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Name Redacted: If central banks had kept interest rates below the natural rate for the last 50 years we would now all be in hyperinflation. Didn't happen. NGDP grew at just a little above trend for a couple of years before 2008 in Canada.

The Arthurian: Congress? You mean the US Congress? That's a very US-centric explanation for a global phenomenon.

"Banks can create loans out of thin air, but they can't create real saving out of thin air when real income is bolted down to the long run equilibrium trend line."

Getting closer ...

"4. The Great Moderation/Minsky. Over time, risks of unexpected inflation or deflation, and risks of booms and busts, and financial crises, and political and legal risks, have become smaller. So it's been perceived as safer to borrow and safer to lend."

Put emphasis on the "perceived" part. Is the more and more currency denominated debt (whether private or gov't) path actually an unstable or disequilibrium path for NGDP targeting and/or price inflation targeting?

"So both the supply and the demand for loans increased."

Do banks have plenty of "loan supply" and are just waiting for demand?

wh10 said: "TMF, are you asking if that is a reason for the long-run trend? I mean I don't really know the detailed history and haven't lived through the century, so I really don't know, but I think you could make a sensible argument of this. If not housing, then whatever collateral, as the economy develops and grows."

That might be one reason. Calculated Risk has more than one post about the fed "curing" a recession by lowering the fed funds rate, having other interest rates follow, and having an increase in housing demand from more mortgage debt. It seems to me that is what has happened in the post WWII period.

"TMF: There are lots of explanations that go like this: "The rich can afford to save and the poor can't afford to save, therefore inequality causes debt, as the rich lend to the poor". These simple explanations typically ignore the lifetime budget constraint."

What happens if the lifetime budget constraint is hit by the lower and middle class, and the economy depends on them to continue to borrow to make up for negative real earnings growth to keep spending and increase the amount of medium of exchange?



The origins of the economic crisis



When will the workers wake up?

Gizzard said: "Borrowing via banks is not the same as me borrowing 1000 from Nick. It just isnt."


"S=I+G-T+NX is a useful way of thinking about *net* private sector liabilities, but we are talking about an increase in *gross* debt."
I'd rather see:

current account deficit = gov't deficit + rich deficit + lower and middle class deficit

Add a stock of medium of exchange that flows.

"Why don't they sell assets rather than borrow against them?"

because they are hoping the assets will continue to rise in value

K said: "This model, by the way, is how I think about Eggertsson-Krugman 2010. They used the fairly standard device of dividing the world into patient and impatient agents, which annoys me, ..."

IMO, they should divide the groups into those experiencing negative real earnings growth by their budget and those experiencing positive real earnings growth by their budget.

"It was at long run equilibrium before the Great Depression. Then the GT, war, inflation, etc. pushed it temporarily below the LR equilibrium. And ever since, it's been slowly rising back up towards the same LR equilibrium."

And Min said: " If you are not joking, Nick, please pardon me for scoffing. First, why should we think that there is any such thing as a long run equilibrium for GDP/debt? (I put the generally more slowly changing variable in the denominator. ;)) Even if the ratio is a feature of various economic equilibria or quasi-equilibria, why should any such state be favored? Second, the crash and depression are prima facie evidence of dis-equilibrium, as are the recent financial panic and our Not So Great Depression. Third, if there is such a long run equilibrium, why would it not be at a point of even greater inequality? Caste societies have maintained their equilibria for centuries. In 1929 the task of crushing the lower classes and creating castes was incomplete."

I agree with Min that the high debt is a disequilibrium/unstable path.

Clarification: I'm not the Oliver who posted above. I'm the Oliver who has posted here and on many other blogs, often MMT, before and I demand my name back :-).

Steve Keen has some graphs on US private debt here


But now to your actual question:

I'd expand on point 2 and add to what JKH said above. GDP refers to the market value of all final goods and services produced within a country in a given period. So, pretty much per definition, if the amount of money per final good increases, an increasing amount must not be going into final goods and services. It can't go directly into its final parking spot, because nobody takes on debt just for the hell of it. But most do take on debt to buy other financial or non financial assets with it. My guess is that rising asset prices themselves create an initial demand for mor debt. Supply is forthcoming because that's how banks earn money. The sellers of the assets then have the choice of spending it on either final goods and services, thus adding to GDP, or on other assets or on nothing at all. I think you're right to point out pension funds and the like as likely final resting places for cash, although in the current situation a lot of it seems to be sitting around as retained corporate earnings. The only remaining question is, why don't people spend their money on final goods an services? My guess, which is also where Minsky comes in, is that with increasing wealth, financial safety becomes increasingly more important than maximising consumption. There is of course a Minskyesque buildup of instability inherent in such a trend. And one way to reverse the trend without having to revert to pre New Deal instability, would be to deliver the desired security, not through fancy schmany finance and self fulfilling asset bubbles, but by providing final goods and services.

Hope that made sense...

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