Lars Schall interview
Mar26
on March 26, 2012
at 7:31 pm
Lars Schall is a freelance financial journalist in the industrial heartland of Germany, the Ruhr Area, who focuses on oil, precious metals and the monetary system. Lars interviewed me several weeks ago for his podcast; click here for the MP3 file, or listen to the link below.
Discussion (11) ¬
Paul Krugman responds to your critique of his treatment of Minsky in his latest blog post: http://krugman.blogs.nytimes.com/2012/03/27/minksy-and-methodology-wonkish/
Congratulations on getting him to show attention toward you in public. Unfortunately the response is rather low on substance and full of hand-waving.
Doesn’t Krugman make a rather elementarymistake in saying that banks lend deposits too?
Many of the comments on the Krugman article point out that bank credit plays a key role in demand. Here is probably the best of them:
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” Brett Seattle
Professor.
I have not read Steve’s latest post, or his new paper, but I think it is possible to clarify the issue a bit by addressing a couple of your points above.
You write:
“If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand.”
Of course this is correct, but it misses the main point of how credit economies work.
Say I go out to buy a car. I take a loan out at my national bank, which (for simplicity’s sake) happens to be the same bank used by the auto dealer and the manufacturer. The bank cuts me a check for $25k, which I hand to the auto dealer, who then turns around and deposits it in the same bank.
Voila, by agreeing to pledge more of my future resources, I just expanded the loans and deposits on the bank’s balance sheet (without absorbing $25k of somebody’s savings, and without needing any monetary expansion from the Fed), and I expanded aggregate demand in the system.
I have suggested in the past that, if you just keep following the logic of your work with Eggertsson, you will end up in a very different place. In fact, I think you will find that your areas of agreement with Steve will have expanded exponentially.”
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As an addendum to our recent series of posts there are several points I’d like to make. First money and purchasing power are not the same things. Second, time is a deceptive factor. Third Free is free, not sticky, enforced in any way or rigged. And fourth ideas, intentions and overall psychology make all the difference in the world for Man and systems.
It is true that there is all manner of money out in the economy at any GIVEN PERIOD of time. However, not all of that money is available as purchasing power. Thus purchasing power (not just money) mathematically must run out for the individual before the system is able to mathematically LIQUIDATE AND CLEAR ALL PRODUCTION IN THE SAME PERIOD OF TIME…….unless of course there is an injection of purchasing power i.e. unencumbered credit for the individual, and save the lottery, a wealthy and gracious relative or some other rare happenstance….there is no systemic availability of such. Of course one can borrow more money with or without debt attached to it, but then your next cost accounting period is going to be less in balance than the last one. Which tends severely to effect your future solvency.
Now the fact that the wheel of commerce is continuous into the future and as a result more money is created is irrelevant. Why? Because inevitably even though there is sufficient money in the system there is both less overall purchasing power in that creation of credit BY COST ACCOUNTING CONVENTION as well as a smaller fraction of purchasing power in ratio to over all PRICES. Money creation, borrowing, goes on. But what if it didn’t? Well production would slow and eventually stop, but that’s not good for business profits or for individuals paying their bills or eating regularly. And so we see that finance is a NECESSITY if the system is to function as it is currently constructed. (Time does not stop and this obscures this fundamental truth. Time is a tricky concept.) Even if you have central bank injections, because they are all private central banks and thus incurring costs with each financial cycle, the problem is exacerbated.
Now I hasten to mention here that the interest of finance is not the cause of the problem itself, but rather it is the EFFECT of it. Generally, the real problem is THE NECESSITY TO FINANCE ITSELF in order to keep the system functioning even marginally, and SPECIFICALLY it is the inherent scarcity of individual purchasing power ENFORCING that necessity through its inability to liquidate all of production in any GIVEN period (not the flow) of time/cycle of production. (Thus the system is in actuality not free flowing at all except as it is rigged around enforced finance which still leads to an inevitable imbalance. Free market economic theory is “free”.
Specifically mandated costless supplementation of purchasing power via a citizen’s dividend and a compensated retail discount of prices to the individual to avoid inflation, all from a centrally administered source is the correct prescription for its true liberation.
Distributism is an evolution of profit making systems because it replaces the faulty orthodox acceptance of enforced monetary scarcity with the more accurate and liberating economic realities of relative abundance. It also has as its intention the actual freeing of the individual AND the system not just the cobbling together of the system in a fashion which continues to degrade the rights of the mass of individuals, ignores the sustained commonwealth economic realities of a cultural heritage of productive capacity and still enables the usurpation of this vast source of wealth by a monopoly of finance. Said intention, and other universally accepted human ideas, experiences and values like confidence, hope, love and a sense of the abundant grace of the natural world can then replace their present underlying psychological opposites enabling policies that place the system in service to the individual instead of the person slavishly having to serve it.
This does not preclude certain sane and prudent regulations to help guide society and prevent human frailties from hijacking it with lesser values. It also acknowledges the importance that iconoclasm has as a lever for freeing minds from the mentally conditioned contagion brought about by long association with diseased cultural and economic systems. Amen. So be it. Even so, come Lord Keens, along with your heavenly father C. H. Douglas.
Rick, I agree. That was a particularly good comment, illustrating exactly what is wrong with the idea that you can only lend money that savers have previously deposited. I am surprised that it apparently made no impact.
Thanks Steve – I found that interview very easy to understand and follow, probably the most lucid and complete that you have done.
Derek,
I have followed the Krugman article a bit further. In trying to justify his position on Steve Keen against the odds of his “commenters” he gets more mud thrown at him:
http://krugman.blogs.nytimes.com/2012/03/27/banking-mysticism/#postComment
Here is one of the comments:
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“-mike G-Corvallis
It was funny, Mr Krugman, to read the comments on the previous post, and see how many people accuse you of not knowing how banks work, and of getting economics wrong.
”
You really should read a good text or two…
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The problem is that the texts he is reading are based on regurgitated nonsense and he lacks sufficient enquiry to work out they are based on nonsense.
I think it is funny, in a sad sort of way, that there are enough people around who understand what Steve Keen is working on to defend his work although not many economists among them.
Thanks Chris,
I had someone on Twitter abuse me over the same interview, so it’s nice to get a different take on it.
Steve,
While you’re absorbing “the slings and arrows” of the economic establishment for correctly perceiving flawed modeling etc., you might just as well take on the additional derision from orthodox minds that refuse or are unable to comprehend what is true paradigm change actually is.
History outlives us all, technological innovation is an inexorable (and mostly positive) force and the ultimate vector and intention of Humanity IS freedom…so why not be mentioned as one of the foremost advocates of that intention? I admire your bravery. Can you be braver still in advocating (even if you do not necessarily or completely agree with the accuracy of Douglas’s analysis) his solution which is paradigm changing and freeing of both economics AND the individual? Who knows we might all get lucky and this time make “the impossible”….possible. The crisis is certainly big enough this time. And if that happens you’ll be one of the few who will have earned the right to address others with the greeting of “You’re welcome!”