Actually, I googled that phrase just now because I googled it before, two years ago, and just now found it in my notes. Among the stuff that never got posted:
I googled the phrase we need credit for growth and got more than 2.8 million hits.Debt is created when money is created. Debt is not created when money is earned.
The first is Credit Growth Drives Economic Growth, Until it Doesn’t by Richard Duncan, from 2011. Good title. Pretty interesting article, too. But his opening is terrible. Two paragraphs, not really even relevant to his article, just sort of introductory. The second of those two paragraphs is completely wrong.
The first is right:
The single most important thing to understand about economics in the age of paper money is that credit growth drives economic growth.
The second is wrong:
Before the breakdown of the Bretton Woods international monetary system in 1971, there was a difference between money and credit. There no longer is.
There no longer is a difference between money and credit, he says. That's wrong. What I always say is "We use credit for money." Maybe that's what Richard Duncan had in mind. But the way I say it, it doesn't mean credit and money are the same. It means they are different. And I expect you to understand that the difference is a source of troubles -- is the source of troubles -- for our economy. Using credit for money creates problems, precisely because money and credit are different.
Stop. Stop everything. Stop the economy. Okay, now look around. I have money in my wallet: sixteen dollars. Two fives, six ones. I also have a credit card. Five of them, god help me. When we start up the economy again, I can buy something. Maybe I'll go out for breakfast.
If I pay for breakfast with my money, afterwards I have less money and more in my stomach. An exchange has been made. An exchange has been completed. My breakfast has been paid for. The transaction is finished.
It's not like that if I pay with credit.
If I pay for breakfast with credit, afterwards I have more in my stomach, but no less in my wallet. An exchange has been started, but not finished. The exchange will only be finished when I have paid for my breakfast. That may happen when I make my next monthly credit card payment. Or maybe it will happen ten years from now, after I've made some 120 interest payments on the breakfast I had on credit today.
The difference between money and credit is that using credit carries a cost, and money does not. What it comes down to really is how we get our money. Get it by working, and it is money. Get it by borrowing, and it is credit.
If it is money, you don't have to pay it back; if it is credit, you do.
If I borrow $16 and put it in my wallet it looks like money. But it comes with a debt. I have to pay the $16 back. Therefore, it is credit. When I spend it, I only spend the "money" part. The "debt" part stays with me. When I use credit to pay for my breakfast, they receive money even though I used credit. I spend the "money" but keep the "debt". The debt stays with me.
Money and credit are not the same. To the extent that money is created by credit use, debt is created when money is created. Debt is not created when money is earned.
10 comments:
"The difference between money and credit is that using credit carries a cost, and money does not."
That might be true or it might be false
Suppose I need a washer and dryer. I can buy one today on sale (20% off) or I can wait 2 weeks until I have cash in hand and pay full price. Using cash will add more than $200 to my cost. Sp sometimes your statement is dead wrong
One reason many people sign a 30 year mortgage is because they believe that if they save income for 30 years to buy a house they will end up paying a lot more for the house plus pay 30 years of rent. In general borrowers often calculate that using cash will cost more than using credit. If a business is faced with more demand than they can produce do you think they will save for 10 years to raise the money to expand production or do you think they will use credit because they believe that in the long run will put them dollars ahead?
If everyone believed that it will always cost more to use credit there would be very little credit expansion. In fact I suppose that the rate of credit expansion reflects the degree to which people buy into your notion that credit carries a cost and cash doesn't.
During the 2008-2009 recession your belief was the prevailing one and that is why credit was contracting. In 2007 many people believed your statement was false and that's why credit was expanding at $4 Tn/year.
Hey Jim. I am trying to make a simple distinction between money earned and money borrowed, based on the intrinsic cost that applies in one case and not the other.
If you can buy kitchen appliances on sale today but not a some future date, the sale price may certainly influence your decision in regard to borrowing. But it has nothing whatsoever to do with the intrinsic difference between money and credit that I describe.
I'm trying to make a simple distinction between what is true and what is not. Its not true that there is no cost to money earned and always a cost to money borrowed. gave an example where the opposite was true.
If you are trying to get people to borrow less by convincing them it costs more than spending from earnings that may work if you convince them. But I don't think you will convince them - its too easy to see its not true.
On my definitions, if I have a dollar of "money" and do nothing with it, it costs me nothing. If I have a dollar of "credit" and do nothing with it, it costs me plenty: I have to pay interest on it, and eventually I must pay it back.
Either way, if I have a dollar and I decide to do nothing with it, there are opportunity costs. However, these opportunity costs do not arise intrinsically from the dollar. They arise from my decision regarding the use of the dollar.
Jim you say "Its not true that there is no cost to money earned". Maybe you mean that I had to do work to get the money. But that is a direct exchange, and when I am paid for my week's work, that particular transaction is complete. There is no additional cost of interest, and no requirement to pay the money back.
Or perhaps you mean that there is a cost due to inflation eating away at my dollar. But this cost applies equally to a dollar borrowed and to a dollar earned. It is a cost that arises from circumstances (the general increase of prices) rather than from the dollar intrinsically.
Strip away everything else, and consider only the difference between a dollar borrowed and a dollar earned. Ceteris paribus: The one carries the cost of interest ; the other does not.
What I am trying to get people to understand is this: In an economy that has $3.50 of debt for every circulating dollar, at an interest rate of 3% the cost of carrying the borrowed money is just over 10 cents. At the same interest rate, in an economy with $35.00 of debt per circulating dollar, the cost of carrying the borrowed money is more than a dollar. At 3% and 35 to 1, the cost of interest on outstanding debt is greater than the quantity of money!
Financial cost has two main consequences that are often ignored: It contributes to rising prices, and reduces aggregate demand.
Art
What it comes down to really is how we get our money. Get it by working, and it is money. Get it by borrowing, and it is credit.
What do you call it when I get my money by working because you got your money by borrowing.
Or "got your credit by borrowing"
Hey O.T.
"What do you call it when I get my money by working because you got your money by borrowing... Or 'got your credit by borrowing'"
I say the "money layer" of credit separates from the "debt layer" and only the "money" part circulates. The "debt" part stays with me.
When it is spent, the money that I create by borrowing is indistinguishable from government money. Money is fungible, as Milton Friedman said.
The difference is that the new money I create comes with newly created debt. When I spend the money, the debt stays with me.
When I spend a dollar, the recipient does not know if the dollar is newly created or not. At the "micro" level, it does not matter. It only matters at the "macro" level, the policy level.
//
"What it comes down to really is how we get our money. Get it by working, and it is money. Get it by borrowing, and it is credit."
That's right. But how we get our money is manipulated by policy. If it is policy to raise interest rates whenever wages start to rise, then the money we get by working will fall below the "natural" level.
If it is policy to encourage consumer borrowing, then the money we obtain by borrowing will rise above the "natural" level.
Together, these policies have had a massive influence on "how we get out money". Policy enhanced our natural inclination to use credit, pushing the debt-per-dollar ratio up, up, and up.
I'm saying the distinction you are trying to make between debt and money is inaccurate and that leads to muddled statements like this:
"Money and credit are not the same. To the extent that money is created by credit use, debt is created when money is created."
So what happens if we agree to the concept that debt is not money?
Lets say you borrow $20K and buy a car. Now you owe the bank $20K and the bank owes the car dealer $20K. Then the car dealer pays the car maker and the bank owes the debt to the car maker. The car maker then pays its workers and the debt the bank owes transfers to the workers.
So there is no money at all involved in any of these transactions. The workers didn't earn money - they earned a claim on a debt owed to them by a bank.
Every day there are $3 trillion transferred on Fed wire. Not a penny of it is money. Its all debt that gets moved from one entity to another.
jim: "The workers didn't earn money"
The workers will not be happy!
Credit -- Wikipedia:
"Credit is made up of two parts, the credit (money) and its corresponding debt, which requires repayment with interest."
Also:
"The global credit market is three times the size of global equity."
And
"The cost of credit is the additional amount, over and above the amount borrowed, that the borrower has to pay. It includes interest, arrangement fees and any other charges."
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