Friday, July 20, 2012

Credit is a sandwich

Credit is a sandwich. Debt does not circulate. Money is a medium of exchange.

The act of lending puts credit to use. But credit is a two-layer sandwich. The borrower peels off the money-layer and spends it into circulation. The borrower is left with the debt-layer, which does not circulate.

When the borrower peels off the money and spends it, the money goes into circulation and becomes indistinguishable from non-borrowed money. To the recipient, it *IS* non-borrowed money. This is how credit-money becomes non-credit-money.

However, the debt remains. The cost of circulating the money, remains. The drag on the economy, remains.


Clonal said...


In the US, you have to distinguish between private debt, non federal government debt, and federal government debt. Each of these is different. Federal Debt is extinguishable any time at the pleasure of the President it does not even require an act of Congress to do so!

Anonymous said...

Dude, just found this:


The Arthurian said...

Clonal -- if only private debt was so easily extinguishable!

DH, I'd have to go back to school before I could read that link. Or get a new brain, maybe.

Clonal said...

State government debt and private debt can only be extinguished if state government income and private income increases. An almost impossible task in a deflationary environment. Hence the Federal government has to step up and increase state government and private income - in other words increase the Federal Government deficit!

You might like to see this video lecture from Richard Koo

The Arthurian said...

Clonal, I was thinking about this the other day. The FIRST time I heard of Richard Koo was when you linked to him here. Since then, I've heard of him more and more and now his "balance sheet recession" is part of the lexicon.

Yeah, it was just the other day, after you linked to Lars Syll's blog. I checked that one out briefly and it was definitely interesting.

I don't know where you come up with all these great links! Thanks, Clonal.

Clonal said...


It is a real "Great Depression"

You might also want to see the video

US streets full of formerly middle class