cool. And yes, very much the armchair philosopher. I’m just working on the logic and learning–from books, blogs and otherwise–what’s going on out there. But all that, and everything about me, is utterly irrelevant. (You’d be so surprised if we met. Aside from the rather shameful way I provoked you, we’d probably get along.) It’s the argument that counts.

        Now, why is what I’m merely forwarding here, that is, the ideas of other people, ideas which seem strong to me, vacuous?

        Why don’t you address the circularity of your position?

      4. Frank Powers

        Oh Mr. Pilkington, you just disqualified yourself, and thoroughly so. Continue to play by the eternal rules, all by yourself – it’s the game that has to change.
        Besides: well said, Toby.

  25. LRT

    Its really funny to see attempter and downsouth foaming at the mouth and engaging in personal abuse irrelevant to the article. Yes, you guys have a real intellectual problem. You have started out arguing that debt is there to be repudiated. Now you have someone pointing out to you that if there is no debt, anywhere, you have a real problem trading in any way except barter. And so what do you do? You resort to personal abuse and name calling.

    Fact is, you have an incoherent view, no view really, of how your vision is going to work out, fiscally, moneywise, or technologically.

    But hey, Lenin found himself running one of the largest economies in the world at the time with about the same lack of any idea how to do it, and he did pretty good. Didn’t he?

    1. attempter

      I notice that you don’t argue for a position.

      As much as possible, I grow food. What do you do, that you deserve to eat at all? The fact that you refuse to defend whatever parasitic position you hold on this earth speaks volumes. I’d bet anything we could easily do without you.

    2. Toby

      LRT, you misunderstand their position. They’re not saying there’s no debt, they’re saying there need not be debt.

      Yes, this system runs on debt, so ending debt will end it. But seeing as this system is unsustainable, where’s the problem? I mean, that’s the point! Of course, this isn’t something that can be accomplished with the flick of a switch, and the resistance to attempter’s and DownSouth’s (and others’) analysis is mighty indeed, but that doesn’t make the transition from perpetual growth to steady state growth any less necessary.

  26. F. Beard

    That’s just factually incorrect. All money is debt — someone’s debt. That’s not even theory; that’s just accounting. PP

    The US Government could easily create, spend and tax its own fiat. Where would the debt be in that case? Hmmm?

    As for private money, common stock requires no debt either. Those with capital, including labor and skills, could simply create a corporation and spend their own common stock into circulation and accept it back for the goods and services of their corporation.

    So you see Philip, money need not be debt at all.

    1. F. Beard

      Or at the very least, no third-party debt is ever required. Banks are thus an unnecessary third-party who have been exploiting people for centuries.

      1. DownSouth

        Beard,

        You are absolutely right. There is no reason why the government can’t just spend money into existence. The only beneficiaries of this debt canard are the banksters.

        There’s a great video documentary that does a great job of debunking the debt money fiction:

        The Secret of Oz.

        1. F. Beard

          I believe in private currencies too as a necessary check and balance to government money creation and to allow usury-free monies such as common stock to compete on a level playing field with private banks.

          1. Calgacus

            Again, in case you didn’t notice my reply above, fiat money (& private currencies) are forms of debt.

          2. F. Beard

            Again, in case you didn’t notice my reply above, fiat money (& private currencies) are forms of debt. Calgacus

            Not necessarily. Common stock is a private money form that requires no debt. As for government money, any debt is from the taxpayer to the government; no third party is required.

  27. Ian

    Like I said, I’ll just keep making my $’s, easy as can be, since none of you seem to get it at all. Once wages in US hit China and Brasil all will be ok there too. Things simply are what they are, like it or not.

    Everything fails to subdue me. Even that gunman shooting 12 schoolchilddren in Rio a few weeks ago fails to excite me anymore, it now seems dull: another sunrise, the lives of heroes, falling in love, war, the discoveries people make about each other. The only thing that doesn’t bore me, obviously enough, is how much money Tim Price makes, and yet in its obviousness it does. There isn’t a clear, identifiable emotion within me, except for greed and, possibly, total disgust. I have all the characteristics of a human being – flesh, blood, skin, hair – but my depersonalization is so intense, has gone so deep, that the normal ability to feel compassion has been eradicated, the victim of a slow, purposeful erasure. I’m simply imitating reality, a rough resemblance of a human being, with only a dim corner of my mind functioning. Something horrible is happening and yet I can’t figure out why – I can’t put my finger on it.

    Well, that’s enough introspection for now, time to focus on the only thing that matters in life, making my $$’s. Tough shit about those favelas, things simply are what they are, like it or not.

    1. F. Beard

      He who loves money will not be satisfied with money, nor he who loves abundance with its income. This too is vanity. Ecclesiastes 5:10

  28. Leverage

    On aggregate level debt is not really neccesary for a steady-state economy which is what every developed nation should be aiming for (so yes, you would have a little of growth until full capacity and unemployment is reached, but eventually you will stop most growth and even you will have de-growth).

    Only problem with no-growth or degrowth and steady-state economy is financial. ¿So do you need debt on aggregate level?

    1) If money circulation drops yes, you need an stable income of currency into the system to keep it functional. Money circulation rate is low in current monetary and financial system because it favours: (a) financial rent, (b) capital accumulation. But doing so via banking system is will cause systemic instability because increasing aggregate debts via banking system means private leverage and implies that you need growth to cancel both the interest and cancel the problem of capital accumulation. So basically you need ‘free-of-debt’ money influx into the economy, from a public institution (treasury, central bank, I don’t care) printing of money. Well here is the problem: this is inflationary in the long run, it favours asset-bubbles and too much liquidity on the system which will cause problems at some point, unless you have a strong political independent system which will keep decent regulation and enforcement.
    2) The other option (anti-inflationary and decreases the possibility of speculation) is to increase money circulation velocity or/and diminish the problem of capital accumulation: this can either be done with some sort of demourage (progressive negative interests rates on capital over time) -less interventionist- and/or higher progressive taxes and redistribution policy -more interventionist-.

    Actually is not hard, both options would provide more a bigger importance of capital markets (minus banking) and a diminishing importance of banking and financial rentism warfare and the possibility of an steady-state dynamic economy without falling into some sort of corrupt autoritary political system and command economy.

  29. dave

    The quality of debt is judged by how it is incurred. Who incurs is (public or private) is secondary. Smart spending by the private sector will cause real growth that can fund the debt that created it. Smart government spending can create growth and fund itself. But dumb spending by any sector of the economy makes us worse off, and when you add interest bearing debt to the equation it has the potential to make us worse off for a long time.

    Bush ran huge deficits, which is exactly what the author wants, but they were deficits to start wars and kill people. Are all government deficits the same? Is any kind of “GDP” growth the same? Or is spending itself something we can judge on its merits, independent of the body doing the spending.

  30. Ian

    Phil,
    Simply I don’t care about right/left.. I care about right/wrong.

    First half just fine, but your conclusions are simply incorrect. You do not understand debt and what it does to the balance sheet of a country.

    FYI. I have grown a large agricultural concern at over 30% yoy without $1 of debt. I no longer trade, lost its fun.

  31. Sufferin' Succotash

    Let’s face it. The Western world has been inflating a debt bubble ever since those wily Italians invented the bill of exchange and letters of credit back in the Middle Ages. We’d be better off if we paid solely in Charlemagne’s silver pennies.

  32. Fed Up

    Philip Pilkington said: “Hyperinflation, it is now recognised, cannot be caused by government debt issuance either (as there has to be a demand for funds). There’s extensive work done on this — here’s some of it:

    http://bilbo.economicoutlook.net/blog/?p=3773

    I suggest bill’s latest quiz:

    http://bilbo.economicoutlook.net/blog/?p=14761

    At the bottom:

    “The best way to reduce the public debt ratio is to stop issuing debt. A sovereign government doesn’t have to issue debt if the central bank is happy to keep its target interest rate at zero or pay interest on excess reserves.”

    Is that the best way to create more medium of exchange with no bond attached? I disagree with bill on that, but I admit it is one way.

  33. JP Hochbaum

    I understand the concept of competing currencies, but in the end that just brings us back to bartering.

    And the most valulable currency would be printed by the private entreprenuer who produces the most.

    Now take that private entreprenuer and apply it to the most productive country and you will see you came full circle.

    1. F. Beard

      And the most valulable currency would be printed by the private entreprenuer who produces the most. JP Hochbaum

      That’s possible but in that case it would be a meritorious monopoly and would depend on continued good performance to maintain that monopoly.

  34. tz

    One thing not addressed is lets say they go into defecit – then just send the money to Wall street to pay billion dollar bonuses. Or to wage a few more wars. That would be a plus in your robotic equation. With our corporatist system, any new debt won’t create jobs – except maybe in the 3rd world. Keynes has another half – run surpluses during booms to moderate them but what always happens is that even with all the extra revenue from the boom we just go farther into debt. We had stimulus on steroids during the tech and housing bubbles. Now when it might be prudent to run deficits (I wouldn’t argue that, only note the point), we have already burned out most of the fuel.

    The words “interest rate” do not appear anywhere in the article or even the comments, but when either sector wishes to go into debt they can do so only to the extent they can handle the debt load and the chance of being repaid in depreciated currency or even having the value of bonds go down makes this reasonable.

    Because government theoretically can print, they generally have a lower risk premium so pay lower interest rates.

    Even now (because the banks are insolvent), the Fed has interest at near zero percent, but you can’t get a mortgage or small business loan anywhere near that rate. You might be able to get a credit card with a decent limit at 15%. But citizens don’t get “Federal Reserve credit cards” with a TALF/TAEP/HAMP like 2% interest rate. Only the banksters do. Well Google and Harley Davidson too.

    But here is the trap – if Government is stretching things, no one will buy the “guaranteed” bonds at the low interest rates. If I expect inflation to be 5% and current bond yields are 3% I will discount the bond – I won’t buy it unless I get effectively 8% interest. So instead of trading at par, the just issued bond – and someone has to buy them (if the central bank instead of some other entity buys bonds that is just money printing), they’ve just had a fairly big capital loss from interest rate risk – or more since that tends to spiral.

    And the market does set interest rates. That is what you call the “bond vigilantes”. When I need to buy food and gasoline and cash in a bond, it would help if it would buy as much as what I paid for it plus interest. Instead if I didn’t hold to maturity and had to sell I would lose a lot of its value, and if I did hold it, it would buy half of what it used to.

    But who attends the bond auctions besides the Fed? The banksters. Godman Sachs can probably securitize and issue CDOs and create toxic treasuries – doing for US debt what they did for Mortgages (or perhaps doing what they did for Greece). And when it blows up and no one will buy a T-bill, note, or bond except at 100% interest rate and existing overvalued bonds are sitting there – unsellable (MERS can be a clearing house for this too!) like so many empty houses, how do you issue more debt into an environment like this?

  35. tz

    “Personally, I favour government debt – as long as it’s issued by a central bank and not subject to the whims of the bond vigilantes, as is the case with the Eurozone countries today. Government debt is cheaper, more sustainable (there shouldn’t be a risk of default as long as a central bank is willing to facilitate it indefinitely) and less volatile”.

    And you would then kill ALL private sector growth – you admit you prefer government debt, so a new auto factory employing thousands will be crowded out by an earmark for a “bridge to nowhere”.

    Basically you’ve thrown the private sector into a pre-debt economy because the government can and will (to your loud applause) suck every bit of savings out of the capital markets and spend it based not on the utility or merits or feasibility of the project, but on how powerful the senator or representative is and their personal whims.

    Government debt means government spending. Government gets to decide who is hired or what project is funded. And for the years this blog has been in existence it talks about government corruption.

    Just remember people like Rove and Hank Paulson – probably with help from the Koch brothers will decide where those borrowed dollars end up.

    Meanwhile there was just a post about how the liberals are being co-opted. Nor do I think the progressives have any special wisdom or knowledge. The market provides that by setting prices in a feedback system of price-quantity, supply and demand. Government ignores it creating either a glut or shortage since price isn’t determined by the market, nor the quantity.

    And while all this government spending goes on and the private sector rots, who will be left to grow food or make products? Maybe it would be nice to have the rest of the world produce everything and every US citizen be issued a debt-created stipend enough for even luxury, but I doubt it will happen. Factories are a long term investment. The one that isn’t funded today will affect the economy for years – as is the one that is closed because they can’t get money to retool.

    So even assuming you are right, all you are doing is saying the private sector cannot and will never be allowed to recover because for them to borrow and start growing again, the government would have to have the debt go into reverse (and I would note part of the new debt is to pay interest on the old) – which you say you never, ever want to happen. Perhaps if people refuse to buy government savings bonds at the near-zero rage we can treat them as terrorists even if they can afford neither the bond nor the depreciation?

    1. Calgacus

      No, tz, the auto factory employing thousands will only be built if the government starts creating and spending the government debt= money that the economy is desperately crying out for. We need the crowding-in, the increased private investment which would be caused by more government spending, just as happened during the New Deal and the war.

      Your arguments, such as they are, could only be valid at full employment, which we are very far from. Capitalist economies are inherently unstable, and easily remain at semistable, stagnant states like now, where they are far below full employment. Higher government spending is the precondition for private recovery.

  36. Bull Pie


    government starts creating and spending

    ~~Calgacus~

    Do you know how much of your tax money and your bond money goes to government spending? How much of the government spending goes to the International Mob? You want more money for lucrative enterprise? Tell your representative to stop spending other people’s money! With more of tax money remaining where it belongs, inside pockets that worked for it, there will be more money for private enterprise that hires workers who spend money that fuels more enterprise! Will that enterprise accelerate global warming?

    Bihsllut
    !

    1. Calgacus

      Do you know how much of your tax money and your bond money goes to government spending?
      None of it. The government destroys its IOUs when it receives them, just like anyone else.

      How much of the government spending goes to the International Mob?
      If you mean those nice mafia guys, precious little. If you mean the bankster mob, far too much.

      You want more money for lucrative enterprise? Tell your representative to stop spending other people’s money!
      Absolutely crazy. Congress is spending far too little, so the banksters will have all the dough.

      With more of tax money remaining where it belongs, inside pockets that worked for it, there will be more money for private enterprise that hires workers who spend money that fuels more enterprise!
      Quite true. Governments have more and more become machines to rob the poor through taxation, and give to the rich through nefarious con games.

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