The big lie of "recovery" - and debt cancellation

[peterv]

I was recently sent this link by a friend
harryshutt.com/2014/07/20/the-big-lie-of-recovery-2/

In his blog post, Harry Shutt questions whether the recovery is real - he says "if you tell a lie big enough and keep repeating it, people will eventually come to believe it”. He goes on to talk about the artificial boost to the economy given by Quantitative Easing and subsidised lending for house purchases, and with more cuts on the way he sees the future as one of "perpetual recession and declining living standards".

Finally, he says "there can be no escape from deepening economic paralysis unless and until the vast bulk of the unserviceable private and public debt is effectively written off". What are the implications of this?

I think we need to treat public and private debt separately.

The public debt (ie. the National Debt) is a deficit of the public sector and an asset of the private sector. The private assets are held, in part, by pension funds and in my view are a good and necessary part of our economic system. People in work 'save' through pension schemes which is borrowed by the govt., transferring some of their surplus wealth temporarily to the public sector, where it is used for public benefit. In return for these public benefits, people pay taxes which go towards paying the interest on the national debt - the interest that the pension schemes receive allows them to pay the pensions of pensioners. So the whole thing is a way of storing surplus wealth while we are of working age, and then drawing on it when we are too old to work.

If this public debt were 'written off', then the pension schemes would no longer be able to pay pensions and we would either face an old age of poverty, or be forced to increase the state pension - which would need higher taxes to pay for it. So I do not agree that the public debt should be written off. This is also the view of the MMT (Modern Money Theory) school of thought.
www.eventbrite.co.uk/e/public-lecture-l-randall-wray-modern-money-theory-the-job-guarantee-tickets-12191708729

The private debt on the other hand is a deficit of borrowers and an asset of the banks. Cancelling this debt means wiping out both the debt and the assets. Well I am not totally against the idea of stripping banks of their assets, or at least giving them a 'haircut', but who would benefit from the cancellation of the debt side of the balance sheet?

According to Positive Money, most of the debt is held in the financial and housing sectors, and only relatively small amounts in the form of consumer debt (credit cards, personal loans etc). We can sympathise with the idea of wiping out consumer debt, and probably mortgage debt, but do we really want to wipe out the debts of the financial sector as well ??!

So any wiping out of debt would have to be done very selectively. I suggest that the first place to start would be 3rd world debt and pay-day loan lenders. For the rest I think we have to tread carefully.
The Positive Money scheme is for the creation of debt-free money, credited to the government, and spent (not lent) into the economy. Eventually the burden of existing debt would be proportionally reduced, but this is a very different scenario to what I think Harry Shutt is talking about.

What do you thnk?

[richardb]

Hello

Interesting Harry is err a bit negative? ha ha seriously tho he makes some
good points, although most of it is politics. As far as the National Debt
I'm with MMT and Positive Money on this its national savings or national capital.
The BOE has called it taxpayer equity in the past. I like the idea of cancelling debts but the politics are very difficult do we really want the government deciding.
It's also worth pointing out that a huge number of transactions worldwide
use government bonds as collateral. I'm unconvinced nice idea not doable.

[steveb]

The concept of the Big Lie is attributed to this quote by Adolf Hitler:

All this was inspired by the principle—which is quite true within itself—that in the big lie there is always a certain force of credibility; because the broad masses of a nation are always more easily corrupted in the deeper strata of their emotional nature than consciously or voluntarily; and thus in the primitive simplicity of their minds they more readily fall victims to the big lie than the small lie, since they themselves often tell small lies in little matters but would be ashamed to resort to large-scale falsehoods. It would never come into their heads to fabricate colossal untruths, and they would not believe that others could have the impudence to distort the truth so infamously. Even though the facts which prove this to be so may be brought clearly to their minds, they will still doubt and waver and will continue to think that there may be some other explanation. For the grossly impudent lie always leaves traces behind it, even after it has been nailed down, a fact which is known to all expert liars in this world and to all who conspire together in the art of lying.

.. although the idea has a much longer history - one that is explored in the excellent documentaries of Scott Noble such as this one :
Psywar- the real battlefield is the mind.

As for the recovery. Well GDP is on the up, and if ever GDP was a signifier of a genuine improvement of our society, it certainly isn't today; in fact the way that our economy is structured it could even be the opposite.

On the point of investing into bonds and government debt, well there is a bit of assumption that is often overlooked, which is that money lent to the government often isn't used for the public benefit. Wars are funded through government borrowing probably more so than through tax. (E.g. I watched a presentation the other day that pointed out that the War on Terror has so far cost 6 trillion dollars - which translates to 290,000 tons of gold. The total gold refined throughout history is 175,000 tons. The US national debt has grown accordingly). I get the concept though.
I wonder what proportion of pension investors realise where their money is going....