Hangover theory and morality plays

My recent fit over the technocratic style in American economics was the excrescence of a long-standing complaint. The very first time I made that complaint was in a piece arguing that Paul Krugman’s dismissal of Austrian-ish “hangover theory” was overhasty. What goes around comes around. Karl Smith offers a new dismissal of “overconsumption theory”, which Matt Yglesias echoes. Smith, like Krugman, is mistaken and overhasty in dismissing “hangover theory” on technocratic terms, perhaps because he is quite rightly upset at how the theory is sometimes portrayed in moral terms. A better approach would be to understand the way in which the theory might in fact be true and useful, and to craft a morality tale that both captures what is accurate in the story and leads to more productive and just intuitions about how we should behave.

First, a technocratic issue. Here’s Smith:

[T]he overconsumption theory of recessions makes no sense… people are confusing cyclical prosperity with personal luxury. In your personal life you might feel like you are doing well because you have a new house or a new car, etc. However, this is not how we measure the cyclical wealth of nations. We measure it by employment and production. We say the economy is “doing well” when a lot of people are going to work and making stuff. For example, we say that Germany’s economy seems to be recovering. However, consumption in Germany is not rising. Consumption is flat. Working is rising. Employment is rising. That is what it means to be doing well. It means that more people are doing more work.

That last sentence is mistaken.

Smith is very right that we do not measure prosperity by consumption, but by production. We get wealthy by producing what someone values to consume. Our wealth takes either the form of current consumption or (more importantly in a deeply uncertain world) claims on others’ production whenever we might want or need it. We should never, ever measure prosperity in terms of consumption, but always in terms of production, weighted, importantly, by the strength of financial arrangements that allow us to convert unconsumed production into credible options to consume later. [*]

However, we do not measure prosperity in terms of how much work people are doing. That is a terrible error and the most vulgar form of Keynesianism. Make-work is not a path to prosperity, and effort is not production. Prosperity is a matter of the rate at which goods and services that are highly valued can be produced, whether the production is labor intensive or capital intensive, however much or little people are working. Employment is a more complicated issue than output. Under current (foolish) institutional and ideological arrangements, for most people, employment is our main source of claims on current or future production, and also a measure of our respectability and value as human beings. Holding institution and ideology constant, unemployment is harmful far beyond its effect on output. But let’s not confuse objectives. Employment and output are historically correlated, because it takes work to produce output, and also because the measured value of output is dollar weighted and there are few consumers to confer value without widespread employment. But the degree to which the production of any given thing is tethered to traditional employment is variable and technology dependent, and the ability to confer value through purchase could be distributed via means other than employment. Employment and prosperity are different things. (Please don’t confuse average and marginal values or invite ridiculous linear extrapolations by pointing to measured labor productivity. That statistic tells us nothing about the output we would get from further employment.)

We measure prosperity by production, not by work, and we measure production by value, by what people are willing to pay for what is produced.

Austrian-ish “hangover theory” claims, plausibly, that if for some reason the economy has been geared to production that was feasible and highly valued in previous periods, but which now is no longer feasible or highly valued, there will be a slump in production. It wisely asks us to consider not only the prosperity we measure today, but the sustainability of that prosperity going forward. I am not “Austrian”, and have no interest in defending specific claims regarding the roundaboutness of activity or the role of central banks in causing bursts of quasiprosperity. But as Brad DeLong wisely reminds us, it is good to be somewhat catholic in our evaluation of macroeconomic schools, and to take what is useful from each. I consider myself Keynesian at least as much as I am Austrian, but I recognize good and not-so-good offshoots of both schools. (Austrian and Keynesian ideas are more complementary than most people acknowledge. The Austrians focus on unsustainable arrangements of real capital, while the Keynesians focus on unsustainable arrangements with respect to money, debt, savings, and income. I think both approaches are fruitful.)

Smith is a brilliant guy. He gets this:

Because we bought too much it is now inevitable that we work less? Why does that make fundamental sense? Surely something is going wrong. Shouldn’t we be working more to pay for all the stuff we bought.

Some people might say that the “something” is structural readjustment. We have to move towards an investment based economy and there are frictions… Recessions in that story are not a punishment for overconsumption, they are a result of suddenly realizing that you have to shift paths. There are still problems here but they are on a deeper level about more subtle things.

That’s the “hangover” story right there. Those more “subtle things” — wealth-destroying misuse of real capital, dependency on skewed and misguided claims to production — are the source of the hangover, not high consumption per se. There is no school of economic thought I know of that suggests increased prosperity and consumption in and of themselves require a painful purge. The claim is that some patterns of economic activity create the appearance of prosperity and enable temporary consumption that cannot be sustained, and that moving from a period during which such patterns obtain to a more “sustainable pattern of specialization and trade” involves adjustments that are difficult. Recovery is hard, both because there is uncertainty about what is to be done, and because powerful incumbents resist changes and block useful action. Only critics of “hangover theory” claim the theory implies that idleness is just desserts. Proponents do claim that poverty in the sense of diminished consumption, painful financial losses, and “creative destruction” of cherished institutions usually attend the adjustment process, and they recognize all this is usually associated with unemployment. But hangover theorists argue that adjustment is worth doing despite the cost in employment, consumption, and disruption, not because those costs are good things. When they do argue that “pain is good”, it is along very conventional lines of moral hazard. It is not that the macroeconomy “deserves” to suffer, but that foolish lenders and borrowers, specific misallocators of capital and overconsumers, ought to suffer disproportionately pour encourager les autres. Hangover theorists, like smart Keynesians, promote policies intended to shorten depressions when they occur. Austrians ask that bad claims quickly be recognized and devalued, so that economic activity can go forward without a debt overhang. Keynesians urge government action that conjures financial income from thin air, risking devaluation of old claims by inflation. There are different tradeoffs between moral hazard, sharp incentives, and political feasibility among the two approaches, but both seek to repair balance sheets and create a clean slate going forward. Hangover theorists are suspicious of booms that might not be sustainable. They are quick to urge that we “take away the punch bowl” — defined as any macroscale stimulus to economic activity that cannot last — not because they dislike a party, but because they prefer a party that might go on indefinitely to one they expect will be punctuated by agony. Rather than ridiculing hangover theory, we ought to apologize to hangover theorists like Dean Baker, who warned against an obvious housing bubble and predicted catastrophe while his betters partied on oblivious.

So back to that morality play. Smith again:

The overconsumption theory by contrast says that the recession is natural because we bought too much stuff during the 2000s. Too many houses. Too many big screens. That’s why you are not working now. Its balance.

Steve Waldman says I shouldn’t tell people that economics is not a morality play. How about this then — that morality play is completely F-ed up. That morality play says that we should sit on the couch and rest our backs because that way we’ll learn not to drink so much. You bought too much so now you have to work less. How does that balance anything?

On what planet is it your just desert that after partying all night you are forced to sit on the couch rather than get the rest of your work done. Maybe in some perverse Brewster’s Millions kind of way. But, I don’t think that what the universe has in mind.

If suddenly everyone stopped buying big screen TVs and started building factories, investing in the future and laying the path for the next generation then there would be no recession.

Steve Waldman agrees entirely. The problem isn’t that there is a morality play, but that the morality play Smith describes is a bad, stupid, dumb, even evil morality play that needs to be challenged on moral terms. (As Smith is doing, by the way.) No one claims what Smith is ridiculing, that on an individual level overconsumption should be punished with unemployment. But people do claim that in aggregate “we” deserve and must endure a period of recession because “we” overconsumed and invested poorly. The right response to that story is, “Who the fuck are this ‘we’ of which you speak, kemosabe?”

At an individual level the correlation between past consumption and recent unemployment is obviously negative. The people who have sinned are not by and large the people being punished. Some people overconsumed relative to their income, and some people invested poorly. Those who overconsumed have mostly faced consequences for their misbehavior — they are either deeply in debt, or they have endured foreclosure or bankruptcy. But the people who invested absurdly, especially “savers” who lent money but permitted themselves ignorance and indifference to how their wealth would be mismanaged, have not suffered the costs of their recklessness. Instead, they have been almost entirely bailed out. It is lenders and investors more than any other group who determine the patterns of our macroeconomy. There are always people willing to overconsume or gamble on foolish enterprises. We do and must rely upon those with resources to steward to ensure those resources are used wisely. They did not, and their recklessness has brought us to catastrophe. But rather than condemn them for negligence and permit their claims to be appropriately devalued, we applaud them for “prudence” and let government action be bound by commitments to sustain their destructive and ridiculous claims. You don’t counter that sort of villainy with technocratic arguments about liquidity traps. You point out that the motherfuckers who are calling themselves prudent, who are blocking both writedowns and government action that might risk inflation, are hypocrites and thieves. You state clearly that their claims are illegitimate and will be written down one way or another, unless we can generate sufficient growth to ratify them ex post, which would require claimants to behave less like indignant creditors and more like constructive equityholders. It is not technocratic economists who will win the day and pull us out of our cul-de-sac, but angry Irishmen and Spaniards who challenge, on moral terms, the right of German bankers to impose vast deadweight costs on current activity because they lent greedily into what might easily have been recognized as a property and credit bubble.

[*] The caveat about financial arrangements is important with respect to Germany’s apparent prosperity. Germany, like China, is less prosperous than it seems, because its surplus production is geared to sale for claims that cannot credibly be redeemed for what the country’s citizens would want should they exercise their option to consume.


114 Responses to “Hangover theory and morality plays”

  1. Foppe writes:

    I’m sorry, but what is with this nonsense of looking at individual economies as closed systems?
    The reason there was borrowing was because there were highish unemployment levels during the clinton era and before, and Clinton along with Alan G. lowered interest rates, which caused the start of a housing bubble, which caused the housing market to go up, which made American seem richer, and (more importantly, which stopped economists from looking at the issue of unemployment because everyone forgot to care, even though most of the new growth could be attributed to the slowish (back then) rise in housing values (due to increasing demand), and then the tech bubble, which made it possible to hire lots of people temporarily. Then the dotcom burst, and Alan G. immediately lowered interest rates even more, which made it even easier to borrow ‘just a bit more’ to bid for your new house, which made the market go up because everyone could do it, which made it acceptable to bid just a bit more again (because the collateral was worth more), and the spiral continued. However, during the entire time, the only reason unemployment went down (which it did not really do, but it compensated for some of the jobs lost due to “US” outsourcing corporations) was because of the extra money that was doing the rounds (which was earned as commissions by RE salesmen etc., and their Nd-order effects).
    During this entire time, however, the aggregate wage, and median income, kept going down, because the US was shedding jobs overseas, thanks in part due to all of the pro-outsourcing tax breaks.
    And all of this went unseen by economists because GDP only measures spending, and because it doesn’t distinguish between debt-fueled increases and wages-backed ones. (Or between debt that is taken on because of investments in production or investments in simple spending – which was buying products from abroad.)
    Basically, you need to throw away all of these stupid measures like GDP and figure out a way to separate out consumption-debt and investment-debt.

  2. Lord writes:

    The problem as I see it, is unemployment. There are two approaches, blame the unemployed for their unemployment, saying what they produce is no longer desired and they must accept whatever they can find or go without resulting in deflation, or blame the employed, saying their wages are now too high and allow inflation to lower them and raise employment. The former attempts to preserve the value of debt but erodes the amount through default while the latter erodes the value of debt but preserves its amount. What do the employed owe the unemployed? What is the moral position and what will produce the best outcomes? Will real growth increase before inflation as well?

  3. David Pearson writes:

    When Smith says, “subtle”, I think he means, “minor”. The “AD” side of the debate sees structural adjustment as some sort of residual: “sure, maybe a point of unemployment is due to unemployed construction workers and the like, but what about the other four points (above the natural rate)?”

    To have a constructive debate, the “hangover” side needs to tell a story about how most of the jobs lost are due to “shifting patterns of specialization”. From what I read, it seems little time is spent actually thinking through this challenge.

    A “pattern of specialization” includes the means by which a business accesses capital for start up. During the bubble years, capital came easily by means of housing equity withdrawal (or collateral for bank financing). Now, this “pattern” has changed: housing equity has vanished, and the lack of new business formation results in low gross hiring amongst a range of (primarily service) industries. So that’s one example of a “shift”. Another is the combination of higher uncertainty coupled with too-high fixed costs for new firms. In other words, a would-be restauranteur, today, needs a lower rent to make up for the higher uncertainty of sales. But because of multiple bailouts, banks are sitting on commercial real estate losses and are not allowing that market to clear. Uncertainty was not an issue before, but it is now — that is a “shift”.

    I could go on with more examples. No doubt, the AD side would counter that the above examples — uncertainty and low housing equity — are just symptoms of an AD shortfall. I think there are strong arguments in favor of the thesis that they are, instead, “hangover” related.

  4. Foppe writes:

    (Sorry, got distracted and forgot to make the point about where the employment went. Apologies for the length, but I’m hoping you’ll appreciate the contents.. If not, feel free to moderate your own blog.)
    The reason why the US, and really most of the world is in recession now, then, is that the fundamentals were already in trouble before the Clinton-era debt expansion began, but because of Greenspan’s policies these problems were ignored for nearly a decade and a half.
    Now, I have no idea why people were having so much trouble explaining the rising US unemployment levels ever since the 1970s, apart from the fact that economists seem to be overly fond of categorization.
    Look at the development of economic history since WWII (my own summary based on David Harvey’s The Enigma of Capital, Ch.1):
    When World War 2 ended, the only large economy that had not been destroyed during the war was that of the United States. As such, they could grow unhindered by competition, and did so at a very quick rate. Japan and the European nations reentered the global economy somewhat later, but by the 1960s, most of them had more or less recovered, and a golden age of growth broke out.
    Fairly quickly after that, US growth began slowing down, because the cost of living in the US had become higher than in its younger, less developed competitors, which meant that they could no longer compete as easily with industries that existed abroad. Japan next took the position as economic leader of the world, and kept it until the late 1980s. Meanwhile, the US had entered what would later be called a stagflationary period, in which growth had stagnated, unemployment rose, but prices kept rising – a combination that had been deemed impossible by economic theory, but readily explainable if you look at the preceding story. This problem appeared to have been solved after a period of high, partly government-induced, inflation, which started in the mid-1970s, and which served to make American wages somewhat more competitive internationally. However, it wasn’t really solved, because the competition would only be increasing from then on out. After Reagan was elected, the systematic destruction of the unions made it possible for industries to drive down wages even further, while at the same time starting a trend towards ever-increasing automation that allowed them to produce more with fewer workers, and even later than that they started outsourcing in earnest, while the workers were expected to somehow find jobs elsewhere. All of these things were terrible for US employment, and therefore equally terrible for sustainable US aggregate demand.

    All during this period, investors had been busily investing first in Japan, and then in some of the East-Asian nations that fell inside the Western/US sphere of influence, resulting in the miraculous growth of a large number of new industries in the countries we now call the Asian Tigers, where Western investors began to invest in order to increase their profits by decreasing their wage-related costs. And once the Tigers had started their growth spurt, and had been developed enough to be able to compete globally, these investors started to move towards China and India, where they again created a political atmosphere that provided high returns on investment and an even larger supply of workers who worked for even lower wages. Meanwhile, because the new entrants to the global market could do everything more cheaply, first the heavy industries, which had by that time become more heavily regulated in the West in order to prevent environmental and employee abuse, and later other industries started to disappear, which left large groups of unemployed workers who could not be retrained in their wake.
    For this reason, since the 1970s, roughly the bottom 80% of the US population have been experiencing lowering, or at best stagnant wages, while the unemployment rate slowly kept going up.
    And then Greenspan and Clinton came along and started their bubble thing to hide the declining wages problem for a while.
    But anyway, the problem you are faced with is with the question how to get those new Asian workers to also consume, and, moreover, to find a way to make the US workers relevant again, because that’s going to be hard until the costs of living start to rise in China and the other countries, so that they lose some of their advantages. The more important point remains, though, how to get them to start consuming in the first place, as this is a large part of the reason why it is so hard to find alternative employment opportunities for US workers.
    Lastly, you should recognize the role western investors played in the near-instantaneous development of those East-Asian countries, and the problems this has caused. If they had had to develop all by themselves, it would’ve probably taken decades longer to get to the level they are at now. This is not to say that I begrudge them their prosperity, but just to say that this behavior of Western investors has been horribly unpatriotic, by only caring about their ROI. The question you could therefore ask is how desirable it is to have (nearly) totally liberalized capital markets, and nearly no restrictions on capital flows, and whether governments should not do something to limit these in order to put something of a brake on these developments.

  5. Steve Roth writes:

    Meanwhile those who bought homes in 2003 — maybe they decided it was time to get married, have kids — and hence ended up just slightly closer to the “saver” end of the spectrum, are lauded as responsible and prudent, while those who decided it was time to get married, have kids, and buy a house in 2006 are feckless, shiftless, no-goodnik “debtors” — because they were born three years later. They should obviously be punished for that birth-date decision, while their elders should be rewarded for their remarkable foresight and wise allocation of assets.

    Damn right the morality play is F-ed up.

    (Full disclosure: I bought my last house in 2003 — as soon as my divorce was finalized. Doing fine. I hope everyone fully comprehends my profound fiscal prudence and perspicacity in choosing that timing.)

  6. Greg writes:

    Excellent piece

    Your. Best. Evah!!

    Very nice comparison between Austrian and Keynesian thought. I’d never quite distilled it out like that. Very helpful.

  7. dave writes:

    Good post. I think people resist potentially inflationary monetary policy as a solution because it is seen as a way punishing savers not involved in the housing bubble to the benefit of savers that did invest directly in the bubble. Inflation is a big brush. Cram write downs on the perpetrators and then we can talk about Keynesian stimulus.

  8. Dennis writes:

    I like this post quite a bit.

    But I have this question, why did these greedy German bankers continue to lend to people? Were they really greedier than the bankers of the yesteryears? (answer: no, periods of greed frequently come up, as Minsky or economic historians can point out).

    I cant help but think that the corporate structures of the world, with the focus on a quarter to quarter, or at most year to year growth meant that no CEO of a bank, nor any board of a bank, would dare to take the other side of the greedy bankers and close up shop to crap loans [and thus 'loose' out on making money in the bubble years]

    That is a real shame. If there were banks whose balance sheets were not infected by crap then these bankers would be all for making the Duestche Banks of the world to recognize their losses and go bankrupt. That would be their reward for staying put in 2005, almost total victory in 2010. Not only would they recover market share that they lost during the bubble but they would get more market share [and on a moral level the platitudes heaped on the 'great geniuses' at JPM compared to the curses spat on BoA/Merril/Citi are a great example of this. Of course that has to do more with JPM's superior political connections and excellent PR but that is another story]

    Unfortunately the bankers are clever chaps, why be significantly less well off than your greedy counterparts? Just enjoy it, become TBTF and then have a powerful sovereign strong arm its and foreign tax payers to get your back when the time to pay the piper comes.

  9. Pete writes:

    I cant help but think that the corporate structures of the world, with the focus on a quarter to quarter, or at most year to year growth meant that no CEO of a bank, nor any board of a bank, would dare to take the other side of the greedy bankers and close up shop to crap loans [and thus 'loose' out on making money in the bubble years]

    That is a real shame. If there were banks whose balance sheets were not infected by crap then these bankers would be all for making the Duestche Banks of the world to recognize their losses and go bankrupt.

    So we’ve got a vicious circle. No bank is ever going invest prudently until there’s a credible threat that they could lose their shirts. And no bank is going to lobby for that threat to be made unless it is, itself, investing prudently.

    The way I read Steve’s post, he’s not disputing that. The question isn’t whether bankers are bad people, but can we tell a compelling enough moral story about banks to put default on the table as an option, and thus break that cycle.

  10. Phil Koop writes:

    Although I like this post, I like comment 3. by David Pearson even better (although I am still mostly in the AD camp myself.) Perhaps there is grist there for another Interfluidity post?

  11. reason writes:

    I’m sure that Dean Baker will be surprised at being lumped with the Austrians in the “hangover” basket. I’m pretty sure he thinks of himself as a Keynesian. And this hangover, is the normal consequence of a financial crisis as Paul Krugman himself has consistantly pointed out. But the Keynesian’s would insist on seeing this “hangover” as a result of changes in balance sheets (which after depend critically on expectations – which depend critically if you like on “animal spirits”) not real structural imbalances.

    In this case, I thinks they are subtly wrong – because the structural imbalance is an international one – and critically caused by a disfunctional international financial system. All the bubbles etc, are a secondary response to this, as eloquently pointed out by Foppe and a both Dean Baker and Paul Krugman hint at themselves (without ever seemly to fully incorporate it into their analyses).

    I find David Pearson’s post interesting, because I actually mostly agree with it, and I think he might be surprised to learn that arch-Keynesians such as Krugman and Dean Baker, would probably also mostly agree. Many forget, that Krugman was against the bailouts in the form they took.

    I understand the point well (often not explicitly made), that startups often have need time to learn what they are doing, and cheap quality staff and low rents surely help make that process affordable. But they also need a supportive macro-environment, because the sort of things people consume in a healthy economy, are different than the sort of things people consume in a struggling and unstable economy. Keynesian’s don’t support bailouts because they want to avoid punishing malfeasant banks, they support bailouts because of the innocent that will be damaged if they don’t.

    But to get around to saying something original myself, I can’t support the Austrian view of the world ultimately, because I think it is based on a false premise. I don’t think there is “a sustainable pattern of specialisation and trade”, and I don’t belief there is a stable equlibrium. I remember once Steve build a little mental model based on the idea that someone was savings with the idea of consuming a particular basket of goods at some stage in the future, but there were no future markets for him to buy that. But that is not it at all is it. People have no idea. They have no idea what they will want in 20 years, no ideas what will be available in 20 years and no idea what relative prices will be in 20 years. They save firstly, to have choices in the future, and secondly in case of unforseen problems in the future. They trust the market will provide for their unknown wants in the future. The market trying to provide these things, is slightly better off, they can use statistics to narrow down the variability in the net quantities of unknown individual wants. But the amount of variability is enormous. And that is before you think about competition (domestic and international). I don’t believe that the market can be as fine-tuned and fragile as the Austrian’s make it out to be, or else socialism (which at least since the age of computers should be better at “calculation” if that really was the issue) could have beaten it. Its capitalisms adaptability that made it triumphant. Capitalism constantly produces almost everything in surplus, firms are constantly being born and dying, capitalism isn’t a fragile machine, it is a flourishing jungle. The occasional collapses are due to epidemics not overzealous gardeners.

  12. reason writes:

    If I’ll be permitted a second post, I think I should ask Steve, whose writing I admire greatly, to take Henry George more seriously and the “Austrian” school less seriously. The big issue about this bubble was not the increase in supply of new houses, but the prices paid for the land they were built on, and also the prices paid for the land that existing houses sit on. That extra supply on new homes would have already been offset by the current recession, if it wasn’t for the high unemployment and fragile balance sheets of the household sector.

  13. Steve Roth writes:

    Reason: ” I don’t believe that the market can be as fine-tuned and fragile as the Austrian’s make it out to be, or else socialism … could have beaten it.”

    Well it did now, didn’t it? If “socialism” means having major systems of social support and redistribution, as opposed to government owning the means of production (a crucial distinction that libertarians and conservatives seem to intentionally ignore), then socialism won, and is continuing to win.

    There is not a single prosperous, modern country that does *not* have those things.

    One has to wonder why a libertopia has not emerged and surged ahead of all those sclerotic socialist states.

  14. [...] 2, 2010 by admin  Not certain this link will work, but at Interfluidity, SRW replies to Karl Smith, closing with a sentiment with which I am very much in sympathy: It is not technocratic economists [...]

  15. Andy Harless writes:

    We measure prosperity by production, not by work, and we measure production by value, by what people are willing to pay for what is produced.

    What people are willing to pay depends on the supply and demand for the numeraire good. If you’re taking money as the numeraire, the problem with this point of view should be obvious: inflation does not constitute an increase in production. I would suggest taking labor as the numeraire: it’s as good a numeraire as any other, and it represents something real and tangible that can’t be inflated. If we take labor as the numeraire, then work is production, and we can measure prosperity by work.

    Now you probably will want to apply a sophisticated notion of value, where we use revealed preference to ascertain some (necessarily vague) kind of subjective value. I would suggest that this is a very difficult approach which ends up being no better than measuring value in terms labor. Once you start using subjective value, you open the door to questions such as distribution and non-pecuniary value, and the evil spirits begin to fly out of Pandora’s Box. If we measure value in terms of labor, it conveniently correlates with the distributional effects of wide employment and the non-pecuniary value of work.

  16. dave writes:

    “Many forget, that Krugman was against the bailouts in the form they took.”

    Defiantly false. I can remember many op-eds where he argued that while he didn’t “like” the bailouts he urged congress to vote for them in the form they took.

  17. dave writes:

    “Keynesian’s don’t support bailouts because they want to avoid punishing malfeasant banks, they support bailouts because of the innocent that will be damaged if they don’t.”

    What they “want” in an obscure academic sense is unimportant. What politicians they support and bills they voted for matters. The Keynesian establishment supported and voted for bailouts. Maybe there was some hand wringing, some “ifs” and “buts”, but when push came to shove and it was time to take a stand they made their bed with the bankers. Now two years later they’ve had plenty of time to go back and make changes to those votes and they haven’t, they have spent all their time and effort defending their original decisions. They use “harm to the innocents” as a relaying cry to defend their political failures, but everyone knows there were ways to save the banking system as a whole while punishing malfeasant banks.

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  19. [...] from Steve Randy Waldmann on what’s aggravating about a lot of the recent lectures about the perils of overconsumption: Some people overconsumed relative to their income, and some people invested poorly. Those who [...]

  20. You are correct it can be useful to try to integrate some of the insights of the Austrian School with Keynes and Minsky. Both Keynes and Mises were working with credit cycle theory in the ’20s, so it would be surprising if there were not points of contact. Few people have dared to explore any such integration – Kurt Richebacher is one exception – as the ideological fur flies to easily on either side, but I suspect one day someone will find a stronger fusion, much along the lines you are sketching above.

    One way to integrate them is to realize the distortions to the structure of production that the Austrians emphasize can be considered to be the real or tangible capital counterparts to the excess of debt or financial leveraging that show up on the balance sheet in Keynes and Minsky.

    Both allowed interest rates and asset prices to misallocate tangible capital investment across time and across industries. Keynes was, however, by the General Theory, very clear that an act of saving out of household income was, in a monetary economy, never an order placed for specific consumption goods at some specific future time. This undermines what feels like and implicit Austrian assumption that there is some knowable and smooth pattern of future demand, in aggregate quantity and composition, that investors, entrepreneurs, creditors, and managers can anticipate or even create. Alternatively, they may be assuming that future demand is somehow cleanly revealed in relative prices in current spot markets.

    I may be pushing this too far, as Austrians are very critical of mainstream economics ignoring the role of uncertainty for entrepreneurs and their active engagement in searching for profitable production possibilities, but lurking behind the misallocation of productive resources is the notion of some correct and identifiable demand structure through time.

    It is in part because that future demand structure is not known, and because Keynes could not find strong enough price signals in contemporary market economies that drew the economy toward full employment, that he advocated a permanent program of public or public/private investment to keep the economy on a full employment growth path. Countercyclical aggregate demand policy was not his main theme, as becomes apparent when you read him in the original.

  21. F. Beard writes:

    How’s this for morality?

    A government backed counterfeiting cartel, the fractional reserve banking system, drove people into debt slavery. The people should now be bailed out, the entire population, borrowers and savers alike, with a huge and equal distribution of new, debt and interest free United States Notes just given to every US adult citizen.

    Inflation risk? Then put the banks out of the counterfeiting business with a 100% reserve requirement.

  22. NKlein1553 writes:

    “Countercyclical aggregate demand policy was not his (Keynes) main theme, as becomes apparent when you read him in the original.”

    There was a very nice article by David Colander written all the way back in 1984 I just recently read entitled “Was Keynes a Keynesian or a Lernerian?” that makes a very similar argument:


    A short, but very interesting piece.

  23. [...] with admiration at the robustness with which the position is argued but otherwise without comment from interfluidity: Some people overconsumed relative to their income, and some people invested poorly. Those who [...]

  24. Greg Ransom writes:

    Why the hell can’t De Long and Smith and the rest of you actually behave like competent scholars and actually master the extensive scientific literature existent?

    Is that too much to ask?

    Smith, Krugman and De Long wouldn’t get a passing grade in an community college undergraduate course on malinvestment / overconsumption macro of the sort found in Garrison or Hayek.

    I can’t imagine you’d find such incompetence posing as scientific discussion among brain scientists or biologists.

    What is it about economists that makes this acceptable?

    Something pathological, clearly.

  25. Greg Ransom writes:

    This is actually at the heart of Hayek’s work as well — it’s simply not the part he thought especially difficult or theoretical from the point of view of the pure theory of marginal valuation:

    “.. while the Keynesians focus on unsustainable arrangements with respect to money, debt, savings, and income.”

  26. Greg Ransom writes:

    I should say, this is at the heart of Hayek’s boom-bust mechanism as well, he simply devoted his limited time to the far harder problems of production and interest theory, i.e. the structure of heterogeneous capital across time:

    “ngements of real capital, while the Keynesians focus on unsustainable arrangements with respect to money, debt, savings, and income.”

  27. reason writes:

    Greg Ransom,
    when will you learn that scholasticism was a dead end. Yes we all have to choose about how we simplify the complex – i.e. make choices about what is actually important and relevant and what not. Things are not important and relevant because they are difficult. Things are not true because Hayek did them.

  28. reason writes:

    Rob Parenteau for supporting my point. Now can someone think about the importance of integrating Henry George into modern economics. I like Henry George’s ideas even if he, and some of his supporters are a pain.

  29. reason writes:

    “Defiantly false. I can remember many op-eds where he argued that while he didn’t “like” the bailouts he urged congress to vote for them in the form they took.”

    umm – Krugman is a pragmatist. He understands the principle of second best. He thought the alternative was even worse.

  30. reason writes:

    from Krugmans blog yesterday:
    “Iceland is an obvious model for us. In a referendum, her voters have already rejected a proposal to pay back their banks’ creditors, who will take major losses. Now they have elected a constitutional assembly charged with drafting a new constitution. Ireland probably needs this more than does Iceland; I wish I were more confident that we will follow the latter’s example.”

  31. reason writes:

    He is quoting O’Rouke, favourably.

  32. reason writes:

    Steve Roth,
    touche – yes if you define socialism like that (I would call that social democracy), I would agree with you.

  33. [...] Hangover theory and morality plays Steve Waldman [...]

  34. Oliver writes:

    First of all, thanks for another great post!

    You write:
    The people who have sinned are not by and large the people being punished. Some people overconsumed relative to their income, and some people invested poorly. Those who overconsumed have mostly faced consequences for their misbehavior — they are either deeply in debt, or they have endured foreclosure or bankruptcy. But the people who invested absurdly, especially “savers” who lent money but permitted themselves ignorance and indifference to how their wealth would be mismanaged, have not suffered the costs of their recklessness.

    Some comments about the assumptions buried in these statements:

    As Steve Roth points out above, the border between sinners and saints shifts in relation to the current state of affairs. Moreover, this state of affairs does not lie entirely in the hands of any of the individuals within these two groups mainly due to globalization and possibly other external factors. This lack of accountability in turn means that any moral distinction between the two groups is fairly arbitrary.

    Secondly, you lament over-consumption and ignorant savers / bad investors. I fear your friend Winterspeak would challenge your implied causality of savings and investment. Further, I’d argue that they are also partly a consequence of globalization in that there are more than enough good investments to go around, they’re just not taking place at home because Chinese labour is so much more malleable (productive). The same goes for US over-consumption – it is the unequal twin of Asian under-consumption. I question the assumption that any of these imbalances represent unilateral acts of volition stemming from any particular American disease other than its hegemonic world status, exacerbated by the forces unleashed in the great moderation.

    Thirdly, for those investments that do take place at home, I ask to what extent it fits in with your morality to challenge the right of the private saver to freely hold low risk government papers while their future is becoming increasingly uncertain while other benefits are constantly being cut. You sound like the kind of financial advisor I’d try to keep my mother away from ;-). I think one should distinguish between different types of ‘savers/investors’ and explicitly separate those who can and those who can’t hide behind some kind of limited liability from each other, not set some arbitrary limit on holdings.

    Subsequently, the Keynesian / Austrian approaches could be practiced along the lines of real risk absorption capabilities. Sadly, as you say, the opposite is taking place where those at the bottom are being pushed into a harsh Austrian winter to ‘pay’ for those waiting in the warm Keynesian chalet until the storm passes. We’re already seeing both schools being played out together, it’s the distribution that is cynical. This also guarantees that the the real capital investment counterparts to the debt overhang, as Rob Paranteau puts it, will not be purged to the benefit of future generations, we’re purging wage expectations instead, both of which will arguably make matters worse.

  35. [...] from Steve Randy Waldmann on what’s aggravating about a lot of the recent lectures aboutthe perils of overconsumption: Some peopleoverconsumed relative to their income, and some people invested poorly.Those who [...]

  36. Foppe writes:

    Oliver: “they’re just not taking place at home because Chinese labour is so much more malleable (productive). The same goes for US over-consumption – it is the unequal twin of Asian under-consumption”
    So at the same time you acknowledge that the Chinese are not consuming, and suggest that investment should take place there because of the growth potential? Who do you suppose is going to buy that produce if nobody is consuming while the Americans are “overconsuming”? These cultural problems are heavily intertwined with economic issues: because Chinese workers are cheaper, they outcompete US workers, but because they are cheaper this means lower AD and more profit extraction, which has to be reinvested. Yet this cannot happen because AD is too low, as you implicitly admit.
    As a consequence, profit extraction by investors leads directly to an increase in the mismatch between AD/AS, because the investor will want to reinvest that extra profit, but cannot do so without making losses unless that extra supply also get sold.

  37. Oliver writes:

    Foppe, I agree with everything you say. I was merely trying to point out that it takes two to tango and that I think there is no unilateral solution that doesn’t involve actively dismantling the US’ hegemonic role in the world and the equivalent adjustment in AD form the Chinese. The prior may be happening anyway, but I don’t think it’s an agenda any national government can plausibly pursue. And up until recently, these imbalances were a win-win situation for both sides.

  38. Foppe writes:

    At least for the political elites and investor class, yes. What national governments *can* do is limit leverage etc. (beyond the attempt made by Basel 3) so that banks can lend less. That would at least limit the amount of damage they can do every time. There are enough savings to go around as it is, so I’m unconvinced there is a need for fractional reserve lending to ‘juice’ the economy. And this is something individual government *can* do.

  39. Greg Ransom writes:

    “reason”, when your comment has substance, I’ll engage it. This is rot.

    “when will you learn that scholasticism was a dead end. Yes we all have to choose about how we simplify the complex – i.e. make choices about what is actually important and relevant and what not. Things are not important and relevant because they are difficult. Things are not true because Hayek did them.”

  40. Foppe writes:

    I’m sorry, but if you want to be a proper academic about it then you would do well to recognize that the malinvestment problem (which is caused by capital accumulation) is something Marx first identified, and not Hayek. It may or may not be that Hayek spent him time on “more difficult problems”, but that’s an entirely separate issue.

  41. dave writes:

    “Krugman is a pragmatist. He understands the principle of second best. He thought the alternative was even worse.”

    Its not “pragmatic” to give into bankers demands when you have the political power to achieve better policy outcomes. However, that is exactly what establishment figures did.

    “Iceland is an obvious model for us. In a referendum, her voters have already rejected a proposal to pay back their banks’ creditors, who will take major losses. Now they have elected a constitutional assembly charged with drafting a new constitution. Ireland probably needs this more than does Iceland; I wish I were more confident that we will follow the latter’s example.”

    He’s not advocating this in America, just a bankrupt little island country he wants to devalue its currency dramatically.

    The time and place to fight was when the bailouts occurred, that’s when we had an opportunity to attack the banks political influence. But Krugmen supported the bailouts. Even on later votes like the Bernanke reappointment he stood in favor of keeping the same crew around. I could go on an on about what a career special interest compromise/center left establishment cheerleader he is (just look at the Obamacare fiasco). The truth is better policy outcomes were possible on all the major legislation of the past 2 years, and when push came to shove and it was time to stand up to powerful interests the establishment on the left as both politicians and pundits caved in and settled for “second best” solutions that weren’t very good solutions and all and fell way short of realistically achievable policy goals that could have been achieved if one was simply willing to fight for them.

  42. [...] 4) Steve Waldman is always worth reading. [...]

  43. Prakash writes:

    The Austrians focus on unsustainable arrangements of real capital, while the Keynesians focus on unsustainable arrangements with respect to money, debt, savings, and income.

    This is the gem of the piece. I’ve been casually interested in economics for over 10 years now and never condensed my understanding like this.

    I agree with one of the commentors that Henry George’s ideas should be taken more seriously, combined with some new thoughts on the source of money as well.

  44. Great, I loved reading post and blog, actually deeper analysis than my regulars such as Krugman, Baker, DeLong, ought to check this out daily.

    Investment does not equal savings, it does not even necessarily come from savings unless you count all wealth (which is mostly nonfinancial) as savings. Our greatest wealth is not numerated, it just is, the knowledge of ages and the planet earth which includes ourselves. Really the decision to invest is decisions to invest. It should be the social decision to invest. We (or they) are doing very badly, but that’s not because of credit money, the most efficient system of money, but our decisions as to how it should be used are badly flawed, driven by greed alone, that cannot work.

    Investment has to be chosen, either to advance private or public ends. Right now our society sees nothing wrong with trashing our commonwealth for private gains. Really what we need to do is advance social economic investment. This is all twisted now so that vice of self interest becomes virtue.

    There is a great need, a crisis IMO, to invest in the conversion from life destroying fossil energy to renewable energy and energy efficiency, and sustainable electric transportation. Will that be enabled purely by “the market”? Well, perhaps if we could levy sufficient taxes on it, and there we run into capture of the government and media. I can’t imagine this happening. Instead, perhaps we should think about the damage that probably will be done, such as sea level rise over 200ft and the deaths of billions, negative externalities certainly greater than all the fossil created wealth. But by the time the water rises, there will be no one to collect from even without the scam of limited liability.

    I can’t see the economist’s rosy scenario of our children being wealther ad infinitum, when it’s clear we’ve already reached the abyss. I pity the future. I hope I am wrong.

    But it doesn’t seem like capitalism has created wealth at all, just borrowed it from a future that will never be.

    And what about China?

  45. reason writes:

    Greg Ransom,
    pot calling the kettle black. I was just reflected on your own substanceless method of argument.

  46. himaginary writes:

    “But hangover theorists argue that adjustment is worth doing despite the cost in employment, consumption, and disruption, not because those costs are good things.”

    So hangover theorists deem unemployment as collateral damage, so to speak. But Keynesians cannot accept that kind of collateral damage. On the other hand, Keynesians deem condoning mal-investors/savers as collateral damage of recovery, which hangover theorists can never accept. In the end, the difference between both schools seems to boil down to which collateral damage you can accept. Surely, that’s where morality kicks in.

    @Andy Harless:
    But labor would be meaningless as numeraire in the world described in Keynes’ “Economic Possibilities for our Grandchildren”. I think Steve is thinking that far.

  47. winterspeak writes:

    SRW: “Savers” do not lend money — either directly or indirectly. You know this.

    Savers, by not consuming real assets, make room for investors, but they are different people.

    Talk about a tortured morality play!

  48. winterspeak writes:

    Do you see how despicable you are, you savers? You put money in banks or bonds that guarantee future returns. You pay no attention to how those funds are invested, whether bankers and politicians find growth-enhancing opportunities, or distribute cash to friends, or skim fees from bad loans (which are easier to make than good loans).

    SRW: As you well know, the above is a load of crap. Is your desire for what you see as your own morality so strong that you simply don’t care about the facts?

    This is despicable. You’re as bad as all your rhetorical targets in making ridiculous rhetorical claims to push your own agenda. I’m disappointed that, in the final analysis, this is where you’ve ended up.

  49. Foppe writes:

    “This is crap” “you simply don’t care about the facts” “This is despicable”
    Care to become a tad more substantive? You’re making it very hard to figure out what you’re claiming, exactly, other than that SRW apparently evokes strong emotions in you. (Which does not really interest me.)
    Why is it “not a fact” that savings, when stationed at a bank, can be used by that bank to create loans? And that banks will preferentially sell loans to people who pay high interest rates? And that banks do not generally nowadays care that this causes untold suffering in the borrowers, who would not have been able to borrow but for the banks’ willingness to lend?
    Or are you of the belief that there is always a need for more investment?
    Savers, by not consuming real assets, create imbalances in the supply/demand scheme, especially because they expect interest on their savings, which can only be made if that money can be invested. But how do you invest in something if most people are saving, or when some people are saving a whole lot and depriving their employees of decent wages, with which they can then buy products?
    Have you perhaps not understood the parable of Henry Ford raising the wages of his workers so that they could afford his cars?

  50. I think also the accusation that the Keynesian medicine is inflation is a bit unfair (though it’s a nice nutshell wrt Austrian). The Keynesian medicine is intended to be counter-deflationary in the long run. A growing economy catches up, and that’s the point (or at least, the hope, and Keynesians are not unique in relying on growth). Small inflation comes from dynamism and we want that to a limited extent. You could say the same thing about limited unemployment, and curiously the optimal numbers are about the same.

    The harder money gets, the more dynamism is suppressed, the more we all become slaves to the gold. Right now we’re at least one step ahead of that, as slaves to profit and growth. Where we need to be is participants in social progress. (That’s actually what we’re doing here, in having free dialog. The most important work is and always has been unpaid. You only get paid to serve the masters, currently the profit and growth masters.)

    Why should credits toward future consumption not go stale slowly if left in a mattress even in good times? Either you’re a player or not. A protected saving account means you’re a limited one sided player. That’s actually asking a lot of society, so you shouldn’t expect much. And though your legal liabilities are limited, your social ones are not so easily dismissed. Stay too aloof, and you should expect the starving masses to invade your Chalet and declare your claims null and void.

  51. winterspeak writes:


    Banks do not lend out deposits. Instead, banks extend credit through balance sheet expansion, and those loans then create deposits. So the conventional wisdom has the causality exactly backwards.

    Similarly, (nominal) savings are not doled out as investment. There is no “loanable funds” market. The investment comes first, and savings is merely the account of record.

    SRW knows this very well as it’s been discussed ad nauseam on this blog, and elsewhere. But he is wrapped up in some bizarre morality play of his own which requires that bourgeois value of putting aside some money for a rainy day to be demonized.

    If it sounds as if I’m getting emotional on this issue, it’s only because Steve really does know better, and seems to have decided not to care.

  52. Foppe writes:

    No, they actually lend out a multiple of the deposits. That the double entry bookkeeping jargon is different does not really interest me all that much (unless you are suggesting that DEB has ontological implications that are relevant to the quality of the loans/savings rather than the record-keeping). So unless I am missing some really exciting technical point, I do disagree with the your priorities (when discussing the ‘loanable funds market’), as it makes banks seem irreplaceable, by suggesting that loans are prior to deposits. It would imply that without a bank, you cannot have (“proper”?) investment. But although it may well be that this matters to accountants, I am not sure it matters for behavior, especially when those banks are only concerned with making profits.

    Anyway, what seems to me to be the point of that editorial you threw a fit over is that, since the abolition of Glass-Steagal — however you put it — the more money the banks have, the more loans they are able to create. And while it may be that at some time in the past when people did not put their savings in the bank ‘savings’ were not used for ‘investment’, wasn’t the main point of G-S to prevent customer deposits from being used in this way, and then being claimed as collateral when the bank did something wrong?

  53. Foppe writes:

    That is: SRW is not condemning saving so much as he is condemning saving at a bank, who then “invests” it “for” them, while keeping part of the profit. Because it was the banks who so kindly extended all those loans to everyone, so that they could extract a huge amount of interest (and “penalties”). And that is where the problem lies.

  54. Winterspeak — Let’s take a breath.

    Questions of whether loans create deposits or deposits create loans are entirely orthogonal to the moral issue here. People who hold money, or bank deposits, or Treasury securities, absolutely are creditors. You are confusing macro mechanics for micro morality. The two are related, and I’ll try to tease that out a bit for you, but the operational characteristics of banking don’t much affect the moral point.

    I don’t expect that you will agree with the moral point. We have had this argument many, many times before. I view savings in the form government-guaranteed claims as imposing serious social costs, along with some social benefits but only for “stashes” of modest size. You have consistently disagreed with this view, but I hold it very strongly, and if one of us is wrong, I will say it is you. But it has nothing to do with the question of how money loans are originated. There is nothing here inconsistent with the places we agree on the mechanics of the current banking system, and nothing inconsistent with my own long held, much-written views, including in long comment debates with you.

    Every holder of a government guaranteed claim, whether a dollar bill, a formally or informally insured bank deposit, or a Treasury security, has initiated a loan. It is not by depositing money into a bank they have enabled a bank loan — we agree, I think, that with respect to the banking system as a whole (although not necessarily with respect to small banks), under current monetary arrangements, that simply isn’t true.

    But when I earn a dollar and do not spend it, I am making a loan, directly. I have lent a real resource, my labor, and in exchange for that I hold a claim on future resources in the form of money. I am absolutely a creditor. Whenever I exchange or sell a real resource for money, I am extending a loan.

    The trouble is, I’m a bad creditor, in a moral sense. The claim that I hold is not contingent, and yet the future against which I lay my claim is deeply uncertain. I make no effort to direct the resources I have surrendered in a manner likely to ensure that resources will be available in the future, when I shall wish to redeem my claim. (Money is not redeemable by its issuer: it’s issuer relies on private exchange in lieu of redemption. But that doesn’t affect the argument.) Further, I under common but deeply immoral social norms, I accept no risk that should the resources I have surrendered by squandered and there be an aggregate shortage of resources, my claims shall have to be devalued. My not accepting the risk doesn’t mean that it disappears — if there will not be resources there will not be resources. But it does mean, that if there is future scarcity, I’ll make a moral and political claim that the state must “retain the purchasing power” of my claim, by taxation or other means that effectively redistribute resources from other claimants, including recent producers of goods, to holders of hold money.

    Everyone who holds a dollar, a bank deposit, or a Treasury security, and who does not consent to devaluation through inflation in difficult economic times, is in this sense an immoral creditor.

    An ethical creditor stewards the resources she foregoes to consume, especially if she wishes to lay claim to future consumption in exchange for present austerity. It is as simple as that, and has nothing to do with controversies surrounding the operation of a banking system.

    Now we might, and I think should, decide that this is too much to ask of creditors of modest means. We might wish to create the illusion, for schoolteachers and plumbers, that they can save risk-free in the form of claims on money, enough to cushion very ordinary mismatches between income and need. I think this is wise social policy. But it is in a very real sense a subsidy, and like any subsidy, it cannot be made available freely, it must be rationed. As it is, we have made a virtue of accepting this subsidy, and we live in a world where wealthy people have indefinitely large money claims against the state and yet insist that no risk be taken that might threaten the purchasing power of those claims. That is a catastrophic circumstance, it is immoral, and it has everything to do with why we find ourselves where we are today.

    And where are we today?

    We do not, yet, find ourselves in a situation where money claims cannot be redeemed for scarcity. If anything we face the opposite: people are eager to offer labor, goods, or services for undifferentiated money claims. Why is that? It is because people holding claims against specific economic projects recently got very terribly burned, while people holding claims on undifferentiated money have been kept whole in both nominal and purchasing power terms. And why is it that people holding claims against specific economic projects got so badly burned? Were they cautious investors who made reasonable decisions ex ante about the stewardship of real resources that happened, due to the cruel vicissitudes of our universe, to go astray?

    Some of them, yes. But, in aggregate, no. That is not a fair characterization of what happened. In aggregate, we engaged in patterns of investment that were visibly absurd at the time and unlikely to be effective at generating future production. We had a consumer and housing lending boom. Who funded that boom? Well, to the degree that it was funded by bank lending, you and I agree I think that the economic creditor was the state. The “investor” that failed catastrophically was a public/private partnership between the state and the financial system, and that was almost entirely unmonitored by the people supplying the resources that it invested. And again, when I talk about resources, I mean resources, not money. The banking system generates money endogenously, no one need lend it money to make a loan. But the resources purchased with that money are lent to the state/banking-system complex. And the people who lent those resources, who exchanged their labor, goods, or services, for money or bank deposits or Treasury bills basically put their wealth into the hands of a psychotic mutual fund manager. People holding Euro let their resources be managed by bankers who in turn funneled those resources to ghost civil servants in Greece and overpriced real-estate sellers in Ireland and Spain. The resources lent cannot be recovered from the people who made use of the resources. Who should bear the loss?

    I say the neighbor of the person who consumed borrowed resources is far less culpable than the person who blindly held a Euro and now demands its value be sustained at all costs. We absolutely should ensure that pensioners have means to live decently if modestly no matter what has occurred in the financial world. But in aggregate, a very substantial proportion of money claims are not held indirectly by Grandma’s 2000 EUR/month pension fund, but by “investors” whose means are substantial, and who speculated not on the viability of an economic project, but on the coercive power of the state to make them whole. I don’t think we should take those speculators’ claims very seriously, morally, politically, or in any other way. The European superstate is presently trying to exercise coercive power in a manner I find deeply immoral, putting hardship on Irish working people (and again mismanaging their productive capacity) rather than extracting value, or at least imposing risk, on speculators in the eternal value of the Euro. But it is the European superstate which itself misinvested the resources that holders of Euro bills and bank accounts failed to properly steward. (FD: I hold some Euro in a speculative position. I hope the EU takes good risks with my position rather than try to maintain its value by austerity and taxation.)

    The odd thing about all of this is though I think we shall never agree on the immorality of building large hordes of savings in the form of risk-free money with a purchasing power guarantee, I know that we agree on policy. We both think right now that the state should be issuing yet more money claims in order to sate the private sector’s current fetish with holding them. Am I being inconsistent then? If I want savers to hold claims against real project rather than nebulous but coercively guaranteed claims against the state, how can I support the issue of more money?

    A few points:

    1) As I pointed out earlier, even though guaranteed money is basically a subsidy to its holders, that’s a wise subsidy up until a certain wealth level. Access to claims on undifferentiated money is a form of social insurance that should be encouraged up to a certain level, so that individuals and families can cushion idiosyncratic volatility, but beyond that level should be actively discouraged, taxed or perhaps even rationed. At the moment, given the terribly lopsided income distribution we’ve allowed, there are a lot of families without sufficient money savings to secure even the short-term uncertainty they face, and a lot of people with resources to offer that are being wasted by nonproduction rather than poor lending. We should issue money claims and encourage the exchange of resources for money claims among these people;

    2) There are many people whose financial position is negative, that is they are short money claims. That is a particularly nasty situation, in terms of what it does to individuals and families, and can only be cured by default or by supplying them with money claims. I think we should encourage both routes;

    3) Issuing money claims, especially offering newly conjured money in the form of transfers, will have one of two effects on holders of large stashes of money claims. Either they will organize new production to back the existing stock of money claims with sufficient capacity so that inflation will not be a problem even when the present fetish for holding money abates, or they will fail to organize new production and their prior claims will be appropriately devalued. Either of those outcomes is far preferable to any sort of austerity.

    In the end, the hard won anti-inflationary “credibility” of central banks is morally inconsistent with tolerance of indefinite savings in the form of money. Ultimately people must organize the future production they desire, and the state/banking-sector complex is not likely or capable of doing so without a great deal of imposed by discipline by at-risk real capital providers. Since we are where we are and we’ve both let large money claims accumulate and watch real resources get profoundly squandered, the right thing to do is to drop the “hard-money” anti-inflationary commitment and issue money claims while simultaneously trying to organize real activity in such a manner so that our “soft money” retains as much purchasing power as possible, even after panic abates. I think we agree about this going forward. But we got where we are by tolerating and even making a virtue of a deeply immoral sort of “saving”, and I don’t think we should do it again going forward.

  55. winterspeak writes:


    No, they do not lend out “multiples of deposits”. A bank with zero deposits can make a loan as easily as a bank with $100M in deposits. And banks do not “invest” money “for” depositors. Banks invest money for profit. They take deposits because it helps them be more profitable, depending on their business model. Banks are not mutual funds.

    SRW knows this — ask him, or read warren mosler, or google “loans create deposits”. I didn’t mention Glass Steagal, I don’t know where it fits into this discussion.

  56. All — I apologize for participating so little (well, not at all) in comment threads lately. When I comment I usually try to either respond to nearly everyone or not at all, and recently it has been not at all. Maybe I’ll revise that policy to make my participation more practical. I miss the back and forth conversation. But you guys generate a lot of great comments. I felt I should respond to Winterspeak, because I was felt accused of being inconsistent or cynical in a way that I think I am not. (Of course I am inconsistent and cynical in so many other ways!)

  57. Foppe writes:

    Winterspeak: I’m sure you care very much about the details, but your disagreement is utterly irrelevant to the point that is being made. Moreover, I get the feeling that your emphasis on the details is a way for you to allow yourself to ignore the social context in which banking happens, in which it is supposed to be a tool not unlike Public Transport is.
    Your repeated hammering on the fact that banks can be viable without having any assets beyond the loan repayments they have been promised similarly does little more than to prove that you’re totally unwilling to talk about what kind of social function you think banks (should) have.
    Moreover, you first state that they do not lend out “multiples of what they hold as deposits” (your disagreement apparently again seems to be entirely about the formulation, and not at all substantive), and then go on to note that these deposits “can help” banks to make even more profits (at which point you add a pointless modifier). That is, you admit the point SRW made in his editorial, namely ‘your parking your savings with a bank matters for the bank, and allows it to behave differently than it could otherwise have done’. So why, then, if you agree with SRW that savings can in fact have the mentioned effect — namely enabling the banks to engage in usurious behavior even more than they do otherwise — do you protest so much after having read his article?
    If your point is to suggest that “might makes right”, then please say so — it is at least less tiresome than having to read these selective responses of yours that say nothing about anything that matters.
    How money is distributed, and how you choose to distribute your money, is a choice that has enormous social consequences, even if the effect of any given individual will not be noticed.

  58. “Keynesians urge government action that conjures financial income from thin air, risking devaluation of old claims by inflation.”

    But this penalizes finance companies that took advantage of people’s ignorance and lack of specialized expertise. Plus, it’s a transfer of wealth from uber-rich financiers, many of whom acted very unethically, to the middle class and poor.

    Plus, in this country, going back to its beginnings, we believe in giving severe debtors a fresh start and not permanently ruining their lives. That’s why the Founding Fathers put bankruptcy in the constitution.

    “Rather than ridiculing hangover theory, we ought to apologize to hangover theorists like Dean Baker, who warned against an obvious housing bubble and predicted catastrophe while his betters partied on oblivious.”

    Dean Baker didn’t have to be a hangover theorist. You could think the bursting of a bubble could cause a recession or depression for Keynesian reasons – people close up their wallets afterward. Moreover a big problem with the hangover/structural explanation is that the evidence doesn’t support it as being more than a relatively small part of the reason for the current high unemployment. See, for example Krugman’s post here:


    And for recessions in general, look at this from Bernanke’s macroeconomics text (with Andrew Abel and Dean Croushore):

    It seems clear that increased mismatches between workers and jobs can’t account for all the increase in unemployment that occurs during recessions. Much of that increase is in the form of temporary layoffs; rather than search for new jobs, many workers who are temporarily laid off simply wait until they are called back by their old firm. Moreover, if recessions were times of increased mismatch in the labor market, more postings of vacancies and help wanted ads during recessions would be expected; in fact, both vacancies and new job openings fall in recessions. (page 376)

    Another problem is that the hangover people usually think that government action makes the economy less efficient. That we would get a more efficient result if we just 100% (or close to 100%) let the market do the job of reallocating the resources, as if the real economy worked exactly like a ridiculously assumptioned simple model, as if things like externalities, asymmetric information, the zero marginal cost of ideas, giant transactions costs and other frictions, etc., etc. never existed.

    In fact, a mixed economy, with a strong and smart government role is vastly more efficient than laissez faire when it comes to maximizing total societal utility, or any reasonable measure of efficiency (neither is Pareto efficient, nothing is, but a smart mixed economy still comes far closer, especially over the long run with its vastly higher growth rate). After a bubble can be a great time to push through high-return government investment of the kind laissez faire will grossly and inefficiently underprovide, as well as to implement smart efficient government regulation. For more on this see:


  59. JKH writes:


    “Questions of whether loans create deposits or deposits create loans are entirely orthogonal to the moral issue here.”

    I agree it’s irrelevant to your issue and your argument. It’s also largely irrelevant to the intrinsic value of such operational knowledge, except when uninformed economists and others start using the wrong causality to buttress arguments about some allegedly related point having to do with the economics of the financial system – which you have not done and would not do.

    “An ethical creditor stewards the resources she foregoes to consume, especially if she wishes to lay claim to future consumption in exchange for present austerity.”

    Well, then you have no use for any sort of financial system whatsoever, because that’s what a financial system does.

    Moreover, and most importantly in my view, your demarcation line between debt and equity (which is a fundamental point in your linked earlier essay) is completely arbitrary under this criterion. I think your analytical framework obscures the fact that it’s really the banking system you are attacking throughout in your theme – not saving. Equity securities are as fundamental to the saving dynamic as bank deposits – more so in fact, based on market capitalization. There is no “marshalling of real resources” by the vast majority of equity investors. Other people do that on their behalf.

    “But it is in a very real sense a subsidy, and like any subsidy, it cannot be made available freely, it must be rationed.”

    It’s not a subsidy, it’s not free, and it doesn’t need to be rationed. It’s subject to pricing. The state has an unlimited capacity to exchange “risk free” or low risk assets for risky assets. The “risk free” interest rate and inflation risk are part of the pricing offer. There is always effective risk in the “risk free” asset, relative to some other outcome. Take it or leave it.

    “If I want savers to hold claims against real project rather than nebulous but coercively guaranteed claims against the state, how can I support the issue of more money?”

    Your subsequent defense is still inconsistent with your core premise, in my view.

    “In the end, the hard won anti-inflationary “credibility” of central banks is morally inconsistent with tolerance of indefinite savings in the form of money.”

    That just collapses to some quantity theory of money debate, which is a horrible debate to have.

    “Access to claims on undifferentiated money is a form of social insurance that should be encouraged up to a certain level, so that individuals and families can cushion idiosyncratic volatility, but beyond that level should be actively discouraged, taxed or perhaps even rationed.”

    I think that should have been the starting point of your essay. That’s an argument about asset risk distribution according to total income or asset criteria, which is fair game in terms of a robust analytical target and a particular ideological belief, in my view.

    In short, the argument you make in effect in my view is about the perceived evils of the banking system, and the importance of asset risk distribution. I don’t think it’s about saving per se.

    BTW, the value of equities held directly and indirectly by US households maxed out at about $ 21 trillion earlier this decade. Nearly half was held directly. That total value collapsed to around $ 11 trillion at the low. These numbers are part of cumulative saving. Don’t you think that’s a fair bit of moral punishment for starters right there?

  60. Andy,

    The problem is that just looking at labor doesn’t tell us about something we really care about — what’s actually produced. There’s a big difference between 100 million units of low tech, low skill labor producing 1 billion baskets of goods and 100 million units of labor using much greater technology and efficiency producing 20 billion of the same baskets of goods.

    Just use an inflation deflator, the best one you have, try to make it continually better to take account of quality, and try to include externalities. It’s imperfect but still very useful, and far better than nothing, than ignoring the issue and going completely blind.

    If you ignore this and only look at employment than nothing beats communism, but it’s completely obvious even with our imperfect measures that that’s far worse for real production and its growth.

  61. Ok, you cover my first point of my first comment at the end. Great finish!

  62. winterspeak writes:

    SRW: I have no interest in discussing the morality of your position. I still find it bizarre and Calvinistic. Tell me, though, was the spitting on Vietnam Vets imagery you opened with in your Observer piece a sub conscious or conscious decision?

    What I’m calling you out on is your hypocrisy in the Observer article. You collapse all classes of liability holders–depositors, creditors, and equity investors–into one, all of whom are equally culpable. You base this “moral” position on the sleight-of-hand where you let the poor Foppes of the world continue to labor under the misconception that banks lend out deposits, and therefore yes, depositors should bear some responsibility for the credit decision of banks.

    You know this isn’t the case, but you know that the lie is widely believed and use it to slip through a moral position which, when stated honestly in the company who know how this stuff actually works, is *debatable* to say the least. And you use this trick in an essay where you complain about innocent victims being lumped with the villains. Just “Who the fuck are this ‘we’ of which you speak, kemosabe?”?

    So, now we’ve gone through that hoary old technical accounting detour one more time, what do you base your moral position on in a world where depositors neither fund nor direct investment? “But when I earn a dollar and do not spend it, I am making a loan, directly. I have lent a real resource, my labor, and in exchange for that I hold a claim on future resources in the form of money.” You’ll have a real time convincing anyone that earning a dollar, and burying it in the ground, is “making a loan”. For the obvious reason that You Have Not Lent The Money To Anyone. You will also have a real time convincing anyone that you “lent out your labor” as you cannot get your labor back. What you did is rented out your labor in exchange for a number in a spreadsheet. You’ll never get your effort back, and the number in a spreadsheet may or may not buy you a sandwich in 30 years. Oh the humanity!

    The “no inflation” contingent is much weaker than you claim. The dollar’s lost about 90 percent of its value in around three generations. If I inherited a 10 bedroom mansion from my father, and it only had one room left standing by the time I could pass it on to my son, I would not call that a powerful store of real value. So much so for “purchasing power guarantee”. Besides, just spend some time in high-inflation countries, namely the entire third world, and you will not see a Korzhevian paradise where everyone is a little Buffet. Europe’s issues do not stem from those darn savers, they come from a bunch of academic economists having no idea how a balance sheet works, and a bunch of politicians who don’t care.

    And please elucidate Foppe on exactly what effect deposits have on banks since you lead him down this primrose path. Be honest now.

  63. Foppe writes:

    Thanks for the rest of your post, but “BTW, the value of equities held directly and indirectly by US households maxed out at about $ 21 trillion earlier this decade. Nearly half was held directly. That total value collapsed to around $ 11 trillion at the low. These numbers are part of cumulative saving. Don’t you think that’s a fair bit of moral punishment for starters right there?” seems to miss the point.
    Certainly the nominal savings and wealth decreased, but the only way it was could stay that high was if everyone kept investing that “bubble money” in the housing market. Individuals could’ve taken it out, but once any kind of massive selling started it’d have melted just like it did now because too many people could no longer afford the interest they had to pay. So that nominal amount of money was unavailable for use by is owners anyway, even if you want to argue it existed at all. (Unless that $21T figure is from before the housing market started to rise in ’97 or so?) Moreover, after 2003 Greenspan’s interest rate policies made it horrible to be saving in normal savings accounts, so even more ‘attractive’ to put that savings money into your next house, so it is likely that quite a few savings that would’ve been useful and meaningful to people disappeared that way.
    The more important point, however, is that (so long as people can take out mortgages and pay for them) the only party who benefits from higher asset prices are the rent-extractors, and it is there that a massive wealth transfer went on from savings to investors of whatever kind. This money is not going to evaporate, as opposed to most of the house prices, so after the bubble has deflated again you’re going to see even larger wealth disparities.

  64. Foppe writes:
  65. JKH writes:

    “seems to miss the point”

    I agree – it misses all the points I didn’t intend to make. The point I intended to make is that equity securities are a conduit for saving just as much and even more so than bonds or bank deposits are. And from a moral point of view, equity security holders have been heavily punished, even though creditors have not been.

    The technical aspect here affecting a balanced moral inquiry is the nature of the attachment point between debt and equity in the financial capital structure of the economy. A great deal of Steve’s argument (in a long series of posts) has to do with the fact that this attachment point shows great discontinuity of effective risk bearing, as evidenced by the issue of “bail-outs” for creditors, particularly in the banking system – the so called moral hazard. That’s the technical and moral issue, not passive saving as characterized.

    If there is an issue related to the disconnection between saving and investment, and the moral question around it, that issue should be focused across the full spectrum of risk bearing in the financial economy. I don’t think there is such an issue. But those that believe there is should be even handed in examining the distribution of failure associated with it. There is no justification for assuming away equity claim losses in examining this issue.

  66. JKH writes:


    Mosler’s hammer doesn’t answer every question in economics.

    Although, mixing metaphors, it does have the advantage of generally hitting the dart board even if it misses the bulls eye.

    I’d probably broaden the approach to the “investment creates saving” meme (e.g. Harless).

    For starters at least, that positions saving correctly in definitional terms, while demarcating the typical real/financial point of interface between investment and saving in a monetary economy.

  67. JKH writes:

    To the degree that loans create deposits, they also create debt and equity. Corporations issue debt and equity in exchange for money, or deposits. That represents a leveraging up of gross balance sheet structure in the economy. It results from money velocity narrowly defined within financial reconfiguration – ex real economy interaction. Loans create deposits, which in turn nourish debt and equity creation. That all has to do with financial stocks and flows. The financial system dynamic originates with credit and money creation, and subsequent financial stock reconfiguration is analytically separate from the dynamic of real economy flows. In the real economy, investment creates saving, using the money balances created by or associated with loans, debt, and equity balance sheet configurations.

    Micro agents always have choices – at a price. Macroeconomic identities only confirm the aggregation of these micro choices, leading to booms, stability, or recession. The question becomes, what is the choice with respect to the association of micro saving with micro investment? There, I say there is no fundamental difference between money, debt, and equity as the finance associated with some real counterpart. Deposit holders do not make loan policy. And most equity holders do not make corporate strategy. They both have a vote – in terms of their loyalty expressed as continued holding of the financial asset in question. All savers at the micro level have a choice to walk away from associated real economy strategies – by selling their financial asset in a micro transaction. Macro aggregation via the usual accounting identity relationships will ensure that such transactions clear in total.

    There is no artificial dividing line between deposits, debt, and equity in this regard. The next question is how are these things priced? The answer is that the market prices them for risk. Even in the case of expected bailouts, the risk of non-bailout is priced into the asset value.

    So by all means change the expectations for bailouts etc. by contract rules, resolution mechanisms, and market pricing. But having people carrying around (“marshal”) their real investment strategies in wheelbarrows is not the answer. That’s a mad max economic system, sans finance.

  68. RueTheDay writes:

    I found this to be the most interesting and most relevant line in the post:

    “The Austrians focus on unsustainable arrangements of real capital, while the Keynesians focus on unsustainable arrangements with respect to money, debt, savings, and income.”

    I assume that by “unsustainable arrangement of real capital” we mean something like a situation where excess demand for a particular finished good (let’s say hybrid powered cars) leads to excess investment in fixed capital to provide said goods which is then followed by some sort of exogenous shock (let’s say the discovery of an inexpensive method for producing fuel cell powered cars or even just a simple change in consumer tastes away from hybrids) which in turn leads to insufficient consumer demand for the end product to justify the current level of fixed capital investment supporting it. We further assume (largely correct) that it is difficult to re-purpose fixed capital investment (plant and equipment designed to produce hybrids cannot be easily reconfigured to produce fuel cells).

    If my assumptions above are correct, then yes, we should not dismiss this effect.

    However, this effect is far less significant than the effect you attribute to Keynesians (and that I would specifically attribute to Minsky and the Financial Keynesians), which is the role of debt. In the example above, are we to expect that for some unknown reason entrepreneurs will not enter the market to produce fuel cell vehicles? Are we to expect that capitalists will not cut their losses and embrace the new market? The transition will certainly not be instantaneous, but there’s no reason to expect it to be a long drawn out affair leading to economic depression either. Unless there’s something preventing a rapid adjustment, and there is – in this case it’s the existence of the debt contracts used to finance the fixed capital investment.

    “There is a multitude of real assets in the world which
    constitutes our capital wealth – buildings, stocks of
    commodities, goods in the course of manufacture and of
    transport, and so forth. The nominal owners of these
    assets, however, have not infrequently borrowed money
    in order to become possessed of them. To a
    corresponding extent the actual owners of wealth have
    claims, not on real assets, but on money.”
    –JM Keynes, “Inflation and Deflation, Essays In Persuasion

  69. winterspeak writes:

    JKH: I don’t know what Mosler has to do with any of this, except revealing SRWs core moral assertion — that all liability holders have equal culpability — as ridiculous (to use a kind word). Frankly, I don’t even know what problem SRW is trying to solve. It certainly isn’t the narrow one of a reformed financial system. He may be hunting the bigger game of Our Spiritual Salvation. But I really don’t know.

    Mosler tends to concatenate bond holders with depositors. I don’t agree with this. SRW seems to bundle bold holders, depositors, and equity holders. This I agree with even less.

    Depositors have no skin in the credit policy game, nor should they. Electricity has no say in what program you choose to run on your computer. But shareholders do have a duty to oversee companies they invest in, at least ideally, so I think the should have some say in corporate strategy. Lots of agency problems in practice, but at least it makes sense at some level.

  70. Steve Randy Waldman writes:

    Some clarifications.

    I have nothing against financial systems, financial investors, or equity holders. On the contrary. As JKH points out, equityholders tether their claims to future wealth to particular enterprises, and for the most part accept losses of the purchasing power of those claims should those enterprises fail to produce value. My beef is almost entirely with holders of guaranteed or quasiguaranteed money claims, especially bank deposits and government debt.

    Obviously I did not make this clear enough, as JKH and Winterspeak — very bright people both of them — have misunderstood me. In the post that headlines this comment thread, I did sloppily refer to “lenders and investors”, though following the reasoning by which I criticized those groups, one might charitably have understood that I was criticizing those lenders and investors who have been protected from write-downs of their claims. In the linked New York Observer article, which makes this argument in greater detail (and overpolemically), I explicitly exempt investors “in the stock market or pork-belly futures or a business you are starting” from my critique, but accuse those who keep “wealth in bank CDs or government bonds” as being deadbeats. (It’s the second paragraph.) In general, that article is pretty clearly targeted at those who “put money in banks or bonds that guarantee future returns”.

    On technocratic terms as well as moral terms, I think good investment vehicles should have the following two characteristics:

    1) Investment vehicles should have some comprehensible attachment to projects or enterprises in the real economy that will generate the production that will satisfy future claims; and

    2) Should planned value fail to materialize over time, investment vehicles should allocate losses in a manner that would have been understood and deemed to be fair ex ante, and which for the most part will be accepted by investors ex post, rather than leaving allocation of losses to a legal or political conflict.

    Note that the world is imperfect, and few investment vehicles satisfy these characteristics 100%. But there are matters of degree. Most equity claims are pretty far along the continuum of “good investments” by these criteria, while Treasury bonds combined with a widely believed purchasing power guarantee are very far down the continuum towards “awful”. There are intermediate investments: corporate debt, for example, is attached to identifiable enterprise, but credit losses are only accepted via a zone of legal conflict called “bankruptcy courts”. To the degree bankruptcy procedures are widely understood and accepted by investors and are efficiently administered, that tilts corporate debt towards the “good” scale. If bankruptcy procedures are ambiguous, and especially if the resources of noncreditors (e.g. taxpayers) might be marshaled to mitigate costs that creditors cannot or refuse to bear, then corporate debt is bad. (This critique is obviously relevant to bank creditors during the financial crisis.) Bank claims that are formally equity might be subject to a similar critique, since loss allocations that would have been understood ex ante are sometimes deemed to involve external social costs leading to “bail outs” even of equity claims. We have to judge investment vehicles by substantive criteria, not by the names or categories that we attach to them.

    The “purchasing power guarantee” associated with government claims is not a guarantee of zero inflation. It can be understood in two ways: 1) either a guarantee that loss of purchasing power of nominal money will not much exceed a widely understood rate, or 2) a guarantee that loss of purchasing power of nominal money will not be larger than the interest that can be earned on default-risk-free claims to that money (over any given time period). Both of these guarantees are widely believed by financial market participants, and actions that might risk either version of the guarantee meet serious political resistance. Neither version of the guarantee can be sustained unconditionally. The guarantee can be sustained, unfortunately, in periods of poor economic performance by taxing current producers to support the value of old money claims. If money claims — again a form of social insurance — are not somehow rationed, the scale and distribution of transfers of wealth required to support the purchasing power guarantee may be deeply unjust.

    Winterspeak — I never have and never would make the assertion that all liability holders (claimants) have equal culpability. I hope I have clarified that. I do not put bank depositors and equity claimants to well-specified enterprises in remotely the same category.

    RTD — You give yourself too easy an example of unsustainable real capital arrangements. Technological obsolescence does render past allocations of real capital unsustainable, but it also renders future superior allocations sparklingly clear. Technological obsolescence is also associated with unsustainable arrangements of debt and credit — GM may go bankrupt (again) when our new fuel cell overlords come into being. Nevertheless, periods of technological obsolescence are nearly always experienced as booms, not busts, because both real capital entrepreneurs and financial capital investors understand how to reallocate and collaborate to do so. My words — “unsustainable arrangements” — are a necessary but not sufficient condition for the “hangovers” we should all strive to avoid, whether Miskian or Misean. Hangovers occur when 1) there are unsustainable arrangements, to either or both the real or financial aspects of capital allocation; and when 2) uncertainty, or political rigidities, or some other friction prevents entrepreneurs and investors from cheerfully pouring into the superior capital allocations for a better tomorrow.

    Suppose rather than fuel cell innovation, we discovered that most petroleum reserves are not recoverable and the price of gasoline jumps 10-fold. Many current arrangements are rendered obsolete, but new arrangements may not be clear. It is not enough to say we are “poorer” in any absolute sense because our carbon subsidy has been withdrawn — enough solar energy hits the planet every day to accommodate our energy demands for a year and it is perfectly conceivable that there is some capital allocation under which even our existing automobile centric arrangements would be sustainable without oil. But we don’t know what that capital allocation is, or how best to get there, and we don’t know how our economy broadly will reconfigure itself if the automotive era does turn out to be at an end. In this scenario, it is the fact that we do not know what must be done that will create a bust — we will experience poverty both because we will produce fewer final goods, not knowing how to replace gasoline’s role in aggregate production, and because we won’t even know how to generate intermediate goods — real capital — that claimants confidently believe contribute to their overall wealth for the future production they will engender.

  71. JKH writes:


    I understood the point you made in the Observer article. My first concern there was with framing, in the sense of the use of the word “saver” to describe your target. It’s a highly charged use of language.

    But my concern included more than language. By automatically forgiving equity investors from your analysis, you omit the very point of fact that there exists a tier of “savers” who are exposed to the highest risk of losses. There is a risk continuum from the point of maximum loss with the equity investor to the top of the macro capital structure where the “risk free” asset lies. Parallel to that risk continuum is a continuum of real economy connection, ordered from strongest to weakest as risk moves from highest to lowest. Moreover, the “risk free” asset is always exposed to inflation risk. So nobody gets out entirely clean in terms of risk hedging. Finally, differential pricing exists along this risk continuum. So while understanding your target stratification of claims as per the Observer article, I think the exclusion of equity is a somewhat artificial demarcation point for the idea of the “evils” of “saving”. On a restated basis, I think you’re attacking discontinuities in effective risk absorption at the capitalization “attachment point” of debt versus equity. So I think your critical point is more about the effectiveness of financial capital structure than the generic nature of passive “saving”. Finally, the question of real/financial association is a question of degree along the same continuum. And it’s not a completely comprehensive or perfectly structured continuum. Equity share holders are still basically savers, and many of them are not in a position to affect real economy strategy, and don’t expect to, notwithstanding the occasional effectiveness of institutional investor activism.

  72. RueTheDay writes:

    Steve – Your example (exogenous shock to petroleum reserves, 10-fold increase in gas prices) really isn’t all that different than my example of hybrids/fuel-cells, it’s just a little more extreme. It does add a bit more of a real (non-financial) constraint in that overall economic efficiency (think the shape of the production function) would take a hit. However, in the absence of significant debt contracts tied to the old, now unsustainable, system, the economy would likely adjust to a new, full-employment state (albeit at a reduced standard of living) rather quickly. What I’m getting at is that I think the factor you identified in your older post entitled The Stickiest Price is far closer to the root cause of economic depressions than the effects of real capital mis-allocation that you describe here.

  73. Steve Randy Waldman writes:

    JKH — I don’t think we’re disagreeing very much, or even at all.

    Note that I plead guilty to the highly charged us of language complaint. But I have a reason. in both cases I am responding to a highly charged moral claim that “savers” are virtuous. Both pieces are public attempts to counter what I perceive as a false and dangerous moral framing with a different moral framing with better policy implications. And I’ll make no apologies for that, except where I have let the intensity of the language impede clarity of communication. (For that I would and do apologize.) I am tired of self-important techocrats who uselessly lampoon those who debate in moral terms and self-righteously lament the stupidity of humans for being human. I think good economists should engage strongly in moral debates, and do so in ways that are accurate, comprehensible to ordinary mortals, and effective. There are tensions between accuracy and the use of charged language. Those tensions must be negotiated. It seems that I confused you and Winterspeak at a certain point, so I didn’t negotiate those tensions as well as I ought to.

    I am attacking discontinuities of risk-absorption among different sorts of claimants (both in quantity of risk absorbed and in the certainty and efficiency with which risk absorption occurs). I certainly so attack the discontinuity that sits at the debt/equity boundary — it’s a longstanding theme at interfluidity that I think we should prefer equity claims to debt claims. But I especially attack the discontinuity in risk absorption between public or quasipublic obligations and private obligations that uncontroversially bear risk of loss.

    I am not, by the way, exhorting investors to be active, in the sense of exercising control over projects in which they participate qua activist hedge and pension funds. Most investors’ roles are to research and monitor, but even those aren’t obligations. The sole moral obligation of an investor is to accept losses when the assets against which she has a claim have in fact devalued. (That included not trying to squirm around that obligation by laying claims to such broad enterprises that losses are always deniable.) Once that obligation is accepted, most investors will research potential investments and monitor existing positions. Investors in aggregate then, do become “active”, simply my modulating the cost of capital to projects with different risks and prospects. That is sufficient. That is the core social function of investors.

    As a matter of reality, the risk-free asset is exposed to inflation risk. If GDP drops by 90% and without a very large drop in the stock of government obligations, prices will rise dramatically no matter what.

    But as a matter of prevailing morality, especially as it expresses itself in the political sphere, money denominated obligations “ought not” be exposed to inflation risk beyond what would be recovered as interest on default-risk-free claims. That ought is a profoundly relevant in shaping public policy, and is what I am trying to challenge. Governments around the world are responding to demands of “savers” — meaning in this case creditors in the nominal currency unit, and especially holders of default-risk-free obligations — and adopting terrible policies in order to minimize the short-term risk of devaluing their claims. You can’t effectively challenge that without challenging the moral narrative that brings the broad middle along onto the side of creditors. That is the “prudence” narrative, which suggests a person is virtuous simply for not consuming all of current income, and that ignores choices made with respect to savings vehicles and the responsibity of savers to bear risk. At least in the short-term (especially in Europe), savers are bearing much too little inflation risk, because governments are choosing foolish austerities at the behest of creditors. In the long term, that strategy will be counterproductive for creditors as well. Inflation / devaluation risk is ultimately inescapable. But it matters very much whether as we collectively believe creditors ought to (or ought not to) bear serious inflation/devaluation risk.

    With respect to the word “saving”, I agree wholeheartedly that a wise economic definition of savings includes accumulation of real assets, and increases in the value of equity claims matched by such accumulation. Usually I’m on the other side of this argument, trying to challenge MMT-ers who say stuff like govt deficits == private savings “to the penny”, which I think implies a poor definition of savings. I try to make clear — but apparently I do not try hard enough — when making this argument that my opposition is to savings in guaranteed money, and that I am an enthusiastic supporter of people who save by putting their resources productively at risk. But I think there is no alternative to putting the word “saving” into the fray, because it is the virtue of “saving” and “savers” that undergirds the pernicious moral intuition. The prevailing moral tenor of that word has to be undermined to match the economic reality. “Saving” really is a questionable virtue, and sometimes a vice, given the availability of vicious savings vehicles. “Investing” (even “speculating”!) should have more positive connotations, while “saving” itself should be morally ambiguous.

    BTW, “The Evils of Saving” was not my title for the Observer piece. My title was “Savers are bad people”, which wouldn’t address your concern, but which I like much better.

    RTD — We are disagreeing, but not very much.

    I think both the Austrians and the Keynesians have a point, and that we don’t have to (and should not) choose between them. I think, for example, that right now uncertainty surrounding how real capital ought to be deployed is a very significant component of the pickle we are in. I also think, right now, that broken balance sheets and debt overhang and associated financial incapacity and risk aversion are very significant components of the pickle we are in. I don’t know how much weight to give each of those two components, but I think they are both important. It sounds as though you think that the real capital issues would quickly be resolved if the financial hindrances to productive investing were removed. You might be right, or not. I’m not sure. My own resources are hiding in commodities for the most part, not because I am especially risk-averse or financially incapacitated, but because I have no idea where capital will be productively deployed. That’s partly just a reflection of the financial problems — until balance sheets are fixed, business conditions generally look iffy. But I’d really be delighted to persuade myself that some real productive enterprises have bright prospects and to deploy resources to those rather than to barbaric relics. But I just don’t know.

    As a policy matter, it is much easer to fix financial overhang by, um, fiat, than it is to have government direct the allocation of real capital (except with respect to durable public goods, which we should be investing in). So as a policy matter, we are likely to have similar preferences: I want the government to find ways to resolve dilemmas in private balance sheets, whether via private write-downs or via distributionally fair transfers that improve financial positions. And I’d concede that it’s fully possible that, absent the financial overhang, the private sector would converge to a good consensus about where we should go from here and start allocating real capital in potential fruitful ways. I hope that’s true. But I don’t know it’s true.

  74. winterspeak writes:

    JKH: Which Harless piece were you referring to btw? His post in this thread (“labor as numeraire”) or the old post on his site that interpreted S=I outside of the “loanable funds” model? Or something else?

  75. JKH writes:


    We agree on quite a bit now. But this continues to surprise me, and it may be central to your message:

    “As a matter of prevailing morality, especially as it expresses itself in the political sphere, money denominated obligations “ought not” be exposed to inflation risk beyond what would be recovered as interest on default-risk-free claims.

    I’m not sure where this comes from as an assumed moral standard, or at least one that is so mechanically defined in its hedging of inflation risk. Is this truly carved in the sand? I see no problem with the idea of creditors and depositors and holders of “risk free” assets bearing inflation risk of varying degrees, including negative real rates of return, particularly in the context of widely varying returns in general, and related policy conditions. E.g. if equity holders lose substantially in a financial crisis, I see no moral conflict in the idea of “risk free” asset holders losing to inflation in the aftermath. I’m not sure “risk free” asset holders are actually demanding a fully hedged expectation currently, all things considered. Anyway, current policy responses are mostly misguided on the issue of inflation risk, whatever the standard. The timing of European austerity measures is fundamentally insane, constrained in an equally insane way by imposed national currency rigidity. Countercyclical belt tightening is a reasonable idea, but the current European mix of cycle and policy is pure madness.

  76. JKH writes:
  77. winterspeak writes:

    JKH: Yes, that’s the one I was thinking of.

    SRW: What a bait-and-switch. You clearly have FDIC insured depositors in your sights, but when pressed on this point you switch to bond holders, or other classes of liability holders, who have made an actual active investment decision (which the depositor has not).

    The depositor did not fund the bad investment decisions directly or through an agent, nor did they direct bad investments directly or through an agent. You know this, yet you let poor naive Foppe believe otherwise in your Observer article because otherwise you assigning moral culpability to depositors is ridiculous on its face. And the patsy is still standing up for you!

    Moreover, the depositor is not standing in the way of the Government taking the right actions to restore aggregate demand, as there is lots of scope to increase capacity utilization before we exceed the current social norms around what is an acceptable level of inflation. The problem is academics not understanding how the the monetary system works, or in your case, understanding how it works but misrepresenting it to push what you believe is a Higher, more Moral purpose.

    I don’t find interesting how to assign punishment between the various classes of equity and debt holders. I do find it…”interesting”… that you found the one truly innocent agent in this morass of greed and chose to isolate and demonize them. What’s your game?

    Is this all some kind of power trip? Because it certainly solves no problems and is profoundly anti-human.

  78. Steve Randy Waldman writes:

    Winterspeak — Any “bait-&-switch” is unintentional: I absolutely include FDIC-insured depositors in my list of “villainous creditors”. They are, for reasons you are intimately familiar with, equivalent to Treasury bond holders. They make loans to the government, rely upon the purchasing power of the guarantee to keep them whole, and (in aggregate) press their case as “virtuous savers” in preventing government from undertaking good policy that would put at risk purchasing power. And the depositor does indeed fund investments: not by enabling a particular bank to invest per some reserve constraint or money multiplier, but by leaving resources unused in exchange for a chit and requiring others to invest those resources in order for that chit to retain value. Most of the time, unconsumed resources are in some sense “invested” — by a banking system that calls present consumption an investment when it makes consumer loans if by no one else — and those investments are absolutely funded by depositors’ resources. The real constraint on lending is the availability of unconsumed resources, and under present banking arrangements, the central bank sets the interest rate intending to find the price of funds at which all resources are consumed or invested without provoking inflation. The resources that depositors have failed to invest or consume directly are left to the offices of a psychotic banking system. Depositors then bear some responsibility for the losses that occur if the psychotic banking system has invested poorly.

    Again, I think it is wise public policy to shield savers of modest means from these concerns, to let small savers pretend that money is a token of predictable value that can be saved like acorns in a bank. But it is not wise, and utterly unaffordable, to extend this pretense to large savers (who use it madly, splitting large nest eggs into multiple FDIC insured accounts to earn the premium of CD rates over Treasury rates, sometimes using formal products like CDARS to ease the process). Having adopted this unaffordable policy (by overissuing Treasury securities and because we have failed to insist upon or enforce insured deposit limits), it will unfortunately be quite difficult to shield small depositors from inflation risk. We have let small depositors become human shields for large “savers”, and that is something we should prevent from ever happening again.

    I’m quite fond of you personally, and prefer to keep these discussions in the realm of ideas — even in the realm of sharply worded moral ideas — than to personalize things. I’m taking a sharp tone in the realm of ideas, and expect responses in kind. Good for the goose, good for the gander. But I’ll make a gentle complaint here: You can agree or disagree with my point of view here. (I know from many past conversations that you are likely to disagree. C’est la vie.) But I am expressing a coherent point of view. My arguments are not ad hoc, the dimensions along which I distinguish different classes of investment vehicles are explicit and consistent. I am not trying to pull any wool over anyone’s eyes. Perhaps the point of view I am offering is “profoundly anti-human” — feel free to make that case. Obviously I disagree. But when you accuse me of “bait-and-switches” or a “game”, when you claim I have adopted shifty and inconsistent definitions, I think that you are mistaken. The argument I’m expressing here is one I’ve expressed many times and places before, and several times in conversations with you. As far as I’ve been able to tell over years of thinking, it is internally very coherent. Again, feel free to find holes, or to argue why it’s a shitty set of ideas despite that internal incoherence. It very well may be. I am often wrong. But there is nothing ad hoc here.

  79. Steve Randy Waldman writes:

    JKH — I think you see the power of the widely perceived “ought to” with respect to maintaining the purchasing power of currencies in almost every political debate on fiscal or monetary policy. Anything that would hurt “savers” is presumptively off-limits, presumptively bad. Savers “have a right to expect” that the purchasing power of their savings will not be impaired, catastrophes in the rest of the economy notwithstanding. You may perceive no line in the sand, as a banker or experienced investor used to including inflation risk in your thinking. But in the political sphere, inflation is “debauching the currency”, a moral failing, a form of default. Even risking it is beyond the pale unless politicians can claim a situation in which they “had no choice”. Obviously these are mere assertions about very fuzzy political and moral phenomena. But I think the characterization is pretty accurate, and have a hard time understanding the politics, here or in Europe, without believing that these moral ideas are widespread among publics.

  80. winterspeak writes:

    SRW: Point taken — and thanks for your civil response. I’ve figured out why I’m having such a strong reaction to your position.

    I reject the moral position that a passive, non-action is in some way equivalent to an active action. I reject this because it annihilates the distinction between the good and the bad, the innocent and the guilty, the bystanders and the perpetrators. Let me illustrate the difference:

    (a) Tonight, a baby in Africa has died, and you could have saved her if you liquidated your commodities portfolio and wrote a check to medicin san frontiers, or quit your PhD program and flew out there yourself to pitch in and help. But you didn’t, you chose to blog instead, and now she is dead.

    (b) Tonight, some guy on Oakland is shooting another guy in Oakland, killing him.

    By your morality, both you and the gunman have blood on your hands. So we’ve now erased the distinction between you and a murderer. This is not moral progress.

    However, there are plenty who want to erase this distinction, and who basically hold the US responsible every time an African baby dies. So this moral position exists, it is just (IMO) reprehensible. The empirics are even worse, but getting into exactly why is beyond the scope of this discussion, which is already far afield.

    To complete the parallel — Sequoia and Kleiner invested in Google by writing a check to Messrs Brin and Page. By saving, I freed up some real resources that those guys would then use to make the search engine we all love. But I’m not responsible for Google in any way, I did not fund them, even though I made some real resources available to them by not consuming them myself.

    If you erase the distinction between culpability arising from your action, and what may happen due to your inaction, you erase morality itself. We all become Josef K, waiting for the knock on the door, hoping that one day we’ll be told what crime we committed, but knowing that it really doesn’t matter because our humanity as been destroyed. This anti-morality is inevitably paraded under the banner of the “greater good” by some Millenarian activists, but it’s basically just a grab at a corrosive and corrupting Power. It is, and I don’t use this word lightly, evil. What else can you call eliminating the very possibility of innocence?

    So no, Treasury bond holders do not “lend” to the Government as buying a t-bill is not lending. It’s just changing the term structure of extant liabilities. And no, putting my money in a bank is not “lending” to the bank, any more than putting my money under a mattress is “lending” to the mattress, or to Sealy. There is no requirement by the saver that anyone works to make his “chit” worth anything. That requirement comes from the investor who makes the call what real resources to marshal.

    The banking system is a product of its environment, so bankers and regulators, together with the academics that shroud their activity with lies, are the bad actors and the psychos. By trying to pin the blame on Joe Saver, you’re letting the real criminals off the hook, but sadly, and unbelievably, this isn’t the worst of it.

    The innocent saver is not “standing in the way” of the necessary nominal adjustment. He’s afraid of Weimar Germany or Zimbabwe, not 3% increase in CPI which is where we would be with sufficient fiscal. His fears are justified given that the White House and Fed is run by crooks, and Harvard Econ and Harvard Law are run by incompetants. If the NYTimes and NPR ran the appropriate stories, and Obama didn’t use fiscal policy to recirculate money into Democratic coffers, you might find savers suddenly on board. But he thinks toothless old QE2 is “debauching the currency” because that’s what he’s been told to believe.

    Fundamentally Steve, your position is Totalitarian. But I finally understand why you’re targeting the blameless.

  81. JKH writes:


    I think your position is probably only consistent with a 100 per cent reserve system (of some sort). That’s only way you can remove the automatic, passive connection between the pay check you receive and the bank assets already in existence that effectively back that money. This is an inevitable dilemma resulting from the turnover and velocity of money within a system in which loans create deposits. (Here I may be contradicting my earlier conclusion, moving a step back towards winterspeak’s point.) The only way to ensure responsibility for the “use” of bank deposits in a monetary system is to organize the system in such a way as to eliminate the payment/asset connection which otherwise is beyond the control of a depositor that has no choice but to “negotiate” value within a banking system that already holds the assets backing the value of the transaction. Every transaction beyond that then becomes an active choice where responsibility for personal choices can be traced and accounted for in a way that is fair.

  82. Mike "Mish" Shedlock writes:

    If suddenly everyone stopped buying big screen TVs and started building factories, investing in the future and laying the path for the next generation then there would be no recession.

    Excuse me but…
    Building factories to produce what?
    TVs, Cars, modular houses, solar panels that are not yet cost productive?
    The next invention that has not been invented yet?
    We are just going to build factories and poof goes the recession

    Can you please look ahead?
    Can any Keynesians ever look ahead?

    Assuming we did that and delayed the recession, now we have all these factories producing uh ? what? Driving up the price of commodities, in the meantime

    And who pray tell is going to hire all these people to build factories that we have no freaking idea of what is going to be produced?


    Gee this sounds just like Japan doesn’t it?
    The only difference is Japan built bridges to nowhere instead of factories.
    And now it is still stuck in deflation, headed back into recession, with debt 200% of GDP

    But hey, I have the solution: Build factories
    In fact the whole world should build factories.

    And to an extent China is
    Paying people $1 an hour.
    And we are going to pay them how much? To produce what?


  83. reason writes:

    I’m a bit concerned about this idea of “shielding” people from mild inflation. There seems to be a widespread tendency to fail to distinguish between relative price changes and general inflation. Solutions to imbalances will always involve relative price changes, and at least some people will suffer as a consequence. Lack of clarity about this is a huge problem with the way the media manages perceptions. If you are part of the problem, you can expect to hurt by the solution. The difference as I see it, is in realising that some solutions are catastrophic for some players and others solutions spread the load more evenly. We need more plain speaking in how these things are explained to the public.

  84. reason writes:

    this is not a useful contribution. One man’s cost is another man’s income. Cost effective, is in a macro sense meaningless. What you are saying is that income is badly distributed. Then come out in favour of redistribution.

  85. reason writes:

    Mish -
    surely what you write is telling you clearly the problem lies in chronically mispriced currencies. Then say that also!

  86. reason writes:

    (P.S. I like to put things this way,
    “It is not that there aren’t any useful things to do, it is that the money to pay for things that need doing is not available (either because the people with needs are to poor, or because the things that need doing are public goods). This suggests a possible solution.”

  87. reason writes:

    “Can any Keynesians ever look ahead?”

    Ah yes – we do. But in the long run….

  88. reason writes:

    That piece from Andy Harless is a wonderfully clear exposition. I don’t think I could have put it that clearly. Thanks.

    But it strikes me that there is a complication here, that perhaps needs looking at more closely. It is that financial income includes something for which there is no production – interest and dividends. Where do they fit into the picture (he does mention that income and output are not exactly the same thing)?

  89. reason writes:

    forget it, I know that dividends and interest (domestic at least) are just a bite taken out of current production and effect income distribution, but not total income. (Still waking up).

  90. Oliver writes:

    So the difference between your ideas and the MMT panacea is that instead of adding indefinitely to savings until they spill over into consumption or investment (depending on the shortfall), you would force people out of their existing savings to achieve this which you defend with a moral obligation by savers to guarantee the quality of investments? I think you are conflating two separate issues (or am I?).

    First, wasn’t it aggregate dissaving by households that led to the implosion? You verbally target savers with a very broad brush but then backtrack and admit you really only mean billionaires. Are you asking everyone who is in debt to save and everybody else to dissave? What exact level of net savings and which precise distribution did you have in mind? Why not target those levels by progressive taxation or some other old-fashioned redistribution mechanism? Currently the US is suffering from lack of demand, not supply, so in effect you’re asking those with savings to make up for the shortfall. Bill Gates, Warren Buffet, we demand you consume your shares of TVs, houses and cars now? I have a feeling you’re trying to skin the distributional cat without wanting to actively redistribute.

    Secondly, it is not the same to demand from savers that they should play an active role in keeping AD and AS aligned by, well, dissaving and to claim that their decision not to do so thus far had any direct effect on the quality of previous investments. This is what your acceptance of ‘loans create deposits’ means, if I’m not mistaken. The investments turned sour because the accrual of private debt to keep up demand proved unsustainable, not because the demand was ‘wrong’ or because of what billionaires did or didn’t do. The course of events may have exacerbated some misallocations that now need correction, but the cause is still either the gross inequality in purchasing power and/or a lack of deficit spending but certainly not any individual’s decision to save. Or what would the world look like now if billionaires had kept up spending all along? What could they have spent on that wouldn’t have increased the AD / AS misalignment? So, while I think it’s fair to doubt the feasibility of infinite public accommodation of private savings desires (no matter how improbable in practice), your subsequent argument should be one of moral obligation to recycle savings to fill the demand gap, aka redistribution, and not of savers controlling the quality of supply brought forth by previous investments.

    And, continuing from my comment above, I also think that current AD / AS imbalances and indeed distributional imbalances, must be seen in a global perspective. Assuming the persistence of global wealth imbalances, the only type of investments that can reasonably made within the US or Europe are ones that can’t be made in China / India etc. at 1/10th of the price. Apart from public investments in infrastructure and private speculation in the housing market , the only thing left short of setting up trade barriers is to fundamentally change consumption and production patterns and towards more quality and less quantity (specialization), thus favouring local production / investment. For the US, this is a nearly impossible educational challenge in the short run, although I agree it’s the only way out in the long run. The legitimate questions, and the ones you may have been alluding to all along, are: what’s the quickest way to get there and what will life look like until then? And what does one do with those who inevitably can’t keep up? What I don’t see is where any individual savers come in. Do you want Buffet to build schools to reeducate the country? That’s where Austrianism strays into cloud cuckoo land. All in my humble and non-professional opinion, of course.

  91. Doc at the Radar Station writes:

    “What exact level of net savings and which precise distribution did you have in mind? Why not target those levels by progressive taxation or some other old-fashioned redistribution mechanism?” – Oliver

    Good points. Could the solution be as simple as reverting to a 1940′s-1950′s era progressive tax structure? I think it might be, combined with capital controls and a consumption tax on imports tied to the level of the trade deficit. It would take a lot of balls to try to get that all across. Tax and spend? Protectionism? Globalism a crock of shit?

  92. Mike "Mish" Shedlock writes:

    There are many things we can do. The problem is the Republicans do not like half or them and the democrats do not like the other half.

    We can no longer afford to be the world’s policeman.
    We can easily cut $400 billion right out of the military budget.
    Do that and I will gladly put $200 billion of it on infrastructure.

    However, before I put a penny on infrastructure I want to kill Davis Bacon and prevailing wage laws. Do that and we can hire a hell of a lot of people for that $200 billion.

    Tell me why we need the department of energy. Scrap the whole damn thing. Put half of that on infrastructure.

    and so on and so forth.

    States are broke. One reason is prevailing wages on roads and other work, another is untenable public union wages and benefits.

    I am not in favor of “redistribution schemes” per se, but those benefits were fraudulently negotiated with no one acting in the best interest of the public. Boom, hit public union pension benefits in excess of $100K a year at a nice 85% and put the money into shoring up the pension plans.

    In the meantime we need to outlaw public union collective bargaining and kill public union pension plans entirely for new employees. This will put more people to work (isn’t that the goal) for a much lower cost. There will be 1000 applicants for every job even at lower wages.

    Our corporate tax laws are a disgrace. Why do we defer profits on taxes overseas? I would slash corporate taxes to 8% in the US but 12% overseas and stop all loopholes.

    Watch money, investment, and jobs return to the US if you do that.

    We do not need a weaker dollar, we need a stronger dollar so that money goes further. With a stronger dollar we can get by with lower wages.

    This is a completely different approach and one that has a chance.
    Building factories without having a clue as to what they will produce or at what wages is Keynesian silliness.


  93. reason writes:

    sorry a stronger dollar is crazy, with so much debt out there. Reducing wages and import prices doesn’t win anything, it just makes debts unrepayable. Then US Inc, really will be bankrupt. We can sell the whole of the US to China then.

  94. reason writes:

    (Real devaluation can be acchieved in two ways – by reducing the price of the currency or by deflating domestic prices. You want to do it the second way, me the first – i.e. we aim to do the same thing. The main difference between the two seems to be distributional, your way is better for those already sitting on lots of money. Maybe that is why is you are for it?)

  95. reason writes:

    P.S. I think “Austrianism” is closet mercantilism, and Mish just proved it. The aim of the game is to hoard all the gold.

  96. reason writes:

    to answer in a way why I find “hangover” theory unconvincing, at least with respect to real malinvestment hangover rather than financial (i.e. balance sheet) hangover, it is because malinvestment is (because of uncertainty and human fallability) inevitable, and is being continually bit for bit adjusted (as new investments are made, and old ones wear out or a scrapped). Financial imbalances on the other hand tend to appear suddenly and precipitously as expectations change. And the immediate responses to financial imbalances (bankrupcies, increases in savings rates etc) tend in the short term to make the problems worse not better. If you think in terms of a dynamically unstable economy that none the less like a stealth fighter can be made to fly, I think this is clear. Gradually appearing imbalances are easy to adjust for, sudden storms, less so.

  97. zanon writes:

    reason: nothings closet about it.

  98. dave writes:

    Again, I think it is wise public policy to shield savers of modest means from these concerns, to let small savers pretend that money is a token of predictable value that can be saved like acorns in a bank. But it is not wise, and utterly unaffordable, to extend this pretense to large savers (who use it madly, splitting large nest eggs into multiple FDIC insured accounts to earn the premium of CD rates over Treasury rates, sometimes using formal products like CDARS to ease the process). Having adopted this unaffordable policy (by overissuing Treasury securities and because we have failed to insist upon or enforce insured deposit limits), it will unfortunately be quite difficult to shield small depositors from inflation risk. We have let small depositors become human shields for large “savers”, and that is something we should prevent from ever happening again.

    My input:

    Until primary culprits (bank executives, bank creditors, GSE creditors and officers, surplus country banks and sovereigns, and others) take a haircut I will firmly oppose any attempt to use inflation to solve the problem. You academic approach isn’t the world today, and the savings account of Joe and Jane average will get hit by inflation. Before we consider that money claims possessed by those actually responsible rather then random savers must be addressed.

  99. Winterspeak — Sorry for the slow reply. And thanks for your civility as well.

    I don’t think we are as far apart as you think we are. Which, of course, should send chills down your spine, because my position is after all Totalitarian… ;)

    First, on the ethical distinctions along dimensions of “active” and “passive”.

    In the end, we merely behave. Active and passive, the distinction between sins of omission and sins of commission, are categories we impose upon the world. Our job, as moral theorists, is to define attach “sematics” — categories, meanings, distinctions, to things — in such a way that our theories lead to just and decent society. That is the work of civilization, as I see it. (Others see it differently: Some people think that ethical truths come from God or nature, and ours is only to follow and let outcomes fall where they may or as God provides. That’s a very fundamental divergence from my position, but I don’t think we are disagreeing at that level.)

    I agree with you that an important component of a “good” morality in this sense is to compartmentalize obligations and to distinguish somewhat between sins of omission and sins of commission. The world is full of suffering, and no one would live a decent life if all of us were held fully accountable of the suffering and injustice of everyone. We draw fairly arbitrary lines around behavior we consider acceptably distant from harm, and are much more reluctant to condemn people for bad inaction than for action. That is wise: We cannot individually account for the infinitely comlex ramifications of every breath, and most of us perceive the right to be left alone, to not be under compulsion, as an important part of decent living. Placing a high weight on sins of inaction would have us constantly compelled to act in prevention of evil somewhere.

    But there are important caveats. Sometimes inaction is unethical: If you encounter a rape, you are obliged to intervene somehow, if only by telephoning the police. We are obliged to pay taxes (and if you, like me, can complete no paperwork on time, to pay burdensome penalties). It is not at all my intention to draw any kind of analogy between depositing funds in an FDIC insured account and rape. My only intention is to point out that the topology of the moral landscape is complicated, that there are no simple rules that fully describe it. That said, I agree with you that we want to define things, if we can, in such a way such that activities perceived as passive can be understood as less sinful than those perceived as active.

    Some related points:

    1) Less sinful should be distinguished from positively virtuous. That is, I think it right that you and I have little obligation to abjure all comforts until every starving child is fed. But it would be foolish, Ayn Rand’s attempts notwithstanding, to define our passivity and indifference in the face of starving children somewhere as virtuous. There are limits to the virtue demanded us, because in practical terms, the consequences of unlimited obligation — enslavement to quixotic projects — would not be conducive to a decent society. However, people who do find effective ways to address the suffering of starving children are more virtuous than I am for having done so. I don’t know who these people are — I can’t very perfectly distinguish effective attempts to address that problem from ineffective and self-aggrandizing attempts. But to the degree I am persuaded that someone is bearing costs in effective pursuit of that goal, I will honor them as more virtuous than my own passive self.

    2) We define what actions are “default” or “passive”, and we had best to define them well. We want defaults to be unsinful, so that people needn’t choose between compulsion and sin. But sometimes what are understood to be “passive” or “default” activities come to be viewed as harmful. For most of history in most cities with rivers, it was ordinary to dump raw sewage in the same rivers from which people drew drinking water. Obviously this is problematic. One solution to the problem is compulsion: each individual or family is compelled to bury their excrement or carry it to some distant compost that will not be used for edible crops. However, that’s much more burdensome than the prior default behavior. A better solution is to develop a new “passive” behavior that is not so harmful. That may not be easy — sewage systems with safe effluent are hard work, and required new technology. But, despite the cost in compulsion, prior to the existence of those systems, it would have been foolish to not acknowledge that dumping sewage was harmful, and not to work to develop over time ever better sewage systems.

    Perhaps a less incendiary analogy than shit would be carbon dioxide. Let’s stipulate, for the sake of argument, that anthropogenic CO2 emissions beyond a certain level will eventually lead to catastrophic widely and somewhat randomly dispersed harms. (I’m not interested in debating whether that’s true, and confess having not done sufficient work to come up with any independent judgment of the matter. For the sake of argument.) In the United States, very ordinary passive, default behaviors involve emitting a lot of CO2. Many people cannot work or participate at all in our society without burning gasoline. I would die of hypothermia today if carbon were not being burned in the cafe where I am sitting. More fundamentally, I literally cannot breathe without emitting CO2.

    Here we have a problem: Simply recategorizing existing “passive” behavior as sinful or criminal would be cruel and counterproductive. If carbon emission is sinful, we cannot breathe! Simply accepting that existing social defaults cannot be condemned because they are “passive” means accepting the catastrophic harms of global warming, and also is not sustainable. The only morally acceptable path — for us as a society, not for individuals — is to work to redefine defaults, in a way that both leaves space for people to lead lives free of burdensome compulsions but that is consistent with decent outcomes in aggregate. Drawing sharp lines between active vs passive sins is unhelpful — we need to change the moral and the physical landscape. To return to the sewage analogy, we need simultaneously to invent sewage systems and to change social norms. With respect to carbon, new norms would probably leave space for people to breathe without masks to sequester the CO2. But they would also probably impose costs on individuals who emit unusually much CO2, and would be accompanied by active attempts to replace a coal and oil-burning energy infrastructure.

    In the context of our existing, IMHO deeply dysfunctional financial system, I view the combination of money-denominated saving and a purchasing power guarantee as akin to automotive CO2. (It’s not like breathing — most people in the world now, and for most of human history, have very little truck with saving in remotely credible currencies.) Under existing social arrangements, it is indeed a passive, default sort of activity. But it causes terrible and predictable harms, randomly and widely dispersed from the point of origin. Just like I won’t personally condemn an individual for driving to work (still stipulating the global warming story), I won’t condemn an individual modest saver. But I would challenge any driver who claims their burning of gasoline is positively virtuous! And if the existing social consensus ignored the harms of gasoline burning and even extolled the practice, I would write as powerfully as I could, over-the-top polemically if I thought that would be effective, to challenge that mistaken consensus. That is what I am doing with respect to the in my view deeply toxic combination of unlimited access to (usually subsidized) money saving and a widely-shared moral expectation that the purchasing power of money must not be “debauched” beyond conventional bounds.

    As with CO2 burning, I don’t think the practice should be banned, but it should be morally “problematized”, and our social norms and portfolio of default behaviors should be modified in a way that is as minimally burdensome as possible, but that is consistent with avoiding serious harms. There are a number of different path we could take: 1) we could relax the moral and political force of purchasing power guarantee, and understand money claims basically as equity claims on the macroeconomy; or 2) we could price or ration access to money claims so that people can still drive to work easily but flying jet planes becomes expensive. Oops! Analogy shift warning… So that people could still save modest amounts with some assurance that its purchasing power would be maintained but so large investors would have to assume the risk of the uses to which their resources are put. De novo I think choice #2 might be best. Just as the benefits of driving are great enough that we should tolerate some of it despite the prospect of global warming, the benefits of investment-free savings in allowing people to save their own nest-egg without becoming risk investors are worth maintaining. We would still have to tax current producers in some bad economic states to keep modest savers whole, but the burden of that taxation would be proportionate aggregate money to savings, which would have been kept modest. However, I think it absurd and immoral that, for example, Berkshire Hathaway keeps tens of billions of dollars in Treasury securities, which you and I are guaranteeing. My view is that individuals should have access to somewhere between one and two million current US dollars of guaranteed savings vehicles, beyond which investment in money unattached to specific risks would be progressively (and steeply progressively) taxed.

    However, our current situation is not de novo, and there are a great deal of existing money claims that ought never to have been issued. So I think the only morally acceptable view now is to treat money claims as macroeconomic equity. That, interestingly, is why our (Winterspeak and my) policy views, in practical terms, are so similar. Just like firms sometimes issue new equity, despite the dilution of existing equityholders, if the benefits of new investment are worth that dilution, macroeconomies now are teetering on the edge of terribly destructive debt deflations. Both from the perspective of existing equity holders (money savers) and everybody else, the benefits of “investing” to avoid this outcome are worth the risk associated with diluting existing claims. So, I support the issue of new money for purposes that can reasonably be expected to create value and avoid great harms. Like you (Winterspeak), I am also very cynical and worries about “Obama [using] fiscal policy to recirculate money into Democratic coffers”, so I prefer new claims to be “invested” in equal, broad-based transfers (to reduce debt burdens) or else in projects of whose value I am persuaded on specific merits (that is not undifferentiated stimulus to be politically allocated).

    As you say, these activities (particularly investment in high-return projects) needn’t be inflationary, just like equity-issues by a firm can be value-enhancing for prior shareholders. However, new issues, of currency or of equity, are usually perceived to increase the risk of devaluation of existing claims. If that new power grid (public investment) or that new acquisition (private share issue) to not produce sufficient value to defray the dilution, old shareholders will suffer a loss. “Investing” in balance-sheet healing via broad distribution of newly issued claims is even more risky to old claimants, as it tilts behavior towards greater utilization of real resources (individuals become less consumption and risk averse) without increasing the productive capacity that supports those uses. So it is not surprising that old claimants are very resistant to those uses. I’d argue that this is short-sighted, even on their part, as decay of productive capacity during a debt deflation can force devaluation of those claims as surely as dilution. But most money claimants don’t buy that argument, and moreover, most money claimants believe as a moral matter that money claims simply must be immune to devaluation and therefore nothing that seems to risk it can be tolerated. Under present circumstances, I think that’s a view that should be strongly challenged.

    Again, I’m not arguing for intentional inflation, but for dilutive issues of new claim that risk devaluation of existing claims, invested or dispersed as best we possibly can to match new issue with growth in macroeconomic value to avoid devaluation. But we have to be willing to risk that, and if we do, I’d acknowledge there’s a fair possibility that above-expected, and above risk-free yield, price inflation would result. (I think our main point of practical disagreement is that you see the possibility of a difficult inflation resulting from fiscal expansion as more remote than I do.)

    None of this, by the way, is intended to substitute for penalizing bankers who enriched themselves at other peoples’ risk and shifted losses to taxpayers. They are the most proximate cause of our problems, and are far more culpable than the vast majority of money savers. To the degree that we can recoup, write down, or cancel their claims, we reduce the risk associated with using new money elsewhere.

    I’ll end with another analogy. Suppose you earn some money and hire some dude to manage his investments for you. That dude impresses you for a few years, earns good returns, and you pay him large salaries. Then suddenly, all of your funds are lost. Reviewing his books after the fact much more carefully than you ever had during, you realize he had undertaken an “investment” strategy foreseeably intended to produce good returns in most years, but occasional catastrophic losses that would overwhelm prior returns. You absolutely should sue that motherfucker for all he is worth, and perhaps get him thrown in prison for fraud. But even if you can only recover a small fraction of those losses, that gives you no right to tax your neighbor to recover the rest. Ultimately, you have to take responsibility for your choice to inadequately monitor your delegate. That’s not fair — you did nothing actively wrong, your sin was mostly of omission, insufficient supervision. But your neighbor, who did not delegate or fail to supervise is more innocent than you are. Trying to recoup your losses from your neighbor would be actively immoral.

    Similarly, money savers may not be particularly “guilty” for having delegated the use of their resources to a psychotic and poorly supervised banking system. To the degree they can squeeze bankers to recover lost value, they are entirely in the right to do so. But to the degree that they face losses beyond what can be recovered from bankers, trying to recover those losses by taxing current workers or by taxing investors who chose good projects and monitored their own agents well is immoral, actively immoral. If I were an Irish worker, or an Irish investor in real businesses, I’d absolutely not put up with it.

  100. dave writes:

    1) “So I think the only morally acceptable view now is to treat money claims as macroeconomic equity.”

    2) “None of this, by the way, is intended to substitute for penalizing bankers who enriched themselves at other peoples’ risk and shifted losses to taxpayers. They are the most proximate cause of our problems, and are far more culpable than the vast majority of money savers. To the degree that we can recoup, write down, or cancel their claims, we reduce the risk associated with using new money elsewhere.”

    As a saver I can’t accept #1 until I feel #2 has been pursued to a satisfactory degree. As practiced today I view the use of #1 as a way of protecting those guilty under #2.

    Given that it seems inflation will be used as a way to paper over political failures and injustices in our society, can you still support it? I can’t. Both on fairness grounds and also because I believe leaving those injustices unpunished and flawed institutions in place ensures #1 will not be very effective.

  101. [...] Hangover theory and morality [...]

  102. winterspeak writes:

    Steve: The world is filled with sticky moral conundrums. This isn’t one of them.

    To your related points:

    1) I am not defending savings virtue, I am taking issue with you demonizing it in general, and in especially so with you demonizing it in this case.

    2) I am not setting a default, I am revealing to you that savings is, fundamentally and intrinsically, a passive act. Saving is definitionally “absence of spending” just as cold is definitionally “absence of heat”. This isn’t Thaler’s “Nudge”. I am not going to let you redefine what it is so you can then taken the moral highground and assert control over peoples lives. Not that that isn’t a time honored strategy.

    The Harless essay is an excellent exposition of what I mean here.

    And since saving is a passive act, it doesn’t cause anything. All it does is free up real resources that can then be used for good or ill by other agents. Since the agents then directing those resources are autonomous they are culpable for the consequences. You keep wanting to make these autonomous agents delegates, and they are not. You know this, but when it hampers your moral assertion, you seem to forget it (as in your misleading Observer piece. Have you owned up to Foppes yet?)

    I agree that in your investment management parable, the employer bears some burden for the bad action of his employee. Neglegence can reasonably be criminalized. But the employee is investors, the bad actor is the financial system, and the innocent neighbour is the saver. And you are engaged in the immoral act of saying the innocent neighbour should be shaken down.

    The operational mechanics in MMT make it clear why the saver is not delegating anything to anyone, which is why I brought this up in the first place.

  103. Winterspeak — Well, I’ve outraged you, but at least I’ve gotten an admission that saving money is not a positive virtue. I’ll consider that a victory.

    The notion that saving money is inherently virtuous is the pernicious idea I am desperately trying to counter. Note that by saving money I mean holding cash, bank deposits, or guaranteed claims on money such as Treasury securities. I do not include undertaking investments where the saver tethers her future wealth to some activity or commodity and accepts loss if her choices develop poorly. I consider risk investment to be positively virtuous. It is saving without risk-bearing that I consider indefensible.

    Saving may be a passive act, but saving money is a passive act only in the context of a very problematic set of institutions. Individuals shouldn’t be held culpable individually for the institutional context that surrounds them like water, but when that institutional context is destructive, individuals have to become aware of it if the difficult work of change is to occur. I do not really mean to condemn any particular holder of money as a sinner, although in the Observer piece, I did, in what I hope was recognizably overpolemic style. But I do wish very much to challenge the self-regard money savers have for themselves as the “good guys” or the aggrieved party, victims, or to use your word, innocents. They are none of those things. Perhaps passively, perhaps unintentionally, people who hold pure money claims are literally polluters of the financial system, generators of demand for future goods and services that, absent a much better financial system than we have, is unlikely to be matched by future production derived from investment of the resources they have abstained to consume. These floating, unbacked money claims become dangerously toxic in large quantities.

    You have altered my parable, but I should have been more specific. Suppose the neighbor has no savings whatsover, but lives “paycheck-to-paycheck” from current income. By what right would the “saver” who has delegated management of resources she earned but did not consume to an idiot or a fraud, tax the neighbor with no savings whatsoever to recoup some of her losses? Even if her delegation were entirely passive, even if the economic arrangements of the time automatically delegated management of unconsumed income to the now disgraced manager, by what right is a neighbor who has no savings at all to be taxed from current income in order to support the value of the saver’s old claims?

    That is exactly what is occurring in the Eurozone right now. You may argue (MMT-ers usually do) that there are alternative means of supporting the value of past savers’ claims that would not involve zero-sum transfers from current producers. And I’d agree that’s possible and worth trying. But those strategies are riskier to current money holders, in the short term at least, than simply taxing current production. Those strategies involve treating money claims like equity rather than debt, and issuing new money to invest in real activity, hoping that the increase in real activity more than offsets the dilution of claims. I support that, if the new issues of money are backed by wise investments and fair transfers.

    Taxing current production to support a huge stock of old money claims is not just passively problematic. It is actively immoral, and it is happening, right now, in the real world. And it will continue to happen as long as the sainthood of holders of money — the notion they are the “prudent savers” while the rest of us are spenders and speculators — goes unchallenged.

    Money savers may be victims, in the same way that Bernie Madoff investors were victims. I have a lot of sympathy for small savers, and in the same way that SIPC makes defrauded investors whole for up to $500K, I’d support limited transfers to support the value of small nest eggs. I think tightly limited guarantees are good public policy — the social benefits exceed the costs and risks.

    But people holding large stocks of bank deposits, bank bonds, or sovereign debt have absolutely no right to extract wealth from current producers to protect the value of those old claims. That taxation, imposing “austerity” for the benefit of past claimants who ought have been expected to steward their own resources, is not remotely passive and it is not remotely moral. It is plutocratic theft, plain and simple.

    Winterspeak — I’m considering escalating our last few rounds to a top level post, if you don’t object. And I’ll let you have the last word, if you respond to this.

  104. JKH writes:

    I realize this has now become a Waldman/Winterspeak exclusive engagement, but:


    Why do you automatically want to punish savers for the recklessness of premature government austerity programs? One either believes these austerity programs are badly conceived, or not. If you think they’re badly conceived, why do you blame those who aren’t policy makers – i.e. savers – for their conception? If you think they’re appropriate, which I doubt, that’s a different debate.

    You’re not paying attention to the fallacy of composition in invoking “the notion that saving money is inherently virtuous.” It is clearly not virtuous in the context of the paradox of thrift, at the macro level.

    If you want to tax concentrations of risk free savings, that’s a matter of wealth distribution. You want a progressive tax on risk free wealth. It reminds me somewhat vaguely of the wacky idea of charging interest on bank reserves. But as an idea, it’s rather more harmless and quite an improvement over both the reserve analogy as well as the more central hypothesis here that savers of risk free assets are THE problem.

  105. [...] post: Hangover theory and morality plays   Tags: correlation Posted in: [...]

  106. reason writes:

    no they are definitely closet mercantilists – in the same sense that homophobes are often closet homosexuals. The Wikipedia entry on Mercantilism contains the following:

    The Austrian School of economics, always an opponent of mercantilism, describes it this way:

    “ Mercantilism, which reached its height in the Europe of the seventeenth and eighteenth centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held exports should be encouraged by the government and imports discouraged.[36]

    That is they are anti-state mercantilism, but some of the assumptions of mercantilism seem built into their world view. In particular, it is hard to see how an economy can bootstrap itself out of a slump unless it is pulled by net exports. And they tend to be moral hazard fetishists, who think caution (savings) is good, risk taking bad. Strange for free market fanatics.

  107. winterspeak writes:

    SRW: I’m not sure when I said saving money was a positive virtue. I suppose I may have, and I think it has potentially has virtuous elements in the right context. But here I’m just resisting your attempt to label it negative.

    Saving does not pollute the financial system, nor are (nominal) risk free accounts held either directly or indirectly with the monopoly currency issuer problematic. This is because, as I’ve said umpteen times, saving does not fund nor direct investment. It merely creates space for it to happen within by freeing up real resources.

    And I have not altered your parable. Even if the neigbour lives paycheck to paycheck, he is still as innocent of the criminality of the money manager, or the negligence of that manager’s employee and funder. My point is that culpability lies entirely with the individual making the bad decision, or the person who delegated responsibility to that bad actor. It does not rest with individuals who neither acted, nor delegated.

    In your Totalitarian morality, someone who made a bundle in internet stocks in the late 90s, put all the money in 30 year Treasuries, and then retreated to live in the wilderness, eating only buried and grilled squirrel, in no contact with the outside world, is responsible for:
    - the credit bubble
    - the houseing bubble
    - the recession that followed
    - heck, why not throw in Iceland, Ireland, and the disaster in Haiti

    You assign his this responsibility because of these actual real actions:
    - freeing up real resources to be used or abused by others
    - From 2000-~2007, he changed the amount the Fed needed to drain from the reserve system to hit their target FFR. In ~08 when OIR started, he didn’t even do that.

    And you choose to target this guy while Blankfein, Bernanke, Dimon, and Geithner are gadding about scott free? While at the same time obfuscating MMT which has a clear path to lead us out of this needless recession? Is Foppes still in the dark?

    In your world, what is left for any of us poor wretches to do other than scream “like a dog” and die, while you Righteously watch over us?

  108. JKH writes:


    saving does not free up real resources

    investment creates saving – remember?

  109. Winterspeak:
    I agree with almost everything you wrote. I do not see it as “virtuous” to save starving peasants in Africa. I see it as reckless. Whaaaat? Why build up a future enemy? Or do you think we create “friends” with foreign aid?
    Diagreeing with Mish, I think we should INCREASE our defense budget.

  110. Did giving North Korea $456 million dissuade it from continuing its nuclear program? Our foreign and defense policies are nuts. But that is a post for another blog.

  111. winterspeak writes:

    jkh: Yes, as Harless explains investment creates savings. But, savings also frees up real resources.

    Look at real effects only across two periods:
    1. stuff gets made. Some of this stuff is consumed.
    2. more stuff gets made. Still have the stuff that was not consumed last period, which is available for consumption now.

    Look at nominal effects across those two periods:
    1. People get paid for their work. Some of that income is spent on consumption goods, some is not
    2. People get paid for their additional work. whatever nominal payment was set aside in the previous period is also available

  112. JKH writes:


    Well, Harless certainly didn’t discover that investment creates savings.

    Although he seems to be “discovering” MMT on his own as we converse.

    Who does he think he is? Leibnitz versus Newton? :)



    Regarding the issue above,

    Consumer goods that get made but don’t get consumed become inventory.

    All inventory is short term investment in the hands of firms.

    Then there’s normal long term investment – plant and equipment, etc.

    Changes in the sum of the two generate saving for the accounting period.

    Real resources don’t get freed up by saving; they determine the saving.

    But they can get trapped – such as unintended inventory expansions.

    Yes, money is saved into the next period, which can then be used to “disinvest” firms of their bloated inventories. But this is just delayed consumption at best, and possibly with perverse paradox of thrift contractionary effects at worst. Certainly, nothing of any long term investment nature gets “freed up”.

    Maybe that’s all you meant by freeing up real resources, but I wouldn’t describe it that way.

  113. winterspeak writes:

    JKH: My point is easiest to see in the case of inventory. But it is equally true for longer term investment. If real resources are available in the future, it means they are not being consumed now. If they are not being consumed now, it means someone is not spending earned income. I usually use the term “make space” to capture this dynamic.

  114. Tyler McClellan writes:


    please email me at the email I left in the comments section.

    outstading subtlety of thought here. thank you.