Usually I don't respond to Henry's pieces which have their own merits even if they
are often shockingly close to the mainstream in their own ways, but since Perry
called this one "a keeper", I thought I might as well throw in my two cents...
>It is
>not clear that debt, unlike equity capital, actually puts money to work
>for the highest and best use, or where it is most needed and where it
>does the most good.
Equity capital puts money to work for the highest and best use??? Like in those
dotcoms?
True, many useful businesses are listed on the stock-market but they are paying
money to their shareholders and not the reverse. With a few exception in times of
financial bubbles, companies pay way more money to their shareholders than they
get from selling shares.
It's nice to criticize debt, but don't think that it means that other forms of market
financing are good. There's only one good way for the wealthy to put their money to
good use, and that's when money is takes from them against their will.
>Debt tends to be most productive at the highest
>risk level which destabilizes the economy.
So lending money to a corporation is more productive than lending money to
someone who wants to build a home? Lending money to a dotcom is more
productive than lending to utilities? Or does Henry mean profitable when he says
productive?
>The problem with debt is that
>it needs to be serviced regularly (except zero coupons which cost more),
>and a debt-propelled economy will reach a point where its ability to
>service the growing debt is exceeded, unless inflation is ahead of
>interest charges. Thus runaway systemic debt always leads to
>hyperinflation.
1) Is inflation necessarily bad? I don't think so. Does managed inflation to solve
credit troubles always lead to hyperinflatio? I don't think so. An explanation
wouldn't
hurt, Henry. Here you're only declaring your faith and talking like someone who
supports the class interests of the rentiers.
2) There are other way to get rid of debt than inflation. One of them is bankruptcy.
Another is taxing net worth instead of consumption, incomes and profits.
>Bankruptcy only relieves the debtor, but not the
>economy. If, as Minsky claims, money is created when credit is
>extended, then the erasure of debt destroys money and shrinks the
>economy.
Why's that? Bailouts don't relieve the economy but when there's a bankruptcy, the
lenders and shareholders lose money... What more can we ask? The economy
can do fine without them. If their losses translates into lack of liquidity, the
central
bank can throw liquidity in the system. What's the downside since aggregate
liquidity doesn't increase? Money is just paper and electronic data... why is it a
problem when it is "destroyed"?
>But the most fundamental aspect of a debt economy is that it cannot
>sustain a slow down, even a soft landing. If Greenspan were better
>versed in debt economics, he would have inderstood that a debt bubble,
>unlike the conventional business cycle, cannot survive the slightest
>deflation.
AFAIK, he wasn't trying to deflate the bubble. Why should he have wanted to do
that? What concerned him was having the so-called "wealth effect" on the top of
strong growth. And when the bubble was deflating, what did he do? Was he happy?
No, he cut rates. He probably would want to curb some excesses as opposed to
the bubble as a whole, but he knows quite well that he can't target specific prices
with interest rates and his market fundamentalism forbids him from advocating
regulations.
>His attempt to engineer a soft landing by raising interest
>rates only accelerated the debt bubble's burst.
The bubble has obviously not burst yet.
And I let me add a wild speculation... weren't most of his actions in the beginning of
2000 designed to balance the expansionary policy he had before Y2K?
>His only option was to
>prevent the debt bubble from forming by tightening credit quality years
>ago, but he chose to rely on the "market" to exercise its discipline.
I argue that the main cause of the bubble is not monetary policy but
overaccumulation. Why do you think so much credit was needed to run the
economy in the first place? Because autonomous financing was lacking. We aren't
talking about a situation where booming credit caused the economy to overheat...
We're talking about a situation where, while the bubble was forming, commodity
prices remained low, unemployment remained fairly high (esp. out of the US), and
average capacity utilization remained boringly normal (except in the small parts of
the economy where the bubble struck the hardest like in computers and networks).
>Once the bubble is on its way, Greenspan is on top of
>the debt tiger that he cannot get off without being devoured by the
>beast.
He can if he's assisted by the government. But he won't. Don't forget who he
serves. Don't forget who sits on the Fed board and at the head of the Treasury...
Those people come from the very core of the beast! I mean Chase, Citigroup,
Goldman, Morgan, etc. Look at their revenues and their profits... Those folks are
having a hell of a good time. Why would they want this to end?
Julien
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