Mish's Global Economic Trend Analysis

Steve Keen Goes Off the Deep End With a "Debt Jubilee" (Free Money to Consumers) Proposal

Posted: 07 Jul 2012 06:32 PM PDT

Inquiring minds are watching Australian economist Steve Keen correctly debunk Paul Krugman in an interview with Lauren Lyster on Capital Account. Unfortunately, Keen's solution to the debt crisis leaves a lot to be desired.

Position of Keen

"Debt does not just matter at zero-bound conditions, debt matters all the time. The change in debt adds to demand. ... It could take 15 years of deleveraging before it's all over. That's why Krugman is wrong. You can't just cure this with deficit spending, you have to abolish the private debt as well."

So far so good. However, I strongly disagree with Keen's proposal of a "private debt-jubilee" which he defines a quantitative easing for the public.

Essentially Keen wants to print money and give it to the public on the provision they must pay down debt first.

Debt Jubilee Nonsense

Suppose everyone is given a "debt-jubilee". What is to stop consumers from immediately going back into insane levels of debt? More regulation? Government controlled printing presses? Academic formulas from all-knowing economists?

Please! Stop already.

Inflation Genie

I am in general agreement with Keen on numerous things.

For example, I agree 100% with Keen that lending comes first and reserves later. I also agree with Keen that the notion of excess reserves is fatally flawed, and so is the notion of money multipliers.

I scoff, along with Keen, with the idea that excess reserves are going to come pouring back into the economy causing hyperinflation or massive inflation.

For a discussion, please see my December 21, 2009 article Fictional Reserve Lending And The Myth Of Excess Reserves in which I rebut the idea espoused by Robert Murphy that the Inflation Genie is About to Get Out of the Bottle.

The idea was silly then and it is still silly now. I believe events have proven as such.

However, start giving money away as Keen proposes and I would change my tune about inflation in a hurry. Note that QE is essentially a loan but Keen's proposal is an outright gift.

Case For Deflation

Mind you there is absolutely nothing wrong with price deflation.

Who out there does not want the price of oil to drop or the price of food to drop? Who does not want more for their money at the department store? Who does not want the price of a college education to drop?

The answer to that last question is public unions, administrators, and for profit colleges. The answer to the above questions in general is those with first access to money, notably banks (and bank CEOs and executives who get paid to make more and more loans).

Free Market Economy

In a free market, the cost of an education would plunge like a rock. Internet services would spring up all over the place providing quality education. Absolving student debt or any other debts cures no structural problems.

More government and more regulation is not the answer. Nor is more Fed the answer. Nor are models. Nor is giving money away any part of the solution.

Big Fan of Keen

Bear in mind that I am a big admirer of Steve Keen. Steve has taught me a lot. I like his debt model. I just do not like his solution. It cannot and will not work, for reasons that quite frankly should be obvious.

Real Solution

Fractional reserve lending is at the very heart of the debt crisis. That is what enables banks to conjure up credit at will (as long as they are not capital constrained and as long as consumers and businesses want to borrow).

The solution therefore, is not free money and not more government intervention into free markets, but rather sound money and less government interference, coupled with the end of fractional reserve lending.

Yes, it will take time. Attempting to short-circuit the time required with "free money" would be a monstrous mistake, solving zero structural problems.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Merkel's Magic Hat Running Out of Rabbits; 54% of Germans Believe Further Bailouts Pointless; 160 German Economists Denounce Summit Results

Posted: 07 Jul 2012 11:48 AM PDT

A pair of articles translated from German and Spanish further highlights the pressure on German Chancellor Angela Merkel to not give into to further demands by Spain, Italy, and France.

160 German Economists Denounce Summit Results

The San Francisco Gate reports German Economists Denounce Summit Decisions

A group of German economists has denounced decisions made during last week's European Union summit, arguing Thursday that they risk increasing the exposure of taxpayers, retirees and savers to the debts of struggling banks.

In an open letter published by the daily Frankfurter Allgemeine Zeitung, a group of 160 economists wrote that German Chancellor Angela Merkel found herself forced to make "wrong" decisions during the gathering. The economists said they "view the step toward a banking union, which means collective liability for the debts of the banks of the eurosystem, with great concern."

"Banks' debts are nearly three times higher than government debts ... the taxpayers, retirees and savers in the so-far solid countries of Europe must not be made liable for backing these debts, particularly since gigantic losses are foreseeable from financing the southern countries' inflationary economic bubbles," they added.

The economists include Hans-Werner Sinn, the head of the prominent Ifo think-tank and a vocal critic of European leaders' rescue policies. They argued that "banks must be allowed to fail," with creditors who knowingly took investment risks bearing the burden.

Merkel rejected the criticism.

"First of all, this is about better banking supervision, and one can only say that that is urgently necessary," she told reporters.

Disingenuous Response by Merkel

Please note the disingenuous response (if not direct lie) by Merkel who says "this is about better banking supervision".

Of course this is about bailouts. It is also about the need to allow banks to fail. Let that happen, punish the bondholders, and kill fractional reserve lending and the situation will take care of itself.

Merkel also stated "This is absolutely not about any additional liability." That too is disingenuous. The amount of money may not have risen, but the odds of losses have increased.

I happen to believe that Merkel would sell her soul to save the euro but can't. She also cannot step over lines in the sand by the constitutional court. Otherwise she would have caved in far more than she has.

Tempers Flare Over Letter From Economists

Via Google translate from El Confidencial, please consider 160 German economists against aid to Spanish banks

"It's not going to save the euro, but the creditors of the banks." "It is unacceptable that taxpayers, pensioners and savers far the strongest countries in Europe are accountable for the debts and huge losses due to inflationary bubbles of the South." "Politicians think they can limit the huge sums spent to pay these debts and misuse through the future European Banking Supervision Agency. But they will not succeed while the debtor countries have a majority in the Eurozone structural. " Three key ideas of the open letter that 160 economists renowned citizens today directed the Federal Republic not to support the creation of a European Banking Union and, of course, direct aid to Spanish banks.

The initiative is a media bomb. Hot and tempers are already with the feeling that Angela Merkel gave away too much at the last summit to pressure from Mario Monti, Francois Hollande and Mariano Rajoy, what these economists, led by Hans Werner Sinn, director of the IFO Institute Munich, and Walter Krämer, an economist statistician of the city of Dortmund, is a kick in the butt to a foreign minister that the last thing needed now is the opening of a new public debate on aid to weaker members of the Union.

Teachers and economists are not alone. The chairman of the Federal Union of German Industry, Hans-Peter Keitel, has joined the criticism: "Germany has said, has to put back the red lines. There should never be a Salvation Fund Banks".

No Salvation Fund For Banks

There should not be a salvation plan for anyone, especially banks. One of the reasons this mess is so big is the repetitive moral-hazard bailouts of the financial sector by central banks and governments.

54% of Germans Believe Further Bailouts Pointless

Via Google translate from Der Spiegel, please consider Majority of Germans Believe Further Bailouts Pointless

The majority of the German population has resigned from the mammoth task of saving the common currency. 54 percent of respondents believe that Germany should not continue to fight for the euro rescue if billions more are needed. 41 percent call for further engagement in Germany, and five percent are undecided.

Skepticism Extends Through Almost All Political Parties

52 percent of respondents with a preference for the CDU / CSU, see "little sense" is that Germany continues to €-rescue battling, only 45 percent of union supporters have responded to another commitment, three percent is "uncertain". The situation is similar in the SPD of (54/43/3).

Even stronger was the rejection of at supporters of the Left: There were 68 percent believe that it hardly makes sense to continue fighting for the euro rescue, they involve billions more are needed. 28 percent supported the idea , and two percent said "do not know" or gave no information.

The largest euro-friends are apparently supporters of the Greens: 64 percent of supporters of the eco-party took the view that Germany's commitment to the euro should be continued rescue, only 30 percent were against it - six percent gave no details.

For supporters of the FDP, the responses for statistical reasons are not shown separately, they are represented in the survey with a too small number.

Fourth Front Against Merkel

The noose around Merkel's neck gets tighter, even as her own personal popularity is at an all-time high.

For details please see German Central Bank Head Warns Merkel on Repeated Weakening of Positions; Third Front Against Merkel

To that we can add safely add the 4th front - voters, and if you like, a 5th front of 160 economists.

Realistically, there is little more Merkel can do but bluff. Her magic hat has no rabbits left in it.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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