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Understanding Debt

57 points by mxfh 12y ago

innguest 12y ago
FTFA: > the world economy as a whole owes money to itself. > debt is money we owe to ourselves Why don't we just collectively forget/forgive our debts, then? Folks, if you think this astrologist/alchemist Krugman is doing scientific work in Economics, please stop and think: can you come up with a falsifiable statement for Keynesian Economics? I can come up with several for Evolution, which is why Evolution is a Science.
- deleted 12y ago
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- jhulla 12y ago
  Krugman's argument fails to see the massive misallocation of capital worldwide and the resulting instability and wealth distortion. Just like he didn't see the 2008-2009 crisis, his models cannot see the current distortions and where they mar or may not lead.
- TheOtherHobbes 12y ago
  In fact Krugman, with his vile Keynesian bias, has been one of the few economists to make the correct calls in the Euro-debacle. His record on other topics is significantly better than that of most 'economic experts.' And he has at least one more econo-Nobel than (I'm guessing) you do. He's been saying for a long time now that austerity is self-defeating. And he is, by any sane evidence-based standard, utterly right. So your ad hominems are entirely off-point. Meanwhile the neo-liberal school has made any number of claims that are often repeated even after they've been falsified by fact. Laffer Curve? Boom. Dead. Utter rubbish. Totally falsified. http://www.brookings.edu/~/media/Projects/BPEA/Fall%201999/1999b_bpea_goolsbee.PDF http://www.brookings.edu/~/media/Projects/BPEA/Fall%201999/1... Trickle down? Self-serving nonsense. No evidence for it at all. http://www.businessinsider.com/study-tax-cuts-dont-lead-to-growth-2012-9?IR=T http://www.businessinsider.com/study-tax-cuts-dont-lead-to-g... Don't tax corporations so they can create jobs? Boom. Dead. Corporations mostly just give the money to executives and hoard the rest. See above, among others. Don't allow governments to spend tax money on infrastructure, innovation, and public education? Excellent! You've strangled the research that led to the beginnings of the Internet, and one or two other important projects too. And so on. The truth here is that facts are not on your side. Name-calling is a poor substitute for being evidence-based, intelligent, and scientifically informed.
  - jhulla 12y ago
    Krugman did not foresee the 2008-2009 financial crisis. If anything, bubble economics is his forte. See here: http://www.businessinsider.com/krugman-in-02-greenspan-needs-to-create-a-housing-bubble-2009-6 http://www.businessinsider.com/krugman-in-02-greenspan-needs...
  - shit_parade 12y ago
    Thanks for the argument from authority, it is really adding to this discussion.
  - crazy1van 12y ago
    > Laffer Curve? Boom. Dead. Utter rubbish. Totally falsified. It may not be perfect, but to say utter rubbish is ridiculous. At its core, the Laffer Curve claims tax revenue is elastic with respect to tax rates. In other words, the revenue derived from taxes is not always proportionate to the tax rate. The classic curve shows 0 revenue at a 0% tax rate -- obviously true since 0% times any number is 0 -- and 0 revenue at 100% tax rate -- because why would anyone work if 100% of it would be taken in taxes. Therefore, there exists a tax rate that provides the maximum amount of revenue between 0% and 100%. The exact shape of the curve is wildly debated and some claim revenue doesn't truly drop to 0 at a 100% tax rate, but those don't change the point that it is possible to lower tax rates and receive more tax revenue.
  - derriz 12y ago
    Erm no. He did not "call" the Euro crisis. I notice he has stopped mentioning Ireland, for example, because it now represents a counter-example to his world view. After a few years of austerity, growth has returned, unemployment is falling and tax revenues are rising in Ireland. All apparently impossible according to Krugman and in fact he explicitly predicted the opposite outcome would result from government policy. He irritates me highly because he is clearly smart but hasn't the tiniest crumb of intellectual honesty - he simply ignores inconvenient facts where other commentators and ecomomists (of various ideological bents) engage with difficult facts in order to explore and refine their own belief systems. I have gone from being a Krugman admirer to considering the guy a lying charleton in the space of 5 years.
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- hnnewguy 12y ago
  >Why don't we just collectively forget/forgive our debts, then? I know, right? I mean, why don't I just throw these BofA bonds I own, paying 6.5% annually, into the trash because I don't like money. In the meantime, why doesn't Ford just give me the car I financed? >Folks, if you think this astrologist/alchemist Krugman is doing scientific work in Economics, please stop and think Don't project your financial ignorance on other people, just because you don't understand how a balance sheet works. Someone's debt is another's asset; someone's income is another's expense. His politics aside, Krugman is right in pointing out a fallacy that I see over and over again in the mainstream. That is, looking at only one side of the sheet. For example, the US households have so much debt! Well, guess how much value they have in assets?
  - msandford 12y ago
    > For example, the US households have so much debt! Well, guess how much value they have in assets? After the housing bubble collapse? Many of them have fewer assets than debt leading to bankruptcy. Assets aren't required to go up along with debt as a law of nature. Some people do a good job of buying undervalued things, other don't.
  - innguest 12y ago
    Value is in the eye of the beholder (or potential buyer). I see you cut my quote halfway so you didn't have to present a case that mainstream economics is scientific, which I'm yet to see. Please show some yet-unfalsified falsifiable statements in mainstream Economics so that it can be shown that it is scientific and true. Don't give me a run around with lots of words and no proof.
m52go 12y ago
> but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression. I don't like how mainstream economists tend to portray deflation: that it's a terrible thing that necessarily leads to depression. I mean, is the average man on the street going have more money to spend if the stuff he needs (food, energy, etc) costs 5% more than it did last year? I'm not saying deflation is always a good thing, but particularly in times of declining incomes, I find it hard to believe it's the scary monster mainstream economists make it out to be. And I particularly don't like how Krugman is always so quick to defend large debt loads. He keeps advocating to borrow borrow borrow, with seemingly no restraint. Is that really sustainable? > America has actually been borrowing less from abroad since 2008 than it did before Ya, because we're printing the rest. That is NOT a good thing. But of course, Krugman won't say that, or consequences that result from such policies.
- yequalsx 12y ago
  The government isn't "printing money" in the sense that this phrase commonly denotes. The government is selling Treasury securities on the open market. The rate of interest right now is quite low and has been for the past 7 years. Krugman isn't advocating a belief that all debt all the time is a good thing. He's advocating a belief that in the current situation debt is not the primary concern right now. Deflation is a bad thing for borrowers. It's a good thing for people who have no loans. I think the idea is that deflation is bad for the country because it's bad for banks and large multi-national companies. It would squeeze consumers who have mortgages and credit card debt and student loan debt. Thus this would contract the economy. As I understand these things. I'm not an economist.
  - jhulla 12y ago
    You forgot QE1, QE2, twist, and QE3 where the Fed digitally created $4 trillion and bought up assets. That $4T didn't exist until the Fed conjured it up. Through a middleman, it was handed to the US Treasury.
    - yequalsx 12y ago
orlandob 12y ago
The title of the article is actually: "Nobody Understands Debt". A few years ago I discovered Modern Monetary Theory (thanks Warren Mosler, Bill Mitchell, Randall Wray, Stephanie Kelton) and it really opened my eyes to the universal misunderstanding of national debt. It boils down to this: the household debt model does not apply to governments that issue their own currency (USD, AUD, JPY, etc., but NOT the EUR).
- jschwartzi 12y ago
  Which model applies and can you sum it up in a few sentences? I know it's generally accepted here to make an effort to deeply understand the issues behind the article, but one criticism I have of Krugman's article is that, while he does explain what he thinks Debt isn't, he never bothers to explain why the household model doesn't apply except in a dismissive sort of sense. So what models apply and why?
  - orlandob 12y ago
    There is one major difference between households and sovereign-currency Governments: households can't create the money they use, but Governments can. "So you're saying government debt doesn't matter? What about Zimbawe, Argentina, Japan, Pre-WWII Germany?" First, I'm not saying that Government debt doesn't matter. Like all things, there are limits. What I am saying (and MMT says) is that there are conditions under which increasing national debt make sense - notably high unemployment and underemployment. ONLY the Government can kickstart an economy in this scenario. In those hyperinflation cases, you saw Governments whose debt was denominated by foreign currencies and they tried to print their way to solvency, which of course failed.
  - sukilot 12y ago
    MMT is Kenysianism, with a fresh coat of paint and slightly different policy. (I say this as Keynsian.) MMT advocates the government directly printing money for stimulus, instead of going through the charade of creating debt and letting banks print money for themselves, and gets a little wacky by hinting that you can print money without inflation. Fiat currency debt is just printing money. The nation isn't borrowing sheep or wood, the banks just increase some numbers in a digital file ("fractional reserve" banking, where someone else gets to spend money that is in your account at the bank)
nostromo 12y ago
> Because debt is money we owe to ourselves, it does not directly make the economy poorer This rational only works if you're thinking about the economy in collective terms. If the U.S. government borrows money from future taxpayers and gives it to the poor today, yes, collectively it's a wash. But there are winners and losers individually: the lender got an interest payment, the poor person got some free money, and the future tax payer paid more taxes to cover both. Telling the future tax payer, "hey, don't worry, it was an economic wash since we just owe the debt to ourselves!" would be cold comfort as he or she is clearly poorer due to the increased tax burden.
- novalis78 12y ago
  wonder why this is not pointed out more often
  - LanceH 12y ago
    Because the future taxpayer doesn't have a seat at the table.
    - novalis78 12y ago
      which points to an answer for jhulla's question: https://news.ycombinator.com/item?id=9023395 https://news.ycombinator.com/item?id=9023395 In a sense a modern form of oligarchy...bread and games go a long way.
- savanaly 12y ago
  Remember, money doesn't matter, only goods consumed (which money can facilitate). To help make this clear, imagine if G.O.D. materialized a bag with $10 trillion on the front steps of the white house. Would the world, past, present or future, to be able to consume more? Thus, it's hard to see how it's possible for the world as a whole to "borrow" from the future in any meaningful sense. How much you tax vs. how much debt you run up does matter, but not in the same way people think.
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crazy1van 12y ago
Perhaps Krugman would like to redefine debt, because his definition does not seem to match Merriam Webster [0]: "an amount of money that you owe to a person, bank, company, etc. the state of owing money to someone or something" Debt is a wonderful thing. It means you can buy an expensive good like a house or a car now and pay for it later. As opposed to saving for years and then getting the car. However, either way you pay. I fail to see how national debt is any different. Governments want money now, so they go into debt often by selling bonds. If the debt was acquired during my generation, but the bill comes due during the next generation, then that seems to be pretty close to stealing from the next generation. Today's debt is tomorrow's taxation. [0] http://www.merriam-webster.com/dictionary/debt http://www.merriam-webster.com/dictionary/debt
- binarytrees 12y ago
  If a country uses that debt to let's say, invest in DARPANET, or build new transit infrastructure for commerce. I'd say that is a good use of debt. I think comparing what a government can use debt for vs buying a car or a house is short sighted.
- twblalock 12y ago
  National debt is different from household debt for many reasons, including the fact that the government operates a central bank, prints its own currency, does not have to apply for credit, passes the laws that specify the terms of the debt it owes, etc. Plus, in the case of the United States, the national debt is in the form of one of the safest and most widely held investment vehicles in the world : US treasury debt. To argue that government debt is the not any different from household debt is to ignore all of those things.
  - crazy1van 12y ago
    The mechanics are different but the fundamental idea is the same. Taking on debt today is a promise to pay back the money in the future. Governments have more ways of violating or manipulating that promise, but the core idea is the same. Taking your points one at a time: > the government operates a central bank, prints its own currency This is one method governments use to skirt paying the full value of what they owe. They can borrow a fixed number of dollars today, then print money and use the printed money to pay what they owe. By doing so they are paying back the dollars they owe, but because each dollar is worth less, they are never paying back the value they owe. And they will pay the price with a higher interest rate next time. > does not have to apply for credit Applying for credit for normal people is a way of offering evidence that you're likely to pay back what people loan you. The more trustworthy you seem, the less risk for the lender, and therefore the less demanded interest. Governments are the same way. The more the perceived chance that a government will not make good on its debts, the greater the interest it must pay to borrow money. > passes the laws that specify the terms of the debt it owes This is another method of skirting paying back what they government has borrowed. Drastic changes or changes which modify the rules on existing debt will have an effect on the government to borrow more money in the future. > in the case of the United States, the national debt is in the form of one of the safest and most widely held investment vehicles in the world Yes, but I think that is true because the US usually doesn't play the games that are in the earlier points. Traditionally, the US has not drastically increased its money supply and has not changed the law on existing debt. If they started doing these tricks more, I think we'll see the high regard fade for US treasuries. One last point: these are methods governments use to avoid repaying debt, but individuals in most countries have their own methods. They can default on a loan or declare bankruptcy entirely. But just like governments, that will make it harder to borrow in the future. The mechanics are different but the core ideas are the same.
shit_parade 12y ago
Another way to think about debt is that central banks are currently purchasing more global sovereign debt than is being issued[1] resulting in negative yields for many bonds. It is hard to fully articulate how perverse this is, but governments are issuing debts and then purchasing them through their supposedly independent central banks and these central banks are paying these governments for the honor of buying their debt -- world governments are paying themselves to take on debts, someone please tell me how anything resembling a market and price realization can occur under these circumstances, this is essentially central planning and is resulting in gross misallocation of wealth throughout the entire developed world. [1]:http://www.zerohedge.com/news/2015-02-09/stunning-chart-day-first-time-ever-global-net-sovereign-debt-issuance-will-be-negati http://www.zerohedge.com/news/2015-02-09/stunning-chart-day-...
- jhulla 12y ago
  Misallocation of wealth is only a problem if it isn't "misallocated" to you. My question is this: how does this edifice collapse?
- Matumio 12y ago
  Hm. I thought the largest part of our money is actually debt money created by private banks when they are granting credit. In order to create the money to pay interest on that credit, it is necessary that somebody makes more debt elsewhere. Which is an absurd system to start with.
marcusgarvey 12y ago
It's amazing. We answered a crisis brought on by too much debt with -- more debt. And instead of investing it in things that would have a real benefit to larger swathes of society (say, infrastructure, education, an even less byzantine and more affordable health system than Obamacare) it seems only to have goosed asset prices and promoted malinvestment. I believe politicians are to blame: they are forcing central banks to try and stimulate the economy in unhealthy ways because they are too cowardly or stupid to promote stimulus programs that might have a chance of boosting real demand.
binarytrees 12y ago
Debt to build new transit infrastructure, research and development labs etc is a great way a country can use debt to benefit it's current and future citizens. A person could take a loan out for a car and that may create a small fraction of jobs. Where as if a government can take on debt to create DARPANET or invest in clean energy the outcome is many times more profitable to the government and future business derived from that.
- toasted 12y ago
  Unless the investments bomb and no value is created eg. the clean energy investments of the last 10 years
  - Fuzzwah 12y ago
    Depends what you value. I personally value a planet where my kids can enjoy a clean environment.
    - toasted 12y ago
      Have there been tangible environmental gains from all the money being invested?
  - deleted 12y ago
    [deleted]
vijayboyapati 12y ago
There are two major problems with this article (although they're not specific to this article and are more generally applicable to Keynesian economics). Firstly Prof. Krugman writes: "Why is deleveraging a problem? Because my spending is your income, and your spending is my income, so if everyone slashes spending at the same time, incomes go down around the world." This model entirely ignores capital theory. It creates a simple closed system where if spending goes up, everyone is better off, and if spending goes down, everyone is worse off (because they have less income). But this has almost no relation to whether more or less wealth is being created. Are there more cars, iphones, loaves of bread, new medical technologies? It is the creation of new capital that makes everyone better off, and increases the standard of living, not more spending (although more spending often follows the creation of new goods) Secondly Prof Krugman writes: "You can see that misunderstanding at work every time someone rails against deficits with slogans like “Stop stealing from our kids.” It sounds right, if you don’t think about it: Families who run up debts make themselves poorer, so isn’t that true when we look at overall national debt? No, it isn’t. An indebted family owes money to other people; the world economy as a whole owes money to itself. And while it’s true that countries can borrow from other countries, America has actually been borrowing less from abroad since 2008 than it did before, and Europe is a net lender to the rest of the world. Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer)" The problem isn't who the debt is owed to, the problem is whether the debt is serviceable or not and is used to create new wealth. This all gets confused by the introduction of money into the discussion. But imagine a situation where person A loans person B a shovel with the understanding they will receive the shovel back in a week, along with 10 potatoes. This is a loan that is likely to be serviceable. Now instead imagine a loan where person A loans person B a shovel with the understanding that person B will return the shovel along with some produce. Now instead of digging up vegetables, person B uses his shovel to excavate some rocks on his property to create a nice looking rock garden. Person B is now going to get into trouble paying back his loan. The debt he has incurred has been used to work on a project that is unlikely to be profitable. This is akin to people going into debt during the housing bubble to fund their consumption (big house, fast cars, big TV etc) rather than fund more production. That is the kind of debt that is not going to be serviceable and will eventually need to be written down, or in the case of the US, handed over to the taxpayer. We ARE better off writing down that debt because, in general, we want people to use debt to work on projects that generate new wealth and capital over time, and if we do not write that debt down, people will continue to work on unproductive, unprofitable projects.
j_baker 12y ago
Krugman's right about one thing: economies that have had large austerity pushes seem to have done worse than countries that have had smaller spending cuts. I don't know that I would agree with Krugman about how much spending needs to happen to recover. Within the next 20 years, spending on Medicare and Social Security are expected to grow rapidly. Thus, I think frugality still makes sense.
sakri 12y ago
I would be very sad to see the death of the monetary union.

57 points by mxfh 12y ago

FTFA: > the world economy as a whole owes money to itself. > debt is money we owe to ourselves Why don't we just collectively forget/forgive our debts, then? Folks, if you think this astrologist/alchemist Krugman is doing scientific work in Economics, please stop and think: can you come up with a falsifiable statement for Keynesian Economics? I can come up with several for Evolution, which is why Evolution is a Science.

deleted 12y ago
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jhulla 12y ago
Krugman's argument fails to see the massive misallocation of capital worldwide and the resulting instability and wealth distortion. Just like he didn't see the 2008-2009 crisis, his models cannot see the current distortions and where they mar or may not lead.
TheOtherHobbes 12y ago
In fact Krugman, with his vile Keynesian bias, has been one of the few economists to make the correct calls in the Euro-debacle. His record on other topics is significantly better than that of most 'economic experts.' And he has at least one more econo-Nobel than (I'm guessing) you do. He's been saying for a long time now that austerity is self-defeating. And he is, by any sane evidence-based standard, utterly right. So your ad hominems are entirely off-point. Meanwhile the neo-liberal school has made any number of claims that are often repeated even after they've been falsified by fact. Laffer Curve? Boom. Dead. Utter rubbish. Totally falsified. http://www.brookings.edu/~/media/Projects/BPEA/Fall%201999/1999b_bpea_goolsbee.PDF http://www.brookings.edu/~/media/Projects/BPEA/Fall%201999/1... Trickle down? Self-serving nonsense. No evidence for it at all. http://www.businessinsider.com/study-tax-cuts-dont-lead-to-growth-2012-9?IR=T http://www.businessinsider.com/study-tax-cuts-dont-lead-to-g... Don't tax corporations so they can create jobs? Boom. Dead. Corporations mostly just give the money to executives and hoard the rest. See above, among others. Don't allow governments to spend tax money on infrastructure, innovation, and public education? Excellent! You've strangled the research that led to the beginnings of the Internet, and one or two other important projects too. And so on. The truth here is that facts are not on your side. Name-calling is a poor substitute for being evidence-based, intelligent, and scientifically informed.
- jhulla 12y ago
  Krugman did not foresee the 2008-2009 financial crisis. If anything, bubble economics is his forte. See here: http://www.businessinsider.com/krugman-in-02-greenspan-needs-to-create-a-housing-bubble-2009-6 http://www.businessinsider.com/krugman-in-02-greenspan-needs...
- shit_parade 12y ago
  Thanks for the argument from authority, it is really adding to this discussion.
- crazy1van 12y ago
  > Laffer Curve? Boom. Dead. Utter rubbish. Totally falsified. It may not be perfect, but to say utter rubbish is ridiculous. At its core, the Laffer Curve claims tax revenue is elastic with respect to tax rates. In other words, the revenue derived from taxes is not always proportionate to the tax rate. The classic curve shows 0 revenue at a 0% tax rate -- obviously true since 0% times any number is 0 -- and 0 revenue at 100% tax rate -- because why would anyone work if 100% of it would be taken in taxes. Therefore, there exists a tax rate that provides the maximum amount of revenue between 0% and 100%. The exact shape of the curve is wildly debated and some claim revenue doesn't truly drop to 0 at a 100% tax rate, but those don't change the point that it is possible to lower tax rates and receive more tax revenue.
- derriz 12y ago
  Erm no. He did not "call" the Euro crisis. I notice he has stopped mentioning Ireland, for example, because it now represents a counter-example to his world view. After a few years of austerity, growth has returned, unemployment is falling and tax revenues are rising in Ireland. All apparently impossible according to Krugman and in fact he explicitly predicted the opposite outcome would result from government policy. He irritates me highly because he is clearly smart but hasn't the tiniest crumb of intellectual honesty - he simply ignores inconvenient facts where other commentators and ecomomists (of various ideological bents) engage with difficult facts in order to explore and refine their own belief systems. I have gone from being a Krugman admirer to considering the guy a lying charleton in the space of 5 years.
- 12y ago
hnnewguy 12y ago
>Why don't we just collectively forget/forgive our debts, then? I know, right? I mean, why don't I just throw these BofA bonds I own, paying 6.5% annually, into the trash because I don't like money. In the meantime, why doesn't Ford just give me the car I financed? >Folks, if you think this astrologist/alchemist Krugman is doing scientific work in Economics, please stop and think Don't project your financial ignorance on other people, just because you don't understand how a balance sheet works. Someone's debt is another's asset; someone's income is another's expense. His politics aside, Krugman is right in pointing out a fallacy that I see over and over again in the mainstream. That is, looking at only one side of the sheet. For example, the US households have so much debt! Well, guess how much value they have in assets?
- msandford 12y ago
  > For example, the US households have so much debt! Well, guess how much value they have in assets? After the housing bubble collapse? Many of them have fewer assets than debt leading to bankruptcy. Assets aren't required to go up along with debt as a law of nature. Some people do a good job of buying undervalued things, other don't.
- innguest 12y ago
  Value is in the eye of the beholder (or potential buyer). I see you cut my quote halfway so you didn't have to present a case that mainstream economics is scientific, which I'm yet to see. Please show some yet-unfalsified falsifiable statements in mainstream Economics so that it can be shown that it is scientific and true. Don't give me a run around with lots of words and no proof.

m52go 12y ago

> but the situation is not improved if efforts to reduce debt end up pushing the economy into deflation and depression. I don't like how mainstream economists tend to portray deflation: that it's a terrible thing that necessarily leads to depression. I mean, is the average man on the street going have more money to spend if the stuff he needs (food, energy, etc) costs 5% more than it did last year? I'm not saying deflation is always a good thing, but particularly in times of declining incomes, I find it hard to believe it's the scary monster mainstream economists make it out to be. And I particularly don't like how Krugman is always so quick to defend large debt loads. He keeps advocating to borrow borrow borrow, with seemingly no restraint. Is that really sustainable? > America has actually been borrowing less from abroad since 2008 than it did before Ya, because we're printing the rest. That is NOT a good thing. But of course, Krugman won't say that, or consequences that result from such policies.

yequalsx 12y ago
The government isn't "printing money" in the sense that this phrase commonly denotes. The government is selling Treasury securities on the open market. The rate of interest right now is quite low and has been for the past 7 years. Krugman isn't advocating a belief that all debt all the time is a good thing. He's advocating a belief that in the current situation debt is not the primary concern right now. Deflation is a bad thing for borrowers. It's a good thing for people who have no loans. I think the idea is that deflation is bad for the country because it's bad for banks and large multi-national companies. It would squeeze consumers who have mortgages and credit card debt and student loan debt. Thus this would contract the economy. As I understand these things. I'm not an economist.
- jhulla 12y ago
  You forgot QE1, QE2, twist, and QE3 where the Fed digitally created $4 trillion and bought up assets. That $4T didn't exist until the Fed conjured it up. Through a middleman, it was handed to the US Treasury.
  - yequalsx 12y ago

orlandob 12y ago

The title of the article is actually: "Nobody Understands Debt". A few years ago I discovered Modern Monetary Theory (thanks Warren Mosler, Bill Mitchell, Randall Wray, Stephanie Kelton) and it really opened my eyes to the universal misunderstanding of national debt. It boils down to this: the household debt model does not apply to governments that issue their own currency (USD, AUD, JPY, etc., but NOT the EUR).

jschwartzi 12y ago
Which model applies and can you sum it up in a few sentences? I know it's generally accepted here to make an effort to deeply understand the issues behind the article, but one criticism I have of Krugman's article is that, while he does explain what he thinks Debt isn't, he never bothers to explain why the household model doesn't apply except in a dismissive sort of sense. So what models apply and why?
- orlandob 12y ago
  There is one major difference between households and sovereign-currency Governments: households can't create the money they use, but Governments can. "So you're saying government debt doesn't matter? What about Zimbawe, Argentina, Japan, Pre-WWII Germany?" First, I'm not saying that Government debt doesn't matter. Like all things, there are limits. What I am saying (and MMT says) is that there are conditions under which increasing national debt make sense - notably high unemployment and underemployment. ONLY the Government can kickstart an economy in this scenario. In those hyperinflation cases, you saw Governments whose debt was denominated by foreign currencies and they tried to print their way to solvency, which of course failed.
- sukilot 12y ago
  MMT is Kenysianism, with a fresh coat of paint and slightly different policy. (I say this as Keynsian.) MMT advocates the government directly printing money for stimulus, instead of going through the charade of creating debt and letting banks print money for themselves, and gets a little wacky by hinting that you can print money without inflation. Fiat currency debt is just printing money. The nation isn't borrowing sheep or wood, the banks just increase some numbers in a digital file ("fractional reserve" banking, where someone else gets to spend money that is in your account at the bank)

nostromo 12y ago

> Because debt is money we owe to ourselves, it does not directly make the economy poorer This rational only works if you're thinking about the economy in collective terms. If the U.S. government borrows money from future taxpayers and gives it to the poor today, yes, collectively it's a wash. But there are winners and losers individually: the lender got an interest payment, the poor person got some free money, and the future tax payer paid more taxes to cover both. Telling the future tax payer, "hey, don't worry, it was an economic wash since we just owe the debt to ourselves!" would be cold comfort as he or she is clearly poorer due to the increased tax burden.

novalis78 12y ago
wonder why this is not pointed out more often
- LanceH 12y ago
  Because the future taxpayer doesn't have a seat at the table.
  - novalis78 12y ago
    which points to an answer for jhulla's question: https://news.ycombinator.com/item?id=9023395 https://news.ycombinator.com/item?id=9023395 In a sense a modern form of oligarchy...bread and games go a long way.
savanaly 12y ago
Remember, money doesn't matter, only goods consumed (which money can facilitate). To help make this clear, imagine if G.O.D. materialized a bag with $10 trillion on the front steps of the white house. Would the world, past, present or future, to be able to consume more? Thus, it's hard to see how it's possible for the world as a whole to "borrow" from the future in any meaningful sense. How much you tax vs. how much debt you run up does matter, but not in the same way people think.
- 12y ago

crazy1van 12y ago

Perhaps Krugman would like to redefine debt, because his definition does not seem to match Merriam Webster [0]: "an amount of money that you owe to a person, bank, company, etc. the state of owing money to someone or something" Debt is a wonderful thing. It means you can buy an expensive good like a house or a car now and pay for it later. As opposed to saving for years and then getting the car. However, either way you pay. I fail to see how national debt is any different. Governments want money now, so they go into debt often by selling bonds. If the debt was acquired during my generation, but the bill comes due during the next generation, then that seems to be pretty close to stealing from the next generation. Today's debt is tomorrow's taxation. [0] http://www.merriam-webster.com/dictionary/debt http://www.merriam-webster.com/dictionary/debt

binarytrees 12y ago
If a country uses that debt to let's say, invest in DARPANET, or build new transit infrastructure for commerce. I'd say that is a good use of debt. I think comparing what a government can use debt for vs buying a car or a house is short sighted.
twblalock 12y ago
National debt is different from household debt for many reasons, including the fact that the government operates a central bank, prints its own currency, does not have to apply for credit, passes the laws that specify the terms of the debt it owes, etc. Plus, in the case of the United States, the national debt is in the form of one of the safest and most widely held investment vehicles in the world : US treasury debt. To argue that government debt is the not any different from household debt is to ignore all of those things.
- crazy1van 12y ago
  The mechanics are different but the fundamental idea is the same. Taking on debt today is a promise to pay back the money in the future. Governments have more ways of violating or manipulating that promise, but the core idea is the same. Taking your points one at a time: > the government operates a central bank, prints its own currency This is one method governments use to skirt paying the full value of what they owe. They can borrow a fixed number of dollars today, then print money and use the printed money to pay what they owe. By doing so they are paying back the dollars they owe, but because each dollar is worth less, they are never paying back the value they owe. And they will pay the price with a higher interest rate next time. > does not have to apply for credit Applying for credit for normal people is a way of offering evidence that you're likely to pay back what people loan you. The more trustworthy you seem, the less risk for the lender, and therefore the less demanded interest. Governments are the same way. The more the perceived chance that a government will not make good on its debts, the greater the interest it must pay to borrow money. > passes the laws that specify the terms of the debt it owes This is another method of skirting paying back what they government has borrowed. Drastic changes or changes which modify the rules on existing debt will have an effect on the government to borrow more money in the future. > in the case of the United States, the national debt is in the form of one of the safest and most widely held investment vehicles in the world Yes, but I think that is true because the US usually doesn't play the games that are in the earlier points. Traditionally, the US has not drastically increased its money supply and has not changed the law on existing debt. If they started doing these tricks more, I think we'll see the high regard fade for US treasuries. One last point: these are methods governments use to avoid repaying debt, but individuals in most countries have their own methods. They can default on a loan or declare bankruptcy entirely. But just like governments, that will make it harder to borrow in the future. The mechanics are different but the core ideas are the same.

shit_parade 12y ago

Another way to think about debt is that central banks are currently purchasing more global sovereign debt than is being issued[1] resulting in negative yields for many bonds. It is hard to fully articulate how perverse this is, but governments are issuing debts and then purchasing them through their supposedly independent central banks and these central banks are paying these governments for the honor of buying their debt -- world governments are paying themselves to take on debts, someone please tell me how anything resembling a market and price realization can occur under these circumstances, this is essentially central planning and is resulting in gross misallocation of wealth throughout the entire developed world. [1]:http://www.zerohedge.com/news/2015-02-09/stunning-chart-day-first-time-ever-global-net-sovereign-debt-issuance-will-be-negati http://www.zerohedge.com/news/2015-02-09/stunning-chart-day-...

jhulla 12y ago
Misallocation of wealth is only a problem if it isn't "misallocated" to you. My question is this: how does this edifice collapse?
Matumio 12y ago
Hm. I thought the largest part of our money is actually debt money created by private banks when they are granting credit. In order to create the money to pay interest on that credit, it is necessary that somebody makes more debt elsewhere. Which is an absurd system to start with.

marcusgarvey 12y ago

It's amazing. We answered a crisis brought on by too much debt with -- more debt. And instead of investing it in things that would have a real benefit to larger swathes of society (say, infrastructure, education, an even less byzantine and more affordable health system than Obamacare) it seems only to have goosed asset prices and promoted malinvestment. I believe politicians are to blame: they are forcing central banks to try and stimulate the economy in unhealthy ways because they are too cowardly or stupid to promote stimulus programs that might have a chance of boosting real demand.

binarytrees 12y ago

Debt to build new transit infrastructure, research and development labs etc is a great way a country can use debt to benefit it's current and future citizens. A person could take a loan out for a car and that may create a small fraction of jobs. Where as if a government can take on debt to create DARPANET or invest in clean energy the outcome is many times more profitable to the government and future business derived from that.

toasted 12y ago
Unless the investments bomb and no value is created eg. the clean energy investments of the last 10 years
- Fuzzwah 12y ago
  Depends what you value. I personally value a planet where my kids can enjoy a clean environment.
  - toasted 12y ago
    Have there been tangible environmental gains from all the money being invested?
- deleted 12y ago
  [deleted]

vijayboyapati 12y ago

There are two major problems with this article (although they're not specific to this article and are more generally applicable to Keynesian economics). Firstly Prof. Krugman writes: "Why is deleveraging a problem? Because my spending is your income, and your spending is my income, so if everyone slashes spending at the same time, incomes go down around the world." This model entirely ignores capital theory. It creates a simple closed system where if spending goes up, everyone is better off, and if spending goes down, everyone is worse off (because they have less income). But this has almost no relation to whether more or less wealth is being created. Are there more cars, iphones, loaves of bread, new medical technologies? It is the creation of new capital that makes everyone better off, and increases the standard of living, not more spending (although more spending often follows the creation of new goods) Secondly Prof Krugman writes: "You can see that misunderstanding at work every time someone rails against deficits with slogans like “Stop stealing from our kids.” It sounds right, if you don’t think about it: Families who run up debts make themselves poorer, so isn’t that true when we look at overall national debt? No, it isn’t. An indebted family owes money to other people; the world economy as a whole owes money to itself. And while it’s true that countries can borrow from other countries, America has actually been borrowing less from abroad since 2008 than it did before, and Europe is a net lender to the rest of the world. Because debt is money we owe to ourselves, it does not directly make the economy poorer (and paying it off doesn’t make us richer)" The problem isn't who the debt is owed to, the problem is whether the debt is serviceable or not and is used to create new wealth. This all gets confused by the introduction of money into the discussion. But imagine a situation where person A loans person B a shovel with the understanding they will receive the shovel back in a week, along with 10 potatoes. This is a loan that is likely to be serviceable. Now instead imagine a loan where person A loans person B a shovel with the understanding that person B will return the shovel along with some produce. Now instead of digging up vegetables, person B uses his shovel to excavate some rocks on his property to create a nice looking rock garden. Person B is now going to get into trouble paying back his loan. The debt he has incurred has been used to work on a project that is unlikely to be profitable. This is akin to people going into debt during the housing bubble to fund their consumption (big house, fast cars, big TV etc) rather than fund more production. That is the kind of debt that is not going to be serviceable and will eventually need to be written down, or in the case of the US, handed over to the taxpayer. We ARE better off writing down that debt because, in general, we want people to use debt to work on projects that generate new wealth and capital over time, and if we do not write that debt down, people will continue to work on unproductive, unprofitable projects.

j_baker 12y ago

Krugman's right about one thing: economies that have had large austerity pushes seem to have done worse than countries that have had smaller spending cuts. I don't know that I would agree with Krugman about how much spending needs to happen to recover. Within the next 20 years, spending on Medicare and Social Security are expected to grow rapidly. Thus, I think frugality still makes sense.

sakri 12y ago

I would be very sad to see the death of the monetary union.