Friday, December 30, 2011


Steve Keen took a survey and wrote about it.

The first question:

Is it important for the Commonwealth government to aim for a budget surplus in 2012-13? Why? Should it continue to aim for surplus even if international conditions worsen?

Keen's answer:

NO! It’s a nonsense neoclassical fantasy to blame this crisis on government debt, when its underlying cause has always been a private sector debt bubble that has now burst. Now that the private sector is finally deleveraging in Australia (after the First Home Vendors Boost delayed the process), the last thing we need is for the public sector to also be pulling money out of circulation, which is what a government surplus would do.

Keen does not "blame this crisis on government debt". Keen is right.

The cause, he says, is "a private sector debt bubble that has now burst." A debt "bubble" refers to rapid growth of debt. 'Rapid growth' of private sector debt is very close to what I say is the problem. I say the accumulation of private debt became unsupportable. Of course, the rapid growth of debt made the accumulation unsupportable sooner. But it would have happened anyway, eventually, when slowly growing debt reached an unsupportable level.

Finally, Keen says "the last thing we need is for the public sector to also be pulling money out of circulation". And I say we need to increase M1, which is money in circulation. See how close we are, me and Keen?

He says debt was growing too fast, and money isn't growing fast enough.

I say we must reduce the debt-per-dollar ratio.

Same thing.


The Arthurian said...

It doesn't help to think of debt as debt. It helps to realize that debt is evidence of credit-use. It helps to realize that debt is the measure of credit that remains in use.

Credit-in-use is money that costs money to use. I refer to this cost as the factor cost of money.

The greater our reliance on credit, or the higher the DPD (same thing), the greater the factor cost of money.

Having a lot of debt in an economy is just like printing a lot of money, except the factor cost is higher. So having a lot of debt is just as bad as printing a lot of money, except that it is worse.

nanute said...

Seems like we're in a quandary here,Art. The economy is demand constrained and overburdened with excessive debt. It would make sense to lower the cost of debt service, which would in turn free up "savings" for further consumption. All the efforts to date have focused on repairing the balance sheets of the financial institutions. (What do they consume?) There needs to be a shift to focusing on relieving consumer debt loads. The equation seems to be out of balance.
PS Good luck on your kind of/sort of New Year resolution.

Jazzbumpa said...

The answer now it what it was in the 30's. Fiscal policy. U.S. infrastructure in in terrible shape. There is so much else that could be done to build for the future - free education, frex.

The key is to get money into circulation, not in excess reserves, or stuffed under mattresses.

Fiscal policy anyone?


Jazzbumpa said...

Instead, we get nonsense like this from VERY SERIOUS PEOPLE.

This is what monetary policy has done.

Huge increases in narrowly defined money stocks, almost imperceptible blips in broadly defined money stocks.

At the zero interest bound liquidity trap, monetary policy becomes infective or useless.

But for conservative economists, the words "fiscal policy" don't even exist.