Saturday, April 23, 2011

The forest for the trees

From The Wall Street Journal, November 22, 2010:

If the European crisis has shown us anything, it’s that, after a certain point, private and public debt are indistinguishable.

What this means is that investors who have focused on measures of sovereign indebtedness in weighing the riskiness of “risk free” yields are missing the full story.

Dunno about "indistinguishable." But certainly, anyone who focuses on government debt and ignores private debt is ignoring the bigger part of the problem.


Greg said...

Well they certainly become indistinguishable when govts do things like buy MBS that are worthless and CDOs, essentially putting bad private debts on CB balance sheets. Ireland did this as well. They bailed out the private banks and then everyone squawked about the increased level of public debt.

Maybe they shouldnt have bailed them out and then we could have seen the collapse of private wealth. It was the increase in public debt that MAINTAINED the level of private wealth(nominal wealth).

Man it is getting really old listening to people who dont get the public/private nominal wealth relationship.

Check out this interesting article by a guy who is a frequent commenter on econ blogs (RSJ)


The Arthurian said...

They bailed out the private banks and then everyone squawked about the increased level of public debt.

I know. People are idiots. Sometimes I think it would serve them right if the whole economy collapsed, as they seem to want.


Wow, great link Greg. That guy is a genius. But I get nervous about ideas when they are too big to fit in my head, all in a piece.

His first graph there, comparing MZM to "Federal Debt Held by the Public", most interesting. From this I get "money is debt" with adjectives: Private-sector money is public-sector debt. Again, sectoral balances.

Shortly after that graph, the guy says: "In the current system, the government is granting almost all seignorage income to banks... With these gifts, the financial sector swells... It is becoming very expensive to match borrowers with lenders, if finance requires a 20% cut."

The guy is talking about the growth of finance relative to GDP. He follows this with two interesting options, neither of which might seem so interesting to me if I better understood the words. And I still say that the whole excessive-debt thing is driven by policies that encourage credit-use, and by the absence of policies that encourage the repayment of debt. He does not consider the policies that drive demand for loans. Only supply.

If we cut the DEMAND for loans in half, we will cut the size of the finance industry in half. But it is cutting off our noses to cut the demand for NEW loans, because new loans contribute to growth. So we are left with cutting the demand for OLD loans: for existing debt which hinders growth, and which nobody wants anyway.

So, why do we have all that existing debt, if nobody wants it? Policy. And if we fail to reduce the demand for loans with policy, we will fail to solve the debt problem, no matter how smart the blogger.

This one is more my speed:

Good link.