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.

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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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19 Responses to Nobody understands debt–including Paul Krugman

  1. Bhaskara II says:

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

    I don’t read professor Krugman any more.

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  3. TruthIsThereIsNoTruth says:

    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.

  4. Farnorth5 says:

    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.

  5. Bhaskara II says:

    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

  6. Bhaskara II says:

    @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?

  7. Willy2 says:

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

  8. Farnorth5 says:

    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.

  9. Bhaskara II says:

    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.

  10. Bhaskara II says:

    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

  11. Bhaskara II says:

    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).”

  12. TruthIsThereIsNoTruth says:

    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.

  13. Farnorth5 says:

    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.

  14. TruthIsThereIsNoTruth says:

    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’.

  15. Bhaskara II says:

    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/

  16. Willy2 says:

    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”.

  17. se7ensnakes says:

    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?

  18. se7ensnakes says:

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

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