We owe it to ourselves

Again, Steve Keen:

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”.

Yeah... and I just ran across this, again, from Paul Krugman of all people:

... So, a few more thoughts on debt and what it does and doesn’t signify.

Start with the numbers that Stockman loves to cite, showing the ratio of total debt, public and private, to GDP...

Stockman, and to be fair quite a few people, would have us see this as evidence that we have been on a vast spending spree...

OK, the sheer size of that number should tell you immediately that this can’t be right. Yes, we have run trade deficits and moved from being a net creditor to being a net debtor, but it’s not that big a deal (and we still earn more on our foreign assets than we pay on our foreign liabilities). So the surge in debt reflects a surge in money Americans owe to other Americans.

Krugman: "the surge in debt reflects a surge in money Americans owe to other Americans."

There it is again, what Steve Keen said: One person's debt is another person's asset. We owe it to ourselves.


Okay. I went back and finished reading Krugman's post. He says:

This is how you want to think about debt: it’s not a burden on the nation’s resources, because it’s mainly money we owe to ourselves, and it’s a problem not because we have to tighten our belt but because debt is currently leading to spending that’s less than we need to maintain full employment.

The last part of that is good -- so good that I can almost overlook the we owe it to ourselves part. But if it is true that "debt is currently leading to spending that’s less than we need to maintain full employment", the growth of debt is the reason.

Krugman acknowledges that debt has grown, but seems to miss the point that it was the growth of debt that gradually undermined the spending we need to maintain full employment. He gets the ending: There was a moment, all of a sudden, when unemployment shot up and an output gap opened. And he can see that the high level of debt was the cause of it.

But debt didn't suddenly jump to a high level and cause the sudden opening of an output gap. Debt was creeping up for a long time, having a harmful effect on growth for a long time, until a final straw broke the camel's back and created the output gap. Debt was excessive -- meaning "debt was hurting the economy" -- for a long time. A long time.

Graph #2: Stages of the slowdown in real growth

Krugman doesn't seem to see it. He says debt is "currently" causing problems. But there is so much more to the story.


Oh, and the other thing: "debt: it’s not a burden on the nation’s resources, because it’s mainly money we owe to ourselves". I don't know what the hell that means: "a burden on the nation's resources". Resources? Debt is a burden on the people who owe it. Even though we owe it to ourselves. Or, to each other. Or, the many of us owe it to the few of us. Whatever.

No matter who we owe it to, the money we pay for our debts is money that goes to finance rather than to labor or to productive ("nonfinancial") business. The money we pay for our debts adds to cost without adding to output. Oh, yeah, we may use that money to produce stuff, or to buy stuff; but we could as easily have used our income for those purposes instead of borrowed money... As easily, or more easily, if policy encouraged it. But policy does not.

Policy encourages saving. Why? I do not know -- Maybe so banks have money to lend?? But hasn't that logic been shot down? So, policy encourages saving for no reason. No economic reason. Policy encourages saving because people like the idea, maybe. It's not a policy that actually helps people save, but nobody seems to get that. Eh, regardless, policy encourages saving.

When money goes into saving, money goes out of circulation. Funny thing is, it's money in circulation that we receive in our paychecks. The money in circulation is money that becomes income. Savings can't be income, because savings is not in the spending stream. Only circulating money flows.

A policy that encourages saving is a policy that makes less money available for use as income. Such a policy has multiple effects. It helps to limit increases of income. So you could say it is a way to fight inflation. Or you could say it prevents incomes from keeping up with the cost of living. Probably both those things are true.

The encouragement of saving also helps credit use grow. Do banks lend out savings?? Regardless, encouragement of saving shifts money out of circulation, creating a shortage of money in circulation. That is a problem people solve by borrowing more. So the encouragement of saving encourages borrowing and encourages the growth of accumulated debt.

So here ya go: Policy encourages saving, which creates a shortage of circulating money, so we increase our borrowing and our debt. Again: less circulating money, and more debt.

Graph #3: Less Circulating Money and More Debt Push the Debt-per-Dollar Ratio Up

From five dollars of debt for every circulating dollar, to more than $15 by 1990, to more than $35 by the time of the crisis.

The cost of a loan depends on the interest rate you can get. But for the economy as a whole, the cost of finance depends on two things: interest rates, and the level of debt accumulation.

The level of debt matters, because it affects the macroeconomic cost of debt.