The use of credit (debt) instead of money (income + savings) has an extra cost associated with the interest payments. As the aggregate amount of debt and interest rises, the percentage of income used to pay interest costs or pay down debt also rises, lowering the amount available for consumption/investment.Sumner replied:
Woj, You said;See what Sumner does here? He lets the "circular flow" run just long enough to make me think the money I pay against my debt is income to my creditor.[1] Note that he doesn't count anything else that happens during that moment of time, the other lending and spending and earning and repayment of debt. And he doesn't call the payment "income" to the creditor (because it isn't income to the creditor. He's not stupid). But he wants me to think it is income.[2][3]
“As the aggregate amount of debt and interest rises, the percentage of income used to pay interest costs or pay down debt also rises, lowering the amount available for consumption/investment.”
This is simply factually wrong. Every debt payment is money received by someone else.
That would be wrong. As PositiveMoney points out,
When you take out a loan, new money is created... When you pay down your debts, the money that leaves your bank account doesn’t go to anyone else – it just disappears. This is because loan repayments are just the opposite process to money creation...Sumner says every debt payment is "money received by someone else." Well of course they receive it, but they can't spend it. They have to do their accounting.
They use the money to offset the money they created by lending it to you. The one cancels the other; the payment cancels the debt. Money created by fractional reserve lending is destroyed by repayment of debt. Not only do you not owe that money anymore; it doesn't exist anymore. Nobody gets to spend it. Nor is it income. Sumner is engaging in pure deceptive bullshit.
From Truthout: Government Debt and Deficits Are Not the Problem. Private Debt Is. By Michael Hudson, March 2013:
The problem is private debt... The problem is the carrying charges on this private debt, and the fact that debt service is eating into personal income – and also business income – to deflate the economy.Michael Hudson says the same that Woj says, and PositiveMoney, and me. And so do Karen Dynan, Kathleen Johnson, and Karen Pence, of the Federal Reserve Board's Division of Research and Statistics, in "Recent Changes to a Measure of U.S. Household Debt Service" from 2003:
When a large share of household income is devoted to debt repayment, households have fewer funds available to purchase goods and services.What was it Sumner said? "This is simply factually wrong."
I don't like to use the word liar but I think in Sumner's case it might be appropriate.
From The Private Debt Crisis by Richard Vague, at naked capitalism, September 2016:
When private debt is high, consumers and businesses have to divert an increased portion of their income to paying interest and principal on that debt—and they spend and invest less as a result. That’s a very real part of what’s weighing on economic growth. After private debt reaches these high levels, it suppresses demand.Richard Vague says the same that Woj says, and Michael Hudson, and PositiveMoney, and Dynan and Johnson and Pence, and me.
If we're wrong, Sumner, convince me of it. Don't bullshit me. And hey, I don't jump to conclusions but you are slowing me down: I've been thinking about what you said for seven years, thinkin maybe you're right and I have things wrong. But you are the one who is wrong, Scott Sumner.
Stop wasting my time.
NOTES:
1. The time lag between making a payment and receiving it may be near zero today. This was not always so. During the historical period when the financial sector grew large enough to become a source of economic problems, computers were still only toys. See Float (money supply) at Wikipedia.
2. Sumner lets the "circular flow" run a little long, so that my most recent payment on my debt has time to be received by the lender and we can imagine it to be the lender's income. But Sumner doesn't count anything else that happens during that extra moment of time. If, for example, the overall trend is that debt grows faster than income (as from 1947 to 2008), then a preponderance of the annual data will show evidence of that trend. So will a preponderance of the quarterly data.
Now, you can take one of those quarters and extend it just long enough for your lender to receive your most recent payment on your debt, then immediately stop the clock; and this is just what Sumner has done. But what goes into the extended quarter must come out of the following quarter. So in the big picture, such manipulations change nothing.
If you take the whole history from 1947 to 2008 and break it down to a sequence of brief moments each just as long as Sumner's extension, in the preponderance of that data you will still find evidence of the same trend that is visible in the annual and quarterly data and in the data as a whole -- unless, like Sumner, you look at only one of those brief moments. Sumner's manipulation changes nothing.
This has been eating at my brain since 2012. I finally have an answer.
3. The interest portion of my payment is income to the lender; but the principal portion is not. However, the interest is income to the financial sector, not to the productive sector of the economy.
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