Not All Debt is Real Debt

While discussing China saving the world today I came across what I think is the crux of the difference between the Post Keynesian view of the world and the 'Sound Money' crowd.

Debt is a promise of repayment with future work and energies.

That is only the case if the debt in question is denominated in a liability you do not have monopoly control over.

When you go to the Bank of England with your £20 note and ask them to fulfil the promise on the front of it, you will get another £20 note. That is not future work and energies. That is an accounting journal.

Some debt is real debt. The rest is just an accounting liability.

Focus on the Buyers

One of the things that bugs me about the explanations for Quantitative easing (QE) is that the narrative focuses near exclusively on the sellers of the assets. For example the Bank of England Quantitative Easing Explained Pamphlet states:

Direct injections of money into the economy, primarily by buying gilts, can have a number of effects. The sellers of the assets have more money so may go out and spend it. That will help to boost growth. Or they may buy other assets instead, such as shares or company bonds. 

Yet this misses the obvious point. Assuming that the transactions were conducted in an open fashion, these sellers would have sold anyway. They were already predisposed to sell and would have done so regardless of the QE process. The timing may have been different but the transaction would have happened. So there is no alteration in sellers' behaviour. They were going to sell and buy something else, and that is precisely what they did.

With QE, and more broadly with any sort of government spending, it seems to me that it is not the people who receive the money directly that we should be focussing on. Instead we should be looking for the people who were outbid by the public intervention and discover what they did instead.

It is the legions of the outbid that have to change their initial decisions. What they do next determine what effect the policy has. Focus on the outbid buyers and a slightly different mental picture forms.

Therefore with QE these were people who had decided to save in aggregate and wanted the security of a government asset, but at a slightly higher yield than that on offer. I'm not sure that those people looking to buy that sort of asset would then suddenly switch to corporate bonds or shares. Nor do I see them throwing a bunk and going off and buying a yacht instead.

Similarly with other changes to government intervention. When purchases are cut who in the private sector do they supply instead and at what price? And that may be the same as the unemployed - ie nobody at any price.

So let's start looking at this horse from the right end. Let's focus on the buyers and their substitution behaviours.

The First Economist

Brilliantly observed.


http://www.gocomics.com/nonsequitur/2011/09/01


Updated to new non-syndicated link.