Nobody under­stands debt–including Paul Krug­man

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Paul Krug­man has pub­lished a trio of blog posts on the issue of debt in the last week: “Debt Is Money We Owe To Our­selves” (Feb­ru­ary 6th at 7.30am), “Debt: A Thought Exper­i­ment” (same day at 5.30pm), and finally “Nobody Under­stands Debt” (Feb­ru­ary 9th in an Op Ed).

There is one truly remark­able thing about all three arti­cles: not one of them con­tains the word “Bank”.

Now you may think it’s ridicu­lous that an econ­o­mist could dis­cuss the macro­eco­nom­ics of debt, not once but three times, and never even con­sider the role of banks. But Krug­man would tell you whyyou don’t need to con­sider banks when talk­ing about debt, and call you a “Bank­ing Mys­tic” if you per­sisted.

Well Krug­man would be wrong, and you would be right.

Click here to read the rest of this post.

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Bhaskara II

    Maybe the Sveriges Riks­bank should send an expla­na­tion let­ter to pro­fes­sor Krug­man.

    I don’t read pro­fes­sor Krug­man any more.

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  • TruthIs­ThereIs­NoTruth

    Although this may be a more ‘accu­rate’ point of view than Paul Krug­man, with­out includ­ing inter­est rates (as opposed to inter­est, dis­claimer about ‘sep­a­rat­ing it’ noted) and credit risk it is only mar­gin­ally closer to the truth.

    Plenty of peo­ple under­stand debt very well, but have no inter­est in express­ing their under­stand­ing in main­stream media.

  • Bhaskara II
  • Farnorth5

    Well now for 600 years the Banks have been legally autho­rized and have the capac­ity to cre­ate a sec­ond type of Accounts Receiv­able by deb­it­ing accounts receiv­able and cred­it­ing a per­son or com­pa­nies exist­ing bank account .Both entries end up on the bal­ance sheet
    instead of being split between the bal­ance sheet and profit and loss state­ment for a con­ven­tional entry. For some rea­son this author­ity is chal­lenged by peo­ple who do not under­stand dou­ble entry bookkeeping.A shame really ‚as that is how 90% of the worlds debt money is cre­ated . It assures us of ade­quate pur­chas­ing power to keep the econ­omy mov­ing ‚pro­vid­ing it is used right.

  • Bhaskara II

    An extaor­di­nary visual pro­duc­tion of pho­tos. My com­pli­ments to the pho­tog­ra­pher.

    Yanis, Christina, Ital­ian Min­is­ter for Eco­nomic Affairs and Finance, DIJSSELBLOEM, Mr Charis GEORGIADES, Cyprus Min­is­ter for Finance.

    Extra­or­di­nary Eurogroup meet­ing — Feb­ru­ary 2015
    Released 12/02/2015

    Euro­zone finance min­is­ters par­tic­i­pate in an Extra­or­di­nary Eurogroup meet­ing on 11 Feb­ru­ary in Brus­sels.”

    http://tvnewsroom.consilium.europa.eu/event/extraordinary-eurogroup-meeting-february-2015/extraordinary-eurogroup-meeting-roundtable-11–02-15#/gallery/1

  • Bhaskara II

    @Farnorth5,

    .Both entries end up on the bal­ance sheet … instead of being split between the bal­ance sheet and profit and loss state­ment for a con­ven­tional entry.” 

    What is your line of con­sid­er­a­tion here please?

  • Willy2

    I wouldn’t waste time debunk­ing a moron like Krug­man.

  • Farnorth5

    Bhaskara ii

    Steve Keens work shows an impor­tant item missed by many
    Economists„that is most peo­ple under­stand 3% of the in cir­cu­la­tion
    money is cash. (Coins or Bills ) But the 97% bal­ance is the arti­fi­cial debt money cre­ated by the banks/central banks over this past 600 years .with the use of the spe­cial accounts receiv­able item noted above..
    It takes very lit­tle effort by your bank to cre­ate debt money for your account,.A sim­ple jour­nal entry at days end does the trick.The point is this power rests with the Banks ‚not the Fed­eral Gov­ern­ments of the world.

  • Bhaskara II

    Farn­worth5

    The pur­pose of study­ing eco­nom­ics is not to aquire a set of ready-made answers to eco­nomic ques­tions, but to learn how to avoid being deceived by econ­o­mists

    (Robin­son, 1951–80, vol;. ii, p.17) *
    Ital­ics mine

    *from:
    Joan Robin­son: Crit­i­cal Assess­ments of Lead­ing Econ­o­mists, Vol­ume 1, p. 84
    edited by Prue Kerr, Geof­frey Colin Har­court
    Google books, pre­view.

  • Bhaskara II

    Old pho­tos of an Indian money lender
    “Life, Work and Fam­ily of an India Money­len­der — Thaal, India 1946”

    http://www.oldindianphotos.in/2012/11/life-work-and-family-of-india.html

  • Bhaskara II

    I saw two inter­est­ing things related to book­keep­ing in the money lender pho­tos above, that were men­tioned in the arti­cle “Bahi-Khata: The Pre-Paci­oli Indian Dou­ble-entry Sys­tem of Book­keep­ing”, by B. M. Lall Nigam. Pub­lished in 1986 in ABICUS, Vol. 22, No. 2.

    1. The lender started record­ing the trans­ac­tion before he received the money.
    “A bahi sym­bol­izes the molto: ‘First write then give’. That is, if there is an error, take from the records.”

    2. The pages of the ledger are creased by folds.
    “The prin­ci­pal bahi is usu­ally 30 inches x 7 or 10 inches, while smaller books are 13–15 inches x 7–10 inches like note­books. This struc­ture dif­fers phys­i­cally from the tra­di­tional Eng­lish books of account bound, ruled and seri­ally num­bered. There aie no columns as such in bahi but the pages are folded into eight, each fold (shal) serv­ing as a col­umn. Con­trary to the Eng­lish con­ven­lion. here ihe left-hand side is the Jama (credit) and the right-hand side the Nam (debit).”

  • TruthIs­ThereIs­NoTruth

    Farn­worth

    Agree with your first state­ment re the pro­por­tion of money in cir­cu­la­tion.

    Your sec­ond state­ment is I think the most likely inter­pre­ta­tion of Steve Keen’s propo­si­tions given no work­ing knowl­edge of the bank­ing sys­tem. I can tell you that the truth is far from that sim­ple and believ­ing that it is that sim­ple leads to unre­al­is­tic con­clu­sions. Steve Keen’s reg­u­lar calls on the Aus­tralian hous­ing mar­ket are a tes­ta­ment to that.

  • Farnorth5

    Truth is There is no Truth
    You have a point.Knowing the creation/mechanics of the debt money sys­tem only gives you a per­cent­age of the truth.
    Its only when you real­ize the fed­eral govts have the abil­ity to also change it by the terms of ref­er­ence for the mortgages/grants involved as well as immi­gra­tion pol­icy, as a real exam­ple.
    I hap­pen to track the Van­cou­ver Canada house prices.Until you know such things as the amount of cash dol­lars com­ing from out­side the coun­try as well as the cur­rent con­di­tion of mort­gage stan­dards in Canada do you have an app­pre­ci­a­tion for the dif­fi­culty involved in mak­ing accu­rate pro­jec­tions. A guess with 80% accu­racy is hard to come by.

  • TruthIs­ThereIs­NoTruth

    Farnorth — I con­sider ‘know­ing the creation/mechanics of the debt money sys­tem’ a heroic state­ment. I know enough to under­stand what reflects real­ity or not, but I would never claim to com­pletely under­stand it and I am scep­ti­cal on any­one mak­ing such a claim. 

    Yes we have a hypoth­e­sis which is intu­itive and in a very sim­ple self con­tained sys­tem at a sin­gle trans­ac­tion level as pre­sented in the arti­cle makes per­fect sense. The prob­lem is iron­i­cally anal­o­gous to the aggre­ga­tion prob­lem in neo-clas­si­cal eco­nom­ics. The hypoth­e­sis pre­sented apply­ing to a sin­gle trans­ac­tion doesn’t aggre­gate well to explain real phe­nom­ena and real fea­tures of the bank­ing sys­tem per­tain­ing to ‘debt cre­ation’.

  • Bhaskara II

    Review dis­cus­sion of a book on bank­ing:

    The Bank Credit Analy­sis Hand­book — Golin & Del­haise”

    http://www.cornerofberkshireandfairfax.ca/forum/books/the-bank-credit-analysis-handbook-golin-delhaise/

  • Willy2

    Krug­man con­tra­dicts him­self. In one sen­tence he says “One’s per­sons debts are another person’s asset”. Whereas in another sen­tence he says: “We owe that debt to our selves”.

  • se7en­snakes

    The way of credit:
    1) Buyer approaches Buyer bank for a loan and it is approved
    2) Buyer signs promis­sory note (nego­tiable instru­ment) and con­se­quently Buyer bank cre­ates an account for Buyer with the appro­pri­ate funds.
    3) The Buyer funds are labeled “lia­bil­i­ties”.
    4) Buyer makes a pur­chase with the banks “lia­bil­i­ties.
    5) The Seller deposits the “lia­bil­i­ties” in Seller bank.
    6) The Seller redeems the “lia­bil­i­ties” in Buyer bank.

    Two facts about the lia­bil­i­ties:

    I)The lia­bil­i­ties are infla­tion­ary to the money stock as would any check.

    II) The lia­bil­i­ties are not com­modi­ties. They are cre­ated ex-niholo, and are fac­tu­ally endoge­nous to the com­mer­cial bank­ing sys­tem. They are cre­ated entirely inde­pen­dent of gov­ern­ment, hence a spe­cial fiat lia­bil­ity.

    Ques­tion: When the “lia­bil­ity” returns to the Buyer bank are the bank’s not bal­anced by the infla­tion? The Buyer bank pays the Seller bank what? As soon as the Seller bank receives pay­ment, which is basi­cally num­bers in a com­puter, there is infla­tion. With the result­ing infla­tion doesn’t the Buyer bank bal­ance their book with either

    a)New deposits
    b)Interbank Loans
    c)Federal Reserve’s dis­count win­dow

    All of these which are the result of the addi­tional money in the money stock?

    So where is the Con­sid­er­a­tion?

  • se7en­snakes

    Paul Krug­man is there to hide a sys­tem, which if it is held under scrutiny, it is ille­gal in every sense