Thursday, March 13, 2014

I can't let this go, Tom

In The Real Ponzi Scheme: Private Debt at Asymptosis (from 2011), we read:

Economists will tell you that gross debt levels don’t matter because one person’s debt is another’s holdings. (Net: zero.) They ignore it.

But if the gross private debt is too large, the real assets in the real economy can’t generate enough income to pay it off. Not really complicated, conceptually.

My reply:

“Economists will tell you…”
Second time I’ve heard that, lately. Got a link or two handy?

I was having a hard time believing that anyone would say gross debt levels don't matter. Steve Roth provided a link; Steve Keen speaking:

One part of the dis­cus­sion that I found quite notable was that, even after show­ing empir­i­cal evi­dence on the impact that ris­ing and then falling pri­vate debt had on the econ­omy both now and dur­ing the Great Depres­sion, I couldn’t con­vince sev­eral of the aca­d­e­mics in the audi­ence of the impor­tance of pri­vate debt: they kept com­ing back to “one person’s debt is another person’s asset, there­fore the level of debt doesn’t mat­ter”.

In the years since, I've come to see that too many people say gross debt levels don't matter because it all nets out to zero.

(Scratching my head) Where've I seen that recently?

Oh, I know. Tom at Mike Norman's:

These morons apparently don't realize that all money is created by crediting and debiting accounts. Money functions as a unit of account, medium of exchange, store of value, and record of debt. Every debt has a corresponding credit denominated the unit of account of that jurisdiction, so that all debt as someone's liability is someone else's asset, which nets to zero.

No, Tom. You're emphasizing the wrong things, and you are leaving out cost.


jim said...

I believe the $57 trillion is the
sum of all the worlds govt debt.

Private debt is something like 3 times larger.

The Arthurian said...

Hard to find data on private debt.

Tom Hickey said...

I didn't say that private debt didn't matter. Of course it does. I was responding to a post in which the author had claimed that the absolute amount of debt in the world was shocking. That's nonsense.

It's not the quantity of credit that counts, since all money is credit-debt relationships. It's the quality that counts, as Minsky points out. What he calls hedge finance is OK, speculative not so good, Ponzi bad.

The Arthurian said...

Hi, Tom.

"I didn't say that private debt didn't matter. Of course it does."

Yeah, I know. But the "it nets to zero" argument that you use, economists use that same argument to claim that excessive private debt is not a problem.

If you use that argument, you validate their argument. This is unacceptable.

Jazzbumpa said...

Art -

Commenter JimH left this on my AB equity extraction post yesterday. I haven't had a chance to check these links yet, but I'll bet 50 cents you will find them interesting.


What you are seeing is the increase in debt leading up to the Great Recession.

Irving Fisher (1867-1947) the economists wrote that the Great Depression had been caused by debt.

These are available for download:

Booms and Depressions: Some First Principles (by Irving Fisher 1932)

A History of the Federal Reserve: Volume 1: 1913-1951
Chapter 5 Debt-Deflation Theory of Great Depressions (by Irving Fisher 1933)

Tom Hickey said...

Art, private debt does net to zero by accounting identity. Peter Booth, on whom I was commenting, apparently doesn't get that, or that pubic debt nets to zero, too, with the liabilities resting with the government and the assets with non-government. This is just how the accounting of money as credit works. Booth is shocked that global debt is 57 T when the global economy is estimated at that figure. Well, global credit is also and everyone's liability is someone else's credit.

The important questions are who are the creditors and who are the debtors, and why some chronically net save and others chronically net borrow. There is also the question of the quality of debt wrt to financial stability of the system.

But the total amount of debt is irrelevant as an absolute number unrelated to anything else. It might to be much, too little, or just right, depending on other factors.

But you are correct that I should have made this clear in the post. It seemed to me that people who follow MNE would understand this and that probably was an unwise assumption.

Tom Hickey said...

I should also say that the amount of credit-debt in the world is likely to little, given high UE, overcapacity (idle resources), and generally low or controlled inflation in most places and deflation or treat of deflation in the EZ.

Minsky's work implies that a higher ratio of public debt to private debt is safer, especially when currency sovereigns are involved since they cannot be forced to default operationally and control their interest rate.

The cost of private debt is not necessarily an issue. If principal and interest can be serviced from income (Minsky's hedge finance), no problem. It's when debtors take on so much debt that they can only pay the interest and must roll over the principle that instability flairs. Of course, when Ponzi finance takes over and debtors require funding by borrowing from increase in the value of the asset, the system become shaky and a bubble is likely.

Cost Itself is not an issue wrt private debt, but rather ability to meet it from income. And as Scott Fullwiler has shown, there is no IGBC.

The Arthurian said...

Tom: "Cost Itself is not an issue wrt private debt, but rather ability to meet it from income."

In other words, it's not the cost of debt that's the problem, it's the affordability of debt that's the problem.

I'm not sure what you're thinking, Tom, but debt would be more affordable if the cost of debt was less.

And before somebody says "but interest rates are very low, so the cost of debt IS less" let me point out that interest rates are not the cost of debt. Interest rates are the cost of new uses of credit.

The cost of debt depends not only on the rate of interest but also on the size of the accumulation on which interest must be paid.

If interest rates are very low, then the only remaining way to reduce the cost of debt is to reduce the accumulation of debt.

Tom Hickey said...

The issue is chiefly affordability, Art, and the cost is determined in contemporary economies by two factors, first, the rate setter (Fed in US), and the markets, i.e., what lenders are willing to offer and borrowers accept. So it's partly a command system and partly a market system.

It's up to lenders and regulators to decide on lending standards.

This is just capitalism in a mixed economy.

The second issue is risk, and cost figures into this not only individually but systemically, The more fragile the borrower the more the likelihood of non-performing loans. This also increases systemic risk, since if many borrowers are pressed and liquidate assets, this reduces asset values that result in balance sheet issues with lenders.

So there are many factors that go into the mix, but the cost of debt is supposedly voluntary in a market economy and both lenders and borrowers are presumed to know the risk-reward ratio.

A basic idea behind the command system of monetary policy through rate setting is that cost inversely related to demand. So it's a feature rather than a bug.

I am personally against the command system of a policy rate and am also a critic of neoliberal capitalism, which is debt-based. I am just describing the system we have in place. I would like to see it overhauled, with less use of private debt, the abolishing of public debt, direct issuance of currency, and a higher ratio of state money to credit money. That would be a more stable system and the cost of debt would be less, too. But that is not where we are now.

The Arthurian said...

I opened the post by considering the notion that "gross debt levels don't matter". I said I had "a hard time believing that anyone would say gross debt levels don't matter." And I said that the problem with high levels of debt is cost.

You said it's the quality of debt that matters, not the level of debt.

You said, "Cost itself is not an issue wrt private debt, but rather ability to meet it from income."

I said, "debt would be more affordable if the cost of debt was less."

I said, "The cost of debt depends not only on the rate of interest but also on the size of the accumulation on which interest must be paid."

I said, "If interest rates are very low, then the only remaining way to reduce the cost of debt is to reduce the accumulation of debt."

You then explained to me a number of factors which influence interest rates: monetary policy; the markets; lenders and regulators; and risk. You said, "there are many factors that go into the mix".

But your response considers only interest rates. It does not address the accumulation on which the interest must be paid. Thus you present a microeconomic rather than a macroeconomic view.

Any time money is borrowed or lent, an interest rate must be established. This is micro.

Looking at all of those borrowings and lendings together is still micro.

But when you look at all those borrowings and lendings together, and compare the size of that to GDP or to Personal Income or to the the quantity of money available for use as income, now you are doing macro.

Tom, do some macro.

Oilfield Trash said...


What are your thoughts on how to reduce the accumulation.

The Arthurian said...


An example of policy that is the problem: the tax deduction for home mortgage interest. The problem is, it encourages people to be in debt.

An example of policy that is NOT the solution: eliminating the tax deduction for home mortgage interest. I can't believe anyone would consider this now, after the crisis. The economy could not stand the shock of it.

An example of policy that IS the solution: Replace the tax deduction for home mortgage interest with a tax credit that reduces your tax for making an extra payment or two on the mortgage. This policy would encourage people to reduce their debt, so it is just the opposite of the tax deduction for home mortgage interest.

The amount of benefit people get from the tax credit could be equal to the benefit they get from the deduction. But the effect would be to help reduce debt, rather than to cause debt growth.

I hope that gives you the idea.

Oilfield Trash said...


Fiscal incentive to reduce debt could work, however I think the political backlash is going to be hard to deal with.

Maybe if the focus is on mortgage debt it will be more accepted since many of us have a mortgage loan.

But people who have no debt or very little will want to know what is in it for them. Why should individuals who over extend themselves get a tax rebate, while those who do not get nothing.

It would make better policy IMO if everyone was given some fiscal stimulus and if you had outstanding debts it had to be applied to principle reduction, those without debt could use it for consumption or (I do not like this option) savings.

Just something rattling around in my head.

Oilfield Trash said...


One other thing I forgot to put in my previous post.

There is a moral hazard issue with Fiscal policy impacting private debt accumulation.

It would be a bailout of the financial sector. This is very distasteful to me. I believe in the motto loans that can not be paid back should not be paid back. That is why we have laws for discharging bad debt.

It seems the FIRE sector has put themselves into the position of forcing the government into a backstop position, yet at the same time resisting all attempts to regulate their behavior.

I do not think you can allow them the benefit of this position.