“For Wonks Only” Speed Read
1. Cross your fingers, credit growth is a necessary but not sufficient condition for economic growth. Economic growth depends on the productive use of credit growth, something that is not occurring.PIMCO INVESTMENT OUTLOOK — September 2014
For Wonks Only
William H. Gross | Managing Director
Appear to be a hyper-endogonist take on money, with bank loans as the only source for more financial assets.
ReplyDeleteGoss goes right off the rails in his 2nd sentence. He says “Without additional credit, interest on previously issued liabilities cannot be paid…”
ReplyDeleteIf I borrow money for some viable project, the project funds the interest. No need for me to borrow STILL MORE in order to fund interest payments.
There are a fair number of monetary loons who subscribe to that “never increasing debt” nonsense. Paul Grignon has produced several videos pushing the idea.
"If I borrow money for some viable project, the project funds the interest. "
ReplyDeleteWhich is of course why interest is expressed in $/mth and loans are expressed in $.
Confusing the two is like confusing miles per hour with miles.
Interest is the wages of bankers and profit is the wages of capitalists. They are paid the same as any other wages - from the flow of turnover.
You note all these things are expressed in the same unit - $/mth.
Ralph he may be looking at this at the systemic level... vice the project level...
ReplyDeleteAll projects look "viable" when the loan is granted or the bank would never make the loan... (dont fall for Bill Black's "control fraud" ideas...that is simply a 'guilt by association' form of tyranny...)
At the system level, if incomes to the liability cohort are not increasing at a rate necessary to service the increase in system liabilities (loan payments) then defaults/reworks have to occur...
Ponzi finance I suppose could work, as long as the people running it know what they are doing (which they dont so the system crashes periodically)...
What Gross misses is here: "It is this expansion of private and public market credit..."
Its not the "public credit" as measured by any increases in net UST issuance that increases incomes (USTs are savings...) its the increase in government spending that increases incomes which can then be used to establish new system liabilities...
"govt spends FIRST, yada yada..."
rsp,
Neil, Yes – clearly the loan is a stock and interest is a flow ($/month). But that flow from borrower to bank flows straight out again: to bank shareholders, bond-holders, bank staff, firms making computers for banks, etc etc etc. That’s the flaw in the “loon” claim that we face an every rising amount of debt because of the need to pay interest.
ReplyDeleteMatt, I agree it’s important to look at the micro and macro or “system” level. But I’ve done that – er - I think. Re your point about “if incomes to the liability cohort are not increasing…”, then in that PARTICUAR CASE, debts will continually mount. But you are concentrating there on INCOMPETENT debtors.
The AVERAGE debtor over the economy as a whole (e.g. the average mortgagor) earns enough to pay interest on their debt without too much trouble. That money flows into banks, and then flows straight out again. So there’s no need for continually rising debts.
Ralph I was assuming losses in flows from taxes and savings... so the system loses these flows and what is left (after taxes and savings come out) is then deficient to support the liabilities...
ReplyDeleteSo then either it looks like we have to depend on a well regulated 'Ponzi finance' like Gross more or less identifies here or govt has to increase spending that ends up with the liability cohort... to pay the taxes and fund savings... and furthermore to avoid the defaults/reworks...
I agree that if we didnt have all the taxes we have and there was no savings desires that the system should more or less "self-sustain" like you outline here... ie no new debt would be needed...
rsp,
Bill needs to run his stuff past Paul McCulley before publishing it. Bill has a bully pulpit and could be part of the solution instead of part of the problem.
ReplyDeleteThe MMT message can be boiled down to the idea that if there is net saving desire in an economic system, then that system cannot fully utilize productive resources without that net saving desire being offset exogenously, since in a closed endogenous money system net saving is not possible by accounting identity, all saving being offset by borrowing. If one cohort tries to net save, then another cohort must net borrow and this is not sustainable indefinitely.
In the three sector model, if the domestic private sector, often conflated with "the economy," desires to net save then either another sector — government or external — must offset that net saving, or else real resources will become idle, e.g., unemployment will increase and aggregate income will fall. In a modern monetary production economy, this means that some borrowers will not be able to meet their obligations and defaults will increase, leading to a bust.
In a closed system of endogenous money there is enough liquidity to maintain cash flow that supports circular flow wrt only if (necessary condition) all income is spent on consumption or investment since saving results in demand leakage, so all goods capable of being produced will not have a market and this will result in idling some resources including labor.
In a system of endogenous money, this means that unless income from all sources is spent in entirety, the borrowers whose borrowing credits deposit accounts and creates loan obligations will not be able meet payment schedules, and debt deflation will set in.
Malinvestment, in which capital allocated to production goes unwanted, is also an issue but not the issue that some make out to be.
The actual issue is debt that cannot be serviced, i.e, cash flow (liquidity) problems that ultimately result in insolvency.
This regularly happened in ancient times, thus the need for a jubilee came to be recognized.
But in open modern production economies with both exogenous currency issuance by government and endogenous bank money, saving desire can be offset sectorally so that circular flow is not disrupted and all available resources are continually put to use.
However, if the underlying principles are not sufficiently understood and adhered to, as they are not by TPTB today, there will still be financial crises and the potential for debt deflation, even though it is totally unnecessary where governments have the ability to offset saving desire that would lead to demand leakage otherwise.
It's not so much a matter of interest payments as the relationship of saving and borrowing, and borrowers becoming unable to meet their loan obligations. Rather than cancel debts that cannot be paid through jubilee or bankruptcy, government can make up the shortfall through currency issuance exogenous to the private sector.
While this is an operationally reality, it is also a political choice. Some fail to realize the options through ignorance, but some realize the options and choose austerity on moral grounds of "acting responsibly."
As far as interest goes, the higher the interest rate will directly impact ability to service loans by increasing saving desire, raising the demand for liquidity, and making it more expensive to borrow to increase liquidity.
As Michael Hudson observes, compound interest did have this effect in ancient times and those in authority came to recognize that the system would break down without debt relief as more and more people struggled to make payments on previous obligations.
Today, one just ends up homeless but in ancient times one could end up in slavery along with one's family. Or, in Dickensian time, in the poor house aka debtors' prison.
Most people find the concept of creating money (as units of account, score in the scorekeeper etc.) "ex nihilo" aberrant even if it has been the reality of human civilization since forever.
ReplyDeleteUntil this believe system is changed and people is educated and get a better understanding of the public (social) purpose of money instead their own fixated moral perception of how the system "should" work (wrong because not practical) it won't be possible to change mad policies for rational ones.
Only some people in high finance and academics, as well as some nerds and analytical types of personalities (which probably are less than 5% of the population) can come to these conclusions without their mind blowing and instead falling into endless moral sophistic discussions.
And so I tend to agree with Gross analysis, in this endogenous (by political choice) way of running the system as long as inflation and wage growth are insufficient, and the capacity of the private sector to produce more credit runs dry, and the marginal utility of each new unit of debt added has diminishing returns ("productive use of credit growth" has diminishing returns), we are just kicking the can and not fixing shit.
Check how the public perceives stuff like the ECB QE (ofc the so dreaded "monetary financing" is off limits!), even if it's the only thing that will keep assets prices all over the place high instead of sinking all that hysterical people balance sheets deep into negative equity. Is surreal!
(P.S: I'm not defending this policy over others btw, is just an example of the reaction of the general population over more 'expansionary' policies. aka "money printing".)
Bill Gross is not a wonk.
ReplyDelete