[Vision2020] Paul Krugman: "No One Understands Debt"

Nicholas Gier ngier006 at gmail.com
Mon Feb 9 11:34:26 PST 2015

Good Morning Visionaries:

Paul said he would do more research about why national debt is different
from personal debt, and here is a good article for him and others to read.

Here is the crux of Paul Krugman’s op-ed:

“An indebted family owes money to other people; the world economy as a
whole owes money to itself.” As I posted earlier, Japan’s debt is 200% of
GDP, higher than Greece’s, but they owe it all to themselves, not to other

Another point that Krugman makes: even with extreme austerity in Europe and
dramatic budget cuts, the debt is still about the same, primarily because
the tax base of declining incomes has shrunk.  Thanks to the Obama stimulus
and tax hikes, we, relatively speaking, are in much better economic shape.

*Nobody Understands Debt*

FEB. 9, 2015 *The New York Times*

Many economists, including Janet Yellen, view global economic troubles
since 2008 largely as a story about “deleveraging” — a simultaneous attempt
by debtors almost everywhere to reduce their liabilities. Why is
deleveraging a problem? Because my spending is your income, and your
spending is my income, so if everyone slashes spending at the same time,
incomes go down around the world.

Or as Ms. Yellen put it
in 2009, “Precautions that may be smart for individuals and firms — and
indeed essential to return the economy to a normal state — nevertheless
magnify the distress of the economy as a whole.”

So how much progress have we made in returning the economy to that “normal
state”? None at all. You see, policy makers have been basing their actions
on a false view of what debt is all about, and their attempts to reduce the
problem have actually made it worse.

First, the facts: Last week, the McKinsey Global Institute issued a report
titled “Debt and (Not Much) Deleveraging
which found, basically, that no nation has reduced its ratio of total debt
to G.D.P. Household debt is down in some countries, especially in the
United States. But it’s up in others, and even where there has been
significant private deleveraging, government debt has risen by more than
private debt has fallen.

You might think our failure to reduce debt ratios shows that we aren’t
trying hard enough — that families and governments haven’t been making a
serious effort to tighten their belts, and that what the world needs is,
yes, more austerity. But we have, in fact, had unprecedented austerity. As the
International Monetary Fund
<http://www.imf.org/external/pubs/ft/weo/2013/01/c1/fig1_1_2.pdf> has
pointed out, real government spending excluding interest has fallen across
wealthy nations — there have been deep cuts by the troubled debtors of
Southern Europe, but there have also been cuts in countries, like Germany
and the United States, that can borrow at some of the lowest interest rates
in history.

All this austerity has, however, only made things worse — and predictably
so, because demands that everyone tighten their belts were based on a
misunderstanding of the role debt plays in the economy.

You can see that misunderstanding at work every time someone rails against
deficits with slogans like “Stop stealing from our kids
It sounds right, if you don’t think about it: Families who run up debts
make themselves poorer, so isn’t that true when we look at overall national

No, it isn’t. An indebted family owes money to other people; the world
economy as a whole owes money to itself. And while it’s true that countries
can borrow from other countries, America has actually been borrowing less
from abroad since 2008 than it did before, and Europe is a net lender to
the rest of the world.

Because debt is money we owe to ourselves
it does not directly make the economy poorer (and paying it off doesn’t
make us richer). True, debt can pose a threat to financial stability — but
the situation is not improved if efforts to reduce debt end up pushing the
economy into deflation and depression.

Which brings us to current events, for there is a direct connection between
the overall failure to deleverage and the emerging political crisis in

European leaders completely bought into the notion that the economic crisis
was brought on by too much spending, by nations living beyond their means.
The way forward, Chancellor Angela Merkel of Germany insisted, was a return
to frugality. Europe, she declared, should emulate the famously thrifty Swabian

This was a prescription for slow-motion disaster. European debtors did, in
fact, need to tighten their belts — but the austerity they were actually
forced to impose was incredibly savage. Meanwhile, Germany and other core
economies — which needed to spend more, to offset belt-tightening in the
periphery — also tried to spend less. The result was to create an
environment in which reducing debt ratios was impossible: Real growth
slowed to a crawl, inflation fell to almost nothing and outright deflation
has taken hold in the worst-hit nations.

Suffering voters put up with this policy disaster for a remarkably long
time, believing in the promises of the elite that they would soon see their
sacrifices rewarded. But as the pain went on and on, with no visible
progress, radicalization was inevitable. Anyone surprised by the left’s
victory in Greece, or the surge of anti-establishment forces in Spain
hasn’t been paying attention.

Nobody knows what happens next, although bookmakers are now giving better
than even odds <https://twitter.com/ericbeebo/status/564502366037475328>
that Greece will exit the euro. Maybe the damage would stop there, but I
don’t believe it — a Greek exit is all too likely to threaten the whole
currency project. And if the euro does fail, here’s what should be written
on its tombstone: “Died of a bad analogy.”
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