Saturday, 23 September 2017

Steve Keen on top form.

Spotted by Lola at Open Democracy:

For a while, this bargain felt win-win for both sides: as the Bank of England recently acknowledged, bank lending creates money at the same time as it creates debt (McLeay, Radia et al. 2014). This money is then spent, either to buy assets, or goods and services. It therefore adds to total demand, and to incomes and capital gains. So, as banks created “money from nothing”, and the UK private sector spent that money that it got for doing nothing, prosperity seemed to abound… [statement 1]

But you can’t have very high levels of credit-based demand without the corollary of an ever-increasing level of debt relative to income. More and more of income is required to service this debt, cutting into spending on goods and services. The turnover of existing money slows down, reducing aggregate demand from actual work [statement 2], while increasing the dependence on credit.

Don't statements 1 and 2 contradict each other? Either credit/debt increases GDP or it reduces it.

As a matter of fact, in the real world it does neither to any great degree.

1. Most of the (increase in) debt is mortgages, which is just an alternative to paying rent. The inevitable transfer of spending power from tenant/borrower to landlord/depositor is pretty much unchanged. This is A Bad Thing either way.

2. A small part of (the increase in) overall household debts (maybe one-eighth?) is credit cards and personal loans used for buying other stuff. This merely brings forward spending a few months or years. Somebody who wants a new car can save up for a few years or he can buy one on HP, take out finance lease, personal contract payment etc (these are all pretty much the same in economic terms). But that person will probably never own more then one car at any one time. Most of that net-extra spending is in the past - the bloke who bought a car on HP two or three years ago is spending less of his current income on other stuff because he is still paying off the HP instalments.

3. It all averages out anyway, yes, increasing levels of debt seem to go hand in hand with extra GDP, until the credit bubble pops, and then we lose GDP. Chances are, the overall long term trend would be much the same if mortgages and house prices were capped somehow (although that would be a good thing in and of itself).

Clearly, Keen's overall point that the whole economy has been hijacked by the banks is correct, he's just very vague on the details.


Ralph Musgrave said...

As Keen rightly says in the last paragraph of his recent book, the deflationary effect of everyone paying off their debts does not matter as long as the state makes up for the resultant deficient demand via standard stimulatory measures, monetary or fiscal. To that extent, Keen gets over-excited about the alleged harmful effects of debt.

I.e. all that is needed is to sack the rather large number of economists who still don't understand the basic message Keynes gave us, namely that governments can actually raise demand. Unfortunately economics is profession filled with nice middle class chaps and chapesses, and those sort of people just don't get the sack however grotesque their incompetence.

Mark Wadsworth said...

RM, maybe so, but that is reinforces the negative effects of Home-Owner-Ism.

The little guys are running a shortfall paying off the debts they took out to avoid paying rent; the government funds the shortfall; the government collects taxes off the little guys to pay off the deficit; rinse and repeat; ultimately those future tax receipts are being used to subsidise today's land owners.

If we had more taxes on land values and less on wages and output then - land values would be lower; so household debts would be lower; so less call for deficits; so lower taxes on wages and output in future; rinse and repeat.

Lola said...

No, RM government cannot raise demand. Demand is infinite. It is precisely the action that government takes to 'raise demand' - arbitrarily expanding money and credit - that ends up in the things that Keen is railing about in the article I found.

The whole money thing is in such a mess that whether you are Keynesian, a monetarist, an MMT'er, an Austrian or whatever that nothing now makes sense. Money has been so badly messed up that somehow or other there will be a reckoning and it's what happens next politically that is the thing to worry about. Money can (will?) be sorted out by the market but the cost of getting to the point where it has to be is going to be huge and devastating for so many people that I grave doubts that liberal free market competitive capitalist democracy, i.e. our liberties, will survive. Certainly the majority of the younger generation is educationally ill equipped to understand the arguments, much less well equipped than I was at their age.

Derek said...

"Aren't those two things opposites? Either credit/debt increases GDP or it reduces it".

Yes, credit and debt are opposites. But the way I see it they happen at two different times during a loan's lifetime. In month 1 you get an increase in GDP caused by the bank creating £150,000 or whatever and handing it out. Then for months 2 to 300 you get a reduction in GDP caused by the borrower handing back part of that £150,000 every month. To begin with it's not much of a reduction in GDP because most of the repayment is interest which gets recirculated back into the economy. But by month 300 the whole loan repayment is principal which the bank just writes off and thus removes it from circulation completely.

Now one loan doesn't make much of a difference to GDP but you have to think of the combined effect of hundreds of new bank loans increasing GDP and thousands of existing loans reducing GDP during any given month. That's what Keen is talking about.

And while you are correct about rent and mortgage payments being interchangeable, there is a slight difference in that landlords get the rent and can choose to keep it or spend it if they wish, whereas banks can only do that with the interest part of a mortgage repayment. The principal part has to be written off and is lost to the economy altogether.

So the higher the outstanding private debt in the economy, the more money is being destroyed by the banks. If you want the banks to counterbalance this, you need to get them to create new money by issuing new loans. Otherwise the only answer is a trade surplus or a government deficit.

And if you don't have any of those three, there will be a recession/depression.

Lola said...

Derek. As i see it banks may right off one loan as it is repaid but that just gives them the capacity to make another one. And that in turn is based on how the regulations say by how much they can gear up their capital.
The problem has been that that ratio has been reduced by regulators meanibg that the money supply must shrink. And then the regulators go and get all panicky sbout thst and engage in QE to sort out the mess they have created.

Steven_L said...

Somebody who wants a new car can save up for a few years or he can buy one on HP

I'm not convinced many people have the willpower to save up for a brand new car. I know I certainly wouldn't. Sooner or later you'll get to the point where you have enough for an acceptable used car you desire and you'll buy it.

I think without consumer credit very few new cars would be made.

Lola said...

Steven_L It might be that without consumer credit new cars would be considerably cheaper....Also the VAT would be much much less. Don'f forget PCP schemes, because of the VAT, are largely off balance sheet government borrowing.

Steven_L said...

Well new cars have certainly gotten a lot more expensive in the era of 0% interest rates.

And I guess if credit was outlawed the manufacturers would offer savings schemes instead?

Mark Wadsworth said...

D, debt and credit are the same thing, not opposites. What I meant was if you read the first two paragraphs he contradicts himself. First he says all this borrowing increases GDP and then he says if reduces it.

How you split up a repayment into principal and interest makes absolutely no difference to the analysis.

L, yes. Except as you have said yourself, the banks own-capital ratios have not been tightened up at all since 2007.

SL, good point about new cars and consumer credit. But without mugs buying new cars, there wouldn't be a load of very affordable second hand cars for people from Yorkshire like me. So what do you think the equilibrium would be? Presumably new car prices would be lower (people would buy lower spec models), there would be saving schemes, fewer cars overall and higher second hand car prices?

Mike W said...

Hi bit late, this is just a note/ask,

Thanks for posting Lola.I groaned when I read, Keen:

This leads to a causal link between the change in new mortgages and the change in house prices (see Figure 4). So it’s not the level of mortgage debt that affects house prices, nor even its rate of change (which is equivalent to net new mortgages), but the rate at which that rate of change is changing: its rate of acceleration

Thanks for your post Derek it allowed me to at least think of Keen's deeper metric above.

RM, yes in the world we currently inhabit.

Mark W. Is Keen vicously contradictory. Isn't he just saying what you say in your point three? Measure it over time T.What you say/add is give us LVT and we disolve the problem over time too.
However, I think this is Keen's thesis against Krugman. Krugman does not get Loanable funds so assumes debt makes no difference over the long run.It is Krugmans insult 'Money Illusion' v Keen's counter insult'Barter Illusion'. It seems that you Mark agree that banks are not merely loanable funds institutions: Keen. But think it doesn't much matter of the long run: Krugman. Which is wholey new position to me. Groan :)

Mark Wadsworth said...

MikeW, he gets muddled because he fails to distinguish between three distinct types of debt:

1. Mortgage debt on land which is an unalloyed bad, being privately collected LVT. 80%+ of all bank lending.

2. Proper consumer debt, for example new cars, new kitchens, this is overall a good thing but in the long run, sorts itself out, it just brings forward consumption/production without increasing it much. 10 - 15% of bank lending.

3. Pay day loans, which is either poor people being stupid, unlucky or downright exploited (to be decided on a case by case basis). <5% of total lending.

These are quite distinct things, what goes for one does not go for another. It's like sand, can be a good thing or a bad thing depending on context - a sandy beach = lovely; sand for making concrete = necesary; sand in your food or in your eyes = bloody awful.