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Hence the name of his blog: Credit Writedowns. The private sector is so deeply in debt that the only ways to deal with it are to either write down or write off the debt, or wait a decade for people to pay it off, accepting the anemic-at-best growth that would come as a result of trying to pay back the debt.

US economic policy since 1980 has been to use debt to replace wages and taxes to maintain prosperity and global domination. That approach seems to have hit its limits, but because the political aspects of this policy are now so deeply rooted in American governments, it's proved unusually difficult to dislodge.

And the world will live as one

by Montereyan (robert at calitics dot com) on Wed Apr 14th, 2010 at 02:49:19 AM EST
It's not a rocket science indeed. People like Keen, Hudson obseved well, that crises "coincide" with out-of-proportion debt waves, and they are never solved until sufficient deleveraging.

Minsky was especially right: good times lead to loss of any perspective of appropriate credit levels. Only in really good times massive shifts to speculative financing (just to cover the interest) and even Ponzi financing (when escalating refinancing is necessary) could be "normal". Before long, money concentrates in hands of a small minority, that can naively expect opportunities for double-digit returns forever. The volume of financial claims now exceeds the evaluation of annual globe production at least 4 times. So instead of producing and exchanging happily, the world must be concerned how to return more than it has. The compound interest is ticking regardless of economic and physical limitations.

The debt proportion gets only worse when massive market bets have to be honoured at the expense of taxpayers and society. Money is just wealth vouchers, really. What else a rich boy could do with it?

by das monde on Wed Apr 14th, 2010 at 04:13:34 AM EST
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Considering the rate at which we are proceeding, a better title for this post might be "Welcome to the Lost Century!"

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 14th, 2010 at 09:57:52 AM EST
[ Parent ]
People like Keen, Hudson obseved well, that crises "coincide" with out-of-proportion debt waves, and they are never solved until sufficient deleveraging.

I have been trying to trace the intellectual history of this idea. As far as I can tell the first to clearly state it was Veblen. Then came Fisher (who introduced debt deleveraging as a way to explain the Great Depression) but who apparently was unaware of Veblen's work and so has to be considered an independent discovery.

Then Minsky refers to Fisher and debt deflation, while also giving some credit to Keynes' General Theory, but again he omits Veblen.

Keen is explicitly working on modelling Minsky's framework, and Hudson is also talking in Minskian terms (Ponzi Finance).

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Wed Apr 14th, 2010 at 10:09:01 AM EST
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Krugman's beloved Keynesian Baby Sitting Coop model shows that recessions can occur without debt. But debt deleveraging turns out to be such a powerful incentive to "hoard" money.

Largely, I see so-called investments as money hoarding as well. The investors do give away money first, but on balance they ask later much more, eventually leading to recession plights.

by das monde on Thu Apr 15th, 2010 at 02:02:41 AM EST
[ Parent ]
Repeating myself ad nauseam, "investment" in the secondary markets is not investment, it is speculation. This is because unless a financial asset is purchased at issue it does nothing to change the capitalization of a going concern.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu Apr 15th, 2010 at 11:29:09 AM EST
[ Parent ]
Except that without the secondary markets to provide liquidity the going concern mightn't have been able to get the capital in the first place.
by Colman (colman at eurotrib.com) on Thu Apr 15th, 2010 at 11:33:23 AM EST
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That's Keynes' dilemma
The spectacle of modern investment markets has sometimes moved me towards the conclusion that to make the purchase of an investment permanent and indissoluble, like marriage, except y reason of death or other grave cause, might be a useful remedy for our contemporary evils. For this would force the investor to direct his mind to the long-term prospects and to those only. But a little consideration of this expedient brings us up against a dilemma, and shows us how the liquidity of investment markets often facilitates, though it sometimes impedes, the course of new investment. For the fact that each individual investor flatters himself that his commitment is 'liquid' (though this cannot be true of all investors collectively) calms his nerves  and makes him much more willing to run a risk. If individual purchases of investments were rendered illiquid, this might seriously impede new investment, so long as alternative ways in which to hold his savings are availale to the individual. This is the dilemma. So long as it is open to the individual to employ his wealth in hoarding or lending money, the alternative of purchasing actual capital assets cannot be rendered sufficiently attractive (especially to the man who does not manage the capital assets and know very little about them), except by organising markets wherein these assets can be easily realised for money.


The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu Apr 15th, 2010 at 11:43:35 AM EST
[ Parent ]
Can't it be solved rather simply with a small transaction tax which changes little to the ability to go out, but limits the extent of speculative movements. If small enough, it will restrain trade but not kill liquidity completely.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sun Apr 18th, 2010 at 05:56:10 AM EST
[ Parent ]
That would kill the noise trading and program trading, yes. Which would be valuable, but would do little to restrain the wholesale delusion of a genuine speculative bubble. For that, you need targeted policies of moral suasion, precise fiscal intervention and (when the bubble is being financed by increasing debt load for speculators) narrow but heavy-handed monetary intervention.

If prices are going up, Ponzi style, at 5 % a month, the speculator will be entirely unperturbed and only mildly inconvenienced by a transaction charge of 1 %.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Apr 18th, 2010 at 06:24:31 AM EST
[ Parent ]
But in non-growing regimes, productive investments become worse than direct hoarding as well. Actual entrepreneurs are ripped off by rentiers (of real estate or capital) just enough to have minuscule margins over alternative pursuits. Like in Henry George's theory, all gains from productivity improvements go to rentiers.
by das monde on Thu Apr 15th, 2010 at 09:26:41 PM EST
[ Parent ]
Hence the name of his blog: Credit Writedowns

Indeed, and the name of Steve Keen's blog, DebtWatch. Steve was making many of these points about debt levels last year and has graphs showing various debt levels, private, governmental, total, vs. GDP. But I was up way past my bedtime as it was.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Wed Apr 14th, 2010 at 09:56:13 AM EST
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