Debt Does Matter | 80 comments (80 topical, editorial, 0 hidden)

So, according to you, all economic activity should be done out of cash reserves?

Otherwise I don't understand your fundamental objection to the mechanism by which a bank creates the cash to advance to a client to purchase some good or service from a seller.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 12:50:09 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

No. I don't have objection to fiat money. Why would you think that? I have objection to asset price inflation, wage deflation and debt deflation, that is unproductive credit.

Even inflation in goods and services may not be such a bad thing. If that results wage inflation.

by kjr63 on Wed Mar 28th, 2012 at 01:42:33 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

I am in no way against consumption. The point of Keen/Minsky (at least how i see it) is just that debt growth does not stop where the real economy stops. Banker may think a customer has the ability to pay, but if debt deflation is too high the credit creates just more unpayable interest charges at the macro level. Which will lead to disaster, the magic of compund interest.

by kjr63 on Wed Mar 28th, 2012 at 02:04:46 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Interest is typically not allowed to compound. Prudent bankers make sure to collect interest as it accrues rather than permitting it to compound. The only place you regularly find compounding interest in the real world is in Ponzi scams.

(Incidentally, this little fact blows "long-run money neutrality" wide open, which in turn torpedoes half the neoclassical modeling framework.)

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 02:17:16 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

You find a sort of compounding interest almost everywhere where is asset price bubble. When the real economy does not cover the interest without recession, it can only be paid by new debt, to keep economy going. At some point there is no return.

by kjr63 on Wed Mar 28th, 2012 at 03:09:42 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Yes, bubbles are Ponzi scams without the Ponzi (or sometimes with one). This is why it's the financial regulator's job to kill bubbles dead, or at the very least plan ahead for dealing with the fallout.

But blowing bubbles is not the main activity of a properly run financial system. Of course, an improperly run financial system does all sorts of dumb shit, but that is a problem with right-wingers breaking the financial system, not a problem with interest-bearing debt per se. If the system worked otherwise, the right-wingers would just find ways to break that system.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Mar 28th, 2012 at 04:46:10 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Part of the problem is that many have little or no experience with a 'properly run financial system', as Alan Greenspan's tenure ran from 1987 to 2006. When and where were there properly run financial systems? It is a judgement call, but finance has been predatory to some extent for a long time, even if the predation was more practiced in other countries for a long while, as is the case in Germany today. Perhaps it would be instructive to look at such golden eras.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 06:13:23 PM EST
[ Parent ]

Re: Debt Does Matter (4.00 / 3)

Financial repression.

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Wed Mar 28th, 2012 at 06:36:28 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

Excellent clue.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Mar 28th, 2012 at 08:56:30 PM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

But blowing bubbles is not the main activity of a properly run financial system.

That is the nature of fiat money. To prevent it self-destruct you need regulation.

by kjr63 on Thu Mar 29th, 2012 at 07:10:22 AM EST
[ Parent ]

Re: Debt Does Matter (none / 1)

blowing bubbles is not the main activity of a properly run financial system
That is the nature of fiat money

No, since bubbles were blown also under the gold standard (most notably, the bubbles leading to the crash of 1929).

There are three stories about the euro crisis: the Republican story, the German story, and the truth. -- Paul Krugman

by Migeru (migeru at eurotrib dot com) on Thu Mar 29th, 2012 at 07:17:54 AM EST
[ Parent ]

Re: Debt Does Matter (none / 0)

That is the nature of ~~fiat~~ money.

Fixed it for you.

To prevent it self-destruct you need regulation.

And in other breaking news, water is wet and the Sun rises in the East each morning.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Mar 29th, 2012 at 04:36:32 PM EST
[ Parent ]

Debt Does Matter | 80 comments (80 topical, 0 editorial, 0 hidden)

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