I guess they haven't figure out that Steve is Keynesian yet.Following his somewhat epic blog debate with Paul Krugman, Steve Keen appears on Capital Account with Lauren Lyster to debunk more Keynesian propaganda and the kleptocratic status quo 'debt doesn't matter' arguments.
The post is of interest to see what "the other side" is making of it.
Anyway, it good that Steve and Monetary Circuit Theory (MCT) is showing up there and at Mish's, especially since MMT and MCT are getting more closely in agreement.
Read it at Zero Hedge (with RT video of Keen)
Steve Keen On Why Debt Matters "All The Time" And The Need For "Quantitative Easing For The Public"Submitted by Tyler Durden
UPDATE: Mish predictably hates the debt jubilee.
Steve Keen Goes Off the Deep End With a "Debt Jubilee" (Free Money to Consumers) Proposal
But the good news is that Mish is on board with important monetary analysis that MCT and MMT share.
I am in general agreement with Keen on numerous things.
For example, I agree 100% with Keen that lending comes first and reserves later. I also agree with Keen that the notion of excess reserves is fatally flawed, and so is the notion of money multipliers.
I scoff, along with Keen, with the idea that excess reserves are going to come pouring back into the economy causing hyperinflation or massive inflation.
For a discussion, please see my December 21, 2009 article Fictional Reserve Lending And The Myth Of Excess Reserves in which I rebut the idea espoused by Robert Murphy that the Inflation Genie is About to Get Out of the Bottle.
The idea was silly then and it is still silly now. I believe events have proven as such.
However, start giving money away as Keen proposes and I would change my tune about inflation in a hurry. Note that QE is essentially a loan but Keen's proposal is an outright gift....
Bear in mind that I am a big admirer of Steve Keen. Steve has taught me a lot. I like his debt model. I just do not like his solution. It cannot and will not work, for reasons that quite frankly should be obvious.Mish thinks a debt jubilee would be inflationary and says he doesn't mind some deflation.
Mind you there is absolutely nothing wrong with price deflation.The problem with deflation is that once prices start falling then self-interest dictates waiting to buy until prices are lower, and lower.... Which increases saving. Which if not offset results in economic contraction due to lagging demand. The old paradox of thrift. What's good for an individual is bad for the economy as a whole and thus ends up being bad for all the individuals that make it up.
Who out there does not want the price of oil to drop or the price of food to drop? Who does not want more for their money at the department store? Who does not want the price of a college education to drop?
"I guess they haven't figure out that Steve is Keynesian yet."
ReplyDeleteMorons the lot of them. Clueless.
The problem with a debt jubilee is the "moral hazard" - it rewards bad behavior. Yes debt needs to be deleveraged. However the way to do it is to get spending power to people who will earn the money, and spend or deleverage - if they deleverage, the government has to prime the pumps a bit more.
ReplyDeleteThis can be best accomplished by the MMT solutions - eliminate FICA - increase Social Security payments. Institute a job guarantee like program. Increase grants that go towards research, development and in building infrastructure that lasts.
An example of very successful programs are - the internet, the space program, NIH, DARPA - Infrastructure wise, the interstate highway system. A project similar to the Highway system, would be maglev in straight evacuated tunnels across the continent - a people mover that will use almost no energy once the system is in place - "New York to Beijing in two hours without leaving the ground?"
@ Clonal
ReplyDeleteThe IMF is now saying principal reduction is needed, too. Seems that finance is frozen until the debt clears. Default is not a viable solution in that it is too deflationary and creates social unrest. The scale of deficit spending to provide the offset to dig out required globally is just too great too accept politically. Seems like the only way to get out this mess quickly, before the whole things implodes, is to write off hugs chunks of debt based on imprudent and even predatory extension of credit. The upshot of this is that govts would be expected to step in and recapitalize the banks, which is easier to do politically than through looser fiscal policy. Otherwise, many countries including the US face Japanification and Europe may implode.
Mish's concept of deflation seems to recognize only deflation in the prices of commodities, but not in the price of labor. That is, he's imagining a world in which the nominal price of commodities declines, but the nominal wages stay fixed, so that we all end up with more purchasing power. That's not what economists are usually talking about when they reference deflation.
ReplyDeleteSince contracts are usually fixed in nominal terms, then if wages and commodities prices fall, the commodity purchasing power of one's labor is unaffected - but one's debts all become more burdensome.
"The problem with a debt jubilee is the "moral hazard" - it rewards bad behavior."
ReplyDeleteI don't see that at all.
The 'bad behaviour' was banks over-lending and having lax credit worthiness. They were trusted to trim demand when thing got hot by saying 'no' and they didn't do that.
What you do is put in place regulations that stop banks lending so much at the same time as you 'jubilee' the existing debt and reset the system.
That then gets the private debt to GDP ratio down to something sensible. And you task the regulators with keeping it in a rational range.
The argument between debt jubilee and supply of the same money via tax cuts, etc is one of distribution and speed of response.
Is it better to delever fast or slow.
Deflation is a theft from creditors to debtors, just like they say inflation is a theft to savers.
ReplyDeleteYes I would like deflation too... in a society where 90% of the people does not have liabilities to other institutions (banks).
Leaving moral argument aside, practically speaking, we can't have severe deflation w/o breaking the economy. The 'liquidationist' solution just does not work, it works social institutions and cohesion which you have to rebuild from zero after have a severe depression. That it does not work is even agreed by late 'austrians' (read "Lord Keynes" blog for more info).
Triggering a deflation and getting the whole society go bankrupt won't fix nothing, it will destroy more capital. Sure after sinking the economy you get spectacular growth eventually (after a decade or two), just to get back to previous levels of activity.
So well, call it debt jubilee or design other ways, but basically the only realistic solution is to bail out the economy and the population. Otherwise unexpected consequences will happen.
"The problem with deflation is that once prices start falling then self-interest dictates waiting to buy until prices are lower, and lower"
ReplyDeleteIf we define inflation as a continuous rise in the price level, then shouldn't deflation be a continuous fall in the price level?
If so, a one-off fall in the price of oil or a drop in the price of a college education does not constitute deflation - it's just a price change.
A continuous fall in the price level (deflation) may lead people to defer spending till prices are lower, and thereby reduce business profits, increase unemployment or push down wages, but a fall in this or that price is not going to have that effect. Depending on the price in question, a fall could be a very good thing.
Is the general sustained fall in the price of consumer electronics deflation? Is that a good or bad thing? (to what extent does it depend on offshoring prodcuction to cheap foreign workers)
You could give people a tax credit or retroactive tax credit for any losses they took on their HOMES, ie if it was a primary residence.
ReplyDeleteIf they got wiped out by being led to pay too much and either now are upside down or previously had to take a huge loss... let them have a $4$ tax credit.
If concerned about the flow rate, then let them have it over 3 years.
Folks still in the homes can step down the basis via this tax credit and if they ever sell in the future at a gain then this new basis would be used to compute the capital gain.
Of course the deficit might increase so you wont see this (or any other like) proposal from an Obama administration.
rsp
@ y
ReplyDeleteYes, a one off drop in goods prices is not deflation. But a drop in goods prices affects profit margin and earnings, so ti will be passed on to worker income at least partially, either through lower wages or layoffs.
Most importantly, asset prices fall in deflations, too, and nominal debt remains the same, thus putting more pressure on housing, since more people will be underwater and more will default. That sparks a deflationary spiral.
It is very unlikely that falling price level would be restricted to goods prices. It would spread likely to assets and wages, and that would result in liquidationism if policy allowed it to progress.
When the IMF is recommending principal reduction, you know matters are worrisome and quickly resetting course in required to avert the cliff.
Moreover, I think it would be very difficult globally to do this in a timely fashion with fiscal injection. The amount required runs into the trillions. Christina Romer was figuring the stimulus package required was on the order of 1.5. I suspect that was conservative and it was more like 2T. Looking at the results and the adding up the cost of lost opportunity, 2T would have been cheap.
It really pays economically as well as socially to get ahead of the curve in times of crisis. And if leaders don't there is a political cost as well.
Matt, this is a ALL about who is going to take the hit. The banks want to shove it off themselves, obviously, and so far they have the leverage to do so.
ReplyDeleteThe banks have already received a massive debt jubilee - they were bailed out. I'm not insensitive to the moral hazard issue. But why the moral hazard concerns about bad debts by households but not the bad debts of banks?
ReplyDeleteMish explains how fractional reserve lending is the cause of all evil. He insists that everyone must read Rothbard and Mises and must learn and understand Austrian Economics (@ 7:00):
ReplyDeletehttp://www.lewrockwell.com/lewrockwell-show/2008/12/10/81-the-answer-to-the-economic-crisis/
The fact that he believes reserves follow loans should demonstrate that any position on loans vs reserves is not an Austrian position per se, but a pure question of fact.
Bob R: "The fact that he believes reserves follow loans should demonstrate that any position on loans vs reserves is not an Austrian position per se, but a pure question of fact."
ReplyDeleteAnd where do you think Mish got it? I and other MMT'ers pounded it in the comments until he finally got it. He still doesn't get sectoral balances and hasn't read Godley. He is into Steve Keen though, and that's progress, since MCT and MMT are on the same page.