Wednesday, April 27, 2011

money equivalents, and other things

From an old (pre-crisis) post by Mish --

For starters MZM and M3 contain credit transactions and money equivalents, not money.

And the distinction between money and credit is a crucial issue. A rapid increase in money supply leads to a Weimar Republic or Zimbabwe hyperinflationary scenario, while a rapid increase in credit eventually leads to a Great Depression or Tulip Bubble collapse endgame.

That last paragraph is a little too cut and dry for me, but only just a little. We have an imbalance between money and debt. If we correct the imbalance by printing money, we get inflation. If we correct it by letting debt collapse, we get depression.

It's why I want to call this monopoly game over, print money, destroy that money by using it to pay off debt, and start a new game ASAP.

From The General Theory:

I am not one to disagree with Keynes. But we went with the lower-interest-rate solution, and all we got for it was debt. Well, it did keep the economy going beyond the 1987 end that Steve Keen points out (see mine of the 25th). And it kept the economy going (if not golden) beyond 1973. That's almost 40 years now of keeping the economy going by accumulating debt. And that's on top of all the debt we accumulated during the golden years, 1947-1973 -- which itself was enough to kill off the golden age.


Oh yeah: Not government debt. Total debt. Mostly private debt, in fact.

We have to keep interest rates low, as Keynes said. And we have to fight inflation by having everybody pay off debt faster. Mostly the private sector.

When we fight inflation by paying off debt faster, we correct the imbalance between money and debt. As opposed to making the imbalance worse by fighting inflation the old-fashioned way. The old-fashioned way: you know, by jacking up interest rates. We'll be doing it soon, again. Making things worse, instead of making things better.


Bigvic said...

It's funny, I just talked with professor Diamond a week ago about this. Imagine how much worse things would be if interest rates were higher though. Professor Diamond has argued that unemployment would be higher, and therefore demand and revenue would be lower if interests were higher, causing deflation which would make the debt even larger since debt is always in real dollars. That's why he was in favor of QE2, although to him the only real solution is fiscal. I on the other hand (yes, to disagree with a Nobel Laureate, very presumptuous of me) don't think there is a solution. I will chose to be Voltaire here and say that things will happen for the worst.

The Arthurian said...

i think there is a solution. i think we do not have any policies that encourage anybody to pay off debt, and i think this is the problem.

paying off debt would reduce the demand for credit, so it would tend to drive the rate of interest down.

paying off debt would drive down the rate of interest while fighting inflation. as opposed to present policy, which increases the rate of interest to fight inflation but allows existing debt to accumulate.

put that in Professor Diamond's pipe and smoke it.

Hi, Vic. Good to see you. And I like the idea of disagreeing with smart people: Everybody's wrong, sometimes.

qe2 does the right thing, the wrong way. it puts lots more oney into the hands of people who have all the money already.

Calgacus said...

i think we do not have any policies that encourage anybody to pay off debt Sure we do. The policy is called "debt", which encourages any private entity in times like these. The problem is we don't have policies that enable people to pay off debt. The right solution is for the government to give a job to anyone who wants one, and in general to spend, spend, spend, because it is the one entity that shouldn't and can't pay off its debts.

The Arthurian said...

I like to say that saving is its own reward. You seem to be saying that debt is its own penalty. I agree. Nevertheless, we do have policies that encourage saving and penalize the saver for early withdrawal. Why? Why would we need them if saving is its own reward? Nonetheless, we have such policies.

Likewise, we have policies that encourage people to use credit. But we have no policies that encourage people to pay off debt. We have no policy that gives you a tax break for making an extra mortgage payment or two each year... no policy that gives you a tax break for lowering your credit-card balance... no policy to balance out against all the policies we have that encourage the reliance on credit. It is this imbalance in policy that has created the imbalance in the money.

As for the last part of your remarks -- "spend, spend, spend" -- I think you are focused on an incomplete picture of the economy. As are those others, who think that your quote captures all that is wrong with our economy.

Calgacus said...

Not sure if you understood I meant that it's the government that should spend, spend, spend. Just saying "print money, destroy that money by using it to pay off debt, and start a new game ASAP" in other words.

Policies encouraging saving were a bad idea for the last few decades, during the height of the baby boom working years, especially during the Clinton surpluses, which made net saving impossible.

The Great Recession is more than enough to make people want to pay off debt. Thing is they can't, especially the people who do real work in an economy controlled by parasites and predators.

On the long-term policy side, I agree, following Minsky. A job guarantee and other Keynesian policies of the type he suggested would address the longterm problem directly. The variety of Keynesian policies the US used in the good old days were destabilizing ones that led to too much reliance on fragile credit, as you always emphasize.