Debt Rattle May 16 2015

 

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  • #21099

    Lewis Wickes Hine Workers stringing beans in J.S. Farrand Packing Co, Baltimore 1920 • The New Era Of Return-Free Risk (Reuters) • Global Asset Classe
    [See the full post at: Debt Rattle May 16 2015]

    #21126
    Diogenes Shrugged
    Participant

    Some personal opinions here that will certainly ruffle feathers. I’m not an economist, so I’m eagerly looking forward to being told where I’m wrong.

    Despite some valid points, I thought the Steve Keen video was just awful. The first half is opaque (I literally spent an hour starting and stopping, taking notes, trying to find math sense in his verbal equations – – without much success, and with a lot of flat disagreement. The second half was better, but still a disappointment.

    Allow me to LOOSELY paraphrase the first half of his talk:

    In practice, most people behave as if greed is good. Like it or not, to one extent or another, Gordon Gekko was speaking for nearly everybody (my words, not Keen’s).

    Keen, it seems to me, is saying that greed leads to financial overshoot when the business cycle tops out. Incompetence and fraud are taken in stride when the economy is rising, but are ruinous on the way down.

    In the second half, he correctly excoriates Paul Samuelson, whose economics text tortured university students with falsehoods for decades. I know firsthand, as I personally suffered that crap nearly a half-century ago. Nonetheless, I found Keen’s talk bothersome, as it was just as difficult to follow his technical mumbo-jumbo as it was to follow economics lectures from my professors back then.

    He indicated that there are three ways to get out of a macro debt bubble: inflation, default (deflation), and heavy government spending. I don’t at all agree with that third option, but then he offered yet a fourth alternative in the form of a personal recommendation: debt jubilee. And that brings me to the reasons I so disliked that presentation.

    He said that central banks could basically credit EVERYBODY a set stack of cash with the mandatory requirement that it be used to pay down debt before any other possible application. I presume that he assumes that the amount of debt thus extinguished will roughly equal the amount of cash added to the economy – – all in the form of central bank “credits” – – and thus would NOT significantly affect the total money supply.

    Here’s why I have problems with that. First of all, the credits handed to everybody would have to equal the extinguished private debt to leave the overall money supply unaffected. But many debts are large enough that much of the private debt would remain unpaid, so the total money supply would actually balloon. Second, I assume these central bank “credits” are produced out of thin air and disseminated like a helicopter drop (figuratively speaking). Being credits, they have to be repaid, don’t they? Even if those credits are issued interest-free, they will inevitably be used as collateral backing a renewed round of leverage. Doesn’t that just perpetuate the scandalous role of central banks? Third, regardless of how successful a debt jubilee turned out to be, and regardless of restrictions placed on banks afterward, the re-ignition of private borrowing would commence immediately, leading once again to the same situation we face today.

    Finally, nothing Keen advocated with respect to debt jubilee is politically feasible. It’s as “Cinderella” as the thinking of the “Samuelsonites” running the central banks, but without their power. I think he would have been better off advocating for a free-market transition to public banking, as advocated by Ellen Brown, preferably before the inevitable deflation.

    I still think Nicole Foss, Ellen Brown and Karl Denninger are among the best “economists” out there.

    #21127
    Patricia
    Participant

    Diogenes Shrugged. I found Steve Keen very coherent and quite understandable. I am a New Zealander so I understand how Australians talk, as they do us. Perhaps you should read more of him and then you might understand him better. He is highly respected.

    #21130

    Steve’s credits do not have to be repaid.

    His plan is sound, but won’t be executed as long as our political systems are controlled by banks.

    There’s another issue with it: a large portion of our private debts have been securitized and sold in international markets. Therefore, country X can enforce the Keen Debt Jubilee, and see much of the credit injected in its economy siphon off to country Y,Z or more likely to international private investors.

    I see a major problem for any debt jubilee in the fact that financial markets are global. At the very least debts would have to be restructured, so it doesn’t all become a free for all for creditors. They would have to swallow large haircuts on their holdings to make things fair.

    In the days of old when debt jubilees were used, it would be one mighty lord forgiving the debts of his feudal servants. And still have enough left over to keep ruling. The whole system is much more complicated now.

    #21131
    Diogenes Shrugged
    Participant

    Thanks Patricia. Exactly the sort of admonishment I was wondering whether or not I deserved. If you understood the content where I was unable to, hats off to you.

    #21132
    Diogenes Shrugged
    Participant

    Excellent observations, Ilargi. Very much appreciated.

    Coincidental that we posted our comments within a minute of each other. Except that it wasn’t 5:53 am here, but rather 11:53 pm. (Colorado).

    This is an extremely valuable website. Many thanks indeed for what is clearly an awful lot of care and effort.

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