In a series of comments on a Mosler post, one finds this from Tom Hickey (June 24th, 2011 at 2:28 pm):
The likely scenario is that consumers would try to maintain lifestyle to the degree they could be supporting it with increasing debt... That cannot go on forever, and so either the middle class would fall behind and the economy would contract, or there would be an enormous implosion of debt-deflation and depression. Given the appetite of the financial sector for rent and the moral hazard that exists, I would be betting on the later...
There is no path to prosperity here other than through exports, i.e., US workers working to supply the rest of the world with real resources of the US, while they also work for the financial sector indirectly by paying rent. Insidious game.
Then there is a comment by Tom -- a different Tom, I think (Tom, June 24th, 2011 at 4:01 pm) -- who quotes the following, in order to have it evaluated:
Our dollars are still backed, but now by debt and thus by the Treasuries and not by physical gold. When we print money the govt must also issue an equal amount of treasuries to back those dollars or it will create inflation (just like if we issued dollars in excess of our gold). The rules of economics haven’t changed. Just the backing item of the currency.
The problem with having debt as a backing is that it is required to issue more debt each year in order to cover the interest on the debts. Also since we’re the reserve currency of the world it is required that we have more dollars going out of the US than in. This leads to trade deficits and thus more debts. We can’t effectively go bankrupt because we issue our own currency, but the value of that currency will continuously decline as long as we spend more than we take in (which is required by being the reserve currency of the world).
We will never really go bankrupt as a nation, but the longer we continue with this sort of debt backed money the more likely we are to have serious economic issues.
Following an analysis of that quote by Art -- a different Art, I'm sure -- Jim Baird writes:
One more thing about the original comment: it seems to be afflicted with the old “exponential interest” canard that neglects the circular nature of interest payments and sees an inevitable crash since “there isn’t enough money to pay back both the principal and interest”. I’m always surprised at how many people believe this…
In response to Jim Baird, there is a comment by Clonal Antibody (who must be the same as Clonal here):
It does not matter that the interests are recirculated... When you borrow $1, you ... have to pay back the dollar plus ... interest. Where will the ... interest come from?
That drew forth this, from Warren Mosler:
the bank shareholders spend their interest income
Clonal Antibody responds:
Yes you are quite correct. But the point I was trying to make was that the amount of interest that can be serviced this way is limited by the nominal growth rate of the economy, and the proviso that all the interest be spent, and none saved...
... any unspent income has that same effect as unspent interest income.
Later comments move to other topics.
I just want to point out that it seems to me that for many of the people commenting at Mosler's, "rent" is one of the world's biggest problems, but "interest" is no problem at all. Yet "rent" and "interest" are the same thing, given the way they use the word "rent".
Michael Hudson defines "rent":
The 19th century elaborated the concept of economic rent as that element of price which found no counterpart in actual cost of production. and hence was “unearned.”
Unearned income. Undeserved income. It is not a far stretch, from saying the income to capital (money) is undeserved, to saying the income to capital (equipment) is undeserved. And that is as Marxist a thought as I have ever seen.
Hudson and Hickey both see rent as a problematic cost. Mosler sees interest as income. The distinction is false, for every cost is someone's income, and every income is someone's cost.
Actually, that may be Mosler's point.
Still, the issue is not the cost of interest in comparison to the income from interest. The issue is interest in comparison to wages and to profits; the issue is the balance among factor costs.
From The Wealth of Nations:
The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue...