Comments on: Chart of the day: Growth and debt A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Viriat Fri, 11 May 2012 12:00:15 +0000 Felix,
Your basic intuition is betraying your reasoning. The point you are making in this post is profoundly wrong for two main reasons. And I have seen recently such kind of argument so many times, that I am becoming paranoid about it. So here is my contribution.
Firstly, as one of the earlier comments highlight it is not clear that a reduction in the pace of debt will lead to a lower capital stock, lower productivity, to lower technological knowledge, or to a lower labour supply. What is the connection between the two sides of your reasoning: debt and potential output? I don’t see any: prices, wages, interest rates may change, but those REAL factors remain the same. I suspect that your problem is related to the second point I am going to highlight next.
You may be confusing the impact of debt with the impact of some other aggregate. The central bank and the banking sector can create money out of the blue. But no one can create debt out of the blue.
For the sake of simplicity, imagine a closed economy (the argument is easy to develop this way).There is a certain level of savings which end up having a certain monetary value. If the level of savings increase (and Price level constant), the monetary value of savings goes up as well. The point is that the level of savings may remain constant, but (apparently) de amount of debt may go up. Why “apparently”? Because in this economy (a closed economy), the level of all debt (negative savings), has to be TOTALLY EQUAL to all loans (positive savings).
So for this economy as a whole, it is as if net liabilities (debt) are zero. In the end, the LEVEL of debt is irrelevant, but not the way debt is USED for. So, if I borrow money and just throw it down the tube, I will not be able to pay it back. But this is another problem which has nothing to do with the level of debt itself, but rather with the efficiency of allocating those loans to specific aims.
So unless, we have someone coming from Mars or any other planet, borrow and disappear, or we have a large proportion of debt badly used (which I am not ruling out, for obvious known reasons), we do not have (as a matter of fact) any problem with the fact that the LEVEL of debt may grow faster than GDP. It is one major mark of the very history of modern capitalism. There is plenty of evidence showing that financial intermediation has grown faster than GDP. And in the world of economic theory there are already convincing arguments showing that if the costs of intermediation go down for a while, yes, we should expect intermediation to grow faster than GDP. There is an interesting recent paper by Edward Prescott and associates on this issue.
Do we remember what happened in the 1990’s with a similar story about the “Paper Tigers”? A huge amount of people were sentencing them to oblivion. It was a fashion that proved wrong.

By: TomGrey Thu, 22 Mar 2012 18:15:22 +0000 GREAT chart — we have been on an unsustainable OVER-employment “trend” since … Nixon took the US totally off the gold standard.

No “good” way out, but the first point is to get balanced gov’t budget. Freeze gov’t spending, and taxes, until balance.
Then print enough cash to retire all gov’t debt — stop borrowing. Let the investors get stuck with too much capital looking for places to invest. And as interest rates rise, the lack of gov’t debt will be fine.

A bit of rough ride, no matter what, but then more stable growth that is sustainable.

By: ReutersRat Wed, 21 Mar 2012 14:42:32 +0000 Felix, I find it amazing that this topic can be bandied without referring to Steve Keen’s work showing the correlations between debt levels and house prices, unemployment, and stock prices.

Actually, a second derivative: the rate of change in the rate of change in debt — what he calls the credit impulse or the credit accelerator. He’s demonstrated strong correlations in the U.S., the U.K, and Australia: teve-keen-dude-where%E2%80%99s-my-recove ry.html

By: MrRFox Mon, 19 Mar 2012 15:45:34 +0000 Bull’s-eye again, TTF. I too can’t see a plausible way to escape the train wreck, if that happens – and I live on the other side of the world. Even here, and no matter what one does, it stands to be a lifestyle-changer if things come unwound in the US.

Hate to say it, but maybe the “money printers” have the least bad of the solutions (all of them ugly) on tap.

By: TFF Mon, 19 Mar 2012 13:20:39 +0000 MrRFox, I don’t exempt myself… I, too, believe in the Easter Bernanke. After all, what choice do I really have?

I do make some effort to risk-proof my portfolio, and my financial picture in general, but if things start to topple I’ll lose plenty along with everybody else.

By: MrRFox Mon, 19 Mar 2012 04:24:33 +0000 “Whatever the “solution”, it is essential that people not lose faith in the house of cards.” (TFF)

I love your tag line here ^ ^, TFF – it’s perfect. Everything will be OK so long as everyone (except you and me, TFF) continues to believe in the financial Tooth Fairy and the economic Easter Bunny that our economic rabbis preach to us.

By: TFF Sun, 18 Mar 2012 19:47:14 +0000 We save as much (proportionately) as anybody, so you know where I stand on THAT.

I agree that inflation is the only way out — but if you announce that you will be aiming for higher inflation for a decade, then interest rates adjust and the massive present debt load kills you.

The trick is running a moderate rate of inflation while publicly arguing a lower rate. An insidious policy, if that is actually what they are thinking.

Whatever the “solution”, it is essential that people not lose faith in the house of cards.

By: MrRFox Sun, 18 Mar 2012 16:40:10 +0000 @TTF – I see some of those flaws that you alluded to as well, and I surely don’t buy the idea that spenders are “good” and savers are “bad”. If Danny Black called himself “old fashioned”, I can too – I think saving is a virtue; every right-thinking, non-Keynseian should too.

Didn’t mean to suggest that money-printing foolishness was your proposal – but it kind of is the Krugman/Keynes attitude, isn’t it? Truth be told, inflating our way out of this debt-trap is the only way out that I can see. You?

By: TFF Sun, 18 Mar 2012 16:11:53 +0000 @MrRFox, I agree that it is ultimately zero sum on the national balance sheet, however it is very different from being a net zero for GDP.

If the households with the reduced payments are more likely to spend that marginal dollar than the households that eat the writeoff, then the net effect on GDP is positive. That’s the theory, at least. I see a couple flaws in the theory, personally, but you haven’t been pointing them out so I won’t drag them into the discussion.

I wasn’t proposing “making the lender whole”, nor was I proposing blowing up the currency. Not sure where you came up with that one? For that matter I wasn’t even proposing this as a GOOD solution. Like I said, I see flaws that seem to have escaped you (or you wouldn’t be making stuff up).

By: MrRFox Sun, 18 Mar 2012 15:51:09 +0000 @TFF – Um … well, you’re half-right, I suppose. A restructured loan may well have lower payments than the original, and that benefits the borrower. But what about the lender? – every dollar of reduced d/s comes right of his pocket, doesn’t it? Sounds like “zero sum” to me.

Of course, someone else could make-up the lender’s loss, so nobody loses anything, right? Wonder who that Tooth Fairy might be? Got any suggestions?

Here’s a wild idea – find the most indebted single individual in the country, and have the Treasury print up enough $100-bills to cover his entire net debt – and give them to him; print enough to give every other man, woman and child in the country each the exact same amount. Now everyone is solvent and everything is perfect and fair – right? Krugman would love it, wouldn’t he?