Monday, December 3, 2012

Beckworth: For every debtor there is creditor

In comments at his Money Still Matters post -- a title that cried out to me -- David Beckworth wrote:

For every debtor there is creditor, thus if debtors cut back on spending to deleverage then creditors should be receiving more funds with which they could provide an offset in spending.

Okay: For every debtor there is a creditor. But it might be only one creditor, for all the debtors. Or at the other extreme, everyone might lend to his neighbor and borrow an equal amount from the same neighbor. Or from a different neighbor maybe. Whatever. Lost in Beckworth's oversimplified assertion is any acknowledgement of concentration and distribution of wealth. But that is not the only thing he overlooks.

When debtors cut back on spending in order to pay down debt, funds come out of circulation and return to their owners. The recipients of those funds could spend them, as Beckworth asserts. But there is no guarantee of this. And as a rule, as a general tendency, those funds are *not* spent. As a rule, those funds remain with their owners, and move back into circulation again only by lending.

The level of debt is evidence of this. The Marginal Propensity to Consume is the operative law. By this law, money that falls out of the spending stream and lands in someone's savings, will tend to stay in savings. If it comes out, it comes out at interest and it comes out only on the expectation that it will return to the saver.

Someone with income sufficient to permit substantial savings to accumulate is unlikely to withdraw those savings and spend them. It is no great incentive to spend, that many people are paying down debt. Sure, prices may come down some. But the accumulator of savings is one person who does not need prices to fall before he can afford things.

If debtors cut back on spending to deleverage -- to delever, I think -- then creditors are receiving more funds and are unlikely to spend them. Certainly the creditors are unlikely to spend as much as the debtors cut their spending.

Beckworth's assertion is baseless.

Or you could look at it this way: Lending creates money, and paying down debt destroys money. So if debtors cut back on spending to delever, then for every dollar paid off, a dollar goes out of existence. The quantity of money goes down.

And if you look at it that way, there are no creditors "receiving more funds that could provide an offset in spending." Beckworth's assertion is baseless, again.

My understanding (if you could call it that) is that there are two kinds of debt. Debt that is created by banks that do the fractional reserve thing, and debt created by non-banks(??) that don't do fractional reserve.

If the lender does fractional reserve, the act of lending creates money, and the act of paying down debt destroys money.

If the lender doesn't do fractional reserve, it's like borrowing from your grandma. When you get the money, she doesn't have it any more. No money is created by this type of lending. This kind of lending is what Beckworth was talking about, grandmother lending.

Beckworth's assertion is baseless, either way.

1 comment:

Greg said...

Just another example of how poorly orthodox econ models the world.

They dont understand that banks create money, they are not intermediaries between savers and borrowers.

They dont understand that govt debt is totally unlike (as in 180 degrees from) private debt.

They dont understand that lowering workers incomes lowers their propensity to consume, which is counter to what every producer is hoping for.

If you dont understand private debt, public debt, and what influences consumption/production, how are you any value as an economist?