Yesterday I was happy to think our debt problem is that we use debt to solve our debt problems. I still think that. But Krugman doesn't:
Whenever the issue of fiscal stimulus comes up, you can count on someone chiming in to say, “Only a moron could believe that the answer to a problem created by too much debt is to create even more debt.”
Well, yeah.
It sounds plausible — but it misses the key point: there’s a fallacy of composition here. When everyone tries to pay off debt at the same time, the result is contraction and deflation, which ends up making the debt problem worse even if nominal debt falls.
According to Krugman, it won't work if we all pay off debt at the same time. He wants people to stop complaining about the growth of government debt until the paydown of private debt turns around.
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The other problem is the long-term growth of debt. This is the problem that most concerns most people. For good reason: Long-term growth of debt is the problem that created the financial crisis.
The crisis is called "the crisis" because it is a big problem. It is an economy destroyer. We have to deal with it. Krugman is right about that. Where Krugman goes wrong, I think, is that he doesn't acknowledge the problem with the long-term growth of debt, the problem that concerns everybody else.
Or, he does acknowledge the problem but has no solution for it. Krugman thinks we should solve the long-term debt problem later. Last July he said "the sensible thing" would be to "run deficits while the economy is depressed, then turn to budget-balancing once recovery is well in place." In other words, later.
But, when "later" gets here, there's no solution. And everybody knows it.
We need to resolve the crisis AND we need to fix the long-term problem.
To fix the crisis, I would let the Federal Reserve print dollars by the trillion and use the money to pay off people's debt, and do that only until the economy recovers.
To solve the long-term problem, I would create tax incentives to accelerate the repayment of debt. This would let us repay debt as a way of fighting inflation.
The existing method of fighting inflation restricts the quantity of money. It restricts the money we could use to pay off debt. It makes paying off debt more difficult.
The Arthurian solution fights inflation by reducing debt.
3 comments:
Bernanke increased the money supply over two-fold and more if you count the other special subsidies to banks such as government guarantees. It did almost nothing. The economy is depressed because money was redistributed from the majority that would spend most of their money earned (the workers) to those that do not spend most of their money, but accumulate it (the rich). Money was also sunk into an oversupply of housing, so there are two money sinks here (the top 1% of earners and overvalued real estate). Since the banks own most of that overvalued real estate and it's not earning them money, they are effectively the new money sink or black hole. You can pour all the money into them you want, but they will not put that money back into the economy until they are made whole and they should not be made whole because they knew the risks when they made their bad investments. When you are talking about the quantity of money, I gather that you are talking about the amount of money in circulation that is stimulating commerce.
Your idea of paying off people's mortgages is similar to a model that Steve Keen made. If the money given to the banks had been given to the mortgage owners instead, there would have been more bang for the buck and the economy would have improved rapidly compared to the "Japanese" solution that we got according to Keen's model. The banks would not have bad loans and they'd have gotten their money back because borrowers would not have defaulted. In the current situation, there is no incentive to pay off existing debt on one's home if one is too far under water. This is one reason why HAMP has been an utter failure. The mortgage servicers have done the math and they are sucking what money they can out of underwater homeowners before foreclosing on them.
We are looking at feedback loops here. Paying off debt all at once is a negative feedback loop. Money that would normally be spent is now going to pay down debt (a money sink that grows exponentially due to compound interest). This causes loss of production and job losses. The cycle is self repeating and self reinforcing leading to a deflationary spiral. One way to fix the mess is to make the banks eat their losses instead of extend and pretend. The insolvent firms should be reorganized and put under FDIC supervision or the equivalent (Citibank) until they are fixed. The solvent firms can continue banking business as usual. Assets from the insolvent firms can be put under an RTC type organization just like the S&Ls' assets were and sold off. Workers' wages should be increased to help people pay off debts, increase spending, and increase inflation. But it will be the last thing government does according to Keen and he's right. But doing both of these things, writing off bad debts and increasing workers' wages increases the overall money supply in circulation and decreases the huge money sinks drastically. But it would also turn negative feedback loops into positive feedback loops.
I had a nice comment but it it failed to post. Some of your ideas echo Steve Keen's ideas. Debt is an exponentially growing money pit or sink hole. It's the opposite of savings, but both take money out of circulation. In a zero sum world, one man's debt is another man's savings, but that is not how the real world works. Money is lent out and created in the process.
The way forward is to make the banks recognize their debt losses. Those banks that are insolvent are reorganized or sold off and the survivors continue on. That eliminates an exponentially growing money sink which we are seeing vast amounts of money disappearing into right now.
Raising workers' wages would pay down debts, increase spending (money in circulation), and lead to inflation lifting us out of this negative feedback loop economists call deflationary debt spiral. But these two remedies, eliminating debt and raising wages will be the last things policy makers do.
"The economy is depressed because money was redistributed from the majority that would spend most of their money earned (the workers) to those that do not spend most of their money..."
Like the endgame of the board game Monopoly. This redistribution, or concentration, can only have happened as a result of policy. An unintended consequence, I presume.
"When you are talking about the quantity of money, I gather that you are talking about the amount of money in circulation that is stimulating commerce."
Yes, absolutely, M1 money or spending-money or the medium of exchange. I shall be more explicit on this point.
"Your idea of paying off people's mortgages is similar to a model that Steve Keen made. If the money given to the banks had been given to the mortgage owners instead, there would have been more bang for the buck..."
It can still be done.
It's just so obvious -- the problem is debt, so pay off the debt! It ain't rocket science. As Keynes said, the ideas expressed here are simple and should be obvious. But we've had bad ideas repeated so often for so long that it is difficult now to see the obvious.
Keen is very good. And that downcast photo of him really adds to the effect.
"But doing both of these things, writing off bad debts and increasing workers' wages increases the overall money supply in circulation and decreases the huge money sinks drastically."
In my terminology, it corrects the imbalance between money-in-circulation and credit-in-circulation. (Debt is the measure of credit in circulation.) Recovery depends upon it.
"The way forward is to make the banks recognize their debt losses. Those banks that are insolvent are reorganized or sold off and the survivors continue on."
The only essential is to force recovery upon the economy.
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