Income is money. Income is circulating money that passes into your hands. That's why people often say "money" when they mean "income". And it's why some people, when you ask them where money comes from, say money comes from work.
Hey, I want more income, just like everybody else. And yes, when I say I want more income, I sometimes use the words "I want more money". Because income is money.
Boosting income could improve my personal economic situation, and yours. But if we boost our incomes by boosting each other's debt, we have gained nothing. Boost income by boosting money instead of debt, and everyone will be better off.
Insist at this point that money is debt, and you will see nothing.
Boosting someone's income is a microeconomic fix. Boosting everyone's income is still a microeconomic fix, the sum of the parts. The economic problem is a macro problem, excessive accumulation of debt. Boosting income carelessly does not fix the problem.A FALLACY OF COMPOSITION
It is possible to assert that no individual owes more debt than he can afford -- in 2006 this was still a popular view -- and yet find that in the economy as a whole, the level of debt has become unsupportable. What is true for the individual, or even for every individual, may not be true for the whole.
Before the crisis, people didn't think they had too much debt. Maybe some did. But debt kept growing, so the general consensus must have been that we didn't have too much debt. And everybody thought they could handle it. Yet we had the crisis.
Some people say that everybody was wrong, that all the microeconomic evaluations were wrong: "Banks made bad decisions". I think that's a weak argument. I say the macroeconomic evaluation was never made. Policymakers made bad decisions.
The macroeconomic evaluation compares debt to the quantity of circulating money, out of which debt must be repaid -- and which is reduced by debt repayment.
The macroeconomic evaluation looks like my debt-per-dollar graph:
What is the source of the money that becomes income? The government? Sure. But that's not where I get money. I get money as income, or as a loan. People in general get money as income, or as a loan.
And that is exactly my point. Sometimes we borrow the money we spend. And sometimes we earn it. I'm saying we need to borrow less, and have more unborrowed money that we can earn and spend. So really, I'm saying we need more income. See? But I'm also saying how it must be done.
Others seems not to care where the money comes from, the money that becomes income. I think it makes all the difference.
If the money comes from increased debt, then the economy as a whole does not benefit from that increased income. Neither the debt-to-income ratio nor the debt-per-dollar ratio is reduced. But if the money comes not from increased debt, then the extra income does benefit the economy. Both ratios are reduced.
And if it matters -- and it matters more than anything -- the decline in the quantity of circulating money was the cause of the economic problem, and the decline of income was a result.
It is possible to assert that no individual owes more debt than he can afford
ReplyDeleteBut it is not possible for that assertion to be correct, or there would be very few personal bankruptcies.
Further, the banking industry adopted practices of giving uniformed people loans beyond their ability to afford leading into the housing collapse.
the decline in the quantity of circulating money was the cause of the economic problem
However, except for a slight back-track in the mid 90's, it never declined.
http://research.stlouisfed.org/fred2/series/M1
The multiplier declined steadily, though.
http://research.stlouisfed.org/fred2/series/MULT
Velocity is more complicated, and fell off a cliff in the Great recession.
http://research.stlouisfed.org/fred2/series/M1V
Your analysis misses a lot of the detail.
Cheers!
JzB
Couple things
ReplyDelete"Boosting income could improve my personal economic situation, and yours. But if we boost our incomes by boosting each other's debt, we have gained nothing. Boost income by boosting money instead of debt, and everyone will be better off."
How about saying "but if we boost our income by taking out loans we have gained nothing" That would be more often true but even a loan can help you gain something.
When those of us who say "money is debt" say that, we are not using debt in the same manner that a bank uses debt when you borrow from it. Maybe a more illuminating way to express the money= debt concept is to say..... anytime two parties
make note of a promise for an exchange money has been created. When Art gives me something of value and I promise to give him something in return and make a physical notation of this promise (account for it) I have created money. It is now an exchangeable credit/debt relationship. And everything we have ever called money is a form of that...... according to the people who make this claim and I think their case is persuasive.
Income is money one does not need to pay back, but my income may be the result of you borrowing and using that borrowed money to pay my income. When your business fails, they dont come looking to me and say "Hey that income Art payed you was borrowed from us so you owe us too" Doesnt work that way (thankfully) but when the decision to lend you money for your business was approved it was based on the "income" you and the bank thought your business would bring in. All loans are made on the basis of income stream of the borrower and how solid it is. If its not solid they ask for a lot more collateral.
"The macroeconomic evaluation compares debt to the quantity of circulating money, out of which debt must be repaid -- and which is reduced by debt repayment"
Quantity of circulating money can be restated as income can it not? Lots of money not circulating at all means no incomes and vice versa.
"Sometimes we borrow the money we spend. And sometimes we earn it. I'm saying we need to borrow less, and have more unborrowed money that we can earn and spend. So really, I'm saying we need more income. See? But I'm also saying how it must be done."
Well stated ....... and I agree.
"Others seems not to care where the money comes from, the money that becomes income. I think it makes all the difference."
I hope your not referring to me in "others"
"If the money comes from increased debt, then the economy as a whole does not benefit from that increased income. Neither the debt-to-income ratio nor the debt-per-dollar ratio is reduced. But if the money comes not from increased debt, then the extra income does benefit the economy. Both ratios are reduced."
Here it is important to differentiate between bank loans and what we today call govt debts. You are correct if you mean "if the money comes from increased bank loans". But if we get more money (free... unencumbered with an obligation to pay back) then this will, under our current institutional arrangements take the form of higher government debt. Many want to put those two in the same category, but I think you know better. And of course, even if we stop making the govt issue bonds, when it spends someone will still refer to it as debt simply because when the govt accounts for its spending (we ALL want it to account for its spending), ITS side ofthe accounting sheet will say (-) and ours will say (+).
But some people will just continue to be silly that way while trying to convince everyone that if that minus sign gets too many zeros after it we will be doomed.
Me: "If the money comes from increased debt, then the economy as a whole does not benefit from that increased income. Neither the debt-to-income ratio nor the debt-per-dollar ratio is reduced..."
ReplyDeleteYou: "Here it is important to differentiate between bank loans and what we today call govt debts. You are correct if you mean "if the money comes from increased bank loans". But if we get more money ... then this will, under our current institutional arrangements take the form of higher government debt."
Under current institutional arrangements, if the Fed buys up some government debt, the interest it receives from that debt is almost entirely turned over to the Treasury. Myself, I am quite satisfied to consider this debt as not debt at all.
Lets see if I can make something of this:
ReplyDeleteIncome is money one does not need to pay back, but my income may be the result of you borrowing and using that borrowed money to pay my income.
Yes.
When your business fails, they dont come looking to me and say "Hey that income Art payed you was borrowed from us so you owe us too" Doesnt work that way (thankfully)...
Thankfully.
... but when the decision to lend you money for your business was approved it was based on the "income" you and the bank thought your business would bring in.
Now you are making a conclusion and preparing to assign blame. I am not ready yet to do that. Look again at the first part:
Income is money one does not need to pay back, but my income may be the result of you borrowing and using that borrowed money to pay my income.
There are two situations I want to compare:
1. The money in my wallet is the result of my borrowing.
2. The money in my wallet is the result of your borrowing.
Observation A: Number two leaves me better off than number one, if only by an amount equal to the cost of interest.
Observation B: For the economy as a whole, there is essentially no difference between number one and number two.
A difference can arise only from a change in the ratio of money in our wallets relative to the sum of our borrowings.
Observation A is micro.
Observation B is macro.
"Now you are making a conclusion and preparing to assign blame. I am not ready yet to do that."
ReplyDeleteNo, not really assign blame, simply to point out where and how loans come from. They arise after an examination of future (potential) income streams are evaluated. When the income stream potential looks good the bank makes the loan, when it looks bad they dont.
Of course the overarching point is that their loan decision never has anything to do with whether Art, or Jazz or anyone else is currently saving money at their bank, its all about Greg and his income stream.
Banks are siphoning income streams, thats all.