Notes for David Graeber's Public Inquiry

At the New Statesman: We're racing towards another private debt crisis – so why did no one see it coming? by David Graeber.

Graeber's article is presented below on light blue background; my responses are on the parchment.

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy.

Three sentences in, Graeber is already predicting disaster!

...to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous.

I won't be attending that impartial forum. But I have some thoughts you might bring up when you go. First: We need to know what the problem really is before we can really solve it. So the most important thing is to get the analysis right.

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

An inverse relation?

I agree with Graeber that private debt, not public debt, is the problem. I agree the crash happened "because of dangerously high levels of private debt" (though I would omit the word "dangerously" since the danger is obvious from the context). And I'm not sure he means to call public debt the "exact opposite" of private debt, but I agree these two types of debt affect the economy in different ways.

But an inverse relation? No. Recently I showed this graph:

Graph #1: Public (blue) and Private (red) Debt relative to GDP, 1834-2011
Source Data from Steve Keen's XLSX file from 2013

Public debt and private debt do sometimes move in opposite directions. There is sometimes inverse movement, we could say. But that is not a "relation". A relation is consistent.

And even if a thing is true, it may not be particularly significant. It's true that public and private debt sometimes move in opposite directions. That fact in itself is barely interesting, and not significant.

As I've said before, what's really significant about the movement of public and private debt (relative to GDP) is that when we have private debt rising while public debt is falling, we have an exceptionally good economy.

Bring that up at the Public Inquiry.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008.

Source: Wikipedia

That's not true. Graeber presents it like a General Principle but it's just not true. The public sector did not "reduce its debt" in the years leading up to 2008. In those years -- lets say since 2001, because before that the trend was different -- in those years, UK public debt increased from about 30 to about 38 percent of GDP.

Source: ukpublicspending.co.uk

Now ignore GDP. Look at the UK public debt in pounds, billions of pounds. There was a steady, gradual increase in public debt from 2001 to 2008.

Again, increase. The public sector did not reduce its debt in the years leading up to 2008. David Graeber is incorrect when he says it did.

As for the idea that private debt goes up when public debt goes down, well, private debt always goes up. Until you get a crisis like the Great Depression or the Great Recession, private debt always goes up. That's the problem. And it has nothing to do with public debt going up or going down.^[1]  Private debt goes up because policymakers think the use of credit is good for growth, and they set policy accordingly.

Oh, and they say private debt isn't a problem. The use of credit creates debt, so the policies that encourage private use of credit also encourage growth of private debt. Policymakers don't see that as a problem. That's why private debt always goes up until you get a crisis.

Bring that up at the Public Inquiry.

Where this idea comes from that "overall private sector debt [only] goes up" when "the public sector reduces its debt," I don't know. But it is most assuredly wrong.

... That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

David Graeber makes an incorrect generalization about the behavior of public and private debt, and treats it as a General Principle. His prediction of "another catastrophe" is based on the flawed generalization.

Don't bring that up at the Public Inquiry.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017.

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

Yeah, no. These graphs do not "show the relationship between public and private debt." They don't show debt at all; they show deficits. Deficits and surpluses. The graphs show quarterly changes, not the cumulative totals that comprise debt. That's why these graphs show the numbers getting smaller since around 2009.

I didn't know. I don't do sectoral balance stuff. I looked into it because if the numbers are getting smaller, it can't be debt.

Oh, and the graphs don't show the relationship between public and private debt. The graphs show four sectors, not two: public and household and corporate and foreign. And the graphs don't really show relationships. They show four separate sets of data. To see a relationship you would divide one of them by another, or like that.

Well, I take that back. I think these must be "stacked" graphs. For each quarter, the stuff that's greater than zero is piled up and compared to the stuff that's less than zero. And, for any quarter, the stuff that's greater than zero is equal to the stuff that's less than zero; that's the whole point of the graph. For each date, the bars below zero are the same height as the bars above zero. That's what creates the symmetry.

But symmetry is really all these graphs show.

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

"First," he says, "notice how both diagrams are symmetrical." Like that was the most important thing. It's not. The symmetry is of no great consequence. I mean, would you be shocked to discover that when you buy something, the amount you pay is equal to the amount the cashier receives from you?

All the money spent is equal to all the money received. All the money borrowed is equal to all the money lent. These things are not shocking. These are the simplest things. It's how transactions work. It would be shocking if the graphs didn't show it.^[2]  Don't be duped by the symmetry visible on Graeber's graphs.


Next, Mr. Graeber provides examples to show that the amount of money involved in a transaction is the same amount for the one party as it is for the other. Two examples, which he puts on a pedestal called the ledger sheet:

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram.

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

Graeber expects you to be shocked and impressed by the symmetry in this. I expect you to know better.

Graeber is right when he says "in any ledger sheet, credits and debits have to match." Credits and debits have to match. That is the way accounting is done. And that is where the symmetry comes from.

Nifty. The symmetry is nifty. It may be shocking, if you didn't know. It may even be impressive. But it is not significant. Don't be misguided by nifty.

The amount you pay the cashier is equal to the amount the cashier receives from you. Actually, it's not even nifty. It's just ordinary.


Graeber next launches a generalization from the ledger-sheet pedestal, but it reaches an unsupportable conclusion:

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

Everyone else has to go into debt because government is in surplus? That's not true. You can have government and foreign in surplus, while household and corporate are in deficit. You can have government and household in surplus, while corporate and foreign are in deficit. You can have government and corporate in surplus, while foreign and household are in deficit. You can have government and household and corporate in surplus. Or government and corporate and foreign. Or you can have government and foreign and household in surplus -- and this you can actually see in the first two years shown on Graeber's graphs.

None of this stuff happens because of "accounting identities". It happens because of spending decisions people make. It shows up on the graphs because of the rules of accounting.

You cannot say "if the government goes into surplus, then everyone else has to go into debt." The statement is a caricature of thought. It is not true. Don't bring it up at the Public Inquiry.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There you go. That's a good paragraph, except for the silly stuff about the magic money tree. But yeah, I used to think of money as "already lying around". Back in 1976 I wrote "there is just as much money in circulation as ever there was." Like Graeber's poker chips. And I was dead wrong.

That is a good paragraph from David Graeber. Bring it up.

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Oh, and things were going so well! Graeber is wrong when he says "the less the government is in debt, the more everyone else must be." That's "the real point" of the paragraph, he says. But it is wrong.

Graeber's in good company. Milton Friedman made a similar mistake. In Chapter 9 of Friedman's book Free to Choose we find a little story about building roads:

Financing government spending by increasing the quantity of money looks like magic, like getting something for nothing. To take a simple example, government builds a road, paying for the expenses incurred with newly printed Federal Reserve Notes. It looks as if everybody is better off. The workers who build the road get their pay and can buy food, clothing, and housing with it. Nobody has paid higher taxes. Yet there is now a road where there was none before. Who has paid for it?

The answer is that all holders of money have paid for the road. The extra money raises prices when it is used to induce the workers to build the road instead of engage in some other productive activity...

Milton Friedman is famous for his view that inflation is driven by "the quantity of money relative to output." But in order to make his road-building example work, Friedman assumes the size of the economy is a given. He ignores the normal expectation that output will grow. And he ignores the common sense that says the expansion of infrastructure encourages economic growth.

In order to make his road-building example work, Friedman has to assume zero growth of output. Why? Because according to his own famous phrase, if output grows then an increase in the quantity of money is justifiable and need not lead to inflation.

Friedman assumes zero growth of output. Graeber's mistake is similar. Graeber assumes zero change in total debt, so that government debt can only be reduced when some other sector increases its debt.

He overlooks the possibility that total debt could be reduced. To be sure, this is an understandable error because total debt never is reduced. But total debt is never reduced because policymakers think using credit is good for growth and private debt is never a problem. Debt could easily be reduced if policymakers were open to the idea of reducing it.

Bring that up.

Set aside those policymakers' principles, and reducing debt becomes possible. Reducing debt becomes a way that allows us to reduce government debt without an increase in household, corporate, or foreign debt. In other words, Graeber's "real point" is not necessarily true. There is a way around it.

Bring that up.

But because of the way the economy works, it would be better to give priority to reducing household and corporate and foreign debt. When those reductions bring true vigor back to the private economy, government debt will fall effortlessly.

Bring that up.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

"In reality," he says, "debt is money."

In reality, debt and money are created at the same time (and in the same amount) when you take out a loan. The money gets put into your checking account or someplace where you can spend it, and it is soon gone. The debt sticks with you, and you pay it off gradually over time.

How can anybody in their right mind say debt is money? Debt is not money. Debt is the obligation you take on when you borrow money. Everybody knows that. So do me a favor and don't say debt is money. You're killing me with that stuff.

But of course debt has to be owed to someone. These charts show who owes what to whom.

"Of course" debt is owed to someone. And money isn't. That's the point. Debt and money are different. So, don't say debt is money. The thought is incomplete, and therefore incorrect.

Graeber says his charts show "who owes what to whom." They don't. The charts show who borrowed how much from whom in each period, net. The charts show surpluses and deficits. They do not show debt, so they don't show who owes what to whom.

Graeber is really not very good with graphs. Keep that in mind at the Inquiry.

Come to think of it, at the start of the article Graeber says "The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically)." And at the end of the article he says "And remember: it was a mortgage crisis that set off the 2008 crash". Graeber's focus is debt, dangerously high levels of debt.

He has the right focus. But his graphs show the symmetry of surplus and deficit. The symmetry and the declining levels of surplus and deficit. His graphs are unrelated to his focus. His graphs are irrelevant.

The symmetry may be striking, but the graphs are not relevant. Don't bring that up, but do keep it in mind.

Graeber's article includes two more sections and several more paragraphs. I have no remarks on that part of the article, except to quote this, which is very good:

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

Bring that up at the Public Inquiry, too.

//

Notes

1. It is true that by increasing at a more rapid rate, public debt can solve some of the problems created by excessive private debt. But this does not mean insufficient growth of public debt is the cause of those problems. The cause is dangerously high levels of private debt, as Graeber correctly says.  Return


2. Indeed, the second graph fails to show symmetry, suggesting an error. As Graeber describes it: "the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up."  Return