Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
The problem was created by too much debt. The debate is whether trying to be virtuous today is more dangerous than trying to save the economy through yet more debt (ie is certain pain today better or worse than uncertain pain later

However, not all debt is created equal. Debt taken out by the sovereign to finance infrastructure development during a serious business depression (you aren't really claiming that Germany couldn't use any more railways, are you?) is not the same beast as debt taken out to maintain consumption in the face of falling real income. During the next boom, this debt has to be removed, of course, either by higher tax income, an explicit default or a quiet default through devaluation and inflation.

and how would that future pain be)

The pain of trying to deleverage the public sector is without a shadow of doubt greater when you do it at the same time that the private sector is trying to deleverage. I didn't realise that this point was controversial at all, outside certain monetarist fantasies.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Thu Jun 10th, 2010 at 09:52:08 AM EST
[ Parent ]
  1. I've long said that public debt to fund socially useful investment was good policy today (or would have been good policy if we hadn't spent so much public debt capacity on bailing out the banksters). I've long written about how this could happen through an energy/transport reconversion plan which would have lots of other positive externalities;

  2. at some point, you can only justify more debt if it is used for investing purposes, and not just to support consumption. Consumption has to be supported by reallocation of the pie in a way which is different from today. To answer DoDo's point above, there is a need for a real reshaping of the tax system. A lot of that could only happen with significant coordination between at least the EU and the US.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Thu Jun 10th, 2010 at 10:25:58 AM EST
[ Parent ]
When banks create credit they do so in one of two ways:

(a) Lending - creating interest bearing loans;

(b) Spending - to buy (say) government debt; to pay staff or other costs; and to pay dividends to shareholders.

In every case bank credit creation gives rise to a matching demand deposit, and the sum of these deposits is - with notes and coin (and now QE) - the 'fiat' money in existence. There is of course plenty of other (trade etc) credit in existence.

There is no reason at all - other than pure ideology - why Treasuries acting directly, or indirectly through Central Banks, cannot spend, as well as lend, money directly into the provision of productive assets in the public or private sectors.

This spending process would need to be managed by a service provider with a stake in the outcome, and would also need to be accountably supervised by a monetary authority.

Once productive assets are complete, then the QE/Public credit used to create them could be refinanced by existing or new long term (eg pension) investment, and the QE would be retired for recycling.

Investment in the individuals and enterprises necessary to create these assets would be taxed, and part of this tax would again retire and recycle the QE investment.

The 'Big Lie' is that public credit/QE is 'inflationary' when private credit is not. In fact both are potentially inflationary, particularly if applied to existing productive assets, but private credit is self evidently more inflationary than public credit to the extent that it includes excess management etc payments and dividends to shareholders.

Neither public nor private credit has any cost at the time of creation. Both come with a cost of service/platform provision and default costs.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jun 10th, 2010 at 02:51:34 PM EST
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