The Big Idea about Private Debt

[@Ken19700]

If I remember right there were ten or twelve economists who accurately predicted the 2009 crisis. They were from all schools of economic thought but the one thing they had in common was their concern over private sector debt.

[@kellnola]

A lot of non-economists did as well. I didn't understand how it was happening, but it was very obvious some tremendous fraud was being committed by 2005. Needless to say, any economist who missed this has absolutely no credibility.

[@Rob-fx2dw]

Ken MacMillan - You say they were all concerned over private debt. But that is understandable since all government debt becomes private debt. That is simply because when debt is created by the central government monetary expansion in a fiat system (by the government's actions in concert with the reserve bank) the obligation to pay the interest on that debt falls solely on the private sector. Government does not pay off it's debt (witness the increasing national debt) and does not do so because it would involve having a budget surplus which was consumed to pay off the debt it had created in the first instance. The opposite does not happen with government paying off the interest on private debt.

[@shawnsteiny1240]

Because of the Royal Commission into the banks (Australia) we already have a break in lending. The correction is upon us!

[@inaciotasse6706]

Thank you for posting these lectures, hope somebody directs MPs to your youtube channel/web pages. I don't get what would happen to the economy after the debt jubilee/banking reforms take place. I don't get how the turnover covers the interest payments. Is the turnover a linear growth or exponential? If it's linear then perhaps compound interest should be stopped and replaced with simple interest payments?

[@inaciotasse6706]

From these websites i get an understanding of how everyone in the economy can pay the principal and interest on their loans. It has something to do with velocity of money or how frequent the transactions are between everyone in the economy. ( preview.tinyurl.com/o3mlzlh , preview.tinyurl.com/j9x29dn )The first article argues that most interest stays in the speculative economy rather than the productive economy. Money in the speculative economy has a slow velocity of money compared to the productive economy. My understanding is that interest siphons money out of the productive economy, creating a shortage, thus requiring new debt to compensate. Could that be part of the high failure rate of businesses? Interest getting thrown into assets is leaving some people falling short of meeting their debt obligations?

[@inaciotasse6706]

If most interest gets reinvested into the speculative economy and has low velocity, then perhaps policies are required to get interest into the real economy. A law in which income from interest can't be invested into assets but must be spent in the real economy. Perhaps the interest is tagged as 'unclean' and while it's unclean it must be circulating in the real economy. It has a half-life based on time or number of transactions the interest goes through in the real economy. It can't be converted to cash either. Another idea I have is that the money must be spent in the real economy and there's an expiry date on the interest, after which the money goes to government or ubi or global aid, kind of like a lazy tax. Not sure if it should be allowed to pay down debt.

[@inaciotasse6706]

I want to clarify that the restriction on how interest can be spent has a half-life. The restriction on the money gets lifted over time. The money itself doesn't decay over time. While it's restricted/'unclean' the interest money should be used in the real economy or to pay down debt. I forgot that if interest earned can't be used to pay down other debts then it won't help borrowers in the economy pay off debt.

[@inaciotasse6706]

My knowledge of economics is limited. I think that money should get tagged as it goes through flows in the economy. I'm guessing this would be useful on flows other than interest payments. The tags should add constraints about how that money can be used. The constraints on the money should decay over time by some progression. I'm thinking an exponential decay with an adjustable half-life. It could be based on time, number of transactions or some other measure.

[@inaciotasse6706]

This idea should be extended to other income earned from the ownership of assets. I'm thinking about rent on property, ip and copyright royalties, etcetera. This income should get recirculated in the real economy and not be used to buy assets and consequently inflate asset prices. Steve's suggestion on limiting purchasing power of assets to a multiple of income should not include income from asset ownership but should only include labour for individuals and profits on goods sold/services rendered for business. Accounting hackers should be consulted to break the systems proposed and fix the problems with it. I hope we find the way to fix all the flaws in the economy someday soon.

[@christianlibertarian5488]

I'm an American who just moved to Oz. I just bought a house. Now, this was a stupid idea, but that's me. What I learned, though, is that all Australian loans are variable rate, and the rate is not tied to anything. OMG, this is a fatal problem for Aussie mortgage debtors, and possibly catastrophe. Why? Aussie banks borrow from abroad to get money for future lending. So the rate of mortgages is tied to the value of the Aussie dollar. With a minor blip in the economy, the dollar will fall relative to the world. This will cause the banks to raise interest rates, resulting in a slow down in the economy, resulting in a further fall in the dollar and...a black hole. The RBA will not be able to lower interest rates for mortgages, even if it lowers its rates to negative territory. In fact, the solution would be to raise rates, improving the value of the Aussie dollar, and limiting the big 4 banks' exposure. Tell me where I'm wrong, please! I have already shown myself to be stupid for buying a house.

[@numbereight886]

They do a lot of carry trade I believe, effectively borrow cheap Japanese money and then lend it to Aussie citizens, the issue though it's denominated in Yen. One thing to remember is the govt cannot afford for the property market to fall more than say 20% so if there's a prob they'll drop int rates.

[@Charliechorizo]

Dumb decisions aren't dumb if you learn from it and sell before it's too late.

[@csyiphk]

Unfortunately you bought nearing the market peak. Did you get out of the loan by now?

[@keithholden]

If gdp was rising at 3percent debt was rising the same and wages at the same percent everything would be better. Wages are rising less than the gdp because of globalization, out source of labour. To keep it all going the government is borrowing and spending to make up for the lack of wage growth in the private sector They are trying to solve this also by lowering interest rates and keeping housing moving up. Govt made up for aging population by immigration and temp workers. this also leads to slower wage growth. Govt made up for locals not buying properties by foreign investors

[@wormytom]

Professor do you have a video where you get to explain your modern debt jubilee solution? How does it differ to the universal basic income? Which is better?

[@smartiepancake]

How should UBI be funded?

[@ama-tu-an-ki]

D Bruce Government creates a fiscal stimulus. This is directed to those in debt. The money comes ear marked for paying back debt. Debtors get their debt paid pack. Central banks monetize this government created debt, just like the monetize the current/previous QEs. You really need to watch the videos to understand how the interplay of money, credit, economic growth (GDP) and debt servicing (loan interest) interact.

[@smartiepancake]

You seems to be talking about the jubilee, not ubi... are you?

[@smartiepancake]

Anca Hummel Mason Gaffney called Henry George's single tax (LVT) a "true fiscal stimulus" - "It stimulates demand for labor by promoting hiring; it precludes inflation as the labor produces goods to match the new demand. It precludes deficits because it raises revenue. That is its peculiar reconciliatory genius: it stimulates private work and investing in the very process of raising revenue. It is the only tax of any serious revenue potential that does not bear down on and suppress production and exchange." What do you think about that?

[@conscious_being]

In the modern debt jubilee, newly created debt-free money is used to pay down/pay off existing debt, if any. The amount of money each individual receives is likely to be based on the total taxes they paid in a period (with a guaranteed minimum), in order to ensure fairness. The purpose of the MDJ is to reduce the total level of private indebtedness. The objective is macroeconomic stability. The Universal Basic Income scheme is intended to address a different problem, increasing unemployment and hence lack of incomes for increasing share of population because of increasing automation. It is supposed to replace means tested welfare schemes, the objective being to remove the bureaucratic steps involved in the transfer. The objective is social stability.

[@mattgilbert7347]

No way could I follow this. Can anyone explain it simply?

[@MrDaymien1]

Hi Matt There were a few really good points on this video , really worth watching it a few times. Ill give some of my interpretations .Larger Governments encourage larger private/people Debt . Larger Privet Debt is basically credit growth, the more money people owe . Credit growth creates more " taxes" for the government and growth in all sectors of the economy which stimulates the employment, so more taxes .< GDP numbers are the Governments index of the economy , of how well they think its going > Total GDP is . Loans , taxes , Government spending, all work done by people in a country and sales, this is all part of total GDP. GDP as a measure of how well the economy is doing is loose at best , there are good and bad transaction in the economic. The creation of credit for this growth . Basically, banks create money when they lend people money. When they lend money it becomes an asset on there books, they or others then borrow against this new asset . So the banks create money out of thin air, lend the assets out , earn interest on that asset as well. There was a breakdown were most of the money created was lent to house purchase.And very little to business . So this has increased privet/ peoples Debt, basically the rapid growth of house prices world wide. Private debt to GDP and the inevitable decline of an economy after high privet debt is incurred . The best graph was the China Privet Debt to GDP. Watch the explanation a few times. The penny drop moment is in the final years , where credit is still growing/ in demand but slightly lower. It effect GDP. It shows that there comes a time when people can not borrow any more money and the amounts of people borrowing declines/ every ones tapped out . The effect is, that because credit growth slows in the later years,,, GDP slows . So the growth of the economy slows. This effects the total economy, jobs being a major thing. So the decline in credit causes job loss : > . If people have large debt and no job, the economy crashes . If people don't take out credit , GDP falls crash. Matt allot of this is common sense , but with all the media crap its hard not to get caught up in the hype of "DEBT is good". Government likes us to spend and be in debt. It allows larger government and more control through more tax . But always ends badly . In not sure what country your in , but this is a world wide issue. What Professor Steven Keen has made is a model of exactly what happens and has proved it . He is a very clever fellow. This is only my interpretation on the video. Please reply if you want to chat .

[@fvgerr]

Thank you Damien

[@robertgillespie3635]

In an oversimplified nutshell: money is endogenously created through lending in the financial sector (not by the central bank), and the aggregate demand/expenditure in an economy is income plus the change in private debt. To solve our current economic ills, we must reduce the level of private debt in the economy to an acceptable debt-to-GDP ratio instead of 300%+, rather than focusing so much on reduction in public debt levels.

[@keithholden]

Australia will be ok if we keep borrowing.. Maybe by 2021 demand for raw materials will rise along with price and our borrowing can slow. Money will come into Aus by selling not borrowing at that point.

[@Charliechorizo]

I don't think you understood the concepts in this lecture. The whole point of the model is you can't "keep borrowing". How the fok are raw materials going to service private debt? Sleep tight.

[@SilverFalcon460]

Let's condense this all down to one main point; our economy is collapsing...period. Prepare for t/ worst, hope for t/ best.

[@thomasandersen9310]

You could have stated that in 2005, 1905, or something like 2500 B.C. and not be wrong. The problem is that an impending implosion/failure/whatever does not equal permanent eradication. Even if the economy as a whole collapsed before I was done writing this comment there is nothing to suggest that "this crash will be the final one". Therefore, I think preparing for the worst is like jumping off of every ship because someone told you about Titanic. Having said that I think it is strange to see how little resonance people like Steve Keen receive. I would stretch it further and say that it scares me, but that does not mean we should prepare for doomsday.

[@SilverFalcon460]

Thomas Andersen When I say prepare for t/ worst, I mean as much extra food/water/medicine/gun(s) and ammo, etc...and THEN hope for t/ best.) ...then, you might know what it's like...

[@thomasandersen9310]

I assumed that was what you meant. However, this hording of essentials will alter your behavior and outlook. After a while I think there is a point where one _hopes for a meltdown_ as it will be the only way to _justify the hording_ that have taken place previously. Furthermore, no one could genuinely prepare for the worst. There is no meaning to life if everyone around you is dead anyway. What I assume - and correct me if I am wrong - is that when people say _prepare for the worst_ what is actually meant is something like a "temporary violent chaos that will last longer than most people can handle, but yet short enough so that the prepared ones will manage with whatever supplies they have at their disposal". It doesn't really depend on an analysis of anything, it is more a hope of validation for those who believed in it. -And satisfactorily, the ones who did not believe will suffer grave consequences. Very easily turned into a cult. Generally speaking of course. Steve Keen is speaking about the mechanics of debt in the economy. I'd say we stick to that. To balance my long comment in the previous paragraph I wanted to ask you what other people you find inspiring in the field of economics?

[@SilverFalcon460]

Thomas Andersen I hear what you are saying, man and it is true, there are NEVER any guarantees, but, I figure if you have at least a months worth of provisions, you are going to be in a much better position than t/ vast majority AND you MAY not become AS stressed out.?

[@brantknudson8194]

where's the rest of it?

[@YOHONOMOTO]

It amazes me that one needs those mathematical calculations to accept the principle that an economy with rising debt has more demand than one with falling debt. Krugman's idea that private debt has a NET effect on the economy makes no sense. Even if debt is simply a "more responsible" party loaning to a "less responsible" party, the "more responsible" party is the rich person who has more money than he/she knows what to do with. It's not like that lender was going to go out and spend all that excess cash. The rich person doesn't need any more houses. It's the act of lending that allows someone who actually needs a house to BUY it. Where there was no demand, there now is b/c a loan was made to someone who would use that money to purchase the property, good, or service.

[@interactparty6629]

Not necessarily where debt is being used by households to pay existing recurring bills which is the case within millions of households in the world.It cannot be said that such a household is contributing to growth through its debt levels as its consumer power to the real economy of trade is completely lost.

[@nasaie24]

You keep underestimating the rally. 2017=1927.