Krugman - Debt Is Good

[interestrateripoff]

http://www.nytimes.com/2015/08/21/opinion/paul-krugman-debt-is-good-for-the-economy.html?_r=2

Rand Paul said something funny the other day. No, really — although of course it wasn’t intentional. On his Twitter account he decried the irresponsibility of American fiscal policy, declaring, “The last time the United States was debt free was 1835.”

Wags quickly noted that the U.S. economy has, on the whole, done pretty well these past 180 years, suggesting that having the government owe the private sector money might not be all that bad a thing. The British government, by the way, has been in debt for more than three centuries, an era spanning the Industrial Revolution, victory over Napoleon, and more.

But is the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?

Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt.

I know that may sound crazy. After all, we’ve spent much of the past five or six years in a state of fiscal panic, with all the Very Serious People declaring that we must slash deficits and reduce debt now now now or we’ll turn into Greece, Greece I tell you.

But the power of the deficit scolds was always a triumph of ideology over evidence, and a growing number of genuinely serious people — most recently Narayana Kocherlakota, the departing president of the Minneapolis Fed — are making the case that we need more, not less, government debt.

Why?

One answer is that issuing debt is a way to pay for useful things, and we should do more of that when the price is right. The United States suffers from obvious deficiencies in roads, rails, water systems and more; meanwhile, the federal government can borrow at historically low interest rates. So this is a very good time to be borrowing and investing in the future, and a very bad time for what has actually happened: an unprecedented decline in public construction spending adjusted for population growth and inflation.

Beyond that, those very low interest rates are telling us something about what markets want. I’ve already mentioned that having at least some government debt outstanding helps the economy function better. How so? The answer, according to M.I.T.’s Ricardo Caballero and others, is that the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.

Now, in principle the private sector can also create safe assets, such as deposits in banks that are universally perceived as sound. In the years before the 2008 financial crisis Wall Street claimed to have invented whole new classes of safe assets by slicing and dicing cash flows from subprime mortgages and other sources.

Debt is useful in the economy, but for it to avoid problems it needs to be serviceable and repayable from future income/earnings. All the problems around debt emerge when the future doesn't turn out as predicted and the income streams for debt servicing aren't there. We have the problem now because the income from past investments haven't triggered the necessary growth to service the debt.

Still the clear answer to all this is more debt and more malinvestment, what is needed is a debt jubilee and the debts wiped and they system reset.

[Venger]

http://www.nytimes.com/2015/08/21/opinion/paul-krugman-debt-is-good-for-the-economy.html?_r=2

Debt is useful in the economy, but for it to avoid problems it needs to be serviceable and repayable from future income/earnings. All the problems around debt emerge when the future doesn't turn out as predicted and the income streams for debt servicing aren't there. We have the problem now because the income from past investments haven't triggered the necessary growth to service the debt.

Still the clear answer to all this is more debt and more malinvestment, what is needed is a debt jubilee and the debts wiped and they system reset.

No. A crash and younger people to buy up assets of over-extended colossus VIs at much lower prices, is the answer.

It's not their fault oldies believe in forever HPI, already sat on hyperfinflated assets, and over-extended business interests. It's not their fault many believe they can be floated to paradise on rivers of £Trns in debt against hyperfinflated asset values.

Debts are retired by paying them off, " restructuring" or default. In the first case, no value is lost; in the second, some value; in the third, all value. In desperately trying to raise cash to pay off loans, borrowers bring all kinds of assets to market, including stocks, bonds, commodities and real estate, causing their prices to plummet.

The process ends after the supply of credit falls to a level at which it is collateralised acceptably to the surviving creditors. Financial assets, and all other asset-classes of value, will be selectively repudiated by default, not obliterated by inflation.

Debt reset and let them keep the houses in the new world order? No incentive to downsize.

A happy jubilee reset is no good if they're still sat on the assets at the end of it.. perhaps half pension, but where house prices are just the same (or worth more) against downward readjusted wider working incomes.

I'm not giving up my meagre savings against hyperinflated house prices and others expecting more doubling in values.

The major economic drama will be the struggle between the market and government over the liquidation of debt. Political authorities will prefer to wipe away debt surreptitiously through inflation. But to inflate away bad debts also means inflating away good credits. Market participants will seek to preserve the value of their assets denominated in money. To the extent they succeed, they will make it harder to repay excessive debt in cheap money, and thus make the system more vulnerable to overt default and deflation. As monetary policy is loosened, in increasingly desperate efforts to reliquify the economy, the market may force a deflationary response.

Daily Mail

Average UK house price to hit £780,000 by 2040, says leading think tank

Kilo Charlie, My World, 9 hours ago

We purchased a property in 1983 for £72,000.........today it's worth £650,000 plus. It's certainly possible and quite likely.

Sam, Bucks, 3 hours ago

Bought house in ,74 for 16k added extention about £8k now valued at £480k you do the maths?

[Venger]

Daily Mail

Average UK house price to hit £780,000 by 2040, says leading think tank

Kilo Charlie, My World, 9 hours ago

We purchased a property in 1983 for £72,000.........today it's worth £650,000 plus. It's certainly possible and quite likely.

Sam, Bucks, 3 hours ago

Bought house in ,74 for 16k added extention about £8k now valued at £480k you do the maths?

The market needs to kick their boomer asses back into reality.

[billybong]

the debt of stable, reliable governments provides “safe assets” that help investors manage risks, make transactions easier and avoid a destructive scramble for cash.

What the world has now is sub-prime governments debt, sub-prime private debt, sub-prime financial sector debt and sub-ptime corporate debt etc.

That plus bailouts paid by taxpayers and savers including bailouts for money out of thin air bankers..

"Stable reliable governments"

Edited August 22, 2015 by billybong

[winkie]

Debt + inflation + consumption growth + above inflation wage growth = good

Debt + shrinkflation/stagnation + high housing cost inflation + underemployment = bad

Can't pay the rent........

[Killer Bunny]

ISIL is good too and AlQuaeeda IRA Nazis and 3rd World War will be amazing...

[gf3]

I think Krugman is right. He is saying what I have been thinking for a few months. To be honest it's quite a relief to see something written on the subject sometime google isn't any good. How do you search for a concept idea with out any key words?

People believe that if Warren Buffett went and spent a million pound of his own money tomorrow it would be good for the economy.

But if government borrowed Buffett's money ( because he had nothing left to buy) and spent it into the economy it's bad.

If savers wont spend their money the government must borrow it and spend it for them. Other wise debt can't be serviced an the banks go pop.

The neo classical economists had it right about money not mattering because one person was just spending another savings when it comes to Government debt. But they had it dead wrong with private debt.

[Venger]

If savers wont spend their money the government must borrow it and spend it for them. Other wise debt can't be serviced an the banks go pop.

I know I repeat some positions time over, but this one is a fave for you.

Pop. Also known as HPC.

[evetsm]

what Krugman doesn't tell you, or doesn't know, is that increasing the debt has a decreasing marginal utility, because each new unit of debt adds to the servicing burden until eventually you get the entire economy working to service debt and real growth halts. At the point that the economy ceases to be able to service the debt it collapses..

Krugman assumes that each additional unit of debt grows the economy as the last unit did, ad infinitum. it's just not true. Krugman is dangerous.

Edited August 22, 2015 by evetsm

[gf3]

I know I repeat some positions time over, but this one is a fave for you.

Pop. Also known as HPC.

Yes I know I am repeating myself But this is the first time I have ever seem a main stream economist back me up. Other than that it has been my own musings. It's to late now but I hope to look at 47 page pdf linked in the article.

[richc]

Krugman is a political hack. All though the Bush years, he constantly preached that the US was over-borrowing, but come the Obama administration, the US suddenly couldn't borrow enough. I have zero respect for the guy.

[Venger]

I think Krugman is right. He is saying what I have been thinking for a few months. To be honest it's quite a relief to see something written on the subject sometime google isn't any good. How do you search for a concept idea with out any key words?

People believe that if Warren Buffett went and spent a million pound of his own money tomorrow it would be good for the economy.

But if government borrowed Buffett's money ( because he had nothing left to buy) and spent it into the economy it's bad.

If savers wont spend their money the government must borrow it and spend it for them. Other wise debt can't be serviced an the banks go pop.

The neo classical economists had it right about money not mattering because one person was just spending another savings when it comes to Government debt. But they had it dead wrong with private debt.

How about the young renter-saver who is trying to position for a house vs 'We purchased a property in 1983 for £72,000.........today it's worth £650,000 plus' hoping for year-on-year, decade-on-decade asset values to fall back down.

Instead of just seeing it from as the oldie millionaire/billionaire side, £650,000 all happy owner side..

Gov doing the spending borrowing on borrowing, easing and zirping, holds up asset values.

Why not take your world that bit further. Gov can print us up and gift us non-owners £650,000 plus value houses. In fact, everyone just give up work and borrow us each £40,000+ a year.

[gf3]

How about the young renter-saver who is trying to position for a house vs 'We purchased a property in 1983 for £72,000.........today it's worth £650,000 plus' hoping for year-on-year, decade-on-decade asset values to fall back down.

Instead of just seeing it from as the oldie millionaire/billionaire side, £650,000 all happy owner side..

Gov doing the spending borrowing on borrowing, easing and zirping, holds up asset values.

Why not take your world that bit further. Gov can print us up and gift us non-owners £650,000 plus value houses. In fact, everyone just give up work and borrow us each £40,000+ a year.

I will have to say I own a average house in Britain worth just under £200,000. I don't know what a £650,000 house looks like and wouldn't expect to be able to buy one now and certainly not as a first time buyer. Aren't there any average priced houses around where you live?

[Venger]

I will have to say I own a average house in Britain worth just under £200,000. I don't know what a £650,000 house looks like and wouldn't expect to be able to buy one now and certainly not as a first time buyer. Aren't there any average priced houses around where you live?

The £650K+ house was an example from that newspaper comment of an oldie, who bought it for £72,000 and expecting loads more HPI.

There are some 2 bed flats. Tiny terraces in some parts. Of course you can go to the dodgier areas and get a house. It's the argument I'm reading over at 118, comments on newspaper articles, other forums.. that there are affordable houses in duff areas.

I don't want my family to compromise. They know what they want and it's overvalued.

They're not going to pay £200,000 for a duffo average house in a duffo average area when they're senior professionals... whilst big older smilers sat in £650K houses and who've put lump sum into yield chasing BTL last few years, project even more HPI on massively overvalued houses, that in their view, are prone to massive HPC.

That is, provided we don't get Breakdown 2.0 which includes those who call for Gov to borrow/spend even more money, to replace younger-savers who are refusing to spend in the economy, exactly because they are saving for a house.

[gf3]

http://www.rightmove.co.uk/property-for-sale/property-51144364.html?premiumA=true

Just had a quick look at a £650,000 house in my area.

Is this the sort of place you are thinking of buying?

[frederico]

This is all so obviously ridiculous, its the economics of a 5 year old.

None productive assets are not an investment, they are speculation. If they increase the cost base of the country they reduce productivity and are a liability.

What makes it worse is that much riskier proper investments lose the competition for cheap money.

There is also the cost of servicing the debt against zero return in a stagnant market, which will always eventually be the end result.

[Venger]

Not thinking about myself gf3, tbh.

Don't get too transfixed on the £650K+. It was just to focus a point.

Family members I am thinking of want a humbler semi/small detached house, but that's still £300K-£400K in this market.

They will not settle for paying £200K for average house in duffo average area (South Manchester) - just because they could buy such a house, when they want and expect better value into a HPC. Providing it's not averted by another round of borrow and spend, adding more debt to Gov tab again.

Also in HPC maybe opportunities to buy such houses will occur (your example), if we get fewer upsizers, BTL tax biting, HPC cascade.

That one (Offers In Excess of £650K). Nothing ever sold that high in 1/2m of postcode, going fro RM sold prices. There will be some HPCers positioning for such homes, and why shouldn't they. Should they settle for £200K average house. The forum is not just renter-saver first time-buyers, but also would-be upsizers.

http://www.rightmove.co.uk/house-prices/detail.html?country=england&locationIdentifier=POSTCODE^341565&searchLocation=GL4+0UH&radius=0.5&referrer=listChangeCriteria

[DabHand]

Yes I know I am repeating myself But this is the first time I have ever seem a main stream economist back me up. Other than that it has been my own musings. It's to late now but I hope to look at 47 page pdf linked in the article.

I dunno, l asked you to clarify this in the Corbynomics thread and you ended up repeating the same words with no further explanation. Actually l was more interested to see your response to Jacks Creation post in that thread which was worth something more than adding "(forgeting QE here)"

The government stepping in to maintain the flow (that's what you are talking about here to effectively stop the bank-pop) is itself only a temporary measure. Even if the gov never pays off its increased debt but simply services it, the exponential nature of debt plus the lack of activity it's trying to cover will mean it simply spends more and more of any income it has paying the interest to the entities it was initially trying to save. As Jack tried to point out, where is a lot of this money going when you look more closely?

It's not sustainable and l think you know that. Unless we do have some sort of reset event the ultimate destination for the path we are on has to be debt free money issued (spent!) by the government. The vagaries of what that entails is another matter.

[canbuywontbuy]

If debt is good, then the UK is going through an incredible boom over recent years. Heading to a £2Tn debt pile by the next election, and paying back circa £1.2Bn a WEEK in interest alone on the current debt pile - we've never had it so good.

[kjw]

I would rather tax the rich than borrow from them...

[gf3]

I dunno, l asked you to clarify this in the Corbynomics thread and you ended up repeating the same words with no further explanation. Actually l was more interested to see your response to Jacks Creation post in that thread which was worth something more than adding "(forgeting QE here)"

The government stepping in to maintain the flow (that's what you are talking about here to effectively stop the bank-pop) is itself only a temporary measure. Even if the gov never pays off its increased debt but simply services it, the exponential nature of debt plus the lack of activity it's trying to cover will mean it simply spends more and more of any income it has paying the interest to the entities it was initially trying to save. As Jack tried to point out, where is a lot of this money going when you look more closely?

It's not sustainable and l think you know that. Unless we do have some sort of reset event the ultimate destination for the path we are on has to be debt free money issued (spent!) by the government. The vagaries of what that entails is another matter.

Well you say it is unsustainable but Krugman says it has been going on for 180 years in the US and three centuries in the UK.

The first part of this is Steve Keen explanation of neo classical think the economy works

So I am saying they were right with government debt but wrong with private debt. Think of your saving in a bank as a loan to the Government. Your money in the bank is not just sat there safely in the bank it is paying for the NHS etc. After all the money in the bank is not your money and the bank is free to buy tier one capital with it ( government bonds)

But I have probably got that completely wrong. There will be some one along in a minute to correct me.

[tinker]

If debt is good, then the UK is going through an incredible boom over recent years. Heading to a £2Tn debt pile by the next election, and paying back circa £1.2Bn a WEEK in interest alone on the current debt pile - we've never had it so good.

Precisely - and who is getting that interest?

Krugman was a big supporter/encourager of Gordon Brown - that worked out well.

In the late 90s government spending was a bit over £300b, it's over twice that now. Housing was generally within in reach back then too; the 'ladder' steps closer. A more fluid market.

[gf3]

Precisely - and who is getting that interest?

I would say the government because they will borrow it back off the saver.

So should we just keep worrying for the rest of our lives that the sky is going to fall on our heads. Or should we be looking for reasons why it hasn't.

[interestrateripoff]

I would say the government because they will borrow it back off the saver.

So should we just keep worrying for the rest of our lives that the sky is going to fall on our heads. Or should we be looking for reasons why it hasn't.

I think one reason is that for the most part the ponzi is self-reinforcing everyone is in it, with pensions etc.... You can't escape it but mathematically at some point the system will fail. Japan is currently the perfect example when the system fails and private debt reaches it's limits. What happens when other advanced economies hit that point is anyones guess. Japan has treaded water because is had the rest of the world to trade with, now everyone else needs to trade their way out of the mess. The last time the world was in such a mess it ended in war.

[gf3]

I think one reason is that for the most part the ponzi is self-reinforcing everyone is in it, with pensions etc.... You can't escape it but mathematically at some point the system will fail. Japan is currently the perfect example when the system fails and private debt reaches it's limits. What happens when other advanced economies hit that point is anyones guess. Japan has treaded water because is had the rest of the world to trade with, now everyone else needs to trade their way out of the mess. The last time the world was in such a mess it ended in war.

Well yes Japan.But haven't people said for a fail country it's doing quite well? Isn't their standard of living better than ours.