The Secular Rise of Debt

[@krcalder]

The USP of neoclassical economics - It concentrates wealth. Let’s use it for globalisation. Mariner Eccles, FED chair 1934 - 48, observed what the capital accumulation of neoclassical economics did to the US economy in the 1920s. “a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped” “The other fellows could stay in the game only by borrowing.” Mariner Eccles, FED chair 1934 - 48 Your wages aren’t high enough, have a Payday loan. You need a house, have a sub-prime mortgage. You need a car, have a sub-prime auto loan. You need a good education, have a student loan. Still not getting by? Load up on credit cards. “When the credit ran out, the game stopped” Mariner Eccles, FED chair 1934 - 48

[@aryansaini5219]

This is really interesting!

[@aryansaini5219]

Where did you read about this? I'd love to educate myself more on the subject

[@krcalder]

@@aryansaini5219 The quote came out of Adair Turner's book "Between Debt and the Devil" Well worth reading. We stepped onto an old path that still leads to the same place. 1920s/2000s - neoclassical economics, high inequality, high banker pay, low regulation, low taxes for the wealthy, robber barons (CEOs), reckless bankers, globalisation phase 1929/2008 - Wall Street crash 1930s/2010s - Global recession, currency wars, trade wars, austerity, rising nationalism and extremism 1940s - World war. We forgot we had been down that path before.

[@krcalder]

@@aryansaini5219 1920s economic thinking is rather dangerous. The Americans wrapped a new ideology, neoliberalism, around 1920s economics and repeated the economic mistakes of the 1920s. Policymakers couldn’t see what Glass-Steagall did, as they thought banks were financial intermediaries. It separates the money creation side of banking from the investment side of banking, and stops bankers producing securities; they buy themselves with money they create out of nothing. www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf (There are intermediaries involved so it’s not obvious, but this is effectively what is happening) The whole thing turns into a ponzi scheme and you get a 1929 or 2008 type event. 1929 and 2008 look so similar because they are. kzbin.info/www/bejne/rHK2pY2AeLCgmLc At 18 mins. 1929 and 2008 - Minsky Moments, the financial crises where debt has over whelmed the economy. They did save the banks this time, which avoided another Great Depression. They left the debt in place, which caused a balance sheet recession. As a CEO, I can use the company’s money to do share buybacks, to boost the share price; get my bonus and top dollar for my shares. Share buybacks were found to be a cause of the 1929 crash and made illegal in the 1930s. What lifted US stocks to 1929 levels in 1929? Margin lending and share buybacks. What lifted US stocks to 1929 levels in 2019? Margin lending and share buybacks. A former US congressman has been looking at the data. kzbin.info/www/bejne/bavYZIadjd1mp5Y “The Great Crash 1929” John Kenneth Galbraith “By early 1929, loans from these non-banking sources were approximately equal to those from the banks. Later they became much greater. The Federal Reserve Authorities took it for granted that they had no influence over these funds” He’s talking about “shadow banking”. They thought leverage was great before 1929; they saw what happened when it worked in reverse after 1929. Leverage acts like a multiplier. It multiplies profits on the way up. It multiplies losses on the way down. Today’s bankers seem to have learnt something from past mistakes. They took the multiplied profits on the way up. Taxpayers picked up the multiplied losses on the way down. Mariner Eccles, FED chair 1934 - 48, observed what the capital accumulation of neoclassical economics did to the US economy in the 1920s. “a giant suction pump had by 1929 to 1930 drawn into a few hands an increasing proportion of currently produced wealth. This served then as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied themselves the kind of effective demand for their products which would justify reinvestment of the capital accumulation in new plants. In consequence as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When the credit ran out, the game stopped” The problem; wealth concentrates until the system collapses. “The other fellows could stay in the game only by borrowing.” Mariner Eccles, FED chair 1934 - 48 Your wages aren’t high enough, have a Payday loan. You need a house, have a sub-prime mortgage. You need a car, have a sub-prime auto loan. You need a good education, have a student loan. Still not getting by? Load up on credit cards. “When the credit ran out, the game stopped” Mariner Eccles, FED chair 1934 - 48 ...... etc .....

[@aryansaini5219]

@@krcalder I will definitely read this

[@krcalder]

Debt looks like the solution to every problem when you use an economics that doesn’t consider debt. The economics of globalisation has always had an Achilles’ heel. In the US, the 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at debt, neoclassical economics. Not considering private debt is the Achilles' heel of neoclassical economics. Can you see when the UK started using neoclassical economics? www.housepricecrash.co.uk/forum/uploads/monthly_2018_02/Screen-Shot-2017-04-21-at-13_53_09.png.e32e8fee4ffd68b566ed5235dc1266c2.png It’s not hard, don’t overthink it. What happened in 1979? The UK eliminated corset controls on banking in 1979, the banks invaded the mortgage market and this is where the problem starts. The transfer of existing assets, like real estate, doesn’t add to GDP, so debt rises faster than GDP until you get a financial crisis. Before 1980 - banks lending into the right places that result in GDP growth (business and industry, creating new products and services in the economy) Debt grows with GDP After 1980 - banks lending into the wrong places that don’t result in GDP growth (real estate and financial speculation) Debt rises faster than GDP 2008 - Minsky Moment, the financial crisis where debt has over whelmed the economy After 2008 - Balance sheet recession and the economy struggles as debt repayments to banks destroy money. We are making the repayments on the debt we built up from 1980 - 2008. Japan has been like this since 1991. They enjoyed the good times of a 1980s real estate boom and spent the next thirty years paying down the debt they had built up in the 1980s. kzbin.info/www/bejne/boq3qn2wos57fc0 The UK used to be the great financial superpower and it looks as though we understood this in the past. By 1979, it had been forgotten.

[@vcoonrod]

Wow. This discussion is definitely at a superior level than typically found for general audiences. Thank you for bringing these geniuses together. Great information and well explained.

[@vinm300]

Yes, it certainly is a superior level.

[@krcalder]

Economics the timeline. Classical economics - observations and deductions from the world of small state, unregulated capitalism around them Neoclassical economics - Where did that come from? Keynesian economics - observations, deductions and fixes for the problems of neoclassical economics Neoclassical economics - Why is that back again? We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics. On bringing it back again, we had lost everything that had been learned in the 1930s and 1940s, by which time it had already demonstrated its flaws. The Mont Pelerin society developed the parallel universe of neoliberalism from neoclassical economics. We need to know what small state; unregulated capitalism was like when it existed before. Why is it so different to today’s expectations? I’ll cover something that highlights how different it was. “The interest of the landlords is always opposed to the interest of every other class in the community” Ricardo 1815 / Classical Economist Ricardo was part of the new capitalist class and the old landowning class were a huge problem with their rents that had to be paid both directly and through wages. What does our man on free trade, Ricardo, mean? Disposable income = wages - (taxes + the cost of living) Employees get their money from wages and the employers pay the cost of living through wages, reducing profit. Employees get less disposable income after the landlords rent has gone. Employers have to cover the landlord’s rents in wages reducing profit. Ricardo is just talking about housing costs, employees all rented in those days. Low housing costs work best for employers and employees. This does actually lead into Keynes. What was Keynes really doing? Creating a low cost, internationally competitive economy. Keynes's ideas were a solution to the problems of the Great Depression, but we forgot why he did, what he did. They tried running an economy on debt in the 1920s. The 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at private debt, neoclassical economics. Keynes looked at the problems of the debt based economy and came up with redistribution through taxation to keep the system running in a sustainable way and he dealt with the inherent inequality capitalism produced. The cost of living = housing costs + healthcare costs + student loan costs + food + other costs of living Disposable income = wages - (taxes + the cost of living) Strong progressive taxation funded a low cost economy with subsidised housing, healthcare, education and other services to give more disposable income on lower wages. Employers and employees both win with a low cost of living. Keynesian ideas went wrong in the 1970s and everyone had forgotten the problems of neoclassical economics that he originally solved.

[@peternyc]

Sounds like you would enjoy the economics of Henry George!

[@kerrypay239]

Great discussion listened while having lunch Homeless at 69 with CIS degree.

[@kerrypay239]

Great enjoyed very much business CIS Cal Poly 1984 learned more thank you

[@TheBandFiles]

The global savings glut beginning c.1998 was caused by the federal budget surpluses of those years; reducing the available Treasuries (aka "paying down the nat'l debt") left investors with little choice but to seek new "safe assets." Housing aside, the federal budget surplus resulted in a corresponding private sector *deficit* - driving consumers into private debt. The private sector cannot produce its own net financial surplus. Net pvt savings = federal deficit. Solution starts with intelligent fiscal policy. Also stringent financial (re)regulation is required; the entire GFC was a result of careful dismantling of the regulatory framework that was designed to prevent it.

[@danishlewis2378]

thank you for bringing this discussion. really enjoy and very enlighten. this topic is a big deal in my country.

[@warrenberkholtz8410]

Amir Sfi has nailed it !

[@jibbi4one]

It takes money to make money even during a silly debt based economic period we currently live under.

[@J-Christophe_DUVAL]

What the world needs is a new monetary and banking architecture. Currently, the only institutions authorized to distribute money in society are commercial banks, and when they do, it is only in the form of debt, not a grant. Also let us remember that the banks do not lend the currency of others, they lend money that does not exist, by simple creation "ex nihilo". (Monetary economy of production with endogenous debt currency). Debt agents can only get out of debt through the indebtedness of the following agents. This implies an increasingly high wave of debt, because it is necessary to add to each agent a usury and an additional surplus value. Banks only create money on the condition of the profitability of borrowing projects, and profitability is often the extraction of natural resources in order to produce goods and sell them to those who will go into debt for buy them (tangible assets). The deleveraging of some can therefore only be done through the indebtedness of others and knowing that debt is reverse extraction. Debt is a promise of future extraction for the purpose of profitability. We therefore force ourselves to make bigger and bigger holes in nature in order to fill bigger and bigger holes in our accounts sheets. This is where the ecological problem cannot be resolved with our current monetary system. Jean-Christophe Duval

[@krcalder]

The economics of globalisation has always had an Achilles’ heel. In the US, the 1920s roared with debt based consumption and speculation until it all tipped over into the debt deflation of the Great Depression. No one realised the problems that were building up in the economy as they used an economics that doesn’t look at debt, neoclassical economics. Not considering private debt is the Achilles' heel of neoclassical economics. What could possibly go wrong? It’s not even hard, don’t overthink it. They're overthinking it.

[@krcalder]

When you use this economics, policymakers run the economy on debt until they get a financial crisis. Policymakers don’t realise it’s the money creation of bank loans that is making the economy boom as they head towards a financial crisis. www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf At 25.30 mins you can see the super imposed private debt-to-GDP ratios. kzbin.info/www/bejne/rHK2pY2AeLCgmLc With neoclassical economics policymakers run the economy on debt until they get a financial crisis. 1929 - US 1991 - Japan 2008 - US, UK and Euro-zone The PBoC saw the Chinese Minsky Moment coming and you can too by looking at the chart above. As we can see everyone has been doing what the US did in the 1920s. It was inevitable really, they were using neoclassical economics. They are going not to get anywhere if they think banks are financial intermediaries, which they do. See BoE link above, banks create the money they loan out.

[@geertvanreeken1676]

Hi Keith, really interesting stuff. If you would like to discuss this further, i would like to ask a few questions. If you have the time pls contact me: geertreeken add gmail.com

[@TheBandFiles]

One point re: at about 33:00 Mr. Sufi talks of paying interest on US govt bonds with tax revenue; the interest payments are not paid by taxes, they're paid with new bond issuance. The interest payments add net financial assets to the private economy, not take them away. (I believe this is true for Brazil as well as the US.)

[@pictureworksdenver]

Surprising, that in a lengthy discussion of the secular rise of debt there is no mention of credit money creation via debt instruments by commercial banks.

[@geertvanreeken1676]

I almost get the idea as if they are under the assumption that debt is always lent out by someone that had pre existing money so the net effect of private debt is always zero. For the rest, interesting to think about the dynamics of income inequality, consumer demand and indebtedness.

[@snowballeffect7812]

does that go without saying? what is special about that? i don't think they really needed to spell out the mechanism of lending.

[@geertvanreeken1676]

@@snowballeffect7812 they say savings equals investing.. that is not necessarily true if you invest with borrowed money that is lent out into existence.

[@Stewiehleba]

@@geertvanreeken1676 That is still viewed as investment from the POV of the bank that issued the loan, but you are right. I also got the feeling they think banks lend out existing money. Also they assumed that governments have to borrow or tax in order to spend, and ignored the fact that most governments can just create new money to spend with no need to borrow. And they mentioned post kaynesians several times, so they must know it.

[@peterwright9934]

@@snowballeffect7812 Yes they should bring it up. It's a big but misunderstood topic. Banks create money by issuing loans. They don't need other people's money to do it. See Richard Werner - kzbin.info/www/bejne/eYmmfpycgb-moNU This is a revelation

[@kerrypay239]

Debt holiday during Roman empire had logical reason !

[@EzekielsBones]

Advise everyone to check out Michael Hudson and Steve Keen. 2 of the very few academic economists who predicted the 2008 crash. Hudson explains importance and benefits of debt cancellation (jubilee-which was every 50 years in ancient Israel and concept borrowed from Babylonia) “Debts that can’t be paid, won’t be paid” Debt cancellation or revolution: take your pick The late Roman Empire refused to implement any debt cancellation..... dark ages ensued

[@robertmitchell8630]

Goes back further all the way to babylonians sumerian Egyptian Hindus etc Jubilee

[@anglosaxon7806]

You know, i've always thought that a rising tide increase of overall tax bases sort of eliminated progressive taxation. Since the pool grows as the tax base shifts upward at the same time. It would make sense though, that without progressive taxation, private savings through debt spending would widen the gap.

[@lharris4371]

A bubble is an imbalance. Too much pressure for the suds.

[@CaleHeintz]

I love the logic "it's doing well.." I guess this mindset may help explain the unexplainable, how do you justify any of these valuations? ROFL

[@tippyandfriend]

33:37 great point

[@bernardheathaway9146]

This is crazy interesting

[@cappedvillain2522]

Can the panel engage the point. When we were younger we were told that we need to save so that we can be house owners. People in the developing world have punished for not being fiscally responsible. Is it normal that we do not apply the same rule to ourselves and that when it came to us we chose to print our way out of debt

[@anglosaxon7806]

Are you saying that governments should have surplus tax revenue? Like a a household ? And whoever told you that you should be saving rather than investing doesn't understand that money loses value over time.

[@cappedvillain2522]

@@anglosaxon7806 inflation is another form of taxation. In the olden days, it was coin clipping. If you or I do it its fraud and counterfeiting but when the government does it it's ok. Investing in this day and age is like engaging in a ponzi scheme. We borrowed money that we're inflating out of existence. That makes us no better than Zimbabwe

[@torrentialrage]

I can't follow any of this.

[@mns8732]

It's a struggle to listen.

[@mns8732]

The 2

[@HigoWapsico]

I wanted to watch, until I saw in the description that private and public death are clumped together....

[@rafaelcarvalho3928]

Wooooew

[@mitchwilson1969]

Why the crappy background and bad special effects?

[@J-Christophe_DUVAL]

U + ∩ = 0