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Steve Keen's proposal for a modern debt jubilee

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shrugger posted on Mon, Nov 28 2011 8:29 PM

Steve Keen gave an interview on Hard Talk a few days ago in which he called for a "modern debt jubilee" where the government "gives money" to the citizenry who are required to use it to pay mortgage debt if they have any, and can spend it however they wish otherwise. He claims this is the way we can avoid the  "grinding twenty years" and associated social unrest needed to unwind the current global mess. He doesn't give any numbers, just the concept and qualitative arguments for it.

I have a lot of respect for Austrian economics, what little I know of it. I wonder if a learned Austrian could comment on the wisdom or folly of Keen's proposal. I can imagine it would be politically very popular with voters.

His explanation of the plan starts at about 7 minutes into the above You Tube video.

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Kakugo replied on Tue, Nov 29 2011 2:51 AM

No need for Austrian economics: where is the money coming from?

Inflation? Government Debt? Taxes? I don't recall him mentionining the origin of this "gift".

But let's assume it takes the form of freshly minted bills (ie inflation) and everybody (rich and poor, young and old) gets exactly the same amount. What's going to happen? The same thing that happened to Europe when Spanish silver started to pour in during the XVII century: massive price inflation. In this scheme there's nothing of the sophistication of modern inflationary schemes to reduce the impact of freshly minted money on prices: it's as blunt and brutal as a club.

This "gift" could generate a very-short term burst of economical activity (because most people have high time preferences and hence they would immediately go out and spend the money) but in a matter of days prices would automatically adjust themselves to reflect the drastically increased money supply without even the pretense of increased wealth creation and capital accumulation. Once the "gift" is gone people will be left with higher prices on everything.

This is nothing short of an "extreme" version of the low cost debt that has been fueling the world economy for the past decade or so.

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Not an expert here but my take:

This is a fairy tale. His premise is the politicians don't recognize the problem and just need a few stern OWS'ers outside their window to "wake up". Nonsense. The government is run by the banks and the banks are run by the government. So where is this magic policy going to come from? Mine as well just call for secession among individual states and a statement of financial sovereignty. He further thinks nationalizing will solve the problem, but we all know this is a failing solution in the long run. Do we really think we could roll back that kind of state power once enacted?

The whole concept that we can control the economy to achieve xyz goals is flawed in and of itself. Even if we had an omniscient economist at the helm for eternity, there is no way he could see to it that all his plans are executed the way he saw fit, nor could he control the actions of so many actors and variables within the economy. Central planning is always doomed to failure in the long run.

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This might answer your question. Not new but same issues! Peter Schiff v. Steve Keen: part 2 of 2

http://youtu.be/QV4osrNJBMQ

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You don't have to know much AE to see the folly of this scheme.

Let me paste a bit from my blog about what money is:

How does one make money? By working. In other words, you only have money  if you have first produced something worthwhile, which is what working is . After you have done your share, being productive, then you get money. The money in your wallet allows you to go out there and reap the rewards of your productivity, by consuming what you want. 

The point of this obvious little exposition is that before you spent any money, you have contributed to the wealth of the nation by producing something. Otherwise you wouldn't have the money to spend.

In short, having a dollar in your wallet is at once a Certificate of Productivity [a proof that you actually contributed to the nation's wealth],  and a License to Consume [which is why we want money in the first place, to spend it]. Your consumption will not reduce the wealth of the nation, because you have already increased the wealth [by working for the money] before you ever took any wealth for yourself [by spending the money].

But what happens if the supply of money is increased? This means, in practice, that the govt prints new money for itself, either paper money or digital money. They are giving themselves a License to Consume with that new money, but it certainly is not a Certificate of Productivity. They did not contribute anything to the economy to get that money; they just printed it up for themselves.

So what happens if we do as Keen suggests? Without having produced, everyone will go out and consume. It will be like a plague of locusts hit the country. There will be little left of anything. Prices will then naturally go up, by the law of supply and demand.

After the initial spending binge, we will be worse off than before, because there will be less to go round. Every day will be like Black Friday, with people fighting in the stores over what little is left.

Now there might be one earthly place we can look to salvation in such a situation, and it's called China. Maybe they will be stupid enough to take our piles and piles of dollars and sell us things in return. After all, they have been doing it for years. But if our economic policy is going to be "Let's pray the Chinese keep on playing the fools", then we are being fools ourselves.

 

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Smiling Dave - that's why a trade deficit is in fact a wondrous thing! You give people pieces of paper in exchange for actual items!

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Another intellectual some hard leftists take seriously is Michael Hudson, of Kucinich fame. He agrees with Keen on a lot:

http://michael-hudson.com/2011/11/reforming-the-u-s-financial-and-tax-system/

 

The pretense is that privatization is more efficient. But privatizers add on interest and financial fees, high executive salaries and bonuses, and turn the roads into toll roads and other infrastructure into neofeudal fiefdoms to charge monopolistic access fees for people to use. This is what has happened in Chicago when it sold off its sidewalks to let bankers finance parking meters in exchange for a loan. Chicago needed this loan because the financial lobbyists demanded that it cut taxes on commercial real estate and on the rich. So the financial sector first creates a problem by loading the economy down with debt, and then “solves” it by demanding privatization sell-offs under distress conditions.

 
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No debt huh? I can go with that. Looks like I won't be paying SS anymore! Hooray!

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Why should creditors lend if there could be a jubilee at any time?

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But privatizers add on interest and financial fees, high executive salaries and bonuses

Yeah, so let's nationalize everything!

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Answered (Not Verified) EEmr replied on Tue, Apr 3 2012 8:29 AM
Suggested by Rodolphe Topffer

I got Debunking Economics for Christmas, and he said some very lame and uniformed things in there about ABCT and Austrian economics. So I thought I would paste my comments in here and I would very much like a response.

I started to work on a critique of the whole book since then, but for now here is a critique of his critique of Austrians and ABCT.

"Steve Keen mistakes on ABCT and the Austrians


I will here outline some very basic mistakes in Steve Keens book “Debunking Economics” where he assess shortly the Austrian School and particularly his attempt to address ABCT.

Confusion over ABCT
Steve Keen claims that the Austrian business cycle theory is one that attempts to explain the business cycle by the fact that the central bank lowers interest rates. This is a mistake, as the ABCT is a theory that explains the business cycle by an expansion money and credit affecting relative prices and leading to capital and resource misallocation. The discernible difference between monetary and credit expansion that must lead to capital misallocation and what must not, is dependent upon the amount of savings that can counteract the expansion. There is no clear macro-aggregate or measureable aggregate statistical number that can be computed to necessarily reveal this, but it can and often is reflected in the amount of savings not increasing (or decreasing) while money and credit is expanding.
If the ABCT was simply a theory of how central banks can create booms-and-busts, then it would not be a theory that could explain why business cycle occurs before central banking. But that was precisely what it is and the reason it was thought out. This is why Mises(1949) places business fluctuations under the analysis of a market economy and not an interventionist regime.
Lets now quote Steve Keen in his first reference to ABCT:
“and the latter[the Austrian School economists] because of their familiarity with Hayek`s argument about the impact of interest rates being held too low by government policy.” (p. 326)

The ABCT in fact lays the casual factor again on artificial increases of credit or rather increases not corresponding to an relative increase in voluntary savings.
Had Steve Keen consulted one or more of the dozens of articles by Austrians scholars in the run up to the financial crisis predicting the crisis, the focus is expressly on money, credit growth and the interest rate policy that encouraged. Indeed this is why for example Jesus Huerta de Soto locates the start of the boom in 1992 and the expansionary monetary policy that did not end until 2007, and not with Greenspan interest rate cuts in 2001 although that did play an important role in extending and enlarging the financial crisis.
This can be produced both in a free fractional reserve banking system and in a highly regulated central banking system such as today.  It can also be produced by financial participants that engage in maturity mismatching. What the central bank can do, even without actively inflating is to guarantee that the banks can themselves inflate by extending loans and being backstopped by the central bank. That is the raison d’être of the central banks and the reasons almost all Austrians would cherish its demise in an attempt to avoid/limit business cycles and other ill-effects of inflation.
The fact though rather is that the central banks actively target goals to accomplish of a certain amount of inflation that is to be achieved through credit growth and often actively encourage credit expansion.

If one read the listed material of Austrian authors on the business cycle by Steve Keen such as Murray Rothbard(Americas Great Depression) this would be absolutely clear and the comments above almost completely unnecessary, I only bring them up because all these considerations are ignored and certain arguments against ABCT is formed that are wrong in the light of these considerations.

These are:
they argue that the current system of state money means that the money supply is entirely exogenous, and under the control of the state authorities” (p.447)

If the monetary supply is completely “endogenous” as the Post Keynesians like to hold, the current monetary easing should not be expected to be able increase prices at all, as deleveraging and deflation is the goal either way. If the Austrians are right the monetary expansion that has taken place if continued will again lead either to higher price-inflation or credit growth.
Furthermore this presumes that Austrians hold that monetary growth under the current system can only take place via an increase in base money, or reserves. This is far from the case, but the ability, willingness and in fact expansion of base money of the central bank encourages the commercial banks to extend further credit with their legal granted monopolies and guarantees of being saved by the central bank should they find themselves in need of money. This is then a false accusation and indicates yet again that Keen seems to be unaware or unlearned of the position he is critiquing.

…private banks and other credit-generating institutions largely force the state`s hand. Thus the money supply is largely endogenously determined by the market economy, rather than imposed upon it exogenously by the state.”(p. 447)
“empirical…supports post-Keynesians rather than Austrians on this point. Statistical evidence about the leads and lags between state-determined component of money supply and broad credit shows that the latter “leads” the former
(p. 447)
If the Austrians were correct, state money creation would instead precede private credit creation.” (p. 447)

There is also the strange notion of statistically “proving” this by appealing to what follows of the these two aggregates, focusing on these two aggregates misses the whole institutional set up and ignores the fundamental aggression against private property and its natural restrictions on bank credit expansion that have been detailed in the works of Austrian economists since Mises and by classical authors before him.
None of these elements are discussed, thus leaving an important economic and legal aspect of banking practices out the analysis. To claim that private banks “force” the state hands is simply presuming his conclusion and assuming away any guilt on the central bank for constantly expanding the supply of money, lobbying, demanding and appealing for the monetary policy which benefits them the banks certainly do. But that does not warrant Keens label of it “forcing the state hands”. A follow-up question to that statement then is, what would the banks do if the state did not have a monopoly over money? There would be no hands to force, and they would have too bankrupt as they should.

Furthermore if all banks are compelled by government edict to be a member of the state bank, and all deposits with them insured to what extent are they private? This would at least not meet the definition of private in any other field and this seems to mere rhetoric. If it has any importance at all, it seems to be more of the debate between the various current mainstream schools of thought and not the Austrian theory of money and banking. Austrians do not claim that all expansion of money is actively engineered by the central bank, as I have stated it can simply backstop their members and leave it to them, the problem is of course the only way any trust is placed in that backstopping is because of the monopoly over the supply of cash.
This claim is also made even more ridiculous and thinly based once one recognized the fact that in the financial crisis of 2007-08, if the government edict interest rates were removed and market rates were allowed to form or by simply keeping the interest rates up the market participants would have deflated severely the broad money and credit aggregates the Keen focuses on. It was in fact the actions of the central bank in the US and around the world which kept this from happening and thus illustrates the erroneous nature of his claims.

“monetarism also provides an evocative counter-example.” (p. 447)

To envoke monetarism as a counter-example also seems to be completely missing the point and misleading. No Austrian has only fought against an expansion of base money, but an expansion of broad money. The fact that Austrians all are against an expansion of the supply of base money, does not equate them to monetarists who also want to limit the supply of base money. Secondly, the fact that the current central banking system failed to keep credit growth from growing is no surprise.
It is precisely the reason why Austrians focuses on getting rid of central banking, and advocate 100 % market commodity money. The classical Austrian position that Keen completely ignores in his argument against them and the only true form of endogenous market money would be the money chosen under freedom of contract.

Some last comments
“a non evolutionary attitude towards both the existence of the state…the state was simply imposed from outside as an alien artifact”
“This is certainly one way to consider to the growth of the welfare state….an equally tenable argument…evolved as a response to the failure of the pure market system during the Great Depression”

These comments appear as a weakness of the Austrians, but it is more of a weakness and misleading description by Steve Keen. The existence of the state is seen as evolutionary by rothbardians, as state rulers and the nature of their justifications and the choice of state leaders, and the peoples convictions and interactions has changed. But if by evolutionary it means that the state will or must naturally arise, then this is of course an anathema to the Rothbardian view of the state.
Secondly, it is weak because it confuses the state as an institution with the welfare state. As if the growth of state argued against is only in the form of the welfare state.
Thirdly, it is downright dishonest to label the period before or during the Great Depression as a pure market economy. Especially to a group of scholars who locate the problem of business cycles with fractional-reserve banking, government meddling with money and credit, in its worse form central banking and fiat money. As central banking in America was established in late 1913, the history of events is more fitting with the Austrian detest of central planning in money, banking and finance simply broadening out the business cycle and exacerbating it. It is in fact the Post-Keynesians and in general the economic profession admiration for central planning in this arena which is an anathema both in the historical examples and the basic theory of a dynamic market economy. To say that they are equally tenable is just a statement, and in contradiction with the historical facts around government intervention in the early 20th century.

I get the sense that Steve Keen has simply attempted to fill his “Alternative schools of thought”-chapter on the Austrians with something, while actually not investigating the literature. Anyhow, the above comments are only certain observations and a more general critique of the Minsky approach to business cycles and other concepts in Keens “Keynesian” economics will be investigated and discussed later."

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What's here to bump about?

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Granted his debt jubilee would have been a better way to fix the economy than giving money directly to the banks.  The Austrians on here are not going to concede that as a good idea.

Repudiation is the way to go.  Hardcore austerity.

Inflation would be proportionate to the amount of money people earn that used to be spent on debt, but since there debt is being subsidized any money they spend elsewhere will create inflation.  For the consupmtion preference junkies this is a better plan than baiing out the banks without forgiving or subsidizing the public's debt.

And besides, the derivative markets are what are over 800 trillion dollars. 

Here is an old BIS total

Bail that out Ben.

 

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EEmr replied on Fri, Apr 6 2012 4:03 PM

Smiling Dave, thats not nice :P

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