Wednesday, October 19, 2011

Debt Serfdom and the Origin of the Crisis


Trapped assets that generate no income streams in the present are not capital; the value of such non-productive assets is illusory. Strip away these trapped assets and the reality is revealed: most American households toil to service their debts.

The typical American household is insolvent: its debts exceed its assets.

There is nothing fancy about calculating insolvency: if debts exceed assets, the enterprise is insolvent. By this measure, most American households are insolvent, if their real assets are marked to actual market.

For example:
Auto loan balance: $9,000 
Actual market value of auto: $6,000
Credit card balance: $6,000 
Street value of stuff purchased with credit card: $300
home mortgage: $250,000 
Auction value of house: $200,000
Student loans: $60,000 
Market value of education: Not applicable, as it cannot auctioned off or securitized
And so on.

The typical American household is thus in service to its debt, not to its assets, and to the holders of that debt. This is debt-serfdom: serfdom in service to the owners of debt, debt that may well always exceed the value of the household's assets. This is debt-serfdom for life.
Read the rest at of two minds, Debt-Serfdom Is Now the New American Norm by Charles Hugh Smith

Smith continues in The Origins of American Debt-Serfdom where he traces the beginning and course of the long financial cycle culminating in Ponzi finance that was described by Hyman Minsky.

14 comments:

Anonymous said...

Smackdown MMT crowd. This is a good piece.....finally.
http://market-ticker.org/akcs-www?post=196248

Anonymous said...

the primary problem with the "MMT" folks and their derivative offshoots: They ignore the fundamental relationships that underlie ALL economic systems and cannot be changed.

The first (and most-important) of these is MV = PQ

Simply put, that's "Money" (inclusive of credit) * "Velocity" (number of times each unit turns) = "Price" (of each item in the economy) * "Quantity" (number of items, goods and services)

You can see that this must be a factually-correct equation. That is, every good or service that is sold (P * Q) must be transacted using either a unit of money or credit, and that unit will change hands some number of times during a period of time. Therefore, MV = PQ.

So if we simply "emit" more credit (by pushing buttons on a computer) then "M" (money and/or credit) increases. Assuming "V" (number of turns) holds constant then either "P" or "Q" must increase, as the equation must, by definition, balance.

The issue of course with the so-called "demand driven" folks is that they argue that by increasing "M" through government deficit spending you drive increases in "Q". But this is not a given; "P" may increase instead in which case you are stealing from everyone who has stored some of "M" and redistributing it to the government. This is functionally identical to increasing taxes since all I care about is the purchasing power of what I have and earn, not the number of units I possess!

http://market-ticker.org/akcs-www?post=196248

Matt Franko said...

Anon,

How many paragraphs did it take until that fat slob used the word "Weimar"? LOL!

That is a metric I use to gauge how much of a moron any Monetarist is...

Ralph Musgrave said...

Anon, You’re teaching grandmothers to suck eggs. 99.9% of those who have got to grips with MMT will be well aware that increasing M can result in increasing P (i.e. that increasing the amount of money can result in increased inflation). I’d guess 90% of the rest of the population have worked that one out as well.

Matt Franko said...

Anon,

I checked.

KD is an 18. Not too bad.

Although he used a lot of 1 sentence paragraphs...

Oliver said...

while the mechanics are well presented, the main theme is 'wew've been living beyond our means'. all morals and no fun! the real question is, could there have been a parallel world in which the real spoils as they have come about (mostly as houses) had been created in an analogous manner but without producing a credit bubble and subsequent debt bonanza (and also without '70s style inflation)?

The Red Capitalist said...

"I’d guess 90% of the rest of the population have worked that one out as well."

Ralph, I wouldn't be too sure of that - given the vast amount of people who believe in the hyperinflation myth, I would venture that the number is inverse e.g. 90% have not worked it out.

Ignorance is one of the primary reasons why we are in this mess right now (and why MMT is relatively unknown).

Anonymous said...

The real world doesn't play in your make believe world.

It may have taken many years to pop the scheme but scheme always fail.

Someone always gets a benefit at others expense when using a scheme.

Responders here rarely re-evaluate thoughts....... This is a MMT clone pool isn't it?

Anonymous said...

FRANKO.... you use a lot of 1 sentence paragraphs too.....

nice point in the debate though don't you think

Adam said...

MV=PQ does not mean that if you add M only P increases. That is the bases of that "critique". And it ignore the other two variables. It basically saying that M=P but that is not ever what that relationship says ever.

MMTers never ever say that M=Q either. And they never ever say that V is constant. That is the only way that this criticism can be correct. But it never can be correct because of the last assumption of them all. MV=PQ is a static relationship. But we live in a dynamic world. Things always change.

Matt Franko said...

Anon,

Yeah your boy KD there is a real high class act:

http://market-ticker.org/akcs-www?singlepost=2228079

Here is a post from Bill Mitchell that explains the limitations of the MV = PQ equation wrt models.

http://bilbo.economicoutlook.net/blog/?p=11302

Excerpt: "One of the contributions of Keynes was to show the Quantity Theory of Money could not be correct. He observed price level changes independent of monetary supply movements (and vice versa) which changed his own perception of the way the monetary system operated."

Anon, look at price levels throughout the 2008/2009 time period vs. "money supply". Money supply went up by some measures 13,000 % and prices collapsed.... how do you account for that empirical result via the MV = PQ equation?

Matt Franko said...

Anon, Even the Fed is giving up on the multiplier:

http://www.federalreserve.gov/pubs/feds/2010/201041/201041pap.pdf

Excerpt: "The huge quantity of bank reserves that were created has been seen largely as a byproduct of the purchases that would be unlikely to have a significant independent
effect on financial markets and the economy. This view is not consistent with the simple models in many textbooks or the monetarist tradition in monetary policy, which
emphasizes a line of causation from reserves to the money supply to economic activity and inflation. . . . [W]e will need to watch and study this channel carefully.
Donald L. Kohn, Vice Chairman of the Federal Reserve Board, March 24, 2010"

Tom Hickey said...

Don't feed the trolls.

Ralph Musgrave said...

The fractional reserve banking system contributes to high debt levels.

In a “monetary base only” monetary system, one person can only borrow if someone else forgoes consumption and lends out that forgone consumption. And the lender is liable to charge a significant rate of interest for doing this.

Enter fractional reserve, and commercial banks can create and lend out money at essentially no cost (administration costs apart). No need to forgo consumption. The net result is that commercial bank money drives central bank money to near extinction, and cuts interest rates to an artificially low level, which in turn means more borrowing and lending than is optimum.

I deserve a Nobel Prize for that idea :-)