Yves here. Even though I agree with a good bit of Hudson’s post, I take exception to part of his argument, both in general and with Krugman. Hudson fails to distinguish between private sector debt (particularly consumer debt, whose overall level is negatively correlated with economic growth) and debt issued by a government that also issues its own currency. As we have stressed, unless a country runs a trade surplus (and if some countries run surpluses, other countries must run deficits), when the private sector delevers, the government sector needs to run deficits to accommodate the private sector deleveraging (otherwise GDP and wages contract, which is the austerian result Hudson wants to avoid). And that includes debt writeoffs. Although Krugman argues for deficit spending largely from a Keynesian perspective, he sometimes invokes the sectoral balances approach we described above.
Richard Koo, who coined the expression “balance sheet recession” stresses how financial-crisis-hangover high private sector debt loads are crippling. Consumers and businesses prioritize paying down debt over investing.
By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City and a research associate at the Levy Economics Institute of Bard College. His new book summarizing his economic theories, “The Bubble and Beyond,” will be available in a few weeks on Amazon.
Paul Krugman is widely appreciated for his New York Times columns criticizing Republican demands for fiscal austerity. He rightly argues that cutting back public spending will worsen the economic depression into which we are sinking. And despite his partisan Democratic Party politicking, he said from the outset in 2009 that President Obama’s modest counter-cyclical spending program was not sufficiently bold to spur recovery.
These are the themes of his new book, End This Depression Now. In old-fashioned Keynesian style he believes that the solution to insufficient market demand is for the government to run larger budget deficits. It should start by giving revenue-sharing grants of $300 billion annually to states and localities whose budgets are being squeezed by the decline in property taxes and the general economic slowdown.
To focus the argument against “Austerian” advocates of fiscal balance, Mr. Krugman hopes that economists will stop distracting attention by talking about what he deems not necessary. It seems not necessary to write down debts. All that is needed is to reduce interest rates on existing debts, enabling them to be carried. He does not advocate shifting taxes off labor onto property. The implication is that California can afford its Proposition #13 that has fiscally strangled the state by freezing taxes on commercial property and homes at long-ago levels. It is not necessary to change the economy’s tax shift off real estate and finance, except to restore a bit more progressive taxation.
The effect of Mr. Krugman’s suggestions is for the government to subsidize the existing financial and tax structures, not write down debts or make the tax system more efficient. So I am afraid that his book might as well have been subtitled “How the Economy can Borrow its Way Out of Debt.” That is what budget deficits do: they add to the debt overhead.
Mr. Krugman has gotten censorial regarding the debt issue over the last month or so. In last Friday’s New York Times column he wrote: “Every time some self-important politician or pundit starts going on about how deficits are a burden on the next generation, remember that the biggest problem facing young Americans today isn’t the future burden of debt.” Failure to see today’s economic problem as one of debt deflation means a failure to recognize the need for debt writedowns, restructuring the banking and financial system, and shift taxes off labor back onto property, economic rent and asset-price (“capital”) gains. The effect is to defend the status quo – and to me, that makes Mr. Krugman a conservative. I see little in his logic that would oppose Rubinomics, which has remained the Democratic Party’s program under the Obama administration.
Many of Mr. Krugman’s readers find him the leading hope of opposing even worse Republican politics. But what can be worse than the Rubinomics that Larry Summers, Tim Geithner, Rahm Emanuel and other Wall Street holdovers from the Democratic Leadership Committee have embraced?
Perhaps I can prod Mr. Krugman into taking a stronger position on this issue. But what worries me is that he has moved sharply to the “Rubinomics” wing of his party. He insists that debt doesn’t matter. Bank fraud, junk mortgages and casino capitalism are not the problem, or at least not so serious that more deficit spending cannot cure it.
Criticizing Republicans for emphasizing structural unemployment, he writes: “authoritative-sounding figures insist that our problems are ‘structural,’ that they can’t be fixed quickly. … What does it mean to say that we have a structural unemployment problem? The usual version involves the claim that American workers are stuck in the wrong industries or with the wrong skills.”
Using neoclassical sleight-of-hand to bait and switch, he narrows the meaning of “structural reform” to refer to Chicago School economists who blame today’s unemployment as being “structural,” in the sense of workers trained for the wrong jobs. This diverts the reader’s attention away from the pressing problems that are really structural.
The word “structural” refers to the systemic imbalances that neoclassical economists dismiss as “institutional”: the debt overhead, the legal system – especially bankruptcy and foreclosure laws, regulations against financial fraud, and wealth distribution in general. In 1979, for example, I juxtaposed economic structuralism to Chicago School monetarism in my monograph on Canada in the New Monetary Order. I have elaborated that discussion my textbook on Trade, Development and Foreign Debt (new ed. 2010). The tradition is grounded in the Progressive Era’s reform program. That is what classical political economy was all about – and what the neoclassical reaction sought to exclude from the economic curriculum. From the neoclassical writers through Rubinomics deregulators, the debt problem simply disappears.
So this is getting serious. I realize that it is more difficult to criticize someone for an error of omission than for an error of commission. But the distinction was erased a month ago when Mr. Krugman got lost in the black hole of banking, finance and international trade theory that has engulfed so many neoclassical and old-style Keynesian economists. But last month Mr. Krugman insisted that banks do not create credit, except by borrowing reserves that (in his view) merely shifts lending savings from wealthy people to those with a higher propensity to consume. Criticizing Steve Keen, who has just published a second edition of his excellent Debunking Economics to explain the dynamics of endogenous money creation, he wrote:
Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what. I think it has something to do with the notion that creating money = creating demand, but again that isn’t right in any model I understand.
Keen says that it’s because once you include banks, lending increases the money supply. OK, but why does that matter? He seems to assume that aggregate demand can’t increase unless the money supply rises, but that’s only true if the velocity of money is fixed…
But “velocity” is just a dummy variable to “balance” any given equation – a tautology, not an analytic tool. As a neoclassical economist, Mr. Krugman is unwilling to acknowledge that banks not only create credit; in doing so, they create debt. That is the essence of balance sheet accounting.
Mr. Krugman then doubled down on his assertion that bank debt creation doesn’t matter. People decide how much income they want to save or how much to borrow to buy goods that its stagnant wage levels no longer are enabling them to afford. Everything is a matter of choice, not a necessity (“price-inelastic” is the neoclassical euphemism):
First of all, any individual bank does, in fact, have to lend out the money it receives in deposits. Bank loan officers can’t just issue checks out of thin air; like employees of any financial intermediary, they must buy assets with funds they have on hand.
So how much currency does the public choose to hold, as opposed to stashing funds in bank deposits? Well, that’s an economic decision, which responds to things like income, prices, interest rates, etc.. In other words, we’re firmly back in the domain of ordinary economics, in which decisions get made at the margin and all that. Banks are important, but they don’t take us into an alternative economic universe.
As I read various stuff on banking — comments here, but also various writings here and there — I often see the view that banks can create credit out of thin air. There are vehement denials of the proposition that banks’ lending is limited by their deposits, or that the monetary base plays any important role; banks, we’re told, hold hardly any reserves (which is true), so the Fed’s creation or destruction of reserves has no effect.
“Your money or your life” is what banks mean when they say, in effect, “Take out a mortgage or go without a home,” or “Take out a student loan or go without an education and try to get a job at McDonald’s.”
This blind spot with regard to debt derails Mr. Krugman’s trade theory as well. If Greece leaves the Eurozone and devalues its currency (the drachma), for example, debts denominated in euros or other hard currency will rise proportionally. So Greece cannot leave without repudiating its debts in today’s litigious global economy. Yet Mr. Krugman believes in the old neoclassical nonsense that all that is needed is “devaluation” to lower the cost of domestic labor. Costs can “be brought in line by adjusting exchange rates.” the problem is simply exchange rates. That will reduce labor’s cost and other domestic costs to the point where governments can export enough not only to cover their imports, but to pay their foreign-currency debts (which will soar in depreciated local-currency terms).
If this were the case, Germany could have paid its reparations debt by de
preciating the mark in 1921. But it did – a billion-fold, and even this did not suffice to pay. Neoclassical trade theorists just don’t get this.
Blindness to the debt issue results in especial nonsense when applied to analysis of why the U.S. economy has lost its export competitiveness. How on earth can American industry be expected to compete when employees must pay about 40 percent of their wages on debt-leveraged housing, about 10 percent more on student loans, credit cards and other bank debt, 15 percent on FICA, and about 10 to 15 percent more in income and sales taxes? Between 75 and 80 percent of the wage payment is absorbed by the Finance, Insurance and Real Estate (FIRE) sector even before employees can start buying goods and services! No wonder the economy is shrinking, sales are falling off, and new investment and hiring have followed suit.
How will the government running a larger deficit cope with today’s dimension of the debt problem – except to enable states and localities to spend marginally more revenue and avoid further layoffs, while the military industrial complex steps up its “Pentagon capitalism”?
This is the problem not only the United States but also in Europe. Germany balks at bailing out Greece until it will streamline its bloated government and inefficient bureaucracy, stop tax evasion by the wealthy, clean up corruption and, in a word, be more Germanic. The U.S. “Austerian” budget cutters whom Mr. Krugman criticizes likewise can point to wasteful government spending, failing to distinguish positive infrastructure investment from “roads to nowhere” promoted by Congressional earmarks to the tax loopholes inserted by politicians whose campaigns are sponsored by special financial interests, real estate and monopolies.
But I fear that Mr. Krugman is being drawn into the gravitational pull of Rubinomics, a dark Democratic Party hole from which the light of clarity dealing with the debt issue and bad financial and legal structures simply cannot escape. The only variables he admits are structure-free: The federal government can spend more, and interest rates can be lowered (especially on mortgages) so that the higher debt overhead can be afforded more easily. No need to write it down. That extreme a structural solution lies outside the scope of his neoclassical economics.
The problem is that bank debt creation plays no analytic role in Mr. Krugman’s proposals to rescue the economy. It is as if the economy operates without wealth or debt, simply on the basis of spending power flowing into the economy from the government, and being spent on consumer goods, investment goods and taxes – not on debt service, pension fund set-asides or asset price inflation. If the government will spend enough – run up a large enough deficit to pump money into the spending stream, Keynesian-style – the economy can revive by enough to earn its way out of debt.”
That is the problem with neoclassical economics. It brainwashes students to treat all activity as current spending and consumption. Debt is left out of account.
Without recognizing its role, on cannot see that what is preventing American industry from exporting more is the heavy debt overhead diverting income to pay Finance, Insurance and Real Estate (FIRE) expenditures. How can U.S. labor compete with foreign labor when employees and their employers are obliged to pay such high mortgage debt for its housing, such high student debt for its education, such high medical insurance and Social Security (FICA withholding), such high credit-card debt – all this even before spending on goods and services?
In fact, how can wage earners even afford to buy what they produce? The problem interfering with the circular flow between producers and consumers (“Say’s Law”) is not “saving” as such. It is debt payment. And without writing down debts, the U.S. economy will shrink just as will those of Greece, Spain, Portugal, Italy, Ireland, Iceland and other countries subjected to the Washington Consensus of neoliberal austerity.
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It is highly tiring to read time and again arguments that start from invoking names that are supposed to be as bad as Satan. It may be the case that Rubin, Summers, Geithner and Emmanuel (the last wasn’t even dealing with economics directly) are totally wrong. But, if you cannot make your arguments without resorting to four letter words and name calling, how about not even trying?
Satan has nothing to do with economics (as far as I know)?
Satan has nothing to do with economics (as far as I know)? Middle Seaman
LOL!
It’s not Satan, it Mammon, right? ;)
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 New American Standard Bible (NASB)
“No servant can serve two masters; for either he will hate the one and love the other, or else he will be devoted to one and despise the other. You cannot serve God and wealth.” Luke 16:13 New American Standard Bible (NASB)
Like I said. :)
“Mammon – Mammon is a Syriac word, a name given to an idol worshipped as the god of riches” — http://bible.cc/matthew/6-24.htm
Michael Hudson said; “That is the problem with neoclassical economics. It brainwashes students to treat all activity as current spending and consumption. Debt is left out of account.”
That is the problem with validating deception with your attention. It brainwashes you into treating all activity as the intentionally divisive; ‘private sector” and ‘government sector’, when the reality is that we are the one sector — we are all humans. An ideal economic system and a good economist would recognize that more moral ideal and respect our oneness.
This is not an economic problem this is an intentional dismantling of human morality problem — a morality sheet depression.
Evil (Satan) is definitely in play here.
Deception is the strongest political force on the planet.
My intent is not to argue with Hudson about economics. (He knows way more than I do there.) I wanted to ask him and other practioners of writing economic arguments that one should not start by: “your sister is a hooker.” No matter what Rubin et al did, they don’t belong to the logical argument.
If we are at that, it’s also about time that Hudson and friends (on both sides of any aisle) write more concise contributions. Everything he said can be stated in 10 paragraphs; he uses about 100.
So true! These days I often I feel like I’m living in the financial version of Groundhog’s Day. The same arguments over and over, the same bad guys the same good guys… BIG YAWN! And how about some type of abstract at the beginning of these long posts… you know, making the key points. Are these people being paid by the word? Or suffering from a mild version of hypergraphia? Maybe that should be added to the new DSM manual too.
I don’t understand this objection–do you feel wounded on Rubin’s behalf? He and Summers have both practiced and pimpped for a neoclassical economic approach that, Hudson argues, has been highly injurious to the economic lives of 100s of millions of people. If you’re not going to attach real names to actual actions, work to show harmful results, why bother? Would you prefer that the conversation remained wholly theoretical, and that we just continue to put the cocaine users and marijuana smokers in jail, leave the big time criminals at large, to continue the same practices, not bothering to ID what it is they are up to? Muddle-headed, from my POV.
Yves is right. These constant attacks on Krugman from a “left” perspective are getting a bit tiresome. After all, the guy has been getting most of his predictions right – something to be expected, since his beloved IS/LM model in a situation of near zero interest rates says basically the same things that MMT proposes from a more generical theoretical point of view.
Of course Krugman is a star, a celebrity economist so maybe it’s understandable that some of his lesser known colleagues sometimes get irritated by all the attention paid to him.
But we should pay the man his due. Krugman has been the most visible voice for sanity in a world inundated by austerian irrationality. The left shouldn’t waste its energy in constant mostly straw man attacks against him.
Anyone who disagrees with Hudson on this simply does not understand what he is saying. You might want to read what he says over again.
Hey, anybody else think this Kool Aid tastes funny? Why is everybody napping?
Yes, whenever anybody explains why Krugman’s belief that the government can borrow our way out of a debt problem is nonsense, the left should shut its eyes and put its hands over its ears.
That is the problem with neoclassical economics. It brainwashes students to treat all activity as current spending and consumption. Debt is left out of account.
I see a similarity in Krugman’s view on politics after 9/11 in his famous The years of shame post. In economics, he can’t or won’t see the Debt problem, in politics he refuses to touch the demolitions of the three WTC buildings, although he pointed out that Bush, Giuliani et al. were faked heroes.
[enjoyed this article by the way, my comment below relates more to previous krugman pieces on NC]
“I see a similarity in Krugman’s view on politics after 9/11 in his famous The years of shame post. In economics, he can’t or won’t see the Debt problem, in politics he refuses to touch the demolitions of the three WTC buildings….”
Dear me, did Krugman pay you to write that? Where next, reptilian lizards? Or are those guys obv. crazy to you?
May I quote from a comment I made earlier in the year:
“you can see from the tone of the comments here that you’re one step away from leading your own version of the tea-party. The rhetoric is too much, and you’ve made too little reference to all of the good work that Krugman does in his columns (if not his text books).”
http://www.nakedcapitalism.com/2012/04/keen-vs-krugman-cage-match-will-there-be-a-round-2.html
Just testing the gif file. It does not contain reptilian lizards of any kind.
Ah, actually Krugman was paid for not to see some obvious things, not me. The test for the gif file has failed.
http://ww1.prweb.com/prfiles/2006/02/18/348811/wtc7.gif
Pa leeze, there are many important things to debate and discuss. How the WTC “really” came down is not
one of them. All the techniques of lying,exageration
and deception used by 9/11 Truthers is exposed
in a two and a half You Tube video. Watch the
video get off the demolition band wagon and come
back to earth. We need your help on real issues.
http://.google.com/search?q=screw9/11mysteries
That is what budget deficits do: they add to the debt overhead. Michael Hudon
Not necessarily. The Federal Government could simply spend new Greenbacks into circulation without borrowing. The National Debt, according to Bill Mitchell is “corporate welfare”:
“The US government issues its own currency and, in intrinsic terms, never needs to fund its own spending in US dollars. The issuing of public debt is an entirely voluntary act by the US government and provides the bond markets with “corporate welfare”. Just imagine what the uproar would be from the bond markets and investment banks if the US government announced it was cutting off this source of corporate welfare.
It happened in 2001 in Australia when the Australian government had virtually caused the official bond markets to dry up when it used the surpluses it was running to run down outstanding debt. The Sydney Futures Exchange led the charge and demanded that the Government continue issuing debt, which gave the game way – if debt-issuance was to fund net government spending (deficits) then why would they be issuing debt when they were running surpluses?
Answer: it was patently obvious that the outstanding debt was private wealth and its risk-free nature allowed the private investment institutions to price other risky assets and maintain a safe haven when uncertainty rose (by holding bonds).” from http://bilbo.economicoutlook.n… [emphasis added]
Thanks again for that Mr. Beard.
Not that anyone seems to notice.
I am grateful to Bill Mitchell for spelling it out so clearly.
It appears the Australian Economists (including Steve Keen) are the antidote to the poisonous Austerian Economists. :) (I make zee pun, haha).
I should say “an antidote” not “the antidote”.
Well, I definitively doubt that their recipe for the present situation in Australia promotes exactly the same policies that led the rest of Western countries into the present liquidity trap. Australia still has a real good chance to avoid such an outcome by accepting slower growth for a while in order to rebalance the economy on a better footing but Bill is simply focused on creating additional money (on what basis does not really matter to me) in order to avoid some level of “creative destruction”.
What is important that we have policies that do not fester the present power structure but allow its destruction for rejuvenation of economic strength. Actions and policies that try to support and enhance the present power structure will lead a slow deterioration of the economy on the whole.
Debt, no matter in which form, is slowly but surely undermining our option in dealing with real life problems. It robs us increasingly of many possible options in working together reasonably and creates a decisive society. Societies that do not try to be all-inclusive in their policies tend to loose economic vigour.
Unpayable debt has to be written off. Full stop.
Unpayable debt has to be written off. Full stop. Linus Huber
That’s gold standard thinking. Fiat can be created as necessary to make debts payable. So why not, if that creation can be done fairly?
Or do you think there is something inherently ethical about a gold standard?
Beard…a real estate attorney that I trust told me not to sign or agree to anything with the banks regarding the mortgage. He told me their debt is unsustainable and can never be repaid. People don’t get it. The banks aren’t paying their debts with the money they are collecting from all of us because they owe so much, they are just pocketing our money. Dylan Ratigan said today that the loans need to be written down. Now wait a minute…..there is $700 trillion in mortgage derivatives fraud debt that these criminals created. There is an estimated $1.2 quadrillion in derivatives fraud total. Make the FED pay the Treasury Dept back the peoples money they borrowed and plundered. CNBC reported that Wall Street made $60 TRILLION DOLLARS IN the year 1999 from selling interests in derivatives ………and we are bailing them out….? It is all hidden overseas……They are using weapons of mass deception simply to bankrupt US..
There is an est. 8 trillion in real estate in America according to attorney Neil Garfield and $700 TRILLION DOLLARS in mortgage derivatives fraud debt…..This is a FRAUDULENT LAND GRAB…
Well, I definitively doubt that their recipe for the present situation in Australia promotes exactly the same policies that led the rest of Western countries into the present liquidity trap. Australia still has a real good chance to avoid such an outcome by accepting slower growth for a while in order to rebalance the economy on a better footing but Bill is simply focused on creating additional money (on what basis does not really matter to me) in order to avoid some level of “creative destruction”.
No, Bill wants to avoid destructive destruction. Creative destruction goes on all the time. Bill wants to creatively destroy the crooks that created this mess & the morons in academia – he blogs on one of the great princes of stupidity today – who abet this destruction. Accepting slower growth is the wrongest thing one could do.
Unpayable debt has to be written off. Full stop. Linus Huber
F Beard: That’s gold standard thinking. Fiat can be created as necessary to make debts payable. So why not, if that creation can be done fairly?
Right, FBeard. Linus is right that truly unpayable debt should be written off. But the really serious unpayable debt is not the utterly unpayable ones that should be written off – and which should have bankrupted, creatively destroyed our glorious financial sector. The more important debts are the ones that aren’t payable because you have no job and no money, or your customers have no job & no money, etc. The damage that the financial sector has visited on the real economy with their crooked gambling. The solution is to provide money & jobs.
These are the debts that aren’t payable because the government makes them unpayable. By running a system where it sucks money out of the economy and allows the biggest crooks to suck money out of the economy, and refuses to give enough money to the real economy, except to the crooks in the hope they will allow some to trickle down on the lesser people. Give ordinary people enough money & jobs to do sensible things, like restoring a first world infrastructure to the USA from its 3rd world status. You’ll get a healthy economy, and awesome growth, far better than we’ve seen in decades.
ding ding ding ding ding! We have a winner! F. Beard calls it out clearly and conscisely, again. Why aren’t you a contributor to this blog?
I’m yet again bored to the brows with the (implied)assertion that government debt and household debt are essentially equivalent. I’m no economist but it seems pretty clear to me that conflating private and public sector debt is going to muddle your thinking pretty early in the game.
This is excellent! Michael Hudson and F. Beard are both entirely correct. Hudson is dealing with things as they now are and Beard is explaining how they should be in a rational non-finance controlled world. Benjamin Franklin and the Quakers, Andrew Jackson and Abraham Lincoln all understood the depredations of bank issued debt and wanted the government to issue its own currency debt free and did. That is until the masters of finance once again gained control of the political reins. There is no earthly excuse for the United States to borrow its own currency into existence.
Franklin was instrumental in implementing fiat currency in Pennsylvania. But it was not debt free. The gov’t created money by lending it.
Yep, and all the interest was spent back into the economy so it could be recycled as the interest for further loans. Not so with banks who would spend some of the money but would lend out most of it for even more interest thereby making it impossible for all loans to perform unless the interest was borrowed into existence too.
I would argue that our economy is not capable of self starting, monetary theory stuffed the banks with out results, corporations are stuffed with cash and nothing is moving. I think Krugman correctly identifies inflation as a tool to get things moving. J.P. Morgan and MF Global demonstrate the progress the financial community lessons learned from Sept 2008. In short the economy pump demonstrates the capability of not self priming. Volker has demonstrated the tools to manage inflation, Krugman is only suggesting to use tool of inflation to get things moving. This whole article is demonstration of distinctions without a difference. I have just finished reading Krugmans new book and find it a honest effort to get us out of our potential lost decade. We need to remember that Clinton and Gingrich left Bush with a near zero deficit. However we need to remember, Clinton signed legislation to enable deregulation, Bush implemented it and now Obama is maintaining it by not prosecuting fraud. Krugman is saying that continuing doing the same think and expecting a different result is a definition of insanity.
Thank you for the description. I would like to read Krugman’s book. I keep feeling like everyone is talking past each other and would much rather hear about common ground rather than ‘…why I’m right and you’re wrong…’
“… and nothing is moving.” The American economy has had a ton of stimulus and stimulus-adjacent expenditure (bank bailouts particularly) and nothing is moving. Krugman is probably right to say that the “stimulus” part was too small. I think the rest of it didn’t work because it was a titanic structural mistake.
The non-stimulus stimulus pumped up the economy with a lot of monetary helium that floated straight to the top and stayed there. The bottom, where hundreds of millions of livelihoods are at stake, still can’t get enough exchange power, enough money, enough claim on resources, to get anything going.
The Club of Rome report is still out there, and in getting anything going, people will have to face those facts. But without the ability to do anything, they’ll never get the chance to face them.
Let’s be plain here. All the spending power which ticked things along has gone, stolen by your own government.
Krugman, for all his blindness about MMT and the new thinking in economics, is nonetheless correct that properly directed stimulus spending can put real people on the public payroll, who then pay taxes and spend their money, supporting the economy during times of stress.
Give a dollar to someone who is already wealthy and it just gets invested, not spent. Give a dollar to someone who needs it and you support your economy. Not rocket science this.
The Keynesian emphasis on debt is disturbing. While the policy recommendation of more deficits is sound, the motive seems to be to just keep the debt slaves productive.
We should be aiming for money forms that do not encumber people with debt. Government money (legal tender for government debts only*) should simply be spent into existence without borrowing. Private money might be anything but certainly only the fairest private money forms would prosper in a true free market of private money creation.
*After a universal bailout with full legal tender fiat.
And without writing down debts, the U.S. economy will shrink just as will those of Greece, Spain, Portugal, Italy, Ireland, Iceland and other countries subjected to the Washington Consensus of neoliberal austerity. Michael Hudson
But credit creation has cheated non-debtors too. How about instead of debt write downs, a universal (ala Steve Keen’s “A Modern Jubilee”) bailout of every US adult citizen?
mr. beard: why not get jesus to repeat the water-into-wine thing? it makes
as much sense as most of what you keep talking about.
What’s so hard to understand?
Men prepare a meal for enjoyment, and wine makes life merry, and money is the answer to everything. Ecclesiastes 10:19 [emphasis added]
F. Beard– Your commentary is the best! Please keep up the good work here…
If done with sovereign money and not debt backed notes it makes far more sense than everything thats been done so far.
“The effect is to defend the status quo – and to me, that makes Mr. Krugman a conservative. I see little in his logic that would oppose Rubinomics, which has remained the Democratic Party’s program under the Obama administration.
Many of Mr. Krugman’s readers find him the leading hope of opposing even worse Republican politics. But what can be worse than the Rubinomics that Larry Summers, Tim Geithner, Rahm Emanuel and other Wall Street holdovers from the Democratic Leadership Committee have embraced?”
This is my problem with Krugman. His continued support for the guy and the party who won’t do what he says should be done can not be squared.
Yep. Logically he should be supporting someone such as Jill Stein with her Green New Deal. But then he wouldn’t be a Very Serious Person.
http://www.jillstein.org/text_psou
You are absolutely correct. But it is true not only of Krugman but of “progressive” types of all sorts – politicians, pundits, bloggers, news media, etc. – who have a field day critiquing Dems but who always stop short of even suggesting that there are, indeed, alternatives to them, as Tom mentioned above.
One of the most glaring examples of this absurdity, IMO, is Kucinich whose plan listed below is obviously totally anathema to his “party”, as were his other positions re single payer, Dept. of Peace, etc. If he were serious about these positions he would be out working with other folks, e.g. the Greens, who are also serious about this stuff.
What is the problem with these folk? Are they genetically modified to incorporate Dem genes? Are they just so blinded by dislike/fear of Reps that even lousy Dems are considered better? (Is that why TPTB keep insuring/ensuring increasingly whacko Reps, so the Dems, who are increasingly awful, “look good” to any “reasonable” person by comparison?)
When will folks realize that doing the same thing, supporting Dems, over and over and expecting better results is a fools errand? Apparently you can fool some of the people all of the time, and these folks seem to fall in that category …
Methinks Plato had these folks in mind when he described his cave people ….
Debt is critical, if only because it ruins flesh and blood lives; but it must be placed in the larger context off reaching the limits to growth. Economist Herman Daily recently wrote: “The reason so much debt was incurred is that we have had absurdly unrealistic expectations about the efficacy of capital to produce the real growth needed to redeem the debt that is “capital” by another name.
In other words the debt that piled up in failed attempts to make wealth grow as fast as debt is evidence of the reality of limits to growth.”
In other words the debt that piled up in failed attempts to make wealth grow as fast as debt is evidence of the reality of limits to growth.” Dan B
According to Karl Denninger the debt normally compounds faster than real growth.
I don’t understand why there is NOT more emphasis on this particular point of disagreement.
Dr. Hudson describes Krugman’s debt-blindness here:
“” he believes that the solution to insufficient market demand is for the government to run larger budget deficits. It should start by giving revenue-sharing grants of $300 billion annually to states and localities whose budgets are being squeezed by the decline in property taxes and the general economic slowdown.””
So we have the necessary socio-economic solution as revenue-sharing $300 Billion grants to states.
The problem, it MUST be DEBT-funded by the government.
WHY?
The direct causes of this financial crisis are both systemic (debt-based money) and irrational greed by private players. But it IS the government that established the private debt-based money system and the unnecessary requirement for government to borrw deficit balances.
Congressman Kucinich has proposed legislation to END government borrowing and also to extend revenue-sharing grants to the states.
http://kucinich.house.gov/UploadedFiles/NEED_ACT.pdf
Why does the argument not focus on this type of real potential for systemic reform to the money system as a means to get from here to there?
For the Money System Common
Of course Krugman recognizes the role of debt. That is why he favors substantially higher inflation. The only question is how to generate that inflation.
If the purpose of inflation is so people can pay their debts then what is more direct than just giving the people new fiat?
Just giving money directly to people also bypasses arguments about government spending.
I completely agree with Hudson on his two main points: on the need for a write-down of debt; and on the benefits of shifting from an income-based tax system (tax on labor) to a property-based tax system (tax on capital).
Both of these seem to be sacred cows for the left and the right alike; for all the talk of “taxing the rich” on the left, I have yet to hear any leading voices propose shifting taxes to property, securities, etc., which is where the real wealth of “the rich” lies.
Likewise, proposals for writing down debt seem to be verboten. But where is it written that debt cannot be reduced if necessary? We have views on the sanctity of debt that approach the religious, but even the Bible mandated the write-down of debt after a prescribed time. Granted, much the reluctance to force through the write-down of debt seem to be based on fears of the impact to pension plans and other public trusts, as well as the solvency of banks who may hold the debt; but surely these are problems for which there are ready solutions if we will only look.
I suppose this suggestion will reflect my abysmal ignorance – but why can’t pension funds etc. get the hell out of the stupid stock market and invest the same way SS does? SS has met its obligation for decades and can continue to do so “forever” with a little tweak here and there ….
Frankly, i think we would all be better off if the stock market just sort of disappeared – was widely recognized as just another form of gambling and became a boutique niche for folks with too much money … shrink it to the size where, in the immortal words of Grover, the right wing muppet (with apologies to real Muppets) it could be drowned in the bath tub …
In practical terms, what is the “extreme structural solution” that Hudson is proposing? How would it work, step by step?
Wouldn’t a useful starting point be, and a policy area we could all agree on, to goose a truly good home refinancing program. Banks will scream, but just saying theoretically.
The excuses are failing….Chase is bragging about being over capitalized while dishing out food stamps and the economic conditions are worse than ever while the FED collects trillions of dollars in mortgage money per month and the fraudclosures roll on. It is the epitome of evil that while the American people continue to be forced to pay for all of the FED FRAUD the President of the U.S. is attending $40,000.00 a seat fundraisers in Hollywood. Its a gay marriage alright, and I don’t mean their sexual orientations. Anyone hear John Travolta is being accused of molesting young boys? Yeah America …keep spending billions at the box office a weekend supporting this type of behavior.
The Consumer Financial Protection Bureau is a bad joke. Yet another in a long line of comedy from the Gubbmint.
The Consumer Financial Protection Bureau is a bad joke. Yet another in a long line of comedy from the Gubb’mint.
As always, I agree with Yves’ comments on my article. I focused on what Mr. Krugman wrote last Friday and in recent weeks, because I think he left out what Steve Keen calls the elephant in the living room: debt.
Of course public and private sector debt are different. But the focus of Mr. Krugman’s article was on public debt, so I followed it.
Regarding “debt-free money,” the term is misleading to an accountant. It is the essence of book-keeping (especially double-entry book-keeping) that every entry on the asset side has a corresponding entry on the liabilities side (with net worth on the liabilities side being the balancing item). So technically, the greenbacks in your pocket ARE debt — only they are debt that nobody really expects to be repaid.
I’ve explained all this elsewhere, and didn’t want to be repetitive for this focused topical essay.
I’m expanding the article using Mitch Green’s (NEP’s UMKC editor) suggested editing on the UMKC Economics Blog to take account of the above comments.
Professor Hudson: Speaking of the elephant in the room, I have heard unofficial estimates of the cost of the current war in the middle east as not just the usual one trillion per year but double that because so much of it is/was under the table. When Obama took office he addressed the issue of accountability for military expenditures and he promised to put it all on the table. Yet no one is discussing this expense – all of which must be paid with borrowed or siphoned funds.
Thanks for the clarification — and I’m looking forward to the expanded version with edits.
I only just recently internalized the difference in economics descriptions between a model that includes private banking functions as opposed to a neo-classical model that excludes banking and money. Thanks to Prof Keen and to you I can appreciate the importance of credit/debt creation in the private sector and Keen’s financial “elephant in the living room.”
Three presentations in the recent INET Conference in Berlin (with their graphics), in particular, helped me understand the effects of private credit/debt creation versus sovereign government money/debt creation. The graphs of Keen, Schularick and Bezemer comparing private and government debt from approx. 1900 to the present time were powerful in pointing to “the elephant in the living room.” Those few graphs and Bezemer’s and Keen’s invocation of Minsky about “good”, “harmful”, and “catastrophic” levels of private credit/debt creation were eye-opening!
Krugman’s blog today had a “victory lap” type of post that referenced an interview of Bill Gross (PIMCO bond guru) that I liked. The money quote from Gross was (with one edit from me in <>:
“I’m not a big Krugman advocate. But I agree that you don’t cut everything and hope the private markets reward you for it. It has to be a balance. What Europe really needs is to get the private market back in there. They’re trying to convince the Pimcos of the world to return (by having the European Central Bank lend to banks), but all the efforts so far use public money. The global marketplace is privately funded <> . And if the private markets can’t be convinced, this crisis is going to be with us for a very long time.”
OOPS !! My edit in the Bill Gross quote was supposed to be “and subsidized by public governments.”
Should have read — “The global marketplace is privately funded ‘and subsidized by public governments.’ “.
Thanks for this! I’ve never been clearer on what the argument was vis-a-vis Krugman.
I do feel like reiterating the comment above, tho it does ask for something now within the framework limit of this article.
“In practical terms, what is the “extreme structural solution” that Hudson is proposing? How would it work, step by step?”
Besides the debt problem we are crippled by Healthcare inflation and also by fixed huge unnecessary military spending.
If we could wish away political reality we could also solve the above 2. But what is really going to be done? Probably nothing to solve either of the above let alone any large scale debt restructuring. The political system is crippled and the American people have probably never been drawn this far to the right in economic beliefs before.
The ‘free market’ worship is unquestioned. No matter how many people end up on the street the consensus by maybe %90 is ‘they deserved it’, and ‘if you borrow, you gotta pay back’.
I’m interested in theories but I’m also practical. Short of revolution, even supposing there was even a tiny smidgen of political support for the very idea of debt rollback of some sort – assume that there is enough to start, what could happen by what mechanisms? Where would you start and would you do?
One thing I deeply appreciate about Dean Baker is his suggesting very interesting ‘practical’ ideas such as how about we subcontract our entire medical system to one of the countries with much lower costs than us. We could split the different between what we now pay and what they pay and that would still be enough to fix medicare.
michael hudson: “Regarding “debt-free money,” the term is misleading to an accountant. It is the essence of book-keeping (especially double-entry book-keeping) that every entry on the asset side has a corresponding entry on the liabilities side (with net worth on the liabilities side being the balancing item). So technically, the greenbacks in your pocket ARE debt — only they are debt that nobody really expects to be repaid.”
OK, I’ll bite. :) Suppose that we used tobacco for money (as has been done), grown on gov’t farms, and introduced into the economy when the gov’t uses it to pay for goods and services. How is that tobacco money debt?
How is that tobacco money debt? Min
Good question. I’d say tobacco money ISN’T debt unless it was borrowed. Of course some might say tobacco money isn’t money but a barter item but I’d say tobacco money was a commodity money.
Commodity monies are primitive but they are money, imo, even if they are not necessarily debt.
Min: Tobacco has never been used for money. Gold has never been used for money. As Wray notes in his recent paper, it can’t be used for money. Tobacco or gold can be used to represent money, to be a money-thing, but that does not mean it IS money, any more than a wedding ring can BE a marriage. Money is like the marriage. Gold, tobacco is like the wedding ring.
The idea of “debt-free money” is more than “misleading to an accountant”. It’s psychotic, like the idea of a marriage which is not a relationship. It’s something no human being has ever understood, no matter how they think they have. It usually proceeds by uselessly redefining the word “debt” to mean something other than in the dictionary, definitions lexicographers understand to be impossible and worthless. (F Beard – you have the most interesting & productive non-understanding.)
Hudson says: So technically, the greenbacks in your pocket ARE debt — only they are debt that nobody really expects to be repaid. Either so misleading it is impossible to see what he is saying, or just plain wrong. Everybody expects that the debt represented by the greenbacks can and will be paid to the government by using them to pay taxes or buy army surplus or buy a hot dog at the Pentagon hot dog stand. In the normal course of business, every dollar spent usually winds its way back to the gubmint quick enough.
This is not at all saying that one expects the greenbacks in everybody’s pockets to be simultaneously paid back, or for issue & redemption to balance for some mystical reason, or for this mystical balance to be magically delicious for some reason.
This is not at all saying that one expects the greenbacks in everybody’s pockets to be simultaneously paid back, Calgacus
Actually, if the Federal Government runs a deficit every year or least runs a deficit some years and never runs a surplus and if the deficit is funded without borrowing (Greenbacks) then some fiat is effectively debt-free in that there is no place for it to pay Federal taxes.
So if the Federal Government spent like it should (no surpluses and no borrowing but some deficits) then SOME debt free fiat would be created.
Yeah, sure, if it paid it all to someone who buried their bills in the ground. Then it wouldn’t be “paid back”. Or the someone would be to all intents and purposes deflating the currency, performing a tax, by destroying the money. But I was speaking of the destiny of the average dollar. Runs around the economy for a while, has a short life filled with wine, women & song, maybe interrupted with snoozing in banks for a while, then is killed when the government takes it in for taxes. This would be obvious if all transactions were made with dated fiat dollar bills. Then people would see that notes more than a few years old would be rarities, just in the normal working of the scheme of things. Even if a bank account is constantly increasing, it is a rare one that just sits there without any outflow. And one should glom together all the dollar bills the bank has at its reserve account, not individuate them in separate private accounts.
Yeah, sure, if it paid it all to someone who buried their bills in the ground. Then it wouldn’t be “paid back”. Calgacus
I see no reason why the money could not continue to circulate in the economy forever since the Federal government would never tax more than it spent. There would be no means to permanently remove the “excess” money besides destroying (illegal) it.
Yes, but my point is that if you looked at each dollar bill individually, it wouldn’t be “the same money”. Of course this is a bit silly. Of course dollar bills are interchangeable. But any particular dollar you have is probably going to be spent, and then spent somewhere else, until it meets its maker, Uncle Sam, when it is used to pay taxes, and then this dollar, this debt of the government to the private sector, completely discharges a debt from the private sector to the government.
Think of putting 10 identically numbered balls in a jar of 50 balls, and then randomly taking out 10. Iterate and increment the numbers on the balls each time. Then after 100 iterations, conceivably a ball numbered “1” is there, but more probably, the balls you take out of the jar, or that are still in the jar, have numbers in the 90s.
This is going to happen even with balanced budgets, even with growing deficits. (an increasing number of balls in the jar, more put in than taken out each time) And this “looking at each dollar bill / ball individually”, looking at its path as it goes from government spending (buying stuff from the private sector, issuance, efflux) to government taxation (private sector buying stuff from the government, redemption, reflux) is what is important for the interaction with the real economy, for inflation, for the question of whether they “are debt that nobody really expects to be repaid.” And NOT, except in an extremely gross manner, the total of dollars (or balls) input/output, the deficit.
Mr. Hudson,
Maybe this is irrelevant to this discussion, but the one thing that seemed to me to be left out of the discussion about how debt is drowning folks is the degree to which productivity gains over the last decades have been swallowed up by a smaller and smaller number of folks – and not shared with those – the “99%” – who helped produce them. The minimum wage is, so i understand, adjusted for inflation, less than it was 30+ years ago.
You write “In fact, how can wage earners even afford to buy what they produce?” Henry Ford’s answer in the 30’s(?) was pay them more so they could … Why is this not at least part of the answer now?
i guess the other thing I wonder is why must we be “competitive” internationally? Why isn’t it sufficient to rely on a domestic economy, at least considerably more than we do, to meet our needs and wants, wherein both importing and exporting would be “niche” activities?
Although a debt jubilee would be the most godly, humane, economically productive, and democratic action our society could take, it is never going to happen until we break the cognitive link that most people have between the notions of a) debt, b) personal irresponsibility, and c) moral hazard.
Because those are so tightly linked in the social consciousness of the majority of citizens, it’s essentially impossible for any politician to argue for forgiveness of debt principal. FDR was able to declare a moratorium on foreclosures because the old cognitive link (as old as the Protestant Ethic!) had been broken by the Crash, the Depression, and the tipping of mass consciousness over into an awareness that society had been had by the banksters of that era.
We missed that moment when Obama refused to prosecute and demonize the banksters–we all know that. But there is still a slow, technical route to breaking the debt-moral hazard link: we need algorithms that show the percentage of housing debts that are the result of systemic fraud, which inflated prices and thus mortgages. If you could take out the fraudulent percentage of a mortgage, millions of homes that are now underwater would not be; the first step towards taking that action is to *show* that calculation.
That is technical, difficult work, but it is not impossible at all. There are other areas where the same cognitive link needs to be broken–student debt comes to mind, where the amount of debt was inflated by false promises of employment and artificially higher tuition costs–but let’s start with housing and take it from there.
What is so striking, now that i have become aware of it, is how Krugman and his kind treat a bank loan as the bank buying something from the borrower. Note all that talk about a bank “asset”. To them, a bank loan and stock market shares are the same thing with different names…
But it’s true. Paradoxical maybe, but it’s true. A loan on the lender’s books means a series of cash payments that the lender will receive as the loan is repaid.
A gold mine that will produce a million dollars in gold over the next ten years is certainly an asset. A winning lottery ticket that will bring you timed payments totaling a million over ten years is an asset. A million-dollar bond redeemable in ten years is an asset. And any bond is fundamentally a loan for a stated amount payable over a stated time.
When you grant a loan, you debit cash to account for the money you gave the borrower, and credit an account on your balance sheet to account for the right to future cash payments that you’ve “bought”.
On the dark side, this is one of the strategies in the War on Payroll. Wages and salaries paid count as debits on the Profit&Loss statement, cut into profits, and make the company look unproductive. Loans, on the other hand, show up as assets on the balance sheets and make the company look more valuable. Even if they’re actually toxic sub-prime mortgages and liar loans, as long as the financial statements can fool the world into thinking those loans will be repaid, the lender is golden corporate-wise.
Michael Hudson’s big theme as I understand it is that nobody took Keynes seriously and “euthanasized the rentier.” This the rentier who pursues capital gains through blowing inflationary asset and commodity bubbles and imposes such such high additional costs on the Real Economy it sucks out demand. This state of affairs has been allowed to continue even after the obvious salutary lesson of the Great Depression. Now the failure to learn a lesson from allowing this pursuit has given us once again another Great Recession to stagnate in. In simple terms our problem is we allow two types of capitalism to run side by side. Real Economy Capitalism that provides income through profits and Cannibal Capitalism that seeks income through capital gains based debt and price inflation but has the negative effect of devouring demand in the Real Economy.
Krugman’s limits are defined not by his intellectual abilities but by his class affiliations. Venues like this one point out all the time where his theories simply do not describe how the economy actually works. Krugman is not unaware of these criticisms. He simply chooses to ignore or misrepresent them.
If this was purely an intellectual process, we would expect an evolution, since that seems to be a popular word nowadays, in Krugman’s thinking, but we don’t. Krugman discharges a few Keynesian barbs, usually in the direction of Republicans, and then retires to the safety of his neoclassical, kleptocracy-enabling redoubt. Where intellectual rigor would see Krugman’s Keynesianism destroying his own neoclassical suppositions, adherence to class allows the two to exist happily together.
As a result, Krugman will always go so far but no further, regardless of the arguments marshalled against his positions. He will never challenge the structure of the elites of which he is so much a part.
Everyone should just get over it and move on. Krugman is always going to tailor his intellectual positions to fit his class membership. In this regard, it just seems very, very strange to talk about Krugman’s good works when his primary loyalty is the elites who are looting us. Are we supposed to praise or excuse Krugman then because he is advocating kleptocracy-lite?
I think so much and so many of our discussions get confused and blurred because we lack a real taxonomy of who is who and what is what. Neoliberal becomes liberal. Faux-progressive becomes synonymous with progressive. Populism gets shunted to either the far left or the far right, when, in fact, it is neither. A corporatist, kleptocracy-enabling President gets labeled a socialist while his Republican counterparts, in no substantial way different from him, are conservative or libertarian. It is all the smoke and distraction of class warfare. We need something simpler and clearer, an Occam’s razor for our times, and we already have it in the distinction between the 1% and the 99%. No one can stand with our elites and also claim to stand with us in the 99%. Krugman can not both endorse and criticize the system which loots us even as it bestows privileges on him. If he endorses it, then his criticisms become nothing more than air, something to distract the gullible rubes, and we should treat them as such.
Hugh, thanks, I appreciate your thoughtful and intellegent posts. OTOH I’ve got to ask you; being covered in the media by those under the spell of the 1%’s ideology, how does OWS ever spread beyond the 0.01 to wake up the 98.9%? I don’t really want to argue ‘left wing’ or whatever you want to call non-conventional political theory here but what is your theory on how anything could possibly change for the better?
I was only 14 at the time but I saw on the TV the demonstrators getting bloodied and the crap beaten out of them by Chicago’s finest. It wasn’t till much later that I realized the democrats inside the hall solidly supported the cops and not the demonstrators. The whole country has moved way, way to the right steadily since then.
I don’t want to be negative, but I wonder how you think that things could ever change for the better in the US from now. I can’t help but ask if you have any model on how OWS ends up having any real influence at all.
I really hate Obama, but OTOH who gets appointed to the federal bench does seem to likely to have effects (more likely than not only sad ones) on real people. Do things like that matter to you? I’m not being facetious, I just don’t see how OWS is ever going to get a wider voice let alone how they could possibly influence let alone break down ‘the system’. I don’t even have any model for how that could happen. Do you?
The Tea Party and OWS are both beginnings. Neither is the ending. The populist discontent and desire for change is still out there. It hasn’t yet found the vehicle to express itself. That can be frustrating, but the truth is we can provide ideas and analysis and OWS and the Tea Party can provide protest, but we can’t impose a structure from the top down or before its time. This doesn’t mean that we give up and go home. It just means that we must have faith in what we are doing.
John Jay Chapman wrote that movements must be religious in nature to be effective. I think what he meant by this is that intellectual arguments and solutions are not enough. Even appeals to self-interest fall short. People have this extraordinary ability to believe in something bigger than themselves and they will make equally extraordinary sacrifices for this, far more than they would ever do just for themselves. It is this that I think we can give them, that there is something better, things can work out. We can have a society where we take care of each other, not because anyone is forcing us to, but because it is the right thing to do, where we reduce the inequalities but respect the differences, where every citizen is entitled to the basic building blocks of a good and full life: a solid job, good housing, healthcare, education, and a decent old age. And that we do this because this is the society we want to have.
We need to stop waiting for the media to take up our issues just at we must stop expecting our politicians to act upon them. These are never going to happen. What we need to do is start talking to each other. This is where and how real organizing starts. We need to keep in mind what to do about kleptocracy, the kleptocrats and their enablers, but we need to keep our eyes upon the prize, the society we always should have had, the one implicit in the words of the Founders, the one we still can have.
Sorry in advance if you find this all too vague. I suppose it is.
Every hurricane begins with fluttering of the butterfles’ wings!
This has been said before at NC, but it needs to be repeated from time to time: it is a mistake to limit discussions about why we can’t “get the economy going” to arguments between economists over which fiscal and monetary tools and strategies work best to foster growth, promote full employment and ensure a stable currency in a generic economic model. There is another academic discipline called history, and it teaches that nations and societies rise and fall. The wealth of western democracies, like the unprecedently high standard of living of their citizens, was and is a product of a unique period in the rise and likely eventual fall of capitalism. Our ascendancy stems much more from historical events,resource availability and distributions, access to markets, demographics and the absence or presence of competition in wealth production from other societies than from the economic manipulations of central bankers, politicians and the ideas of the economists who advise them. Our period, like all historical periods so far, is ending in a decline. It appears so far to be a slow one. For decades, we have been borrowing at an increasing rate, privately and publicly, to maintain as much as we can of the standard of living that we have grown accustomed to. At the same time, politically powerful interests are working to capture for themselves as much of the diminishing stores of wealth as they can, without much regard for the fate of their less powerful countrymen. It might be possible to draw on history, democracy, economics, science and various other disciplines and belief systems to arrange a better and fairer accomodation with this reality, but neither MMT, Keynesianism, Austerity, nor any other economic nostrum has much of a chance at changing the trajectory.
Mr Hudson is wrong, starting with his straw-man argument that if devaluation worked, Weimar Germany could have devalued away its reparations. Weimar Germany’s reparations were specified in gold: it was not sovereign in its own currency and could not devalue.
For decades, we have been borrowing at an increasing rate, privately and publicly, to maintain as much as we can of the standard of living that we have grown accustomed to. bobh
You confuse money with real capital. Banks don’t lend houses and new businesses; they create new money as they lend it and people use that “credit” (a form of counterfeit money) to build the houses and businesses themselves.
So the population has NOT lived beyond its means if “means” is properly defined as real output. It was real output that built those houses and businesses.
As for imported goods, the Chinese have already been paid since the debt of a monetary sovereign is ITSELF a form of money. To payoff that debt would merely mean swapping non-interest paying fiat for the interest paying sovereign debt.
F. Beard,
I’m not an economist, but I think I understand what you (and Krugman, and Hudson) are saying. You all believe that we could eliminate capital shortages and liquidity dislocations from economies through more enlightened government monetary and fiscal policies– primarily deficit spending funded either by selling treasury bonds or directly through fiat creation–and that, if we do this, we could all get back to working productively, building houses and bridges and solar panels, starting businesses and consuming the things our fellow world citizens,who could be fully employed in their own fully capitalized and productive economies, produce. There would be no involuntary unemployment, no depressions and no cyclical recessions that couldn’t be fixed by adjusting fiscal or monetary policies. You and Hudson, I think, are saying that we should start this off in the U.S. by forgiving some or all of existing private debt. Krugman, I believe, thinks we shouldn’t do this. But all of you think that the prosperity resulting from full employment and increased productivity will make it possible for the growth in public and private debt to be reversed and that eventually we could have a sustainable economic system with full employment, a stable currency and no reduction in living standards. Is that right?
But all of you think that the prosperity resulting from full employment and increased productivity will make it possible for the growth in public and private debt to be reversed bobh
Neither the public nor private debt are morally legitimate:
1) A monetary sovereign like the US should NEVER borrow its own money supply; to do so is a form of “corporate welfare” according to Bill Mitchell. So much for the National Debt.
2) Private debt has resulted from what is essentially a government enforced/backed counterfeiting cartel so it is not morally legitimate either.
That said, neither should be repudiated. Instead, further issuance of national debt should be forbidden and the existing national debt paid off as it comes due with new fiat and all new deficits financed via money printing too. As for private debt, in addition to banning further counterfeiting, that should also be paid off with new fiat by simply distributing it equally to the entire population since the counterfeiting cartel has cheated non-debtors too. The bailout, btw, could be metered to just replace existing credit as it is paid off to preclude significant price inflation risk.
and that eventually we could have a sustainable economic system with full employment, a stable currency and no reduction in living standards. Is that right? bobh
That is my goal at least. To be on the safe side I would also allow private currencies after the universal bailout period to abolish the “stealth inflation tax” and to insulate the private sector from government monetary mismanagement and vice versa.
Thanks for the reply, but I still don’t think the answers to our serious problems can be found in economics. I don’t entirely understand how your proposed remedy would work, whether it could ever be politically possible to establish these new rules–even in a revolutionary context–or how cancelling all existing private debt by distributing fiat currency to all and then funding as much future fiscal stimulus as is needed through fiat creation would not be inflationary and destabilizing. I have heard this explained here before and never understood it or quite believed it. It seems that with your approach there would be different winners and losers than in the current system and I, as a close-to-retirement person with a small mortgage and a fair amount of savings, would probably be a net loser. But that would be okay, since my savings aren’t safe now and the pleasure of seeing some of the current winners brought low would be a consolation. I see a severe levelling crisis ahead in any case, and your vision, were it possible to achieve, is far from the worst imaginable next stage for our overheating, cheap energy-based, resource-depleting and excessive consumption-driven planet.
but I still don’t think the answers to our serious problems can be found in economics. bobh
The solutions I advocate are rooted in justice and ethical money creation per Matthew 22:16-22.
The question you should ask yourself is how a nation can be prosperous one day and in a Depression a short time later with NO real destruction to the economy?
So if this Depression is artificial (and it is) then why should we tolerate it?
As for your own personal situation, I admire your willingness to sacrifice but as far as I can tell no one need sacrifice much and many would sacrifice nothing, not even in real terms if the bailout was metered appropriately.
F Beard: The question you should ask yourself is how a nation can be prosperous one day and in a Depression a short time later with NO real destruction to the economy? So if this Depression is artificial (and it is) then why should we tolerate it?
Absolutely. Absolutely the right way to look at things. The resource, environmental problems bobh is worrying about are just bad accounting for externalities. Account for them correctly.
But above all, don’t then use bad economics to guide policy. Modern bankster-slavery “economics” guiding today’s government policy destroys the economy. As much as bombing your own cities, as flying a jet into a skyscraper EVERY WEEK would. Using real economics, MMT / Keynes / Institutional / FDR / F Beard / Michael Hudson (even Paul Krugman) economics would stop this utterly purposeless destruction. Modern neoliberal “economics” forced people to live below their means in the Great Moderation/ Great Stagnation- now in the Great Recession, far below their means.
The bad guys enslave & win by convincing everyone that their unnatural, destructive predation is “natural”, an efficient, “equilibrium” economy. It isn’t. If you stop letting them destroy the lunch you already have – you got a free lunch!
If I decide to cut back on my spending and stash the funds in a bank, Paul Krugman
Your funds are already in a bank, Mr. Krugman, or do you use your mattress?
which lends them out to someone else, this doesn’t have to represent a net increase in demand. PK
Assuming you did use your mattress previously, the funds you deposit will serve as new reserves for the banks to leverage many times. That does increase demand – multiple times.
Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what. PK
Reserves serve to settle net differences between the banks; they are not lent out except to other banks. The larger the bank, the less it needs reserves since it is more likely that transactions will be between customers of that bank.
shift taxes off labor back onto property, economic rent and asset-price (“capital”) gains
We need to make a concerted effort to rename the capital gains tax “The Wall Street Rate.”
Republicans know how to do this sort of thing — the estate tax became the “death tax,” thus getting people worked up about a tax that affects hardly anyone. Well, hardly anyone pays capital gains taxes and the phrase doesn’t mean much to people.
The Wall Street Rate. You know, the special low rate for hedge fund managers, traders, and Mitt Romney.
I find this Hudson piece as frustrating as Keen’s earlier exchange with Krugman, and basically for the same reason. We have the usual recognition of Krugman being perhaps the most influential public voice standing against the Austerians including our own peculiar set of T-Party Congressional nitwits preparing to hold us hostage to debt ceiling shenanigans again. But then comes the transition of discounting that value (“So what he has done is basically get into a fight with intellectual pygmies.”) as if those pygmies are not actually coming close to succeeding at bringing the entire Euro Zone down and setting their sites for the same in the US perhaps even earlier than the fiscal cliff now scheduled at the end of this year. With the near simultaneous genuflecting and dismissing of Krugman’s value, we are now free of being subject to Voltaire’s complaint of the perfect being the enemy of the good.
Krugman spends around four chapters in his new book, “End this Depression Now,” explaining how the profligate credit creation by the financial sector was at the heart of our economic fiasco. Not only does his book include a chapter titled “Bankers Gone Wild” but another titled “The Minsky Moment.” What Krugman points out in those chapters is the bankstas shot us in our collective heads with the equivalent of Dirty Harry’s 45 Magnum. Keen’s entire argument with Krugman boils down to the latter getting in wrong – it was a bazooka! Okay, so maybe the clean-up is going to be a little different perhaps, but I don’t think we’re any deader or any more pissed off at the bankstas because they used the bazooka.
But now comes Hudson to tell us specifically the difference in the clean-up resulting from a 45 Magnum (profligate reserve-based bank money creation) versus a bazooka (profligate not reserve-based banking money creation). First off, Hudson pleads that we need debt forgiveness. Otherwise, all those school teachers that now don’t get foreclosed on because of Krugman’s suggested $300 billion federal support to state and local govts will just wind its way back to the bankstas (although Hudson might want to check with those teachers to see if they believe its better to have their possessions moved out to the curb). But wait! Under Krugman’s chapter on what we need to do we have a sub-section titled “Housing” and what does the good professor have to say? “…we should try debt relief again, this time based on the understanding that the economy badly needs such relief…” True, I guess Krugman didn’t say “really really really, I’m not lying, we really, really really need debt relief.”
I guess we could take Krugman to task for not mentioning debt relief other than mortgages. However, he provides the Rooseveltian resolve, aka “If at first you don’t succeed, try , try again” – given that and other Krugman writing does anyone doubt that he would not be supported of say, relieving student debt as well? Hmm, relief for mortgages and student debt, that’s pretty substantial no? Are do we want to relieve credit cards and auto loans as well? This is political viable, how?
So we’re left with Krugman not laying out Hudson’s proposed shift of the tax base from income to property. Given that politically makes debt forgiveness look like a relative pea-shooter next to a nuclear bomb, do you blame Krugman? I think we all secretly would like Krugman with his megaphone position to carry our favorite hobby horse, but really, given the size of that one, shouldn’t the hobby orse proponent lay a little more foundation, in academia let alone on the national political stage, before expecting him to do so. I mean he’s good, but is he that good? That’s quite an assumption particularly given that he mostly deals with intellectual pygmies.
So I’m frustrated. I respect all three of these guys immensely, but really, don’t you just want to shake them or give them a time-out and ask can’t the all just get along?
I have a very interesting segment in this link that I think
it would be hard dismiss. After all, the fact that ‘Faith’ leads to auto-censorship is well known and documented aplenty…
enjoy: [2:15 to 2:55 — but the whole series is interesting if you ask me…]
https://www.youtube.com/watch?v=Q7uJIjSO-a4&list=FL7Ap0EQxdCgszpqqN5fIGnw&index=10&feature=plpp_video
If the government printed the public’s money supply rather than borrow money printed by the banks and issued as interest-bearing debt, we wouldn’t need income taxation to support the lifestyles of non-productive aristocratic parasites around the world who hold treasury bonds nor would we need to support the lifestyles of non-productive bankers who have the most lavish buildings and towers in every city. Canada’s 12 year old prodigy Victoria Grant is right. The government and banks are in collusion ripping off the productive masses.
The banks are essentially criminal organizations and financial terrorists guilty of treason and theft of the highest order, who hold governments and their citizens hostage, and should be treated as such.
the key word is “should be” … they aren’t treated as such because they also own the media, like the nazi propaganda machine, where most people don’t even believe such could be possibly true because the media hasn’t told them otherwise.