This chart says it all!
The per capita debt load exploded in the 1940s, yet it didn't bankrupt us. On the contrary, it made us rich because there is no such thing as a "per capita debt burden." That's a made up, fictitious construct. The debt of the government is an ASSET of the non-government, so what this chart should really be called is the per-capita asset windfall. That's what made us rich after it occurred.
A debt is only an asset if you are the creditor Mike. If you are a debtor then it is a liability. I don't know why you have such difficulty with this straightforward concept.
ReplyDeleteDebt to finance capital equipment investment is a good thing. Debt to finance blind consumption spending at the cost of diverting these scarce savings away from wealth generators is very harmful. A market driven interest rate would coordinate production across time efficiently and insure that scarce savings would go to wealth generators first. Government short- ciruits this process by subsidizing loans for present consumption in conjuction with the FED pretending that it knows what the correct interest rate should be.
The "debt" of the government does not create any liability at all, but it is a free asset of the non-government.
ReplyDeleteAnd my thoughts on this line of yours:
"...Debt to finance blind consumption spending at the cost of diverting these scarce savings away from wealth generators..."
It's just crazy talk. What are, wealth "generators???"
What is "blind" consumption?
If I want to buy a TV or a new suit, is that blind consumption? And if it is, by your definition, who the hell are you to tell me what I can or cannot buy???
I agree with Mike that the “debt of government” is not really a liabililty. All you’ll ever get from govt for Treasuries is monetary base (which like Treasuries appear on the liability side of the Fed’s balance sheet). And as Willem Buiter (former member of the Bank of England Monetary Policy Committee) put it in reference to monetary base, “These monetary base ‘liabilities’ of the central bank are not in any meaningful sense liabilities, because they are irredeemable…” See:
ReplyDeletehttp://blogs.ft.com/maverecon/2008/03/wanted-tough-love-from-the-central-bank/
Having said that, I think government borrowing is largely a farce. In a recession, governments should print money and spend it rather than borrow money and spend it. And given excess demand and looming inflation, governments should do the reverse: rein in money via tax, and “unprint” the money or extinguish it. That’s what Modern Monetary Theory advocates. Milton Friedman also advocated this policy. See
http://nb.vse.cz/~BARTONP/mae911/friedman.pdf
WW state seems to miss the point that it's only a liability in the sense that at some point, someone at the Fed has to enter a payment on a computer. It's fiat currency!!! The only liability is inflation or price of dollar. Hardly something they would have been worried about.
ReplyDeleteDebt has no emotional component so attempting to make a distinction between good and bad consumption is ridiculous. Unless you think that the government should impose how the non-governmental sector spends its money. Then it's communism.
Musgrave, its my understanding that governments borrow money to set interest rates and thus the 'borrowing' increases after the money is out the door (to reign in excess bank reserves). So, in effect governments do do as you suggest as well as offer interest bearing bonds to give safe haven and predictable income to investors and foreign banks.
ReplyDeleteMike, I am not telling you what you can or cannot buy. I'm not a leftist who treats the individual like so much cattle to be directed by some pretended expert in government. I am saying that debt-driven consumption spending upon the part of the overleveraged consumer and government is diverting scarce savings away from those who would borrow to invest in expansion and the purchase of capital equipment. In an environment where the interest rate was allowed to find its natural level with an absence of government-subsidized loans then scarce savings would naturally flow to businesses first. A market interest rate would be a lot higher than the current rates and would encourage savings. It is these savings where real credit for businesses comes from.
ReplyDeleteWealth generators are capitalists who combine inputs (labor and scarce resources)that meet consumer preferences. The market has a profit-loss test that serves as a feedback mechanism. It is the losses that are even more important than the profits. If a market actor uses resources inefficiently to meet consumer preferences then he is punished with losses which discourages the activity that he was engaged in. Those rewarded with profits met consumer preferences and can continue acitivity that is meeting consumer preferences. The reason that government's are such inefficient users of scarce resources is that they have no mechanism to sort, i.e profit/loss test.
The reason that you guys have such a difficult time understanding me is that you haven't read the same intellectuals that I have. I know where you guys are coming from because I have read people like Krugman, Galbraith, Keynes, among others. I found the classical and Austrian explanations far more convincing. They have also been remarkably accurate in their long-term predictions. Keynesians--not so much.
Musgrave, with all due respect, how has this Keynesian remedy worked for Japan since the 90's? They have been mired in a depression for nearly two decades. You are right about Friedman/Schwartz advocating an expansion of the monetary base. He was free market in every area except money--the one are where we need a free market the most. Are you aware that he also advocted that the Federal Reserve be ended?
ReplyDeleteIf you find the time, look up the depression of 1920-'21. The GDP and stock market dropped by more than they did in the asset bubble crash of 1929. The depression of 1920-'21 was over within a year though. They simply did what they had always done after a bubble spawned by easy credit came crashing down: they let the bad debt be liquidated; businesses were allowed to collapse; employers layed people off; and the economy was allowed to resturcture after the phony credit boom. Observe what happened in 1929 when the government resorted to interventionist schemes. All we got was a prolonged depression because fallacious economic ideas were practiced.
Mike, why did debt per capita fall during the 1950s?
ReplyDeleteWhy didn't the government just drive it to infinity (especially since "That's what made us rich after it occurred")?
WW: debt driven consumption...So, let's all get rid of our cars, houses and other assets. They we can live in caves and walk to work, naked, of course.
ReplyDeleteCapitalists create wealth for themselves. Sweden is a Socialist country by any definition. It has a very high standard of living (wealth). Who's to say a capitalists motives are in tune with the needs of the nation as a whole? We certainly see a fair amount of disconnect in this country right now, especially among finance capitalists/speculators. Their motives are not in the national interest, but in their own interests. They are not wealth creators.
Welfarewarfare - You are being an unreasonable ideologue.
ReplyDeleteHow can only capitalists be the only wealth generators when they need labor and resources to do what they do.
In truth management, capital, labor and resources all are needed for wealth generation.
The management does not need to be capitalists either. They could be government bureaucrats at NASA or a genius mathematician like the late Benoit Mandelbrot.
Stuff what capitalists make is not the only thing that increases wealth. Productivity and knowledge is what generates wealth.
About the differences between the 1921 recession and the great Depression you need to read some debt-deflationist theory of Minsky and Irving Fisher.
Welfarewarfare state:
ReplyDelete"The reason that government's are such inefficient users of scarce resources is that they have no mechanism to sort, i.e profit/loss test."
Like it or not, sovereign government - the only issuer of fiat money with floating exchange rates - is meant to play HUGE role in the economy - even Warren Buffett admits it.
Did you find some time for my link?
http://heteconomist.com/?p=658
Oukid:
ReplyDeleteDebt per capita fell because incomes rose and there was a population boom.
The government can drive it to infinity, but anything that pushes beyond full employment is bad.
The last time we were at full employment as a nation was during war time. We haven't approached it anytime since.
MIke, I and the rest of humanity have benefitted far more from the activities of Bill Gate's company more than he ever will. Europe is moving away from socialism in some areas while we are moving towards it.
ReplyDeleteI am not saying that people can't have cars and houses for sryuing out loud. If consumption spending on the part of individuals and government were a nirvana then we shouldn't be experiencing any problems in the U.S. given the last 20 years. Our so-called economy is consumption spending. Where's the production though? Credit will still flow for cars and houses but they will flow to wealth generators first. We've got two to three cars per household and enough houses for the next 20 freakin' years. What we need are higher interset rates to encourage savings. It is out of these scarce savings that real credit for welath generators is derived.Consumption, i.e. the act of using up, is a product of wealth creation and not the cause. You are putting the cart before the horse. It might be interesting to note that the Chinese buy their cars out of their own savings for the most part.
It is my understanding that some of Sweden's economy is done in barter in an attempt to go around the tax/regulatory burdens. I correspond with a Swedish resident regularly. Perhaps this is why they began inching away from their socialist model recently. Reforms have been slowly instituted there over the last 4 years. It's also interesting to note that is looks like a housing bubble may have begun to form there.
Cheers!
WW, consumption is me having enough dollars in my account to buy stuff.
ReplyDeleteWhere's the production though? Credit will still flow for cars and houses but they will flow to wealth generators first. Since the rest of the world wants to send us stuff, we don't have to produce that much. Since credit is fairly infinite and demand driven, it can flow anywhere the private sector wants its to go.
Savings to not fund credit. Banks create loans out of thin air. Later they borrow reserves to meet reserve requirements. You are so confused. Cheers!
"Debt per capita fell because incomes rose and there was a population boom."
ReplyDeleteThe population boom made the denominator bigger so the ratio of debt to citizens declined. Did the fact(?) that incomes rose mean that more tax was collected and applied to the national debt thus reducing it further?
"The government can drive it to infinity, but anything that pushes beyond full employment is bad.
The last time we were at full employment as a nation was during war time. We haven't approached it anytime since."
Are you saying that government borrowing (increasing the debt per capita) increases employment?
Durng which war was the last time the US was at full employment?
Why didn't the debt explosion in the 1940s bankrupt us?
ReplyDeleteSimple: All the factories in the world but ours had been destroyed in the war. America was the factory for the world. This, in part, contributed in creating an economic boom which had never been seen before and will never be seen again. America produced stuff, lots of it, and got rich in the process.
(The debt was mostly incurred to build factories and to destroy the other guys'. i.e. the ultimate formula for successful capital equipment investment)
Unfortunately, there are some now who believe we can consume without producing; we just need easy credit and when even that fails, we just need to print (transfer electrons, whatever you guys call it) to sustain our consumption.
Severus, so long as the rest of the world is willing to take our money in exchange for products and services we don't have to produce in order to consume.
ReplyDeleteThis comment has been removed by the author.
ReplyDelete"Are you saying that government borrowing (increasing the debt per capita) increases employment?"
ReplyDeleteNo, but government spending does. The government doesn't have to borrow (or tax) to spend.
"During which war was the last time the US was at full employment?"
The Big One, sonny, World War II. In 1944, the last full year of the war, unemployment was 1.2%, inflation was 3.5% and the GDP grew
by 28%.
Of course, drafting into uniform every healthy young male had a lot to do with the tight labor market and it was only with rationing and price controls we could have that kind of GDP growth with little inflation.
Call me a libertarian but I suppose I'd be willing to sacrifice a bit of economic growth if it meant we could do without the need to ration food, clothing and gasoline to control inflation. :o)