

Understanding Debt - mxfh
http://www.nytimes.com/2015/02/09/opinion/paul-krugman-nobody-understands-debt.html

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m52go
> but the situation is not improved if efforts to reduce debt end up pushing
> the economy into deflation and depression.

I don't like how mainstream economists tend to portray deflation: that it's a
terrible thing that necessarily leads to depression. I mean, is the average
man on the street going have more money to spend if the stuff he needs (food,
energy, etc) costs 5% more than it did last year? I'm not saying deflation is
always a good thing, but particularly in times of declining incomes, I find it
hard to believe it's the scary monster mainstream economists make it out to
be.

And I particularly don't like how Krugman is always so quick to defend large
debt loads. He keeps advocating to borrow borrow borrow, with seemingly no
restraint. Is that really sustainable?

> America has actually been borrowing less from abroad since 2008 than it did
> before

Ya, because we're printing the rest. That is NOT a good thing.

But of course, Krugman won't say that, or consequences that result from such
policies.

~~~
yequalsx
The government isn't "printing money" in the sense that this phrase commonly
denotes. The government is selling Treasury securities on the open market. The
rate of interest right now is quite low and has been for the past 7 years.
Krugman isn't advocating a belief that all debt all the time is a good thing.
He's advocating a belief that in the current situation debt is not the primary
concern right now.

Deflation is a bad thing for borrowers. It's a good thing for people who have
no loans. I think the idea is that deflation is bad for the country because
it's bad for banks and large multi-national companies. It would squeeze
consumers who have mortgages and credit card debt and student loan debt. Thus
this would contract the economy. As I understand these things. I'm not an
economist.

~~~
jhulla
You forgot QE1, QE2, twist, and QE3 where the Fed digitally created $4
trillion and bought up assets.

That $4T didn't exist until the Fed conjured it up. Through a middleman, it
was handed to the US Treasury.

~~~
yequalsx
I don't fully understand QE but I believe there is a balance sheet. It's not
like money was created out of thin air as such. It did not increase M1. I'm
guessing it did increase MB but I don't know. Of course my perception may be
completely wrong.

~~~
nostromo
> It's not like money was created out of thin air as such.

No, it was. Literally. The Fed can and does create money and then buy assets
with that new money.

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nostromo
> Because debt is money we owe to ourselves, it does not directly make the
> economy poorer

This rational only works if you're thinking about the economy in collective
terms. If the U.S. government borrows money from future taxpayers and gives it
to the poor today, yes, collectively it's a wash. But there are winners and
losers individually: the lender got an interest payment, the poor person got
some free money, and the future tax payer paid more taxes to cover both.

Telling the future tax payer, "hey, don't worry, it was an economic wash since
we just owe the debt to ourselves!" would be cold comfort as he or she is
clearly poorer due to the increased tax burden.

~~~
savanaly
Remember, money doesn't matter, only goods consumed (which money can
facilitate). To help make this clear, imagine if G.O.D. materialized a bag
with $10 trillion on the front steps of the white house. Would the world,
past, present or future, to be able to consume more?

Thus, it's hard to see how it's possible for the world as a whole to "borrow"
from the future in any meaningful sense. How much you tax vs. how much debt
you run up does matter, but not in the same way people think.

~~~
john_b
When a country's debt grows faster than its real GDP over a long enough period
of time, some sort of fiscal tightening ("austerity") will become necessary to
avoid default. This may take the form of reduced spending, increased taxes, or
both.

Guess who will be paying for that? Future consumers and taxpayers.

Not all debt leads to this. Debt which is incurred responsibly and paid off in
a timely fashion promotes growth. But there are examples (Greece is one) where
debt is used by those in power to sustain their own power structure rather
than dealing with economic problems under their watch. To the extent that
economic changes negatively affect the ruling elite, those in power will avoid
making those changes. If those changes happen to be necessary to preserve
future economic stability, then it will be future generations who pay for it.

~~~
jhulla
Completely agree.

In 2008-2009, there was an opportunity to take apart big banks after their
gross misallocation of capital. Instead those very banks and bankers were
fortified and rewarded to continue onwards.

I still haven't figured out how this phase will end.

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marcusgarvey
It's amazing. We answered a crisis brought on by too much debt with -- more
debt. And instead of investing it in things that would have a real benefit to
larger swathes of society (say, infrastructure, education, an even less
byzantine and more affordable health system than Obamacare) it seems only to
have goosed asset prices and promoted malinvestment. I believe politicians are
to blame: they are forcing central banks to try and stimulate the economy in
unhealthy ways because they are too cowardly or stupid to promote stimulus
programs that might have a chance of boosting real demand.

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orlandob
The title of the article is actually: "Nobody Understands Debt". A few years
ago I discovered Modern Monetary Theory (thanks Warren Mosler, Bill Mitchell,
Randall Wray, Stephanie Kelton) and it really opened my eyes to the universal
misunderstanding of national debt. It boils down to this: the household debt
model does not apply to governments that issue their own currency (USD, AUD,
JPY, etc., but NOT the EUR).

~~~
jschwartzi
Which model applies and can you sum it up in a few sentences? I know it's
generally accepted here to make an effort to deeply understand the issues
behind the article, but one criticism I have of Krugman's article is that,
while he does explain what he thinks Debt isn't, he never bothers to explain
why the household model doesn't apply except in a dismissive sort of sense.

So what models apply and why?

~~~
orlandob
There is one major difference between households and sovereign-currency
Governments: households can't create the money they use, but Governments can.

"So you're saying government debt doesn't matter? What about Zimbawe,
Argentina, Japan, Pre-WWII Germany?"

First, I'm not saying that Government debt doesn't matter. Like all things,
there are limits. What I am saying (and MMT says) is that there are conditions
under which increasing national debt make sense - notably high unemployment
and underemployment. ONLY the Government can kickstart an economy in this
scenario. In those hyperinflation cases, you saw Governments whose debt was
denominated by foreign currencies and they tried to print their way to
solvency, which of course failed.

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crazy1van
Perhaps Krugman would like to redefine debt, because his definition does not
seem to match Merriam Webster [0]:

"an amount of money that you owe to a person, bank, company, etc. the state of
owing money to someone or something"

Debt is a wonderful thing. It means you can buy an expensive good like a house
or a car now and pay for it later. As opposed to saving for years and then
getting the car. However, either way you pay. I fail to see how national debt
is any different. Governments want money now, so they go into debt often by
selling bonds.

If the debt was acquired during my generation, but the bill comes due during
the next generation, then that seems to be pretty close to stealing from the
next generation. Today's debt is tomorrow's taxation.

[0] [http://www.merriam-webster.com/dictionary/debt](http://www.merriam-
webster.com/dictionary/debt)

~~~
twblalock
National debt is different from household debt for _many_ reasons, including
the fact that the government operates a central bank, prints its own currency,
does not have to apply for credit, passes the laws that specify the terms of
the debt it owes, etc. Plus, in the case of the United States, the national
debt is in the form of one of the safest and most widely held investment
vehicles in the world : US treasury debt.

To argue that government debt is the not any different from household debt is
to ignore all of those things.

~~~
crazy1van
The mechanics are different but the fundamental idea is the same. Taking on
debt today is a promise to pay back the money in the future. Governments have
more ways of violating or manipulating that promise, but the core idea is the
same.

Taking your points one at a time:

> the government operates a central bank, prints its own currency

This is one method governments use to skirt paying the full value of what they
owe. They can borrow a fixed number of dollars today, then print money and use
the printed money to pay what they owe. By doing so they are paying back the
dollars they owe, but because each dollar is worth less, they are never paying
back the value they owe. And they will pay the price with a higher interest
rate next time.

> does not have to apply for credit

Applying for credit for normal people is a way of offering evidence that
you're likely to pay back what people loan you. The more trustworthy you seem,
the less risk for the lender, and therefore the less demanded interest.
Governments are the same way. The more the perceived chance that a government
will not make good on its debts, the greater the interest it must pay to
borrow money.

> passes the laws that specify the terms of the debt it owes

This is another method of skirting paying back what they government has
borrowed. Drastic changes or changes which modify the rules on existing debt
will have an effect on the government to borrow more money in the future.

> in the case of the United States, the national debt is in the form of one of
> the safest and most widely held investment vehicles in the world

Yes, but I think that is true because the US usually doesn't play the games
that are in the earlier points. Traditionally, the US has not drastically
increased its money supply and has not changed the law on existing debt. If
they started doing these tricks more, I think we'll see the high regard fade
for US treasuries.

One last point: these are methods governments use to avoid repaying debt, but
individuals in most countries have their own methods. They can default on a
loan or declare bankruptcy entirely. But just like governments, that will make
it harder to borrow in the future. The mechanics are different but the core
ideas are the same.

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binarytrees
Debt to build new transit infrastructure, research and development labs etc is
a great way a country can use debt to benefit it's current and future
citizens. A person could take a loan out for a car and that may create a small
fraction of jobs. Where as if a government can take on debt to create DARPANET
or invest in clean energy the outcome is many times more profitable to the
government and future business derived from that.

~~~
toasted
Unless the investments bomb and no value is created eg. the clean energy
investments of the last 10 years

~~~
Fuzzwah
Depends what you value.

I personally value a planet where my kids can enjoy a clean environment.

~~~
toasted
Have there been tangible environmental gains from all the money being
invested?

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j_baker
Krugman's right about one thing: economies that have had large austerity
pushes seem to have done worse than countries that have had smaller spending
cuts. I don't know that I would agree with Krugman about how much spending
needs to happen to recover. Within the next 20 years, spending on Medicare and
Social Security are expected to grow rapidly. Thus, I think frugality still
makes sense.

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sakri
I would be very sad to see the death of the monetary union.

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vijayboyapati
There are two major problems with this article (although they're not specific
to this article and are more generally applicable to Keynesian economics).

Firstly Prof. Krugman writes: "Why is deleveraging a problem? Because my
spending is your income, and your spending is my income, so if everyone
slashes spending at the same time, incomes go down around the world."

This model entirely ignores capital theory. It creates a simple closed system
where if spending goes up, everyone is better off, and if spending goes down,
everyone is worse off (because they have less income). But this has almost no
relation to whether more or less wealth is being created. Are there more cars,
iphones, loaves of bread, new medical technologies? It is the creation of new
capital that makes everyone better off, and increases the standard of living,
not more spending (although more spending often follows the creation of new
goods)

Secondly Prof Krugman writes:

"You can see that misunderstanding at work every time someone rails against
deficits with slogans like “Stop stealing from our kids.” It sounds right, if
you don’t think about it: Families who run up debts make themselves poorer, so
isn’t that true when we look at overall national debt?

No, it isn’t. An indebted family owes money to other people; the world economy
as a whole owes money to itself. And while it’s true that countries can borrow
from other countries, America has actually been borrowing less from abroad
since 2008 than it did before, and Europe is a net lender to the rest of the
world.

Because debt is money we owe to ourselves, it does not directly make the
economy poorer (and paying it off doesn’t make us richer)"

The problem isn't who the debt is owed to, the problem is whether the debt is
serviceable or not and is used to create new wealth. This all gets confused by
the introduction of money into the discussion. But imagine a situation where
person A loans person B a shovel with the understanding they will receive the
shovel back in a week, along with 10 potatoes. This is a loan that is likely
to be serviceable. Now instead imagine a loan where person A loans person B a
shovel with the understanding that person B will return the shovel along with
some produce. Now instead of digging up vegetables, person B uses his shovel
to excavate some rocks on his property to create a nice looking rock garden.
Person B is now going to get into trouble paying back his loan. The debt he
has incurred has been used to work on a project that is unlikely to be
profitable. This is akin to people going into debt during the housing bubble
to fund their consumption (big house, fast cars, big TV etc) rather than fund
more production. That is the kind of debt that is not going to be serviceable
and will eventually need to be written down, or in the case of the US, handed
over to the taxpayer.

We ARE better off writing down that debt because, in general, we want people
to use debt to work on projects that generate new wealth and capital over
time, and if we do not write that debt down, people will continue to work on
unproductive, unprofitable projects.

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shit_parade
Another way to think about debt is that central banks are currently purchasing
more global sovereign debt than is being issued[1] resulting in negative
yields for many bonds. It is hard to fully articulate how perverse this is,
but governments are issuing debts and then purchasing them through their
supposedly independent central banks and these central banks are paying these
governments for the honor of buying their debt -- world governments are paying
themselves to take on debts, someone please tell me how anything resembling a
market and price realization can occur under these circumstances, this is
essentially central planning and is resulting in gross misallocation of wealth
throughout the entire developed world.

[1]:[http://www.zerohedge.com/news/2015-02-09/stunning-chart-
day-...](http://www.zerohedge.com/news/2015-02-09/stunning-chart-day-first-
time-ever-global-net-sovereign-debt-issuance-will-be-negati)

~~~
jhulla
Misallocation of wealth is only a problem if it isn't "misallocated" to you.

My question is this: how does this edifice collapse?

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innguest
FTFA:

> the world economy as a whole owes money to itself.

> debt is money we owe to ourselves

Why don't we just collectively forget/forgive our debts, then?

Folks, if you think this astrologist/alchemist Krugman is doing scientific
work in Economics, please stop and think: can you come up with a falsifiable
statement for Keynesian Economics? I can come up with several for Evolution,
which is why Evolution is a Science.

~~~
TheOtherHobbes
In fact Krugman, with his vile Keynesian bias, has been one of the few
economists to make the correct calls in the Euro-debacle.

His record on other topics is significantly better than that of most 'economic
experts.'

And he has at least one more econo-Nobel than (I'm guessing) you do.

He's been saying for a long time now that austerity is self-defeating. And he
is, by any sane evidence-based standard, utterly right.

So your ad hominems are entirely off-point.

Meanwhile the neo-liberal school has made any number of claims that are often
repeated even after they've been falsified by fact.

Laffer Curve? Boom. Dead. Utter rubbish. Totally falsified.

[http://www.brookings.edu/~/media/Projects/BPEA/Fall%201999/1...](http://www.brookings.edu/~/media/Projects/BPEA/Fall%201999/1999b_bpea_goolsbee.PDF)

Trickle down? Self-serving nonsense. No evidence for it at all.

[http://www.businessinsider.com/study-tax-cuts-dont-lead-
to-g...](http://www.businessinsider.com/study-tax-cuts-dont-lead-to-
growth-2012-9?IR=T)

Don't tax corporations so they can create jobs? Boom. Dead. Corporations
mostly just give the money to executives and hoard the rest.

See above, among others.

Don't allow governments to spend tax money on infrastructure, innovation, and
public education? Excellent! You've strangled the research that led to the
beginnings of the Internet, and one or two other important projects too.

And so on.

The truth here is that facts are not on _your_ side. Name-calling is a poor
substitute for being evidence-based, intelligent, and scientifically informed.

~~~
derriz
Erm no. He did not "call" the Euro crisis. I notice he has stopped mentioning
Ireland, for example, because it now represents a counter-example to his world
view. After a few years of austerity, growth has returned, unemployment is
falling and tax revenues are rising in Ireland. All apparently impossible
according to Krugman and in fact he explicitly predicted the opposite outcome
would result from government policy. He irritates me highly because he is
clearly smart but hasn't the tiniest crumb of intellectual honesty - he simply
ignores inconvenient facts where other commentators and ecomomists (of various
ideological bents) engage with difficult facts in order to explore and refine
their own belief systems. I have gone from being a Krugman admirer to
considering the guy a lying charleton in the space of 5 years.

