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    I’m interested your take on this argument I ran across: Government Debt and Deficits Are Not the Problem. Private Debt Is

    A Keynesian economist would point to excess saving as the problem. But debt repayment has changed the character of saving in today’s debt-ridden economies. In the 1930s, Keynes pointed to savings being a leakage from the economy’s circular flow. What he meant by “saving” was mainly non-spending – keeping income in bank accounts or other liquid or illiquid financial investment.

    But savings rates have risen since 2008 for quite a different reason. America’s recovery of savings rate from zero in 2007 is not a result of people building up saving for a rainy day. What the National Income and Product accounts report as “saving” is actually paying down debt. It is a negation of a negation.

    This is what debt deflation means. The antidote should be more government spending and larger deficits – as well as debt forgiveness.

    Bank lobbyists are urging just the opposite set of policies. They have implanted a false memory and a false economic theory blaming hyperinflation on deficit spending. The reality is that every hyperinflation in history has come from paying foreign debts, not domestic debts.

    Germany’s Weimar inflation resulted from the Reichsbank having to pay reparations to the Allied Powers. It sold German currency on the foreign exchange markets for sterling, francs and dollars – far beyond Germany’s ability to obtain foreign exchange by exporting. Germany had been stripped of its coal and steel production capacity and its ability to export was limited. So the currency plunged.

    Declining exchange rates caused import prices to rise. The general price level followed suit behind the umbrella effect of higher import prices. More money had to be printed to pay for transactions purposes at the higher price level. Every serious study of the German hyperinflation – and also those of France and, later, of Chile – shows the same sequence of causation from foreign debt payment to currency depreciation, rising domestic prices, and finally to new money creation.

    The German economy suffered from austerity imposed by over-indebtedness. The same was true of debt-strapped Third World economies from the 1960s onward under IMF austerity programs, and it is true of Eurozone countries today. Austerity and lower government spending did not make these economies more competitive. It worsened their balance of payments, and made their distribution of wealth and income more unequal as economies polarized between creditors and debtors.

    The policy lesson for today is that to avoid debt deflation, falling markets and unemployment, the economy needs to be revived. The way to do this is what was called for and indeed promised four years ago: a write-down of debts in keeping with the ability to pay.


    Holding money (in Keynes-speak “saving”) means a reduction in demand for goods (in Keynes-speak is a leakage from the total spending) and therefore, results in price deflation. But paying back debt simply transfers money from the debtor to the creditor. For money demand to be reduced it must be the case that the creditors hold more of the money transferred than the debtors. This seems unlikely, especially if the debtors are banks since banks can pyramid more money substitutes on top of any cash paid back to them in loans or, at least, issue the same amount of the loans in money substitutes if they are paid back in money substitutes. So I don’t see what distinguishes “debt deflation” from deflation. Also, I don’t see what importance can be attached to the distinction between foreign and domestic debt in cases of hyperinflation. Hyperinflation is caused by increases in the money stock large enough to set in motion a collapse of money demand, which results in the vanishing of money’s purchasing power.

    Here’s a more reasonable assessment of the German hyperinflation:


    Here’s more on hyperinflations in the 20th century:




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