Wednesday, Dec 02, 2009

The case for government deficits and debt jubilees

Counterpunch: The path to full employment

QE won't work. That's not how money and credit work. Loans create deposits and not vice-versa. Bank lending is not constrained by lack of reserves. As for expansion of central-bank balance sheets, the debate as to whether this is inflationary (bad) or credit-creating (good) is not what it's about. In the US the Fed has simply brought the wholesale money market onto its balance sheet in order to restore a destructive status quo ante. Budget deficits are the way forward. The private sector is deleveraging (and private debt is much bigger than public debt) and this cannot happen without gov't deficit spending) and/or (unlikely) a trade surplus. (And budget surpluses are not good.) Debts that can't be paid won't be, and bailing out debtors is much better for the economy than bailing out banks.

Posted by icarus @ 07:42 PM (899 views)
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3 Comments

1. mark wadsworth said...

"Loans create deposits and not vice-versa."

That is probably the cleverest one-line summary of the whole banking system in ages. Well done.

Thursday, December 3, 2009 10:16AM Report Comment
 

2. icarus said...

mark - unfortunately it's not my line. It comes from Steve Keen and Marshall Auerbach, whose views, including the idea that what constrains lending and credit is the lack of creditworthy customers, not lack of reserves, are summarised in the article. If you have time SK's "Debt and the economy - how do we pay for all this" on youtube is worth a watch. Both have strong theoretical and other objections to QE.

Thursday, December 3, 2009 11:24AM Report Comment
 

3. mark wadsworth said...

Icarus, I hadn't heard it before, but I was stumbling towards it during a very long comment thread over at my 'blog.

Thursday, December 3, 2009 11:28AM Report Comment
 

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