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I think your ideas are in the right direction, and may very well be consistent with how Marx and Smith believed the world worked, but you seem to be attaching meanings to words like "consumption," "asset," "investment," and "circulation" that Marx and Smith, as well as Krugman, would have trouble following without a more explicit explanation from you.  You have a semantic dispute, and not an idea dispute, with Krugman.  I think you and Krugman would probably believe the same things if you both agreed on the same definitions of words, is what I'm saying.  For example, "asset" is an accounting word, referring to the asset side of a double-entry accounting balance sheet that must be balanced against claims by others on the real resource behind the asset, called "liability."  Accounting, however, is just a method for trying to keep people honest with their transactions over space and time, and not anything that is fundamentally connected to the world of real things.  

An asset is a positive entry on a balance sheet and represents a real investment only insofar as that investment has the value that the bookkeepers' ledgers say it does. If someone borrows resources to buy the asset, the loan gets entered as a liability in the books. Lot's of times, people and firms invest in assets with the expectation that their value will be retained or will produce income sufficient to offset the liability of a loan. But when it turns out otherwise, the failed "investment" is the same thing when dealing with real resources as if it had been a consumption expenditure with no expectation for a positive return, just present enjoyment or use value.  That's why Krugman is on target when he uses the word "consumption."  He's referring to what happens to real resources not accounting identities -- the real resources got consumed in the moment and their value is depleted now and not available anymore for producing more real resources, which is going to cause a problem for the poor bankers who lent their wealth and credibility in order to buy the "assets."

by santiago on Thu Apr 15th, 2010 at 03:59:50 PM EST
[ Parent ]
You make it sound like the bankers are the victims here...

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Fri Apr 16th, 2010 at 02:13:52 AM EST
[ Parent ]
That's a really good point, but the question is, since the problem is essentially that some borrowers are failing to make good on their obligations to repay their loans (and loans given at historically LOW interest rates, for the most part), WHY aren't bankers the victims here?

To answer this, we have to break out of the rules of the system and account for the fact that bankers are simply more powerful people in society, as a class, than borrowers are, and they are not the victims here precisely because they are the ones who made up the rules that borrowers and themselves must try to follow.  And those rules are what allowed borrowers to be given more credit than was their due, not the borrowers themselves.

by santiago on Mon Apr 19th, 2010 at 07:53:43 PM EST
[ Parent ]
That and the fact that the bankers helped inflate a property bubble.

If you borrow € 1 mil to buy a house that is really only worth € 0.5 mil, pay off € 0.2 mil out of your ordinary income before going underwater when the price resets to a more realistic value, then you've lost € 0.2 mil relative to the scenario where the housing market didn't suffer from a bubble. Plus the expense of bankruptcy and the inconvenience of foreclosure...

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Tue Apr 20th, 2010 at 06:25:31 AM EST
[ Parent ]
First i have to say, that Krugman is a nobel price winner i'm an amateur.

Lot's of times, people and firms invest in assets with the expectation that their value will be retained or will produce income sufficient to offset the liability of a loan. But when it turns out otherwise, the failed "investment" is the same thing when dealing with real resources as if it had been a consumption expenditure with no expectation for a positive return, just present enjoyment or use value.  That's why Krugman is on target when he uses the word "consumption."

I don't buy this explanation. Speculative losses on "assets" are "consumption?" Of course Casino needs labour, but that is not not where the money went. This money just circulates in the financial sector from pocket to pocket. Of course one can call this "consumption" from individual's point of view, but they did not "consume" in an economic sense. They gave their money away.

..He's referring to what happens to real resources not accounting identities -- the real resources got consumed..

No real resources were consumed. They just gave their money away. And now it is available to the receiver to be consumed. Nothing happened in the real economy. only the "savings" got reallocated.

..in the moment and their value is depleted now and not available anymore for producing more real resources, which is going to cause a problem for the poor bankers who lent their wealth and credibility in order to buy the "assets."

They don't have the money to produce more real "stuff", but somebody else has. So nothing was "lost," no "surplus" was lost and no surplus was created.

Now the beneficiary of these capital gains goes to the bank and makes a deposit. Bank gives out more loans to cover it's losses and all is well again. As long as there are debtors.

by kjr63 on Fri Apr 16th, 2010 at 03:21:43 AM EST
[ Parent ]
i add here that with "assets" (in quotation marks) i mean financial assets, not "real" assets like machines or buildings etc. Also financial "assets" are on asset side in the account books.
by kjr63 on Fri Apr 16th, 2010 at 06:46:29 AM EST
[ Parent ]
Consumption = resources consumed today.  
Investment = resources not consumed today in order to provide more resources tomorrow.
(Contrast investment with Savings, not part of our discussion = resources not consumed today but simply held until tomorrow with no expectation of providing more resources tomorrow.)

Therefore, if a speculative investment goes bad, it is equal to consumption -- it's not providing more resources for tomorrow, and its expenditure precludes other consumption or investment. To illustrate think of the difference, vis a vis the US, between WWII and the Iraq war.  Both involved very significant expenditures of national resources, but only WWII turned out to be an investment because the US won the war at low enough costs to reap the (very significant) economic benefits, repaying its debts in the process very quickly.  In Iraq, although the US has apparently "won" the war, having successfully removed Saddam Hussein from power, the costs turned out to be much  higher than had been anticipated so no economic benefits could be reaped and, unlike WWII, the adventure has effectively prevented other US consumption or investment, which means that expenditures in that war must be categorized as consumption.

So, yes, speculative losses on assets are consumption, even if after the fact, because speculative losses mean that resources are no longer available for other uses or for providing more resources for tomorrow.  An investment that goes bad is a form of consuming, not preserving, economic resources, regardless of the intention when the resources (real or not) were initially expended.

by santiago on Fri Apr 16th, 2010 at 09:55:51 AM EST
[ Parent ]

Consumption = resources consumed today.  
Investment = resources not consumed today in order to provide more resources tomorrow.

Consumption = buying produced goods and services.
Investment = buying produced goods and services.
Savings = resources not consumed today in order to provide more resources tomorrow.
Speculation = buying claims on wealth in the hope of "profit."

by kjr63 on Fri Apr 16th, 2010 at 03:23:06 PM EST
[ Parent ]
That's what I mean.  You're using different definitions of the terms than Krugman (or Marx, Smith, or most anyone else) would use, so you're having just a semantic argument, not an argument over different ideas. Try thinking it through using the more common meanings for the words that I gave above, and I'll think you'll see that you and Krugman are on the same page.
by santiago on Fri Apr 16th, 2010 at 04:04:46 PM EST
[ Parent ]
Investment = resources not consumed today in order to provide more resources tomorrow.

If we say that investment = savings we are not talking about semantics, we are talking BS. And oh boy, there is a lot of it.

by kjr63 on Sat Apr 17th, 2010 at 12:40:35 AM EST
[ Parent ]
kjr63:
If we say that investment = savings we are not talking about semantics, we are talking BS.

That's not what santiago said.

by generic on Sun Apr 18th, 2010 at 08:19:29 AM EST
[ Parent ]
Consumption = resources consumed today.  
Investment = resources not consumed today in order to provide more resources tomorrow.

Money | resources. In a functioning monetary economy, money can command resources.

But simply increasing the prices of - say - houses does not (ignoring for the moment any distorted incentives towards new construction) consume any real resources.

So I think you need another term here:

Consumption: Resources consumed today.
Investment: Resources used in ways that increase usable resources at a later date.
Speculation: Making promises about the allocation of resources that are presumed to be available at a later date.

Speculation does no harm (except inasmuch as it can fuel a consumption binge) until it has to be unwound.

This is not simple nitpicking. There is an important difference between consuming resources that you thought you were investing and oversubscribing future resources. While both result in a shortage of resources at some future date, the former wastes resources and sets unrealistic expectations, while the latter only sets unrealistic expectations.

Malinvestment, in other words, causes real damage to the real economy before the problem becomes apparent - while speculative bubbles cause real damage to the real economy mainly or only during the process of bursting the bubble.

This in turn has important policy implications, in that the damage done by a bubble can still be averted (almost) entirely by the time the bubble is discovered, whereas the damage done by real malinvestment is at least partly a done deal by the time you realise that the jig is up.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Apr 17th, 2010 at 09:23:17 AM EST
[ Parent ]
I think you're right, but there's two other concepts at play here too: risk and credibility.  Risk is the chance of failure, and trying to account for risk is a way of distinguishing between reasonable levels levels of speculation and unreasonable, or unsustainable, levels.  Credibility is the ability of an agent to be trusted by counter-parties, and is, like cash money, used to command resources. Greater credibility provides one with greater power to command resources. The problem is that one can't know with certainty, within a given system, the true credibility of an agent or the true risk of a venture.  This means it's really hard to tell until after the fact whether a bad investment really is bad, or whether a speculative bubble really is a bubble and not just an indication that some resources, such as fossil fuels or habitable space, are getting really scarce during conditions of global economic growth. Hence the old joke about economists correctly predicting 9 of the last five recessions and the tendency to think that naysayers are crying wolf whenever some start to raise alarms about such things.
by santiago on Mon Apr 19th, 2010 at 07:09:58 PM EST
[ Parent ]
That's true to an extent. However it is, at least in principle, possible to compute how much prices would have to drop in order to trigger a systemic margin call. Such computations can be compared with historical safety margins, historical price levels and historical intelligence on the increase in volatility as slack decreases.

Such calculations do not and cannot obviate the need to make political decisions about risk. Risk assessment, like discount rates, is inherently a partly political decision - and that's doubly true for systemic risk. But hopefully such calculations can make those political decisions more informed. And certainly, they can remove the plausible deniability of "nobody could have predicted."

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Apr 19th, 2010 at 07:23:18 PM EST
[ Parent ]

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