Monday, April 11, 2011


From my four o'clock:
Anyway, Robins. He says, "Getting less and less economic benefit from each dollar of new debt is becoming an enormous and onerous problem for the US." That's the debt productivity thing. Robins quotes Grandfather Hodges:

“In 1957 there was $1.86 in debt for each dollar of net national income, but in 2006 there was $4.60 of debt for each dollar of national income – up 147%. It also means this extra $2.74 of debt per dollar of national income produced zilch extra national income. In 2006 alone it took $6.32 of new debt to produce one dollar of national income.”

Why is debt less productive?

Because debt is NOT productive and it never was. Credit-use is productive.

When you go to the bank for a loan, it's because you want to spend some extra money on something. The extra spending you do will help the economy grow. Productive.

When the bank gives you a loan, you and the bank (together) put credit to use. I assume that if you borrow a dollar, you're gonna spend it. So, a dollar of credit put to use is a dollar of boost for the economy. Productive.

When you pay back your loan, you do it by taking money out of circulation and giving it back to the bank. Because the money comes out of circulation, it creates a drag on the economy. Counter-productive.

There is no magic in this. The dollar of "boost" and the dollar of "drag" have to balance out.


The use of credit is a boost for the economy. Debt is a record of how much boosting we have done. This record of boosting is not "productive."

Or if you prefer: Debt is the obligation to pay back what is borrowed.
Well, sure. Why else bother to keep track of it??
But in any case, debt is a DRAG on the economy, that counterbalances the BOOST that comes from using credit. Credit-use is productive; debt is not.


Nobody goes to the bank to accumulate debt. People use borrowed money -- credit -- because it suits their needs. But nobody says, "Gee, I think I'll borrow some money because I want to add to my debt today." Nobody says that. Debt is not the driving force. Debt is just a record of the borrowing. Debt can never be "productive."

Why is credit-use less productive than formerly?

Because there is so much to be paid back, so much drag. Because our debt is so vast. That's why.


greg said...

Borrowing is a boost. It’s inflationary, because it creates money. Paying back is a drag. It’s deflationary, because it destroys money. You might find, "Money as Debt," interesting. And the follow up: "Money as Debt II" is even better. But you’ll have to Google that one.

The Arthurian said...

Greg of Another Amateur Economist, hello.

Borrowing is a boost. It’s inflationary, because it creates money. Paying back is a drag. It’s deflationary, because it destroys money.

Agreed. But the question is not about inflation and deflation and whether money is debt. (Money is NOT debt.) The question is: Why is "debt productivity" giving us "less and less economic benefit"? That's Ron Robins' question. I prefer to call it "credit efficiency." So my question is: Why is credit efficiency declining?

My answer is that new uses of credit have to become bigger and bigger to surmount the drag of accumulating debt.


Calgacus said...

Arthur, if money is not debt, then what is it? All forms of money are best understood as debt. And conversely, government (backed) debt is money.

The Arthurian said...

Money is a medium of exchange, a store of value, and a standard of value. The stuff we use for money -- the stuff we spend, or choose not to spend -- is money.

Debt is money owed.

On your definition, money=debt.

By substitution then, money = money owed.

But this cannot be true, because not all money is owed.

It is, however, that increasingly over the last 60 years, we have come to use credit as money (which is why we now have all this debt). Excessive reliance on credit is the central problem, in my view, and that is why these definitions is so important to me. Thanks for your patience.

The Arthurian said...

Another look.

The stuff you have in your wallet is money. The greenbacks, and the credit cards.

Austrians would not agree that credit cards are money, because they cannot be used to make the "final payment," and that is true. But we do use credit cards as a medium of exchange. And therein lies the problem.

The spending you already did with your credit card, and have not yet paid off, is debt. But that's not in your wallet. It went out into circulation. That money is gone. Of that, only debt remains, the record of credit put to use.

The Arthurian said...

Cal -- maybe you should give me (again) your definitions of money and debt. Or (if money is debt) then what is debt? And how do you distinguish between money that must be paid back and money that is earned? The difference is central to my thinking.

I suspect that we actually agree on these things, because we're looking at the same economy. I thnk our differences arise from mismatched meanings of the words.

Jazzbumpa said...

There is an Elliot wave explanation. Either we are in a 5th wave, or the 5th wave has ended and we are now in a period of secular decline.

Less bang for the buck - quite literally - is a standard 5th wave phenomenon; or perhaps symptom. Debt overhand could be the - or an - underlying cause.

Also consider the uses of debt:

For investment - good.
For consumption - not so good.
For leveraged financial tail chasing - very bad, indeed.

Most money and/or debt is in the latter category. The total market value of obscure financial derivatives is a huge multiple of total world GDP. This is a grotesque misallocation of resources, and a huge drag on everything else.

I happens because of our unwillingness to regulate - and most especially those things which need the most stringent regulation.

I have no problem using the word "greed."


The Arthurian said...

"Most money and/or debt," you say, is in "leveraged financial tail chasing."
Okay. Rather than "good" and "bad" I would use the terms "productive" and "nonproductive" but the meaning I suppose is about the same.

This has happened, you say, "because of our unwillingness to regulate."
Well... without disagreeing with you I think I can point out that "or unwillingness to regulate" is an economic policy. We were willing to regulate until the 1973 problem arose. By the 1980s there was a new plan in place.

In addition to our unwillingness to regulate there is the continued reliance on credit. This is the one part of Golden Age policy that survived the transition to Reaganomics intact. And it is the one part that MUST change.

Jazzbumpa said...

Actually when I say bad, I mean BAD - as in harmful and destructive - rather than merely non-productive, which is by comparison rather neutral.

And how do you distinguish between money that must be paid back and money that is earned? The difference is central to my thinking.

This strikes me as being overly absolutist, and even artificial. Money that is earned is a mechanism for discharge of debt from employer to employee. There's a good argument that money originated as debt: were-gild, fees, fines, tithes and tribute, which ultimately evolved into taxation.

We do not view money as a “thing”, a commodity with some special characteristics that is chosen to lubricate a pre-existing market. Further, we believe that the monetary unit almost certainly
required and requires some sort of authority to give it force. We do not believe that a strong case
has yet been made for the possibility that asocial forces of “supply and demand” could have
competitively selected for a unit of account. Indeed, with only very rare exceptions, the unit of
account throughout all known history and in every corner of the globe has been associated with a
central authority. Hence, we begin with the presumption that there must be some connection
between a central authority—what we will call “the state”--and the unit of account, or currency.


The Arthurian said...

JzB: "Money that is earned is a mechanism for discharge of debt from employer to employee."

Money is a mechanism for the discharge of debt. I like that. But it certainly does not mean that money is the same as debt. It means something more like money is the opposite of debt. But "the opposite of" is not full of meaning. The way I would put it: One of the uses of money is to cancel debt.

If I have a dollar, I'm a dollar to the plus. If I owe a dollar, I'm a dollar to the minus. There are other differences as well. Money is used in transactions; debt is not. Debt is the record of money owed; money is not.

In Chapter 13 of The General Theory, Keynes wrote, "we can draw the line between "money" and "debts" at whatever point is most convenient for handling a particular problem." So in a sense money and debt are the same. Yet Keynes draws a line between them.

"There's a good argument that money originated as debt..."
I know. And if there was debt before there was money, then money cannot be the same as debt.