The bad half of Antonio Fatas's "debt is not a problem" argument

Antonio Fatas says "the world has no (net) debt. For every liability there is an asset."

The world also has no net wage cost. For every dollar of wages paid, a dollar of wages is received. Does this mean that we could increase wages 9% a year (like private nonfinancial debt) or even 14% a year (like financial business debt) and it would have no harmful effect on the economy? Of course not. The "no net wages" argument is nonsense.

The "no net debt" argument is just as bad.

Part 1 of 3

The rise and fall of civilizations is an economic cycle

Item:

Civilization may be seen in the rise and fall of cities.

Item:

The cycle of civilization is a cycle of dispersion and concentration of wealth. The growth and decay of cities and nation-states is evidence of that cycle. The "saucer-shaped" pattern traced by interest rates during the course of ancient civilizations is evidence of that cycle. The inequality that troubles Piketty is evidence of that cycle.

Item:

If the growth of wealth outpaces the concentration of wealth, times are good; otherwise, not.

Item:

Arnold J. Toynbee showed that civilizations rise and fall in a recognizable pattern. Homer and Sylla show that interest rates are intimately involved in the process. Keynes identified the interest-rate trough in the cycle of civilization as "the greatest age of the inducement to investment."

My thoughts exactly!

I noticed the words cycle chart in a link to Mosler's, so I went looking. This graph, from John Burns Real Estate Consulting, LLC:

The text on the graph reads in part: "The shallow, low-growth trajectory of this expansion gives us confidence that this cycle has room to run."

That's it! That's what I was thinking. I wish I could have said it so clearly.

I've quoted John Taylor (from 2016) on this:

Because the economy has grown from the start of this recovery at a pace no greater than the prerecession trend, it has left a vulnerable gap of unrealized potential that can and should be closed with faster economic growth. In several key ways the US economy resembles an economy at the bottom of a recession...

I guess you could say that economic growth has to end in recession sometime, so the longer growth continues the more likely recession becomes. But if you look at it the way John Taylor did in 2016, growth didn't even start yet.

No cause for celebration, this

Under the heading World Trade as Percentage of Global GDP at Reddit:

Problem solving

From the unposted archives. Written back in March 2016.

Economist's View links to A Cheaper Way to Battle Recession at Bloomberg View. It's a Noah Smith post -- not that there's anything wrong with that.

I liked the post. It's well-organized, well written, and interesting. But that's not why I'm writing.

I'm not writing because I liked it. I don't even want to talk about what Noah talked about. I want to talk about something else. I want to talk about problem solving -- in case you couldn't tell by the title of mine today.

But in order to talk about problem solving, I need an example. Noah is my guinea pig, Noah's post.

In order to say what I have to say, I have to talk about what Noah says in his post. That's a problem for me, because Noah's is interesting. I might even say very interesting. And I don't want you to be distracted by it.


The title of Noah's post -- A Cheaper Way to Battle Recession -- seems to offer a solution to a problem. And it does, it does. I'll get to it in a minute. But, because of his title, we approach the text with a particular thought in mind: that Noah will be talking about a possible solution to a problem that does seem to need solving.

Here's his first paragraph:

What should the U.S. government do to fight recessions? What should it do to fight slow growth? This is the eternal question of so-called countercyclical policy. The two mainstream ideas are fiscal and monetary stimulus. The fiscal version works by having the government borrow and spend money, either on useful things like infrastructure, or by simply mailing people checks. The typical monetary variety works by having the Federal Reserve swap money for financial assets, which lowers interest rates.

Six sentences, and we are already deep in theory. I gotta give it to Noah: This is well-written stuff.

His next three paragraphs move us along quickly:

Paragraph 2: "Unfortunately, both of these methods have major drawbacks." Noah describes the drawbacks. Basically, the mainstream solutions no longer work.

Paragraph 3: "Because of these limitations, macroeconomists have been trying to dream up alternate ways of stimulating the economy." Noah presents two: the helicopter drop, and negative interest rates. He doesn't list problems with these. But he doesn't have to. I have problems with them already. Maybe you do, too.

Paragraph 4: Noah introduces the cheaper way to battle recession: "A third new idea is to have the government lend people money at very low interest rates" -- Miles Kimball's idea. Noah spends a few paragraphs with this one, and actually makes it sound pretty good. You know: interesting. We'd get low interest rates, he says, and the economy would benefit whether we paid back the loans or not.

Noah doesn't get into what happens when the government can no longer borrow at "just a bit more than 0.25 percent". And he doesn't spend a lot of time wondering whether it is wise to build into policy the notion that not paying back one's loans can be good. But he does bring up a couple potential problems with the idea of "national lines of credit".

Noah's concluding paragraph:

So there are serious political problems with using national lines of credit. But the evidence shows that it can give a big boost to demand, so the challenge is to find ways to minimize the political problems. Not only are national lines of credit a potential tool for recession-fighting, but they might even be useful for boosting growth to higher levels in a sluggish economy like the one the U.S. now is experiencing.

As I said: Interesting stuff.


My turn.

We don't like recessions and slow growth, Noah says. And we have ways to fight them. But these solutions no longer work, Noah says. Then he looks at some other solutions.

Noah identifies a problem and goes immediately to solutions. He never gets to the part where he actually figures out the cause of the problem.

Nobody does. That's why our solutions don't work.

Credit is an open sandwich: A layer of money on a layer of debt.

I just now googled we need credit for growth and turned up 436 million hits. The first is Credit Growth Drives Economic Growth, Until it Doesn’t by Richard Duncan, at the Daily Reckoning.

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.

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.

Debt is created when money is created. Debt is not created when money is earned.

You are in competition with the Federal Reserve.

Years before the internet -- probably in the mid-80s -- I wrote to Milton Friedman and happened to describe interest rates as "the price of money".

No, Friedman replied: The interest rate is the price of credit, not the price of money.

I thought about that for probably ten years, and then one day it made sense: Money and credit are different things. "Credit" is the money that you pay interest on. "Money" is the money you don't pay interest on.

That understanding is the foundation of all my work. Money and credit are not the same. The difference? The cost of interest.


I've got near ten years in econ blogging. In ten years I don't know if anyone ever agreed with me, with Milton Friedman and me, on the difference between money and credit.

Nobody gets what I'm saying, because these days credit is money. Or at least, we use credit for money all the time. So everybody thinks credit is money, and everybody thinks I have it wrong. Like David Glasner thinks Milton Friedman had it wrong.

If you cannot see the difference between paying interest and not paying interest, you cannot see the problem I see. In order to describe the problem, I need different words for "money that has no interest cost" and "money that does have interest cost". I use the words money and credit.

If the two are different, it is surely confusing to call them both "money".


Anyway, this comes to me from Milton Friedman, this idea that interest is the price of credit. Also the basis for the idea, which is that money and credit are different, the difference being whether or not you pay interest on the money. Once again: If you pay interest on the money, the money is credit. If you don't, it's money.

Now most of us I guess don't really "have" money that we pay interest on. Maybe for an hour after you walk out of your bank with a new loan. But after an hour you've spent the money, and you don't "have" it any more.

Yeah. But that's micro, econ from the point of view of the individual and what's in his pocket. Look at it as macro, econ from the point of view of the economic system as a whole. It's not that you borrowed the money and spent it. It's that you created new money and put it into circulation. In this sense, you are just like the central bank. When you borrow and spend, you are putting money into circulation. When you receive income and pay down a debt, you are taking money out of circulation. You do the same things the Federal Reserve does. You are in competition with the Fed.

All during the time that your money is in circulation -- after you borrow and spend it, and until you pay it back -- you "have" money on which you pay interest. You don't have it in your pocket. You have it in circulation.

The least expensive way to add money to circulation is for the public sector do it. Least expensive for the private sector, and therefore most favorable to growth.