It’s the Private Debt, Stupid
I’ve gone on about this elsewhere, but thought I should bring it up front and center here.
While everyone hyperventilates about government debt, they don’t seem to be aware of the massively greater load of private debt, and its spectacular runup compared to government debt:
This from Steve Keen’s latest. (It’s not very long. There are lots of pictures. It makes every kind of sense. Read the whole thing.) The blue line is publicly held debt — not including money the government owes itself (on the consolidated budget) for Social Security and Medicare.*† The red line is debt of 1. households and nonprofits, 2. nonfinancial businesses, and 3. financial businesses.
Here’s how those sectors break out:
Again, you hear all sorts of hyperventilating from the morality-based school of economics about households/consumers going on a debt-financed spending binge, especially in the 00s. And that definitely happened. With the financial industry begging them to borrow — almost literally throwing money at them — and telling them authoritatively that it’s free because house prices always go up, it’s not surprising. Humans will be humans; who’s gonna turn down money when the powers that be — who presumably know a lot more about finance than a high-school-educated homeowner working at a lumber mill — say it’s free?
But that ignores the really massive runup: financial corporations’ debts. Starting at a little over 10% of GDP in 1970, they hit almost 80% by 2000, and when the crash hit they were over 120% of GDP — a 10x, order-of-magnitude increase over 40 years.
The story explaining these pictures was told long ago — notably by Irving Fisher in 1933 (only after he had driven his Wall Street firm to ruin and lost everything, including his house, by clinging, Polyanna-like, to the kindergarten-ish Price-Is-Right! nostrums of classical economics). Minsky told it in cogent and convincing detail.
The basic story is very simple. It goes like this (in my words):
There’s your (economy-wide) Ponzi scheme. Households and nonfinancial businesses definitely participate (the financial industry makes it almost irresistible not to), but it’s driven by the financial industry, and a huge proportion of the takings go to players in the financial industry.
But as Keen points out, the powers that be almost completely ignore that simple story. He quotes one of Bernanke’s extraordinarily rare mentions of either Fisher or Minsky:
Fisher’s idea was less influential in academic circles, though, because of the counterargument that debt-deflation represented no more than a redistribution from one group (debtors) to another (creditors). Absent implausibly large differences in marginal spending propensities among the groups, it was suggested, pure redistributions should have no significant macro-economic effects… (Bernanke 2000, p. 24; emphasis added)
The rarity — inexplicable to me, at least — speaks even more loudly and eloquently than this blithely dismissive quotation does.
When really smart people like Ben Bernanke constantly ignore an elegant, simple, even obvious explanation that’s been lying on the ground, ready to pick up, for at least 75 years, you gotta figure they’ve got some incentive — whether they’re conscious of it or not. That’s what I talked about the other day.
Again, read Steve’s whole piece. And if you have any interest in economics and haven’t bought the new edition of his book yet, do.
* Please don’t try to dismiss this by pointing to the net present value of SS/Medicare liabilities extending into the infinite future. 1. Including those intra-government debts doesn’t change this picture much at all. 2. It’s a completely separate discussion, about whether we choose to provide those services out of current GDP over future years and decades. 3. If charges by health-care providers were rising at the same rate as inflation, even that future cost would not be a terrible burden. 4. Social Security is actuarily solid on a cash-flow basis for decades, and beyond the foreseeable future (75 years+) if we simply Scrap The Cap on the payroll tax, requiring high earners to pay their full share.
† I’m not clear whether he includes bonds held by the Fed — again, money the government owes itself, if you view Treasury and Fed as both being part of the government — which total a whopping $1.6 trillion or so, more than 10% of GDP, last I checked. I don’t actually know if Fed holdings are included in “debt held by the public.” (You gotta wonder whether the Fed counts as “the public.”) Little help, so I don’t have to go Google it up myself?
Cross-posted at Asymptosis.
Steve
I may be misunderstanding you here , but it seems to me you spoil your argument with the assumption that the SSTF is money the government owes itself. That is not true. It is money the government owes to the Social Security Trust Fund which is a legal instrument to protect the retirement savings of the people who pay their Federal Insurance Contributions… and the difference is important.
You are correct that it is error to include the present value of projected shortfalls in the SS system.
But you are wrong wrong wrong to go from there to suggest scrapping the cap which would turn SS from Insurance to welfare. A very modest increase in the insurance premium to cover the extra costs of living longer, would keep the SS system “solvent” forever, without destroying its basic nature.
Coberly, the whole “trust fund” thing is, in my view, more of a rhetorical/political football than anything else. (Is Social Security a floor wax or a dessert topping? it’s both!) I agree with the righties on that. But I disagree with them profoundly on the implications of that. I wrote up some thoughts on that here:
http://www.asymptosis.com/is-the-social-security-trust-fund-a-liberal-own-goal.html
But let’s talk about the post instead of the footnote!
Best of luck to you Steve in trying to clarify this point
Steve
I am afraid heart-of-flint is right. I read your cited post. You make a number of fundamental errors, which is not surprising because you don’t understand the basic fact about Social Security: lt an insurance program for workers paid for by workers. And somehow that leads you to the peculiar idea that there is no difference between the government paying back money that it has borrowed .. from the government paying for the program it borrowed from. And that … well i can’t say “leads” because you started out with the “meme”, learned it in skool, that “it’s a regressive tax.”
And i guess that’s where I have to stop. I already know you can’t untangle the minds of those who have convinced themselves, without actual thought, that they are right.
Good luck with the present post.
Coberly, you misunderstood. I was sincerely wishing Steve luck because he is up against some very obstinate opposition.
Steve, I think the part of the story that needs more attention is the role of government in encouraging bad loans. Investors will not be prudent if they believe that the government will cover their losses. This distorts the economy by creating an incentive to exploit government policy rather than make productive investments.
Also, not all private debt is the same. We want private debt because that’s what finances new businesses, for example. The private sector is larger than the public sector, so it can service more debt. Also revenue in the private sector comes from earnings (wages, profits) whereas government revenue comes from taxing someone’s earnings. While basic government services are essential for an economy, it does not follow that government debt (and the marginal spending enabled by that debt) is necesarily productive in the way that private sector debt is.
Private debt vs wealth effects may be the problem.
Debtors cannot expect the wealth effect to change under austerity and its object to kill the New Deal.
Sort of like to twin starving urchins under Christmas Present’s robe.
Avarice driven Ignorance of the 1% mixed with resulting want of the 99% the urchins have doom written across their brows.
Business debt is declining with zero bound interest because…………..
There is not much seeming to propose paying 1% ROI.
Under Bush private debt was the stimulus for the economy. Were they not the years with rock bottom interest rates and mortgages that needed to insure the not there collateral? No down-payment, no credit check pre-approved credit cards, anything to keep the economy going, wars and be happy go shopping, just never think how to pay the bills. Private credit was the vouchers the economy ran on, and Greenspan and all the economists in the government knew it. Then they turned on the people, holding their feet to the fire and foreclosed their homes while bailing out the financiers, they deserved every penny of their multimillion $$$ salaries.
Why don’t these government types really say in plain English, the housing bubble was the real stimulus for the Bush economy, that is why the Bush deficits were not higher and the unemployment was contained until almost the end of his term. Just could not keep the balloon in the air any longer.
@coberly:
But remember that Social Security Trust Fund does not finance the gov’t deficit. As per our previous discussion. It cannot. 🙂
The Trust Fund is a myth. The Social Security tax is, indeed, a tax (Chapter 21 of the Internal Revenue Code if you want to look it up) and itspaid into TGA like all other tax receipts. The Social Security Act established a permament appropriation for the Secretary of the Treasury to transfer from TGA to SS trust fund an amount equivalent to “100 per centum” of SS tax collected. What a payroll tax holiday entails is amending that appropriation so the Secretary transfers to the trust fund an amount equivalent to what would have been collected but for the enactment of the payroll tax holiday. There’s no legal or economic reason to prevent Congress from keeping the “but for” language in the SSA and then over in the IRC, permanently setting payroll tax holiday rates at 0% on employees and 0% on employers.
The Social Security trust fund would continue to be fully funded in any event (at least until 2035 or whenever. Any point before then, Congress could make SS solvent forever by adding a blank check appropriation, “There is hereby appropriated to the Federal Old-Age and Survivors Insurance Trust Fund such sums as may be necessary for the purpose of carrying out Title II of the Social Security Act”.
On the beneficiary side, the Supreme Court has ruled that Congress can deny promised SS benefits if it chooses (Fleming v Nestor) so is not really a trust fund in any legal sense. its a welfare program funded out of general revenue (that Congress can amend at will) and not an obligation of the United States (which it could not).
Heart:
“We want private debt because that’s what finances new businesses, for example.”
I keep pointing this out to people:
The National Federation of Independent Businesses asks their members every month (among many other things), what is your business’s #1 problem/constraint on growth?
Financing and interest rates is *always dead last.* It has been for decades, and it was even in the height of the “credit crisis.”
See here, and Related Posts at the bottom:
http://www.asymptosis.com/the-sky-is-falling-business-lending-down-1-2-percent.html
The Kauffman Foundation (entrepreneurship think-tank with pretty strong free-market views) says more than half of young companies get their funding from personal savings. Next biggest source: credit cards. Then: friends and family. Then: traditional banks (“they fund very, very few small companies” because they want to see a going concern with revenues and profits). The number that taps Wall Street is miniscule.
http://bcove.me/9h9mrdh4
Yes: a certain quantity of financing and intermediation is obviously necessary and desirable to lubricate (not “fuel”) the real economy. But it seems to me that the financial industry is X times larger than is necessary to serve that purpose (plus its other purposes of bookkeeping, money-storage, etc.).
How big is X? I think it’s a pretty big number.
“basic fact about Social Security: lt an insurance program for workers paid for by workers.”
If you take that as a given, it is a given.
Beo:
Yeah. If the trust fund and the bonds it contains disappeared tomororow, and SS taxes/benefits were paid to/from the general fund, it would make no difference *arithmetically* to the unified budget. It just doesn’t matter — again, arithmetically — whether those flows pass through the trust fund or not.
But coberly’s right that it *does* really matter. Politically.
And political power is everything in this game.
Sorry to betray the team on this, dale.
Steve, do you agree or disagree with the following:
If you and I each lend each other $100,000,000, this leads to very different real economic outcomes in comparison to my lending you $200,000,000.
Has anyone besides me actually looked at Bernanke’s quote? In attributing the dismissal to Bernanke, Keen is being entirely misleading.
First of all, Bernanke wrote that “Fisher’s idea was less influential…” Now, I haven’t researched precisely what was or was not historically influential in academic circles, but this is clearly intended as a factual statement, not a personal take on Fisher.
Furthermore, Bernanke’s very next sentence begins “However, the debt-deflation idea has recently experienced a revival…” and goes on to discuss how debt-deflation may have macro effects due to effects on “borrower”s net worth.” For example, “From the agency perspective, a debt-deflation that unexpectedly redistributes wealth away from borrowers is not a macroeconomically neutral event…” And so on.
D R
You should lend me $200M, I would not lend you $100M with collateral.
If I lent you $100 it is your problem.
If I lent you $100M it is my problem. Despite the collateral.
As long as I can deposit the cash in the FR/ECB (aka a vaulted mattress) I prefer cash to collateral.
I would also borrow millions of euros from you.
I’ll side-step the marginally relevant SS debate and go back on topic to point out that the percentage of total corpoate profits captured by the finance sector has been increasing since WW II (not YoY every year, but generally over a span of years.) In the 50’s this percenatage was in the low 20’s. Since about 1980, this percentage has moved sharply upward – high 20’s to now mid-40’s, with a brief spike a few years ago to over 70%.
Here’s a picture. My graph, FRED data. Trend lines are least sqrs best fit per Excel, up to ’85, then ’86 on. 13 Yr avgs hug these lines pretty closely.
http://4.bp.blogspot.com/-KP6X8tL_yxY/TflNqYC7WOI/AAAAAAAABdg/Y5ZyDoGXWck/s1600/Corp+Profits+-+Fin+Sh+3.JPG
Huge finance sector debt has made for huge finance sector profits. Who could have imagined. This sector exists to serve a vital function — to lubricate the economy. But the servent has become the master, and everyone else is suffering because of it.
Cheers! (well, maybe not)
JzB
I believe that Kevin Philips has been on this beat for many years. He sees this as a pattern that is repeated by numerous empires in their final stage of over extention and decline.
Min
i don’t think i said the trust fund finances the gov’t deficit. it IS (part of) the gov’t deficit in spite of twisted readings of the twisted bookkeeping and some bizarre interpretations of macroeconomics… “it’s all fungible”
but anymore i despair of people ever meaning the same thing when they seem to agree or about which they disagree.
i don’t want to hijack steves post here. so i will stand down. be glad to talk about it later if you can imagine any possible way we can understand each other. i can’t.
Steve
for what it’s worth, i agree with you about this. been pointing out for years that there is plenty of money available for investment. has been since at least 1929.
or the air in the balloon.
steve
trying not to steal your thread. but i agree with you that if the trust fund disappeared it wouldn’t matter. and if by politically you mean… well, i know what you mean, and it does matter. but at an even more fundamental level, people like the idea of paying for what they get… and getting paid for what they do. sure you could do “the same thing” with a general tax and a “budget item” or even just printing money… but it really would mess up people’s heads. and if that’s what “politics” means, then it’s more respectable than what “politics”usually means…tricksy ways to fool people.
meanwhile there is a carefully designed legal structure that separates the Trust Fund from general revenues, so you need to know you are talking a kind of “middle land” between the actual law and normal finance, and what the law could be and meta-finance… you know, the Big Picture that macroeconomists have… the one in which nothing ever works the way it works in the real world.
beowulf
sorry you misunderstand fleming v nestor. it really says the congress can change the law without violating the constitution. meanwhile the law has created the Trust Fund separate from the general fund… so it is real. and it has been treated as real for seventy five years, with the one exception as far as i know of taking away the benefits of some poor bastard who got deported because he was a communist back in the days when we had madmen scaring the country about commies under the bed.
steve
i am trying not to steal your thread. but i agree with you it woudn’t matter if the Trust Fund disappeard tomorrow. not only for your reasons (with your remedy) but because the payroll tax could be increase a percent and the Boomers would still get the pensions they paid for. the post boomers would have had their tax increased more (sooner) than they expected, but they will still get the pension they pay for. so no one would really be hurt.
on the other hand, it would have been a theft… because without the tax increase, the boomers would NOT get the pension they paid for.
this stuff is not hard, but it can’t be understood with top of the head “ideas.”
as for the politics… there are two sense of that word. the normal “it’sjust tricksy ways of fooling people” which does matter, and the somewhat more profound sense of “what people feel is “just” and in this case people like to pay for what they get, and they like to be paid for what they do.
that is the way SS is designed, and while it would not matter if what we now call SS was just another part of the general budget… if it was paid for… it would not be paid for (politics sense one) and it would not satisfy that sense of justice (politics sense two).
so while it’s all fungible from a macro economics view and could be funded by a single progressive tax, or by just printing the money and letting inflation handle the “tax”… i think the old fashioned simple-folk SS plan is best.
I am inclined to agree that there is too much leverage in finance and too much public policy focused on financial institutions. It outstripped the productive economy (of which it is a part) and fueled asset bubbles. Still I find it strange that you ask: “instead of spending time jawboning and kowtowing to the bankers, should President Obama be waging a FDR-level jihad to rein them in and break them up?” Why not simply let bankers take their own losses? Government involvement should be aimed at smoothing a transition (chpt 11) while letting investors take the loss for their folly. You seem to envision a President who rules the economy and makes war on your enemies.
Even if private debt is larger than public debt, there is a qualitative difference between the two as I indicated above. Poor choices by banks do not automatically absolve governments. Public debt can become a serious problem, just ask Greece or Vallejo.
“sorry you misunderstand fleming v nestor. it really says the congress can change the law without violating the constitution.”
No I understand Fleming just fine, my point is that there is no legal obigiation under the Constitution to pay beneificiaries in the same way there is a legal obligation to pay bondholders. In other words, I was talking about the relationship between the Trust Fund and beneficiaries and not between the Trust Fund and TGA.
Under trust law, the beneficiary is the equitable (or “beneficial) owner of trust assets, meaning that either now or in the future (sometime before the rule against perpuities kicks in presumably), the trustee is obligated to pay out trust income and corpus to its beneficairy. Were the SS Trust Fund actually (in the legal sense) a trust fund, then the govt would have a 14th Amendment obligation to pay beneficiaries what they’d been promised (validity of the public debt and all that); and the Court would not have ruled in Fleming that Congress could repay promises with matching un-promises (so to speak).
:o)
avoiding the FICA surplus BS, this is a drum I’ve been beating for years now.
St Louis Fred has some excellent graphing exercises available, here’s one:
http://research.stlouisfed.org/fred2/graph/?g=3XU
This graph is simply YOY consumer debt take-on vs. wages.
We can see a sustained peak of 20% during the Bush Boom. As mentioned above, that’s what gave us the Bush Boom in the first place.
In straight money terms:
http://research.stlouisfed.org/fred2/graph/?g=3XV
we can see this was a trillion-plus flow into the paycheck economy at the peak, $10,000 per household per year.
I think modern economics is just overly abstracted, and doesn’t accurately model the divide between wage slaves and rentiers, the whole “class warfare” angle.
There is in fact a difference between wage earners and rent-seekers, and the rent-seekers have been winning since 1980.
They collect these rents in finance, medicine, energy, and actual ground rents. Each of these sectors has about a trillion worth of rents flowing from wage earners, and much of this rent flow is a one-way street, which is why the middle class is screwed, and resorted to credit 2002-2007 to live the good life, if only temporarily.
test
Your system seems to think that posts with more than about 100 characters have more than 10,000 characters!!!
Your system seems to think that comments with only about 300 characters have more than 10,000 characters, and rejects them!!!
coberly: “i don’t think i said the trust fund finances the gov’t deficit. it IS (part of) the gov’t deficit”
A lot of people claim that the fact that the fund holds treasuries means that it finances the deficit. 🙂
I am not sure what you mean when you say that it is part of the deficit. It holds part of the gov’t debt. Is that what you mean? And that is somewhat relevant to this post. Is that debt included in the graph?
Ralph,
Hmmm….it appears to work for me. Anyone else? Try a refeshto see if the problem goes away.
D R:
In this case, using your example, it is rather more like your older uncle lending you the $100m, and you giving $100m to your boss, and considering the debt paid.
min
i think steve left it out of his graph. and that is what provoked my first comment.
as for the language difficulties…. if you borrow money, that is debt. but the money you borrow “finances” your debt. unless by “finances” your debt you mean “pays it back” which it, of course, does not.
flint
i understood.
steve
it’s not just a “given” it is “the law.” carefully set up to be that way. FDR insisted upon it.
FDR was a genius, and the folks who worked it out in detail were pretty damn smart too… even if they didn’t entirely understand what they were doing, they builded better than they knew.
flint
i sort of agree with you about letting the banks fail. i am not absolutist about it, because i am unsure of the consequences. but the government wasn’t going to let the banks fail, because the government is owned by the banks.
FDR saved the banks from themselves.
beowulf
i am not a lawyer so i can’t argue the case with you. god knows that lawyers and supreme courts can make law any damn way they please.
but for now the Congress went to a whole lot of trouble to make the Trust Fund operate just like a TRust Fund. and it is now in fact operating just like a trust fund. and the people know the difference between “law” and justice, not to say honesty.
so under current law, and human ideas of equity, the Trust Fund is real. your friends can change the law, and the supreme court says that would not be unconstitutional, but that is what we are trying to prevent. it is neither true nor honest to claim that it is already the case.
“The Trust Fund is a myth.”
Someone making the FICA cap or above the total FICA surplus — their contribututions over and above SSI payouts — amounts to ~$20,000 since 1990.
This is the amount of overtaxation that the upper middle class has been subjected to thanks to the “Greenspan Deal” that built this mythical Trust Fund.
Funny how that tax money wasn’t mythical going into the trust fund.
just to be more clear
beowulf is advocating an understanding of the law under which “full faith and credit of the United States of America” becomes “you should have read the fine print, sucker.”
Troy
i think you are exactly right. but SSI is not Social Security (it’s Supplemental Security Income… and is a welfare program… very, very, different from SS, or “FICA.” in which the workers pay for their own benefits.
nor, if this is what you meant, does the “surplus” come from those making the FICA cap. It’s an “overpayment” that everyone who paid 12.4% instead of (i don’t remember…about 10%?) contributed to… that is, everyone. currently there is no surplus to speak of… except of course the inteerst on the Trust Fund… which is what the Trust Fund was created for (beyond the original TF which was just a bookkeeping convenience and hedge against recession).
i don’t think there was much of a Trust Fund at the time of Fleming v Nestor, so the argument then was about the actual money the taxpayer/beneficiary had paid into the system… was he owed a return? the SC said that “not as a matter of the Constitution. the Congress could, Constitutionally, write a law that deprived a person of his rights in the program… as it did, on the grounds that the would be beneficiary was a deported Communist. There was a significant minority objection, which of course could be “the law” if we ever have another SC which respects actual justice and not lawyerly weaseling.
oh, hell, Troy… not “exactly”right. “substantially” right.
“twisted readings of the twisted bookkeeping”
I don’t find it twisted at all. Just need to distinguish clearly, when discussing, between the consolidated and non-consolidated budgets.
Bravo, Troy!
This was exactly the point of my 9:34 pm comment yesterday – specifically related to the finance sector. A lot of the rent seeking is financial tail chasing, frex, program trading that skims off fractional value from shares billions of times a day. S&P 500 daily volume in 1950 was about 2×10^6. Now, it’s about 4 to 5×10^9, an increase of about 2000 times.
The average holdong period for a stock on the NYSE is on the order of 20 seconds.
I’m also convinced that the price of crude oil is far above any rational supply-demand determined value, due to speculative activities.
Cheers!
JzB
The basic conundrum:
If you don’t insure the banks, innocent people get screwed. (Not just big financiers.)
If you insure the banks (explicitly or implicitly), you have inevitable moral hazard.
The only apparent solution given a fractional-reserve system (where banks quite literally have a license to “print” money) is insurance with strings attached/requirements — regulation.
But I have been thinking a lot of about full-reserve banking lately — making government the monopoly supplier of money. Still have no idea what I think about it.
Coberly:
We understand this in exactly the same way. I am not *proposing* that the trust fund and its bond be eradicated. Just thinking through the financial mechanics of the situation.
Also: I think failing to understand that the right is right on the mechanics/arithmetic puts lefties at a serious disadvantage. We’re supposed to be the reality-based community, right?
Suppose we publicly accept that arithmetic reality? Then, what’s our strongest rhetorical position? It may be too much to give up, rhetorically, given the way most people understand things…
No problem here. Try a different browser?
@coberly
If the gov’t spends more than it takes in, it runs a deficit. It then may issue platinum coins to pay for (finance) the deficit by the seignorage. Or it may sell treasuries to pay for (finance) the deficit. The treasuries that it “sells” to the Social Security Trust Fund do not serve that purpose. They do not pay for any part of the deficit.
Rdan, there is no “this case, using [my] example” as I’m merely trying to get at the difference between gross and net debt.
Steve fantastic chart and analysis. One question – on the business
side, corporations have built up a lot of cash. That is, would “net debt” – debt minus
cash – tell a less negative story for the business sector? Or is this chart showing net debt – as opposed to total debt? Thanks
End stages:
Militarism, and not investing in productivity…………………
Some see a “bond bubble” with serious risk to face “price” of bonds.
It may be expecting rates to rise it is a plan to keep cash rather than buy over priced bonds. Of course, the low interest is related to low demand for cash, which means might as well keep it in the matress.
Until assets values and bonds prices are better valued”d.
Steve and Mike,
Building on Mike’s work and yours I would say the solution to our current crises would be for the Feds to immediately buy up all the private debt so we look like teh graph does in the early ’40s.
Correct? Remember the US cannot default becuase we can always just print….so why not have the Fed take on the debt?
Islam will change
yes, the individual $20,000 FICA surplus is an upper bound. I just added up total 12.4% FICA taxes since 1990 at the FICA cap and took the 10-15% annual overpayment.
People under the FICA cap made proportionally less overpayments, but these all add up to the $1T+ of cumulative overpayment.
I tried to correct for accumulating interest by not counting it at all, how the system would look without any trust fund basically.
I just made an apropos comment son DeLong’s site. Here it is again in case he doesn’t approve it:
People STILL don’t understand that the Joe Sixpack has been shot in the head already.
http://research.stlouisfed.org/fred2/graph/?g=3Yn
shows per-capita consumer debt take on since 1990.
Going more into debt at $5000/yr per person was a very nice tailwind!
Why is this not a primary departure point for all analyses?
I may be a heterodox ignoramus, but I think if you don’t understand the debt dynamic 2001-now you don’t understand anything.
Adding in gov’t debt take-on (red):
http://research.stlouisfed.org/fred2/graph/?g=3Yo
one can see how Congress has replaced the consumer in keeping the debt wheels turning.
In my crudest analysis, debt is simply money redistributed from the top to the bottom, with strings, unlike actual redistributive spending.
The comments here are mostly going nowhere. Have any of you actually read Steve Keen? His stuff is pretty convincing and is based on years of research. Read his book, too. It does get a bit tiresome because he belabors his points more than necessary, but the investment of our time is worth it.
Buff pilot
One of the ideas he floated recently on BBC Hard Talk agrees with your suggestion. He suggests a Jubilee by giving a substantial sum of money (the same amount) to every American household with the condition that it be applied first to mortgage debt.
Coberly
I agree with your defense of Social Security’s legal Trust Fund status as a psyco-political necessity, but do you really think as a practical matter, the Govt would stop sending out SS checks if the find went dry?
Oh wait! With Obama as President , may be actually would stop.
In any case, this constant round on SS gets pretty tiresome.
steve
yeah, but no one does distinguish clearly. they use one or the other as serves their purpose.
min
sorry. i don’t really understand what you are saying here. if the government spends more money (on things other than SS) than it takes in in taxes (not SS premiums which are dedicated to SS), it has a deficit. i assume it can just pretend the deficit is not there (print money) or borrow from “somewhere” to get the money to cover the difference. it does the latter. borrowing some “from the public” and some “from SS.” at the end of the day it ows “the public” the money it borrowed from it. and it owes SS the money it borrowed from it.
steve
the deposits are insured, not the bank. let the bank fail. pay the depositors.
steve
i don’t understand what you are saying here. i have given up on “the left” understanding anything. the right does know the arithmetic, but it lies about it.
i didn’t think you were proposing eradicating the TF.
our strongest rhetorical position is that SS is insurance that the workers pay for. it has nothing to do with “the budget” or “the budget deficit” now or ever. the projected shortfall in SS’ own finance can be made up with a tax increase of one half of one tenth of one percent per year. CBO option two or three.
Oh lordy, you almost trolled me there. Had to delete quite a rant.
“convincing” (SNORT!)
Frauncher
sorry you find it tiresome. so do i.
but the welfare of a hundred million people weighs on my mind. and maybe one day it will suddenly dawn on people that i am right. and we can continue to provide retirement insurance for workers at a price workers can afford.. that has nothing to do with national deficits or “taxing the rich.”
meanwhile my comments and posts seem to draw a bit of interest, so if you are tired you can just skip them.
frankly i find the idea of “jubilee” tiresome just hearing about it once.
oh… would the gov stop sending the checks…?
no. they are not that stupid. they will slowly strangle SS to death. at some point you will find your SS won’t pay you enough to eat, so you won’t be able to retire.
and yes, Obama has shown the way to destroy SS. give the people their money back.
“He suggests a Jubilee by giving a substantial sum of money (the same amount) to every American household with the condition that it be applied first to mortgage debt.”
An absolutely brilliant idea, especially if you are a banker holding mortgage debt and you’re worried about the borrowers’ ability to pay it back now that they are saddled with property worth a small fraction of what it was when bankers were giving out mortgage money as though they were playing Monopoly. Who else is supposed to benefit from doling out new money to bankers?
jack
seems fair to me. when you tax the corps they just “pass it through” to their customers. so when you give the people a negative tax, they should just pass it through to the corps (banks) right?
people don’t notice that the payroll tax holiday is really a way to subsidize WalMart so they can buy cheap crap from china and sell it to Americans for a profit.
but, see, the econ book about “stimulus” was written before the effects of “free trade” were fully realized. it’ll take a century for the economists to understand that… if ever.
meanwhile people who earn 100k or over get 2000 dollar “holiday”, and people who are out of work get nothing.
This is gross debt. (Great question.) If I lend you $100, it doesn’t create (just transfers) money, but it does created debt. When banks lend, it creates money. (Yes, DR, I get that, sorry I realize I hadn’t replied.) Both have implications.
Troy:
That sounds darned interesting. You have a blog where you could do more careful description, with tables and/or graphs?
D R:
Totally agree. Though I find myself at a loss as to how to explain the difference really well, cogently and clearly, micro and macro. Will you take a stab? Much appreciated.
Steve Roth, Good article, but I think you miss the root of the problem.
Where does all that extra money come from to boost asset prices and private debt? It comes from private banks: that is we let private banks create money and lend it out, which in turn boosts asset prices, which in turn makes those assets better collateral to underpin more money creation and more debt.
Why do we allow private banks to engage in seignorage? As Abraham Lincoln and Milton Freidman advocated, seignorage should be the sole preserve of the state or central bank.
Steve Roth, Good article, but I think you miss the root of the problem.
Where does all that extra money come from to boost asset prices and private debt? It comes from private banks: that is we let private banks create money and lend it out, which in turn boosts asset prices, which in turn makes those assets better collateral to underpin more money creation and more debt.
Why do we allow private banks to engage in seignorage? As Abraham Lincoln and Milton Freidman advocated, seignorage should be the sole preserve of the state or central bank.
@ coberly
Small scale, for illustration. Suppose that the gov’t collects only taxes that go into the Social Security Trust Fund, and they are $1,000, and that the gov’t spends $2,000. Its deficit is $2,000 – $1,000 = $1,000. Suppose now that the gov’t says, no problem. We’ll just borrow $1,000 from the Trust Fund to cover the deficit. That does not work, because it counts the Social Security taxes twice. It collected only $1,000, it can’t borrow it and pretend that it collected $2,000. It still needs to cover the $1,000 deficit.
The fact that the gov’t “sells” treasuries to the Social Security Trust Fund has zero effect upon the deficit.
Does the private debt float the public debt or vice versa?
Obviously, it depends on your economic model.
I just don’t see how Keen’s “aggregate demand is the sum of incomes plus the change in debt” is supposed to makes any sense. He basically redefines aggregate demand by continuing with, “This monetary demand is then expended on both goods and services and claims on financial assets.” Breaking down that sentence is even more problematic, particularly because Keen is (almost?) always discussing gross debt, rather than net.
Ignoring for the moment Keen’s aggregate/monetary demand, let’s go to national accounts:
Domestic production of goods and services = Y
Net income and transfers from abroad = NT
Income = Y + NT
Domestic demand for goods and services = C+I+G
Domestic demand for foreign goods and services = M
Domestic demand for domestic goods and services = C+I+G-M
Foreign demand for domestic goods and services = X
Total demand for domestic goods and services = C+I+G+X-M
Goods market clearance: Y = C+I+G+X-M
Income identity: (Y+NT) = (C+I+G) + (X-M) + NT
Rearranging… (C+I+G) – (Y+NT) = (M-X) – NT
so domestic demand in excess of income is equal to the current account deficit.
It would seem, therefore, that the most obvious measure of “change in debt” which would make Keen’s first statement make sense would be the current account deficit. The current account is the flow which corresponds to the Net International Investment Position, which for the U.S. stood at about -$2.5 trillion at the end of 2010, or less than 17% of GDP.
Now, with Keen’s second statement, it seems that he has something other than the usual “aggregate demand” in mind, so maybe the above doesn’t cover it. And it seems like a weird one– where financial assets are included but not nonfinancial assets. Or are they? Does he mean by goods and services not just those currently produced? This opens up a universe of questions…
To be clear, the current account deficit does NOT equal 17% of GDP. The NIIP is (roughly speaking) the corresponding debt stock. But Keen is interested in the change, so there is no real point in converting to a stock and back again– the current account balance is the relevant flow in the national accounts.
Point is, to a first approximation it looks like accumulation of net external debt is what matters, not gross total debt. This is not to say that other debt measures are unimportant– just that it requires a model because it is nonobvious how they become important.
Right you are, Ralph, and I’m pretty sure Steve Keen agrees with you, although I haven’t finished reading his book yet. His BBC Hard talk seemed to favor tight controls on lending.
My own opinion has always been that the US Constitution (that sacred document) gives the Federal government the monopoly on coining (and by analogy printing or otherwiae creating ) money. Therefore banks are not ordinary private enterprises but rather subcontractors (or public utilities) which must be strictly controlled.
“the deposits are insured, not the bank. let the bank fail. pay the depositors.”
Isn’t that what the FDIC does now (for non-TBTF banks)? But can’t bankers still walk away with anything they’ve personally received in the years leading up to their bank’s failure? I really don’t know the mechanics.
And of course the TBTF banks don’t even pay the premiums on their implicit insurance.
Obviously the debtor benefits, and now that her debt load is lightened feels free to consume again, thus adding to aggregate demand, which is the point of the whole exercise as you will note if you take the trouble to read Steve Keen.
The banks don’t benefit all that much, at least not immediately, because their earning assets are replaced by excess reserves at the Fed. Their future lending capacity is increased, but hopefully placed under tighter control. See my response to Ralph below.
Ralph: “Where does all that extra money come from to boost asset prices and private debt? It comes from private banks”
You’re right, I should have included that point. As I said somewhere (I think in this comment thread), I’m getting very interested these days in the idea of full-reserve banking — making government the monopoly supplier of money. But I have a lot more thinking to do on that.
And Frauncher: You are *so* right: if government give banks monopoly licenses to print money, it has every justification (practical and moral) for any associated restrictions on those licenses.
Charles: What do you mean by “float”?
Coberly
Yes, your intentions are noble, and I agree with you, but in your righteous indignation, you did manage to hijack the post (despite your protests to the contrary) thus inciting all the usual suspects to their usual furious opposition. The result was that we didn’t give our full attention to Steve’s important post. Next time, why not try to be more parenthetical in your protest, if SS is not the main topic.
Assuming, c.p., that the government does not otherwise change spending plans?
If the money going through debtors and on to creditors is through cuts in government consumption, then there is a direct loss of AD. If the money comes through (an otherwise) net reduction in government transfers (i.e., it comes with tax hikes/benefit cuts) then the people’s load is not so lightened. If the money is printed, then AD can just as well be increased by putting the new money to government consumption.
Why not a proper Jubilee where the creditors actually lose? It seems that such a transfer would likely be AD-increasing, but the government can always act just the same if otherwise….
Frauncher
bizarre. this is a blog. i walked away for a day after posting my objection to Steve’s “footnote” (though footnotes are the most dangerous way to sell ideas to people). when i came back it seemed to me that you folks had lost the thread on your own.
i don’t know about righteous indignation. i take the “looming poverty” of the American people more seriously than i do thought balloons about jubilees and other delirium dreams of the overeducated.
I was copying and pasting from Word, which can be a problem. Copy and paste from Notepad worked.
Re “thinking”, the full versus fractional reserve argument is EXTREMELY involved and complicated, I’ve found. There was a submission to the UK’s Independent Commission on Banking which advocated full reserve which might interest you:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
Min
your illustration does not reflect the actual situation at all.
the government NEVER borrows money to pay for Social Security… this was true until the Payroll Tax Holliday, which is why the Holiday has killed Social Security…
the rest of what you say is literally nonsense. not trying to be mean here. it’s just that it is so scrambled it means nothing at all, not even as an “illustration.”
well, yes, i guess, but what does that do to your proposition that we can’t let the banks fail?
I am also not totally comfortable with Keen’s definition of AD (though I haven’t sorted out exactly why) — or for that matter, with the notion of AD in general.
Part of why I haven’t sorted it out: the NIPAs as a model of the economy completely ignore financial assets and debt issuance/retirement. They do this by defining “Savings” as Income-Consumption, instead of Income-Spending [Consumption plus Investment]. If they defined Savings as Income-Spending, Savings = Zero. Voila: no financial assets, no debt, no credit, no change in any of those.
This makes it difficult to use as a model in discussing a highly financialized monetary economy.
You have to look at the NIPAs plus the Fed Flow of Funds accounts.
“what does that do to your proposition that we can’t let the banks fail?”
Brings it right back to what I said: regulation.
maybe i’ll put this in my book of exchanges… why we can’t communicate.
you said we can’t not insure the banks because innocent people get hurt.
i said we insure the depositers so the banks can fail and the innocent don’t get hurt.
you said… but can’t the bankers walk away…
i lost the thread.
@ coberly
Take another look and think it through.
The deficit equals gov’t spending minus gov’t revenues. If a portion of those revenues goes into a trust fund, that has no effect upon the deficit. If instead treasuries go into the trust fund, that also has no effect upon the deficit. It would only have an effect if the gov’t spent more because it took money from the trust fund and replaced it with treasuries. But that is not the case. Gov’t spending depends upon appropriations. Neither taxes nor spending depend upon whether the trust fund contains money or treasuries. That’s why we hold them constant in the argument. The purpose of putting treasuries in the trust fund is so that the fund earns interest. The purpose is not to finance the deficit. The trust fund cannot finance the deficit, any more than any other taxes finance the deficit.
Those who still doubt the importance of private debt overhang should read Richard Koo’s latest paper, which makes an even clearer case than does Steve Keen:
http–www.paecon.net-PAEReview-issue58-Koo58.pdf
DR
Steve Keen agrees that fiscal stimulous mitigates the negative effects of balance sheet recessions, but demonstrates that the persistance of private debt overhang has historically set the stage for even bigger busts later on.
I agree we would have been better off in the aggregate with drastic writeoffs of doubtful debt and nationalisation of failed banks, which would have produced a sort of random jubilee effect, but wonder if this might have punished the innocent along with the guilty.
Min
i think what you are saying is completely wrong. I offered Angry Bear a post drawn from our exchange here… so we would not be hijacking Steve’s post. If Dan prints it, join me there and try to make your case. Be prepared to hear noises of frustration from me.
I take full responsibility for diverging into SS issues. Should have taken it offline to the asymptosis “own-goal” post.
@ coberly
I don’t think that this discussion deserves a separate post. The only questions are the definitions of taxes, gov’t spending, and gov’t deficit. It is possible that I am mistaken about what is counted as gov’t spending, for instance. But such a mistake only takes a one liner from someone who knows. 🙂
Agreed. You cannot just look at the NIPA. Just as accounting identities are not models. That’s why I said “looks like” and “nonobvious”– because it’s a starting point. Somehow, debt is going to shift all those accounting variables around. The model says how, but in the end the identity must still hold.
That’s not true about NIPA savings unless you directly include the entire foreign sector in the accounts– in which case it’s no longer the NIPA. In the GIPA (Galactic Income and Product Accounts) it would be true only so long as there is no inter-galactic trade. That’s the point of the specific accounting exercise I provided. Roughly speaking, in an open economy income minus spending is equal to (net) lending.
If you prefer, we can move investment to the RHS…
(C+G) – (Y+NT) = (M-X) – NT – I
… and then flip everything around
(Y+NT) – (C+G) = I + (X-M) + NT
Thus, your quote-unquote “Savings” lies on the LHS, and is equal to investment plus the current account surplus. Regardless of how savings may be counted (either gross or net of investment) there is still a need in the NIPA for something to balance the equation– some sort of accounting of cross border transactions outside of trade in current goods and services. The aforementioned identity doesn’t go into whether this means sale of capital stock, or gold, or cash, or issuance of debt. It merely indicates the net value of these other transactions which must have taken place.
The Flow of Funds helps break that down, but it’s still not a model– just more data and accounting.
Now, I don’t want to give the impression I don’t think debt matters– I just don’t like Keen’s formulation. Indeed, if instead of going more macro to the GIPA, we look at the NHIPA (National Household Income and Product Accounts, there is lots of interesting stuff.
I dismissed the national debt burden by saying it was less than 17% of GDP. On the other hand, households and nonprofits had credit market liabilities of nearly $13.3 trillion compared to credit market assets of $5.3. This net debt of $8 trillion at the end of 2010 came to about 75 percent of disposable personal income, which is a bit more serious even at a low interest rate. And even more serious when one observes how the debt is distributed. (See for example, the Survey of Consumer Finances… for the bottom 25% in net worth, mean financial assets came to $5,800 compared to $60,800 debt– a $55,000 net debt compared to $29,100 income… in 2007. Ouch.) But to the extent that the debts will be paid, much of the debt is owed to other Americans… or rather American financial businesses.
I do agree that private debt is a problem. But gross debt is not a meaningful measure of that problem. See discussions above…
coberly: “i assume it can just pretend the deficit is not there (print money) or borrow from “somewhere” to get the money to cover the difference. it does the latter. borrowing some “from the public” and some “from SS.”
The way things are set up now, the gov’t borrows **all** of what it needs to cover the deficit from the public. What it borrows from SS is in addition to that.
All I’m really saying is what Randy Wray sez:
SUMMARY: Three Sectors
• Nongovt “Inside” net financial wealth created
annually = zero
– Subsequent portfolio adjustments Prices and
returns on stock of financial assets adjust
• Nongovt Net Financial Wealth created annually
= Govt Def
– Subsequent portfolio adjustments Prices and
returns on stock of Treasuries adjust
• ROW Net Financial Wealth created annually =
CA Deficit
– Subsequent portfolio adjustments prices and
returns and exchange rates adjust (floating rate)
If you define “private savings” as equaling the change in private net financial assets (which seems a reasonable definition of savings to me), absent government and international it’s zero.
And that people get really confused by that NIPA definition of savings, and S=I. If you withdraw $10K from your business bank account and spend it on new computers for your employees, that “investment” counts as “savings.”
Spending is saving??
And I’m suggesting that we should instead be using a more sensible model of the economy, i.e. Wynne Godley’s, which incorporates the financial real sectors in one accounting system.
Notably, in his seminal paper on stock-flow consistent accounting, the word “savings” does not appear. No need for it.
Adding this so we make 100 comments the entire string was fun…
There is a simple solution to your “conundrum” which is to make depositors chose between 100% safe accounts, and in contrast, bank accounts where their money is loaned on.
Re the former, the money is NOT INVESTED in commerce, mortgages, etc. It could for example just be deposited at the central bank where it will earn little or no interest, but the state would insure the deposit.
Re the latter, that’s commerce. There is no obligation on taxpayers to subsidise commerce. So a decent rate of interest would be earned, but in the event of the bank going belly up, there’d be no taxpayer funded bailout. This paper advocates the above system:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
Also I’m planning to do a post on fractional on my own blog in the next few days. Comments welcome. See:
http://ralphanomics.blogspot.com/