The Debt Puzzle

How do governments accumulate such high levels of debt without constant major crises? Who is paying the price?
In this interview Ricardo Reis (‪@theLondonSchoolofEconomics‬) challenges conventional thinking on debt sustainability and raises important considerations for the future. He explains that governments can sell debt at lower interest rates, which provides a "debt revenue" and allows them to borrow large amounts without dire consequences. However, he also highlights potential risks for future debt sustainability, such as high inflation. Reis explores the trade-offs in financial regulation and the impact on the demand for government bonds.
Find a copy of his latest book "A Crash Course on Crises: Macroeconomic Concepts for Run-Ups, Collapses, and Recoveries" at press.princeto...
With alarming frequency, modern economies go through macro-financial crashes that arise from the financial sector and spread to the broader economy, inflicting deep and prolonged recessions. A Crash Course on Crises brings together the latest cutting-edge economic research to identify the seeds of these crashes, reveal their triggers and consequences, and explain what policymakers can do about them.
Each of the book’s ten self-contained chapters introduces readers to a key economic force and provides case studies that illustrate how that force was dominant. Markus Brunnermeier and Ricardo Reis show how the run-up phase of a crisis often occurs in ways that are preventable but that may go unnoticed and discuss how debt contracts, banks, and a search for safety can act as triggers and amplifiers that drive the economy to crash. Brunnermeier and Reis then explain how monetary, fiscal, and exchange-rate policies can respond to crises and prevent them from becoming persistent.
With case studies ranging from Chile in the 1970s to the COVID-19 pandemic, A Crash Course on Crises synthesizes a vast literature into ten simple, accessible ideas and illuminates these concepts using novel diagrams and a clear analytical framework.
Learn more about his work at www.lse.ac.uk/...

[@Danny_6Handford]

One of the most stunning things I learned about modern economies is that money is created out of thin air when someone takes out a loan and goes into debt. I was well into my forties when I learned this about modern money. At first I did not believe it and it is certainly not what I was taught about money in my younger days. The money is created by entering numbers into the borrower’s account when the borrower takes out the loan. As the loan is paid back, the money that was created for the loan is eliminated and no longer exists, but the bank or financial institution that created the money gets to keep the interest that was paid. So, the more debt there is, the more money there is and the more interest that is paid to the bank. Modern money is mostly about getting governments, corporations, businesses and people into debt and there is also quite a bit of smoke and mirrors involved. On the international level, debt has been used as a tool to gain power, status and influence over other countries for centuries. In the past century, the US perfected this technique. In the 21st century, China and some other countries have also learned this trick. The idea is to keep the borrowers continuously in debt so they can continuously keep paying interest to the “lenders”. The joke is that the money given out for the loans that make up this debt does not exist. It is basically a “fake loan” and to make the joke even better, to get a loan like this, most of us including governments of other countries have to put up some collateral, so if you default, they can take ownership of your collateral. So basically, they get whatever collateral you put up for free and with no risk since the money they “lent” you did not exist. Supposedly, this has been determined to be a legitimate way to do business! This is how the US has been able to be the dominant player in the world economy but is now being challenged. The Gross Domestic Product (GDP) represents the size of the economy which is the amount of money the economy is worth. When the economy is continuously growing, the GDP is also continually growing. Similar to any addiction, more and more borrowing is needed to have the same effect on economic growth. When the government debt starts to become greater than the value of the Gross Domestic Product (GDP), technically it will no longer be possible to pay back the government debt. If it continues, the buying power of money will start to be significantly reduced and if the government debt starts to become several more times higher than the GDP, the money and financial systems will probably collapse. If this happens, the system is reset and the cycle is repeated. During the run up there will be some good times but, after the reset, times will probably not be good and war is also a possibility. This cycle has been repeated continuously throughout history from the Chinese Dynasties to the Roman Empire to Germany after World War One and to Argentina, Venezuela and to many African and Asian nations in the 21st century. Not sure if the US can avoid this cycle. If they can, they would be the first. The idea and thinking that the economy always has to grow for there to be innovation, progress and prosperity may be a problem on a finite planet with limited resources and the focus now needs to be on sustainability not on growth! Presently if the economy is not growing, it is considered a failure. This type of thinking cannot go on uninterrupted on a finite planet with finite resources. There needs to be flexibility in the system for the economy to expand and contract and for a contraction to be considered normal and not a problem or a failure. The contraction needs to be just as prosperous and productive as the expansion. For this type of thinking to work, there needs to be some new economic theories and models developed along with some new types of money and financial systems based on economic sustainability not on economic growth and money inflation. I am sure there will be some Nobel prizes awarded to the academics, economists, corporate CEO's and business leaders and of course politicians and government officials that can figure out how to make a sustainable economy work and how not to devalue the nation’s money in the process. The way this can begin and improve peace and fairness at the same time is when our business, government, military and academic leaders along with our wealthiest and brightest and smartest among us can learn to be much more truthful, honest and the levels of trust and respect among humans can rise to a point where all religions can admit that their books are fiction and stop lying about magical authorities that live in the sky and all nations can reach a point where they will no longer feel the need to spy on each other and commit resources to manufacture weapons that can wipe out most of the life on this planet and from there start working towards reducing and eventually stopping the manufacturing of any weapons of war. Our leaders need to understand that the wellbeing and happiness of others benefits everyone and is the bases for morality. I do not think it matters if the value of money is tied to gold or if it is pieces of paper, coins, tokens or if the transactions are entered into accounting books or tracked by numbers in computers. If the trust, honesty, discipline and responsibility of governments, banks , businesses and financial markets is not there, the money and financial systems will always end in some type of collapse or reset regardless of whatever money and financial systems are used or developed in the future. Governments can create all the money they need to run the nation without borrowing any money from private banks. Whether governments borrow money that banks create or create the money themselves, there is no real value in this money. It will have value because we will probably have faith in the government and would be willing to work and exchange good and services for this money. This money will also have value because we will need it to pay our taxes. If our trust and faith in the government goes, so will our trust and faith in the money they create. If we do not have trust and faith in the government, we will not have a civil nation nor a civil economy and there will be some type of black market or anarchy based economy. I do not think this would represent progress. Managing and controlling the nation’s money is how the government gets its power and is one of the most import jobs the government has right up there with national defense and protecting us from criminals and protecting our privacy. The privilege of creating the nation’s money should only be reserved for the government. Private banks should only be allowed to lend money that they actually have. If the banks do not have money to lend to businesses and corporations, the government can create this money and lend it to them instead of the private banks and the interest on these loans can be paid to the government, not to the private banks, which would be a nice source of government revenue and would probably result in lower tax rates. If the government needs money for national defense or to build infrastructure or for any other government operations, they can simply create it themselves without borrowing money that the private banks create and going into debt and paying interest to the private banks. If the government creates all the money it needs, the government will not have a national debt and will not have to pay interest on the money it created. There will never be a “debt ceiling” because there will never be a debt!

[@icyvision9]

amazing explanation

[@julianclover1663]

MMT - get the word out there ! Let's hope the Chinese are reading the same books

[@danangelakov7247]

Learning about MMT at an absolutely basic level changes the way you think about economics overall.

[@nedim_guitar]

That's how they punished Greece.

[@DumasMoran]

"money is created out of thin air when someone takes out a loan [from a bank] and goes into debt" Interesting. Is this MMT? I thought MMT claimed that bank loans were NOT money, per se, but only claims over time on an already existing government-created currency supply (which is the ACTUAL money). I.E.: If the already-existing government-created currency supply in circulation for a country was $200, and you went and got a bank loan for $50, but owe the bank $25 interest after 10 years, you can spend that $50 now, or whenever, but you have 10 years to figure out how to get a hold of $75 - and if the government doesn't spend any more $$ into the economy, that $75 has to be taken away from someone/somewhere else. Or is this just semantics about "money" vs "currency"?

[@6thface]

Any discussion about inflation that does not address record corporate profits from monopolized industries is sus.

[@ryanslab302]

Record corporate bankruptcies though.

[@brandonbreunig6735]

The state is a capitalist state. It's their job to allow and support profits

[@ryanslab302]

@Charles Brainard Some banks, for now.

[@6thface]

@@ryanslab302 Many modern bankruptcies are manufacturered. Sears.... Kmart...... these were wealthy viable businesses that were picked clean by venture capitalists. SVB collapsed because depositors made a run on the bank. No bank, by design, has all the cash to pay out depositors.

[@TheCommonS3Nse]

I like Anwar Shaikh’s theory about inflation being the result of the complex interplay between purchasing power and the growth utilization rate. The government can spend all it wants on things that increase the growth capacity of the nation… but if the government is spending money to line the pockets of the wealthy then it isn’t building new avenues for wealth creation, it is merely subsidizing wealth that has already been created. This leads to inflation in other asset classes as the money must find somewhere else to be spent. It helps to explain why housing prices have been so stubbornly high. If there is nothing profitable to invest in, then real estate becomes a viable investment vehicle and house prices inflate. Without a better investment opportunity to pull that capital out of real estate, rising interest rates will only make rents more expensive.

[@TheLivirus]

How was the government able to print so much money for so long without causing inflation? Simple: the money never reached consumers.

[@gallectee6032]

There was inflation, except it's in the stock markets.

[@Eastbayrob]

It just pooled in stocks and real estate we have had asset inflation for a long time.

[@trixn4285]

Can you bring on Randall Wray or Warren Mosler to explain that is is certainly not how the monetary system works? Bonds are sold at an auction to a selected group of primary dealers that pay with central bank money and have an account at the central bank. And central bank money always comes from the central bank. The private sector can only get hold of bonds on the secondary market and it certainly doesn't lend to the government. Also taxes can only be paid because the government spends first because that creates the assets for the private sector to pay them.

[@eroceanos]

Well, let us be honest: P - P + I is an escalating debt trap by design. And that should be a primary fundamental truth in economics. From that simple theorem, all insanity and instability is readily explained

[@johnoldfield2390]

The expenditure puzzle?

[@zareenwilhelm5811]

3:15 WHAT was it called?? 🤔

[@greogewestmann4913]

Any Government with a sovereign currency like the USA, Canada, UK... has no need to "borrow" in its own currency. It is the issuer of the currency and has no need for revenue. Government finance is not like your home finances, we are the users of the money system, the government is the creator of the currency, the banking system also creates money but only at the will of Government. What Ricardo Reis is saying is not new economic thinking, it is Very Old economic thinking. So old, that it is no longer true. We are no longer on the Gold standard.

[@trixn4285]

That's exactly what I thought. Why is this view presented here on this channel that calls itself "new" economic thinking? It's certainly very old thinking and the reason why mainstream economics continuously gets their analysis wrong.

[@rolandnelson6722]

Except that money is a measure, a intermediary device. In order for a measure to be useful it has to be reasonably constant. In order for it to be an intermediary it has to be rare enough that you have to ‘find’ it through work that is worth something. If it wasn’t rare it would not work as an intermediary you would - if there was any point in getting it - go to the source and pick it up. Money makes ‘finding’ the good you want a lot easier than double coincidence of barter, but can’t be too easier you don’t have to do anything. The staggering anthropological finding of the last ten years is how, in spite of how easy it is for rich to compounding their wealth, they are so reluctant to spend.

[@trixn4285]

@@rolandnelson6722 It is an abstract measure indeed, a measure of indebtedness. Therefore it can not be rare. Of course it's true that you should have to earn money by doing something productive. But remember that money is created by spending money that you do not yet have. This is why we have banks. They are like a private-public partnership that is responsible for checking if somebody will be able to pay off the debt. And the central bank and the government is responsible for supervising that process. This construct, while not perfect, is much better than any commodity money can ever be because commodity money doesn't reflect the social relations and the debt character of economic activity. If you conceptualize money as a commodity that is rare you make a mistake. That is not (and arguably has never been) money. Also in a credit based monetary system the money has to continiously be validated by producing stuff because credit has to be paid back, so the money is not just there infinitely. With commodity money its exactly the opposite. Whether we produce something or not, it's always there. Therefore it can not be stable in the sense that it reflects economic activity and wealth.

[@greogewestmann4913]

​@@rolandnelson6722 Yes, that is a version of the mainstream philosophy, unfortunately it doesn't ring true compared to today's reality. Taxation forces society to utilize the currency our government supplies to us. If it wasn't for taxation, anyone would be free to use anything they wanted for means of exchange. Gold, Silver, Oil...bitcoin... and the system would be open to all sorts of con-artistry, worse than it is today. As it is, all businesses must use the government's currency because with every exchange there is a tax to be paid, so the business demands that same currency from their customers in order to pay their taxes, the labourer also pays their income taxes in the currency the government demands, therefore they also demand payment in said currency. It's not scarcity that makes modern money function, it's the demand from the government.

[@vkrgfan]

The inflation will persist. The West expected the flow of cheap oil and gas from Russia and cheap labor from China indefinitely, that wishful position is over, and the economy will never be the same again. And no, I disagree that the debt situation is dire everywhere in the Western alliance as in the USA, that's not true. Not all countries overspend and overconsume, what unites them is a military alliance and being held hostage to the US policy. They can not make independent decisions without authorization from the US corporate clan which controls the military-industrial complex as well. So, therefore they are obliged to make poor economic and public policies even if it hurts them directly as long as they are appeasing big daddies. It's not a secret why prices rise, prices rise with the shortage of supplies and raw materials, therefore you won't solve inflation by a perpetually growing population that fights against scarcity.

[@JerzyFeliksKlein]

He sounds like the smartest guy in the room, just ask him 😄

[@djl8710]

How about we just don’t gamble on expected inflation?

[@greogewestmann4913]

@@coronalmassejectionsdontcare That may be, but at what cost ? How high must the "natural rate of unemployment" be to sustain our plutocracy ? How many millions must suffer poverty to perpetuate this failing system ?

[@zareenwilhelm5811]

6:40 So the government would be better off if it were NOT borrowing -

[@zareenwilhelm5811]

7:30 You say that but that’s not an innocent solution.

[@delfimoliveira8883]

Call swaps insurance is a way that economists normalize the idea that their science is fondamentally flawed and casino game theory should substitute exonomic neo classic theory.

[@danielnc1979]

This is pretty terrible. It is unbelievable how economists still claim that government spending capacity ultimately come from taxes, without ever asking themselves "where does the money used to pay for taxes come from?". Obviously, since money is a State debt, issued the State and no other, taxes cannot be paid until money has been created as the result of some State payment. I.e. government payments are casually prior to taxes. Economists are still mostly "flat Earth" astronomers trying to understand the cosmos.

[@albirtarsha5370]

A) is the clear standard arithmetic answer. sqrt(4) is 2. The path to +2 or -2, would be to ask for the solutions to the algebraic equation: x^2 = 4 .

[@hornox4life]

Puzzle? What about game.

[@zareenwilhelm5811]

6:15 Well we’re also talking about tyranny, right? I’ll never but a government bond - I think it’s against my religion.

[@MatthewCuciti-ui9gr]

the fact that wages have to increase to prevent inflation from dragging on does not imply anything about monetary policy, it implies that in order to swiftly adjust for inflation executive and legislative power should be used to increase wages, by doing things like raising the minimum wage, enforcing antitrust and protecting unions. The recent NLRB regulation perhaps shows that the administration understands this to some extent

[@TheRJRabbit23]

Money is man made

[@rifelaw]

1) The investors' losses over the last 12 months are sunk costs. They are looking for return going forward. 2) The only way to keep up with inflation is investing in illiquid assets, but we're talking about the portions of portfolios investors want or even need to be liquid. Liquidity carries a surcharge, and investors know it. 3) Investors are in a position to haggle only if they have a liquid investment alternative at least equivalent to government debt. Good luck with that.

[@TheCommonS3Nse]

I think a large part of this comes from our neoliberal focus on cutting government spending. Over the last few decades, our governments have invested less and less into the infrastructure that generates the potential for growth. Things like broadband internet, clean power generation like nuclear, but also healthcare and education. As a result, we haven’t built up new industrial capacity to replace dying industries. Now there is nothing profitable to attract investment, which means that investors turn to other asset classes like real estate which are far less liquid but offer a moderate return on investment.

[@zareenwilhelm5811]

Inflation swap contracts 😰

[@bennyboii8886]

Not much new economic thinking here. This is bog standard economic theory which doesnt take into accout how the monetary system works.

[@oaasal]

It's called arbitrage

[@apollothirteen9236]

If the working class and the working poor paid their fair share of taxes, quit getting government handouts and quit being so greedy then inflation would not be an issue.

[@gallectee6032]

Is this a joke?

[@apollothirteen9236]

@@gallectee6032 It is a fact. Little people have been gaining the system for years while high school income & wealthy people get screwed.

[@gallectee6032]

@@apollothirteen9236 And do you consider yourself as part of the working class, or as a temporarily embarrassed billionaire?

[@gallectee6032]

@@apollothirteen9236 Who provided this information to you? Where do I learn this?

[@apollothirteen9236]

@@gallectee6032 You see it every day if you pay attention. Do you think when I give a $20 tip to the guy at my country club reports it on his taxes? What about the waitress with her tips or the teenage girl next door who baby sits. Do you think she is paying taxes?