Reddit reviews The Next Economic Disaster: Why It's Coming and How to Avoid It

@wonkmonk_:
>2014-07-19 17:50:22 UTC

>US Nominal GDP, Federal and Private Debt YoY Growth (1970-2012) amazon.com pic.twitter.com ^[Imgur]

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Hmm. Well, the way I understand it is like this. You have private debt and public debt, and they are, in fact, completely different things. Public debt is what our public government functionaries create. They control whether it goes up or down. I'm arguing and putting forth data that show that when public debt goes down, the economy suffers.

"Debt" is actually a misnomer, in the case of debt-free domestic money creation (such as funds the U.S. military and most other public expenses AFAIK), because the idea that it is owed to someone is based on past practices from fixed-exchange days, when the currency was precious metals. In those days, the government had to 'borrow' metal coins from citizens, because it couldn't acquire metal as easily as it can acquire paper and ink. Once it had handed out the IOUs to borrow that coinage, it really did have to pay them back for their value to remain high(hence, governments also defaulted on internal debt sometimes).

Nowadays a country doesn't have to borrow, because we have left the fixed-exchange financial system behind us. The fact that the US pretends to borrow by issuing bonds, is actually a relic of a past financial system that has lived on as a matter of established custom (the bond market). When the lenders ask for their money back (the bond matures, or interest is due), the U.S. treasury or the Fed will credit that nation or institution's bank account, with money freshly created out of nothing.

Do you see that there is a strong element of farce in this? When you cash in your IOU, we give you some of the stuff we just make out of nothing anyway. One might ask, why was the IOU required in the first place? For appearances sake, and because the collective intelligence of the system has not digested the epiphanies and realizations which I'm explaining in this post.

Let me put it to you this way: do you really think the government needs to give China a 2-inch thick stack of papers, in order to get 10,000,000 dollars?
They have the ability to create 10 million dollars.

There is yet another misunderstanding running rampant, and it is that domestic debt (which is the "debt" that we "owe" "ourselves") -- at some point has got to be repaid by the taxpayer. Its called the theory of ricardian equivalence, and it all stems from some dude's elaborate, purely theoretical, 1974 thought experiment. It has come under heavy criticism. (wikipedia usually sucks for refuting neoliberalism but in this case the editors did well; addendum: I also just found this essay which lampoons the theory and this.)

Ricardian equivalence is the theory which underpins the notion that "our grandkids are going to have to pay all this debt back!" or "all this money was created at the taxpayers expense!!". As you might see from reading above, the theory doesn't hold water.

Private debt is different. When private debt goes up, the economy first booms, and then suffers. The best writers on this are Richard Vague, Steve Keen and Michael Hudson; Richard Vague did a nice long historical study in which he showed that private debt levels correspond very closely to economic crises. This is close to the point you were making before, which is a fair one (e.g. that private debt booms bring subsequent crises). In a nutshell, I would say this is because public debt is created by the currency issuer (government), who does not need interest payments or repayment at all, to remain solvent. Private debt issuers require interest payments and full repayment (generally) to remain solvent. The beneficiaries of government spending don't have to reduce their spending to payback the money they receive.

Let me give a concrete example of the difference between these two forms of money creation. A great deal of our prosperity (let's think of this for right now as "money in circulation") was created by the mortgage loan. As /u/smegko often reminds us, these mortgage loans and other financial products are how banks have created the majority of the money that's out there. Anybody who gets that money issued to them (as a mortgage or as the recipient of the resulting loan), has to pay it back. They become a debtor, to Goldman Sachs, who is their lender. That's not a positive thing in the long-term, because we enjoy the high of easy money, but are stuck with the hangover of debt repayment plus interest. It also allows banks to become the most powerful players in our societies. None of this is a good thing, except for the financial boost we get initially (which, arguably, is better than nothing).

But public debt is different. Right now there is a soldier somewhere fighting in Iraq. Seems like a misuse of human labor to me, but we'll take it for this example. That guy receives a bi-weekly deposit in his bank account, which his family uses to pay for groceries and rent. They don't have to pay it back. It doesn't collect interest. It is debt free money created out of nothing. Economies suffer when this money is removed, as the article by Thayer suggests.

As far as the role of the 1% in these dynamics, I see them more as shysters able to manipulate the terms and provisions of the contracts governing private lending. The Big Short for example, has some characters like that. The reason we are so desperate for their money and contracts in the first place is because we have weak government spending, and its because we can't figure out that public debt is not debt, and private debt is bad debt, generally. We refer to them both as 'debt' and misunderstand the dynamics between these two completely different sources of the origin of money.