Steve Keen's Debtwatch

Discussion (57) ¬

1. 
   alainton

   May 26, 2012, 5:54 pm | #

   @NeilW

   One of the problems of expecting the sectoral balance approach to supply all answers (as opposed to most) is that it focuses too much on the present – where those balences can be accounted – rather than portfolio decisions on a radically uncertain future – where they cannot. You say

   saving … is completely unnecessary anyway in an endogenous money environment.
   Investment doesn’t need savings because it creates its own automatically when it happens as a matter of accounting….Demand and strong expectation of demand is what triggers investment.

   Yes investment creates savings but savings which is spent on a physical asset which will not valorise for a number of years not in the present period, and we are talking about creating value to pay for pensions in the present period.

   Imagine a firm which is 20 years old, it has an asset which realises income which has a life span of 45 years after which it ‘cliff edges’ . As an accountant how will you treat that asset on its balance sheet? I imagine you will depreciate it over its lifetime and recommend that the firm retains value (according to the fundamental accounting equation) by investing in another asset that will mature when the old asset ‘cliff edges’ – some portfolio of gilts/bonds which will mature in 45 years and then be used to purchase an annuuity to maintain income. If that is too risk averse some mix of bonds and equities.

   Now delete ‘firm’ and put in ‘individual’. We are talking about a pension portfolio. Seen from the perspective of economic agency it is entirely rational for that agent to invest to maintain income, it would be very risky to assume that some future enlightened post keynsian government will fund all pensions from current income. However even such a government would have to look forward to future liabilities to the economy as a whole in a radically uncertain future and make sensible policies about how to encourage portfolios to be balanced in light of anticipated future income demands, especially from an ageing population.
2. 
   May 26, 2012, 7:27 pm | #

   “Yes investment creates savings but savings”

   Not really correct is it. Debt and only debt creates savings.

   So debt (a financial liability) always equals a financial asset held by another party. Like money or Govt bonds.

   Money always really = savings but it not always called savings. The key is is this money asset that never reduces until debt is repaid (or Govt issue bonds) used for consumption or investment (called savings).

   If for consumption it flows in one area (holidays, food etc). If for investment into another direction like gold, silver, bonds, shares, property etc.

   If we all decided to save less (direct our assets into consumption) then we would not need more debt.

   At present though we have too little debt to meet our needs for both consumption and future or deferred consumption held in so called investments.
3. 
   cliffy

   May 27, 2012, 12:11 am | #

   RJ,

   Given the above consider the below.

   If it is the case that if we consume more we will need less debt, what about if we need to consume more because resources are becoming scarcer, and technology is not making up for the extra cost of extraction, and so consumption goods are more expensive.

   I am kind of thinking in those circumstances we would need more investment and debt not less.

   How does that reconcile with your above thoughts?
4. 
   alainton

   May 27, 2012, 4:09 am | #

   Rj
   You forgot about crusoe type savings (deferred consumption)
5. 
   May 27, 2012, 4:13 am | #

   “If it is the case that if we consume more we will need less debt,”

   Its if we save a lot less then we will not need an increase in debt. But if money and financial assets continue flowing (and being locked) into future consumption saving assets like shares or gold or property etc then debt MUST increase. Otherwise we will have insufficient money flowing into consumption = unemployment.

   Govt’s really need to step up and provide the debt. Failure to do so = lots of unnecessary suffering.
6. 
   cliffy

   May 27, 2012, 9:07 am | #

   RJ,

   What about the dynamic of borrowing against Minsky layer asset price increases in one economy to purchase consumption goods in another country with cheaper production costs which through profit margin accumulates financial assets [ability of business systems to produce] but no debt in that economy.

   How does that come out for you when you allocate the terms you use above to the scenario I describe?
7. 
   May 27, 2012, 6:25 pm | #

   I’m unsure what you mean. But

   Trade surplus countries either

   Hold savings in the trade deficit country or
   For the Euro countries suck money out of the trade deficit country

   But either situation requires even larger debt in the trade deficit country. To cover their own savings requirement but also savings from the surplus country (generated from the trade surplus).

   It’s why the US must continue to run large Govt deficits.