Gang8 (3)

In part two of this series I quoted Keynes:

...we can draw the line between "money" and "debts" at whatever point is most convenient for handling a particular problem.

I'm with Keynes on this one, and apart from those who claim all money is debt.

You can think of the horizontal line in my graphic as a spectrum of possible divisions between money and debt. And you can "draw the line between 'money' and 'debts'" at any convenient point between zero and 100%.

My view is that in the years since the end of World War Two, we have pushed that line closer and closer to the "All Credit" end of the spectrum, until we had so much debt and so little non-credit-money that we could no longer afford our debt.

To handle our "particular problem" we must push that line back toward money, and away from the reliance on credit.

I think there is a sort of Laffer curve for that spectrum, a curve that shows economic performance as a function of the reliance on credit.

With too little credit in use, there is clear opportunity to expand credit-use and reap an era of golden-age growth. With too much credit-in-use, the factor cost of money competes with wages and with profit, and times are hard.


The curve I used for this graph may look familiar. If you don't know what it is, you can download the Excel file or open the GoogleDocs version to find out. :)

Gang8 (2)

While writing my previous post on Gang8, I had Maynard's book open to page 167, but I didn't think I had a use for the footnote there. Later, on the drive to work, the use of it occurred to me. From the footnote:

...we can draw the line between "money" and "debts" at whatever point is most convenient for handling a particular problem.

What's happening at Gang8 is they see all money as debt. It is just one extreme end of the spectrum described by Keynes.

My position is that the failure to distinguish between money and credit is the source of our economic problems. In mine of 4 November 2009 I wrote:

Economists and pundits continue to utter "money'n'credit" like a single word. But the more we rely on credit for the spending that we do, the greater the cost of using money.

In mine of 8 Feb 2010, I showed how to distinguish money from credit:

In days gone by there were two distinct kinds of money: one with intrinsic value, and one without. These days there are also two distinct kinds of money: one with interest charges, and one without. The extra cost of interest, or the absence of that cost, is the significant feature that distinguishes the two forms of money in our time.

And in mine of 9 Jan 2011, I showed why distinguishing money from credit is essential for policymakers:

As debt is repaid, the monetary authority must allow the increase of non-credit money enough to keep "money'n'credit relative to output" essentially stable.

People don't think in these terms -- that there is too much credit in use. We do what we need to do. How can it be "too much"? And then we get a financial crisis and, for a moment, everyone knows the reliance on credit is excessive.

All the while, of course, everybody wants to reduce their debt, and everybody wants to balance the federal budget. But you can't pay off debt if you use credit for money.

Money and credit are not the same.

Gang8

"Gang8 - devoted to Creditary Economics"
Google Analytics tracks visits to this blog and to my Google Site, and reminds me daily that I must work harder to create something that more people will be interested in. The other day there was a spike of activity on the Site. The "Traffic Sources Overview" in Analytics led me to a Yahoo group called Gang8 and Message #15567:

"Gang," writes Dirk Bezemer,

I came across this wonderful site

He provides a link to my site and says, "Half right, half mistaken." My ego grew three sizes that day.

Responding to Dirk, Arno Mong Daastoel said,

Credit (and interest) is toxic only when it is spent unwisely, resulting in BAD (unpayable) debt. Debt is neutral both ethically and economically and not bad per ce.

And Dirk responded to Arno:

Agreed, Arno, that's the mistaken part. Also that there is money-money and credit-money. The correct part is that there are 'different moneys' and that the 'composition of money' matters. But remember that Keynes liked to read the 'monetary cranks' (like Gesell)- they made him think.

Hey, if Dirk is comparing me to Gesell, that ain't half bad. And if he is sayin I made him think, this is high praise.


For Dirk, a question: If there is not "money-money and credit-money" then how can the ratio of debt-to-M1 vary?

And to Arno I would suggest that the risk of credit-use "resulting in BAD (unpayable) debt" is far greater when the reliance on credit is excessive, than when it is moderate.


Arno's first response was to refuse to consider the possibility that debt can become a problem simply by accumulating. This seems to me particularly closed-minded unless Arno has already worked out an explanation. But the thing Arno says -- Credit is toxic only when it is spent unwisely -- is not explanation. It is proclamation.

Consider the source. The home page of the group says Gang8 is "devoted to Creditary Economics." So the group would want to assume that "debt is not bad." The group would want to assume that "Credit is toxic only when it is spent unwisely." No matter how much debt accumulates, the group would want to assume that it isn't a problem.

It is an assumption that must be challenged.

// UPDATE 10:24 A.M.
There are now additional posts in the thread. There is more now to consider than the views I captured above.

Just briefly, I want to suggest that Gang8 does not seem to consider the cost of a high credit/money ratio. Nor do they seem to treat monetized federal debt as interest-free, non-credit money. Just briefly.