Debate on Deficits: A Reply from Rob Parenteau

Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of the Richebacher Letter, and a research associate with the Levy Economics Institute, responds to DoctoRx’s post, “Debate on Deficits.”

DoctoRx raises a wide swath of excellent questions regarding the correct approach to financial crises, the economic contractions they can induce, and the best way forward. I will focus on some of the key points he introduced with regard to the financial balance approach, since he cites some summary comments of mine on the basic orientation and conclusions of the model, while perhaps Marshall and Ed will chime in later during the week to address the questions he poses for some of their prior posts on the issue of policy orientation.

Early on, DoctoRx asks, is debt the core of the problem? Debt related issues certainly seem to be a recurring contributor to some of the sharpest economic dislocations we witness across time, across regions, and even across economic systems. A lifetime ago, a highly esteemed US economist and entrepreneur named Irving Fisher had to lose his fortune and his house in order to question the general equilibrium approach which still to this day guides mainstream economics. In act born no doubt out of humility and direct experience, he subsequently stepped beyond his general equilibrium conclusions and tried to make sense of the conditions that spawned the Great Depression.

Fisher’s conclusions included the insight that the degree of financial leverage in the private sector matters greatly to the ability of the economy to right itself after any disturbance. His insights are , published in the first issue of the journal Econometrica. If you take the time to read it – it is written in plain English, not technical jargon or abstract calculus – and if you consider the parallels with recent events that can be found in his cursory model of what he called a debt deflation dynamic, I suspect you will find yourself agreeing that debt is indeed the core of the problem. If Fisher’s contribution fails to be persuasive, then I would recommend taking a look at the chapter in Hy Minsky’s recently reissued book, John Maynard Keynes that is entitled “Financial Institutions, Financial Instability, and the Pace of Investment”. Either one should do the trick.

To grossly oversimplify, the problem with debt is it sets up fairly fixed future cash flow commitments, of which there is no automatic mechanism guaranteeing that future cash flow generation by the economy will be sufficient to meet. If private sector leverage gets large enough – and Minsky argues there are inherent dynamics that drive the economy in this direction – then the failure to meet contractual commitments can lead to forced asset sales, falling asset prices, and a restricted propensity to invest out of profit income flows and to spend out of wage and salary income flows, all of which can fuel a vicious, self-reinforcing cycle very much like we witnessed from September 2008 to March 2009 before massive policy intervention broke the maelstrom.

DoctoRx suggest that as long as the entire private sector is not bankrupt, and only some units in the economy are debt distressed, then bankruptcy or debt renegotiation for those units is the best response. This sounds eminently sensible, and it is also a central tenet of the Austrian School approach to financial instability. However, many of you may recall there were central bank officials, including the Chairman, as well as many Wall Street executives and analysts, who repeatedly asserted the subprime mortgage crisis was, to put it in their words, “contained”. This assessment was clearly incorrect. There apparently was enough leverage within the financial system itself, within the household sector, and within the nonfinancial business sector, that the “contained” subprime crisis spilled over into the deepest and longest economic contraction since the Great Depression. So perhaps there is some threshold level of indebtedness beneath which bankruptcy and debt renegotiation can be a successful approach, but clearly, we crossed that line, and given the number of episodes of financial instability I have witnessed over the past quarter century of my career, I would have to add we seem to have an uncanny ability to keep crossing that line.

DoctoRx next considers a contradiction in using policy responses to debt deflation dynamics that require higher government debt. He suggests we best think of the government balance sheet as consolidated with the domestic private sector balance sheet, since Treasury debt is an obligation that ultimately must be paid by taxpayers. This of course is a variant of the Ricardian equivalence argument, whereby fiscal stimulus is deemed to be ineffective at inducing economic growth since the households receiving higher income from deficit spending simply save the entire proceeds in expectation of future tax liabilities of equal magnitude. DoctoRx is probing along similar lines when he observes, “after all, the private sector has to debit its bank account to send the funds to the government in order to buy the debt. All that is really happening is that the private sector had cash, and now the government has the cash with some repayment terms.” Fiscal deficits are, in other words, just an asset swap.

This takes us directly into some of the most controversial and powerful observations of what can be called a functional finance view of government deficit spending. We can start from the realization that the household and nonbank business segments of the private sector cannot create cash – that is called counterfeiting. They have essentially 3 ways they can net accumulate cash: 1) by selling assets to or borrowing from banks (bank loans and bank security purchases create deposits); or 2) by the federal government spending more than it receives in tax revenues, such that the private sector receives more cash inflows from government spending than it pays in cash outflows in federal taxes; or 3) by the central bank (the Federal Reserve) expanding its balance sheet by purchasing assets from nonbank firms and households.

In general, the federal government can and does create the cash that the private sector receives when the federal government deficit spends or when the central bank purchases assets from the private sector. For example, when a household receives an unemployment benefit from the federal government and deposits it in its bank account, the Federal Reserve credits that bank account. Neither the Treasury nor the Fed needs to collect the cash from the private sector before hand. Indeed, the private sector can only net accumulate cash if it sells labor time, products, or existing assets to the federal government or the central bank first. What is missing from most depictions is a clear idea of how money is created and destroyed in the economy that we actually inhabit. Until it is understood how the nonbank business and household sector as a whole can get their hands on money, since they cannot create money without risking a jail term for counterfeiting, then much about fiscal policy, monetary policy, and private saving remains mystified or misunderstood.

Next, DoctoRx proposes several examples of how the private sector can accumulate equity, net worth, or real savings that “do not become anyone’s liability”. He cites as possible demonstrations the following: “consider obtaining enough milk to meet the needs of many children from a cow that eats free grass, building a cabin from logs cut from nearby trees, or building a bridge to create an important crossing point of a river”. Here, we are dealing with a primitive economy that appears to have limited private property rights and no money. Most would agree that does not resemble the economy we inhabit.
Typically, modern production requires large scale capital equipment, and the acquisition of that equipment must be financed. Even the proverbial two guys in the garage creating the next Apple have credit cards they are maxing out. Moving to the macro level, assuming for simplicity no foreign trade and no government sector, it is possible to demonstrate the conditions required for business capital investment to be internally financed, which is probably closer to the point he is trying to make. It is quite simple: the household saving rate must be zero, which means we all die of starvation upon retirement.

By way of illustration:

Total income = profits + wages = P + W

Total spending = investment + consumption = I + C

Total income = Total spending

P + W = I + C

P = I + (C – W)

Assuming no payments to households out of profit income, W – C = household saving

P = I only if W – C = 0

But even then, with investment equal to profit, there is a timing problem, since profits only show up after the sales of produced goods and services. In a monetary production economy – that is, one not characterized by barter exchange of products for products, where production takes place only in the expectation of or search for money profits – the business sector has to gets its hands on cash to set production in motion (since sales revenue follows the act of and the costs of production with a lag), and they usually do this by borrowing from a bank, which creates money and debt in the process (loans create deposits, deposits are acceptable means of settlement, or money). So credit and money are deeply intertwined with real production and the accumulation of tangible plant and equipment, at least in the economy we inhabit, rather than the hypothetical Hobbit shire DoctoRx offers up.

Finally, DoctoRx suggests “the private sector can be profitable while the public sector is simultaneously profitable. Or, both can be unprofitable…If in fact the economy is net unprofitable, then kicking the can over to our doppelganger, the Federal Government that the States created, will not change the underlying economics.”

The financial balance approach may shed some light on these three configurations. If in the aggregate, total income must equal total expenditures, and total investment must equal total saving, and we define the financial balance of any sector of the economy as sector income minus sector expenditures, or sector saving minus sector investment (they are algebraically equivalent), then the following must hold true:

Household FB + Business FB + Government FB + Foreign FB = 0

In other words, the sum of the sector financial balance must be zero. Note the foreign financial balance is the negative of the current account or trade balance. When foreigners net save, we are running a trade deficit, spending more on imports than we earn on exports. So yes, the business sector and the government sector can run a financial sur (what DoctoRx calls being “profitable”) if the household sector is willing to deficit spend, and/or the trade balance is in sur. Or both the business sector and the government sector can run a financial deficit, if the household sector is net saving and/or the trade balance is in deficit (and hence the foreign sector is net saving). Finally, the business sector will run a net saving position (or will be net profitable, in DoctoRx’s terms) when the government deficit spends as long as household net saving or the trade deficit do not increase as much as the government deficit.

There are obviously many permutations that we could investigate on end. The point is to think coherently and consistently about these sector flow imbalances, to try to understand what combinations are indeed compatible and possible, and then try to find ways to support sustainable growth trajectories. In the period following a financial crisis, it is not unusual for the private sector to seek a net saving position. For the private sector to achieve its desired financial sur, the fiscal balance must fall and/or the trade balance increase in an offsetting fashion, or income will fall, and debt deflation dynamics will take hold. Without the financial balance framework, it is difficult to see such things very clearly, but even .

So keep going DoctoRx – you are asking some very important questions. Finance matters – especially debt and leverage in general – to real economic outcomes. Money and finance are not neutral with respect to real economic outcomes, nor is money simply a veil for real exchange, as is taught in mainstream economics and as is held as holy truth by contemporary central bankers. Read a little Fisher or a little Minsky, and then reflect on recent events. Did we destroy some productive resources, lose some technical knowledge, or otherwise experience an exogenous productivity shock to drop into the deepest recession of the post WWII period, or was the drop in real economic activity in no small part a result of a highly leveraged private financial and nonfinancial sector encountering some very drastic financial conditions as fraudulent loans and fraudulent debt ratings were exposed? Does the government need the private sector’s money to “fund” its expenditures when a) the nonbank private sector cannot create money, and b) the government creates the money the private sector accumulates to pay taxes and buy bonds? Under what conditions can the business sector as a whole accumulate tangible capital without issuing financial liabilities, and are those conditions we observe in the real world around us?

Finally, how can we think coherently and consistently about sector financial balances, and what does an analysis of these sector flow imbalances reveal to us in regard to sustainable growth trajectories? These are all timely and relevant questions that we all could stand to explore more deeply and openly if we are going to find a sensible way out of the recent mess without yielding to the default solution of simply creating more asset bubbles, which unfortunately appears to be the preferred path at the moment.

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  1. Skippy

    I like my Martini Dry also, but the one thing I do not see, in any Equations, is LOSS aka fraud, ethically and morally wrong crime, with forethought and intent.

    For many years now the American people have been predicated upon by a class of citizens, with the sole out come to strip them of their future wages. Via usury rates to CC via lobbing of states like south Dakota, lobbing of our elected State and Federal officials, removal, softening, ignoring of laws protecting citizens, creation of SIVs that enable risk to be repackage and sold multiple times obscuring the crimes (no one to handcuff).

    I would like an economist to factor in the multiple required to express the *Loss* against the macro economy, starting with a factor of one to represent one person with a median wage job and add every time they use their CC. Then add all the overdraft charges, late fees, arbitrary increases to card rates, annual fees, now factor in criminal home loans practices which are compounded by agency’s like MERs and modern portfolio practice., SIVs.

    The value must be massive-exponential, there is your flow problem, clogged sink. The flow from main street was flowing into a few reservoirs/pools ie IBs and when main st could no longer supply them with criminally manufactured debt to package and sell as AAA rated security’s, the river dried to a trickle, so the rotten fruit MBS/CMBS was repackaged with the last of the sweet fruit and sold as AAA with a few bruises hidden on the bottom. Well the smell got so bad on the Street, that even at night time no one would buy or lend…eh. Oh and lets not forget AIG, the house of forbidden secrets, insuring practically the hole of the Western worlds markets, a veritable one stop shop, one bomb is all that was need to blow everyone to kingdom come, and all this with the masterminds of risk assessment at the helm…geez.

    Skippy.aka.Grand Nagus..Popular Economists are just criminal lawyers me thinks…really Judge hes a good family man, works hard, employs lots of people, goes to church and gave to the poor.

  2. fresno dan

    “Did we destroy some productive resources, lose some technical knowledge, or otherwise experience an exogenous productivity shock to drop into the deepest recession of the post WWII period, or was the drop in real economic activity in no small part a result of a highly leveraged private financial and nonfinancial sector encountering some very drastic financial conditions as fraudulent loans and fraudulent debt ratings were exposed?”
    “What is missing from most depictions is a clear idea of how money is created and destroyed in the economy that we actually inhabit. Until it is understood how the nonbank business and household sector as a whole can get their hands on money, since they cannot create money without risking a jail term for counterfeiting, then much about fiscal policy, monetary policy, and private saving remains mystified or misunderstood.”

    Unfortunately, all our gubermint money men seen to believe that the end all and be all is banking. No thought is ever given to actually !gasp! raising incomes. No, no, just refinance. If you can’t pay, just pass it on to your kids. And don’t worry – you’ll have PLENTY of money – so much money that you will feel rich…it will only buy half as much as it used to, but if it keeps the hamster on the wheel, than the gubermint money men have done their job.

  3. DownSouth

    Skippy, fresno dan

    I’m very much in agreement with your comments.

    While I’m willing to concede Parenteau’s point that banking and finance can serve a productive function in society, they can also become destructive, especially when they want to garner a far greater share of the fruits of production than what they deserve.

    If we assume a capitalistic society has three great engines of production—banking and finance, science and technology, and labor—what we see over the past 30 or 40 years is that, even though banking and finance have not increased their contribution to production, they have nevertheless greatly increased their claim upon the fruits of production. Banking and finance now garner something like 40% of national income, and wealth accumulation has probably followed a similar trajectory. The banking and finance sector historically has garnered less than 10% of national income, if my memory serves me correctly around 4% or 5%.

    And I agree with Skippy and fresno dan in their assessment that banking and finance have become so corrupt that they now not only fail to contribute to national production, but actually destroy national production. They have become like a thief who will bash in a car windshield, causing $1000 in damage so that they can steal a stereo they can sell for $100.

    Bankers and financiers have set themselves up like the royalty of the ancien régime. Economists serve the same role as the church did, which is to lend intellectual and moral legitimacy to the royalty. “Reason” has replaced revealed truth in the “natural order” of things, rulership is justified with a graduate degree in some pseudoscience like economics instead of a papal bull, but “science” today is every bit as corrupt as the Church was during the days of the ancien régime.

    Probably the best example of what is going on the US today with science can be found in Nazi Germany:

    Although notions of race have a long history, it was ironically the Scientific Revolution followed by the Enlightenment and then the Age of Reason, emphasizing science and rationality, that were the wellsprings for biologically based racism. The earlier division of humans into races had produced opposing views that were hotly debated. The nonhierarchical, biologically homogeneous model held no race as superior. The hierarchical model placed whites, most notably Northern Europeans, at the top and Blacks at the bottom. The hierarchical construct eventually won out and Blacks were relegated to inferiority. This concept of intrinsic value or defect (popularized in the 1860s as Social Darwinism) was clearly articulated by Sir Francis Galton (1822–1911) in “The science which deals with all influences that improve the inborn qualities of a race.” He coined the word “eugenic” (relating to or producing improved offspring) and proposed that “races” were in a struggle for survival of the fittest. German Darwinists argued that innate racial inequalities gave each individual life a different value, and extermination of “inferior” races was not only appropriate but unavoidable. Their model placed the German (i.e., Aryan) Race at the pinnacle and initiated the medical framework supporting the concepts and implementation of racial hygiene.
    –François Haas, “German science and black racism—roots of the Nazi Holocaust”

    One doesn’t have to scratch too terribly deep to see that the “red in tooth and claw” evolutionary “science” of Ayn Rand and the New Atheists—the “science” which underpins the economic theories of Greenspan, Summers, Geithner, Rubin and Bernanke–is almost identical to that which underpinned the German racial “science” embraced by the Nazis.

  4. Siggy

    The seed bed of the crisis is our fiat currency in union with a fractional reserve banking system. The applied fertilizer is the inane belief that markets are efficient and that financial fraud need not be prosecuted because the market would set attempted frauds right.

    There is no need for quotes, citations, ibids, op. cits or bibilographies here. The proposition is straight forward; if you borrow more than you can repay, you are bankrupt! That is where we are today. How you got to being unable to repay is not as critical as to how you got to having so much debt.

    Do you want to have a free market system, if so you you must be willing to allow the free market to function. Absent the incentive of avoiding bankruptcy there is no constraint on the profligacy that derives from persistent inflation.

    Persistent inflation sets in motion a consume now pay later mentality that is soon abused in excessive debt wherein the borrower nolonger has the capacity, nor prospect, of being able to repay. Again, that is where we are now.

    Deficits matter and they matter greatly. The loss in purchasing power of the currency is a fair barometer of the degree of excess debt that exists. I bot a car today for $24,000, it is comparable to the car I bot 45 years ago for $6,000 which is to say that the dollar I spent 45 years ago is only worth $0.25 today. That’s a compound annual rate of loss in purchasing power of slightly more than 3%.

    Please, please, can we stop quibling about our problem and begin to discuss what we do to stop this insane money grubbing!

  5. middyfeek

    @Siggy – your numbers aren’t accurate. A car that costs $24,000 today would have cost significantly less than $6,000 45 years ago. This means your current dollar is worth less than 25 cents vis a vis that dollar.

    @DownSouth – Greenspan, Summers, et al are emphatically NOT disciples of Rand. They produce NOTHING. At the end of the day they’re just parasites.

    1. DownSouth


      You say “Greenspan, Summers, et al are emphatically NOT disciples of Rand.”

      Take a look at this PBS Frontline video “The Warning” and tell me that again:

      I think you got your “facts” a little screwed up.

      1. bj

        I think what middyfreek is saying, if I read him correctly, is that Greenspan et al didn’t produce anything, therefore, they weren’t disciples. I don’t think he’s questioning that Greenspan thought of himself as John Galt, just that he definitely was NOT.

  6. middyfeek

    @Siggy(again) – I’ll give you a concrete example. I bought an original Mustang (1965) for $2502. I’m sure an equivalent car today would cost AT LEAST $30,000.

    1. kevin de bruxelles

      Siggy and middyfwwk,

      There are many ways to calculate the relative value of the US dollar through time. Here are six possible results for what in 1963, $24,000.00 from 2008 is worth:

      $3,413.24 using the Consumer Price Index
      $4,262.05 using the GDP deflator
      $2,830.12 using the value of consumer bundle
      $3,059.26 using the unskilled wage
      $1,651.69 using the nominal GDP per capita
      $1,026.71 using the relative share of GDP

      For an explanation of each indicator:

      1. Siggy

        In my example the ACTUAL prices paid were $6,000 and $24,000. So, I stand by my example and I take your observation to be an emphatic endorsement of my point as to the corrosive effect of inflation; i.e. loss of purchasing power.

        So, tell me have you ever been inclined to spend today because a dollar tomorrow will buy less? Do you recall layaway?

  7. MacroStrategy Edge


    Losses do show up in falling profits, falling personal income ex transfers in the GDP accounts, and falling household net worth in the Fed’s flow of fund accounts.

    Payments of interest expense or principal or fees related to finance are transfers to creditors. They don’t disappear down a black hole. They do end up in a redistribution of income to creditors.

    I agree laws need to be enforced and fraud is very deeply ingrained in financial behavior. I think Bill Black has some very keen insights on all this.

    Am quite familiar with the wrecking ball aspects of finance, as I work in the tradition of Hy Minsky, who worked extensively on financial instability. So am not advocating a rose colored view of finance – only that it has a place in putting production in motion.

    If you borrow more than you can repay, you are delinquent. If your assets are worth less money than the value of your liabilities, you are bankrupt.

    I won’t repeat myself on the purely Austrian solution, except to say I believe there is a larger role for “controlled burns”, but best of luck if you want to run more post Lehman free falls.

  8. Is there some false modesty in qualifying the thesis ” … the problem with debt is it sets up fairly fixed future cash flow commitments, of which there is no automatic mechanism guaranteeing that future cash flow generation by the economy will be sufficient to meet”? Or isn’t this the clarifying abstraction succinctly putting what the problem is?

    If that’s the problem that gives us today’s tasks, some of us are still looking for “the cause” of the credit freeze which in turn put the ice on the real economy we now try to thaw with deficits (well, I still look – I know many of you are satisfied that you’ve identified the sources of our woes – and you may be right, I just know I still ponder). What shut down the flow? Identifying the flow as “not guaranteed” doesn’t explain what interrupted the flow. (Nothing BUT a sense of future flows halting? That whole confidence motif?)

    “Did we destroy some productive resources, lose some technical knowledge, or otherwise experience an exogenous productivity shock to drop into the deepest recession of the post WWII period, or was the drop in real economic activity in no small part a result of a highly leveraged private financial and nonfinancial sector encountering some very drastic financial conditions as fraudulent loans and fraudulent debt ratings were exposed?”

    I don’t know if “in no small part” acknowledges other non-financial factors “cooling” down the real economy, or again, if that’s rhetoric in polite humility. I’m not sure that the list of alternative non-financial interruptions is exhaustive, either. (Don’t real economies deviate from EQ from endogenous causes?) Nor do I think I’m the only visitor who sees Yves Smith’s occasional links to VoxEU and other people (Thomas Palley’s(?) thoughts on the oil run up come to mind) who do look for something gone wrong in the REAL economy first (though I believe she most usually disagrees with them).

    It may be wrong, but it is not incoherent to propose that a) finance acknowledged it was “over-leveraged” because the non-guaranteed future cash flow generator in the REAL economy dropped (if it did), after which b) finance accelerated the drop of real economic activity by seizing and freezing. No motion, no flow, no circulation.

    This is a different theory than one which goes: a) finance caused the real economy drop ab initio b) because finance leverage was the “prime mover” of the real economy and c) finance collapsed for endogenous causes – it’s own dynamics. (And I don’t know that only fraud could do it, or would even be necessary – I don’t think the Minsky model requires fraud, it only needs insatiable risk taking …)

    Well, I know I don’t know, but I appreciate clearly put essays like Parenteau’s that help me ponder more.

  9. selise

    great post, many thanks for it and previous (iirc this is the 5th post of rob’s i’ve read here and NC).

    What is missing from most depictions is a clear idea of how money is created and destroyed in the economy that we actually inhabit. Until it is understood how the nonbank business and household sector as a whole can get their hands on money, since they cannot create money without risking a jail term for counterfeiting, then much about fiscal policy, monetary policy, and private saving remains mystified or misunderstood.

    it’s sometimes frustrating how few people i know are willing to entertain the possibility that reality is quite different from what we have assumed (or been told), or that it even matters. but certainly, given the human costs of our current economic/political troubles, it seems to me important to try (even though i’m not an economist and have never worked in finance).

    i’m very much still struggling with new ideas / ways of thinking (and so may have it all wrong), but currently some integration of the vertical flows (a la warren mosler, bill mitchell and randy wray) and the horizontal flows (steve keen) seems to me the most likely to provide a more accurate, or at least useful, picture.

    any reading suggestions (novice lay level) for text books along these lines, or recommended others, would be much appreciated (i’ve been the reading online blogs of the individuals listed above and articles posted at levy, and now feel the need for a systematic / comprehensive treatment if such a thing exists).

    1. Mike S

      Nice statements here – I feel much the same. The model is simple to write out, but has so much usefulness ingrained. It is quite elegant.

      Please note that Wray/Mosler do talk about the horizontal a bit.

      There is a lot of fertile ground to be covered in the model. It hasn’t been fully examined.

  10. Did we destroy some productive resources,

    Not destroy, export, but essentially lost to our society, read , a collaboration done a while back by a few authors.

    lose some technical knowledge,

    Same thing, read, Read Free Flow of Information

    …or otherwise experience an exogenous productivity shock to drop into the deepest recession of the post WWII period, or was the drop in real economic activity in no small part a result of a highly leveraged private financial and nonfinancial sector encountering some very drastic financial conditions as fraudulent loans and fraudulent debt ratings were exposed?

    Answer, all of the above. We gave up productive capacity, exported knowledge, improved productivity, and over-levered. The leverage might possibly be viewed as a response to the conditions. So all conditions as put forth in this post are true – both the overleveraging and debt-deflation and the destruction of core economic capacity that goes hand in hand with it. Did one precede the other?

    Otherwise, the balance theory is one that has been bopping around in my head as well. I am trying to illustrate it with a mind-map document looking at the levels of the economy. I identified 4 balance points:

    – At any level, revenues (income) must balance needs or credit must be supplied. Individual, business, or government.

    – Tax revenues from individuals and businesses must balance government expenditures.

    – Planetary resources must balance resource needs.

    – The market for businesses production must balance its revenue needs.

    I believe the economy can be analyzed in terms of these 4 balances, and the results we are seeing can be predicted by looking at what happens when they go out of balance. I will post the mind map to the blog as it gets further along.

  11. MacroStrategy Edge

    Dave – I would suggest the cause of the credit freeze had much to do with investor expectations about future cash flows being falsified, and hence uncertainty about may rating agency models and financial instruments and financial institutions came into play. We could trace it back to the expected future cash flows from real economic activity falling short, since so much of the system was hooked into ever increasing house prices, which eventually created an affordability and debt servicing problem since incomes from real activity were not growing as fast as asset prices. So I do believe it is worth remembering the “too much leverage” view must be tied to too much relative to the income generating capacity of the economy, which is of course related to its productive capacity.

    I am also sympathetic to exVWRC’s point that the rise of financial leverage is tied to the globalization of production and the hollowing out of US manufacturing over the past three decades, and that this can be one signature of empires in their late stages, as with the UK.

    Selise, I would recommend Randy Wray’s Understanding Modern Money as a place to get a coherent view. Full Employment Abandoned by Bill Mitchell may also help. I tend to place more emphasis on an older strain of Post Keynesian thinking regarding banks ability to create money, and Basil Moore’s book Horizontalists and Verticalists helped me understand credit money over a decade ago. Hope that helps, and I admire your willingness to dig deeper and question conventional views. More people need to be doing that now, especially as the charades have been revealed on many levels.

  12. selise


    i ordered wray’s book this morning – you are now the third person to recommend it to me in past week! basil moore’s book looks excellent (i read the table of contents at google’s books), but the only copy i could find was $450.00 used. that is so far out of my league i’d be afraid to borrow it from a library. will keep my eyes peeled though for a less expensive used copy (or maybe i can hope for a re-issue?).

    many thanks for your suggestions. they are much appreciated!

  13. MacroStratedge

    Selise –

    If there is a university or business school near you, you should be able to find Moore’s book. There may also be summary articles and debates to be found in the Journal of Post Keynesian Economics, which should also be available in a university library. Otherwise, google his name, or google “endogenous money” and you may find some stray pieces on the web. Nicky Kaldor’s writings against the monetarist approach will also show an endogenous money approach. It is also in J.M. Keynes’ chapter 1 of a Treatise on Money (somewhat buried in the classifications of money, but there nonetheless) but Moore lays much of this out in his late ’80s book. Good luck, keep digging, and share what you find with others, since these questions about money creation and destruction deserve to be asked and answered, especially now.

    1. selise

      rob, thanks for the suggestions. there is one university and a couple of the colleges that have business or econ depts. i will call their libraries, and if that doesn’t work resort to the google.

      wray’s book arrived today and will keep me occupied for now. you’ve got me curious though about moore especially, so i won’t let that drop if i can find some good reading (thank you for the additional suggestions). the only thing i’ve read on endogenous money was steve keen’s blog post, (which blew my mind – i love paradigm shifting ideas that make me question unexamined assumptions).

      and i will certainly talk up these ideas (and share links) at progressive blogs and among friends.

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