Secular stagnation and Mutual Fund Marxism

Suppose the government issued a financial asset that, adjusted for risk and liquidity, promised a higher rate of return than any alternative asset. The government can do this, because it has the power to tax. Everybody prefers holding that government-issued financial asset to any other asset.

There would be an excess demand for that government-issued asset. The only way to eliminate that excess demand would be for the government to buy up all the other assets in exchange for that asset. The government would be operating one big closed-end mutual fund, that owned all the assets in the economy, with people owning shares in that mutual fund. And the rate of return on those mutual fund shares would be guaranteed by the government's power to tax.

Most people would be against that policy. Perhaps we could call the few people who supported it "Mutual Fund Marxists"?

Now let's suppose that particular government-issued financial asset is also used as the medium of exchange. An excess demand for the medium of exchange causes a recession. Each individual tries to ensure that the flow of money leaving his pocket is less than the flow of money entering his pocket, so the stock of money in his pocket increases over time. This is possible for each individual, but impossible in aggregate (unless the government increases the aggregate stock sufficiently quickly over time), but the attempt by each to do something they cannot all do causes a recession.

So we would have a permanent recession, unless the government implemented Mutual Fund Marxism, by buying up all the assets in the economy in exchange for government-issued money, to eliminate that excess demand for government-issued money.

The threat of permanent recession I have just described is usually called "secular stagnation". The proposed cures of ever-expanding central bank balance sheets and national debts are the first steps towards Mutual Fund Marxism.

Should we blame the economy for secular stagnation, or should we blame the government for issuing a financial asset that promises a more attractive rate of return than other assets, and that also is used as medium of exchange?

Would private financial institutions, that lack the power to tax, ever do the same thing?

Some might reasonably argue that the twin threats of permanent recession or Mutual Fund Marxism themselves lower the expected rate of return on other assets.

Just a slightly different way of looking at some old questions. Secular stagnation is the same question as the Optimum Quantity of Money.

Addendum: If we want to avoid having to choose between secular stagnation or Mutual Fund Marxism, we need to increase the yield spread between government-issued money and other assets. One way would be to target NGDP level path, with a suitably high growth rate for NGDP (presumably a rough proxy for the nominal rates of return on other assets). A second way would be to raise the inflation target. A third way would be a Gesellian tax (negative interest rate) on money.

Comments

[JP Koning]

"Suppose the government issued a financial asset that, adjusted for risk and liquidity, promised a higher rate of return than any alternative asset. The government can do this, because it has the power to tax. Everybody prefers holding that government-issued financial asset to any other asset...There would be an excess demand for that government-issued asset. The only way to eliminate that excess demand would be for the government to buy up all the other assets in exchange for that asset."

Are you assuming a peg or some form of rigidity? Otherwise the asset's price would quickly rise until it it no longer provided a higher rate of return than alternatives, no?

[Benoit Essiambre]

Exactly!

I don't understand why there isn't a immense sense of urgency from central banks, governments and the economic profession to fix this.

People argue about details meanwhile central banks like the ECB are maintaining an asset that is directly subsidizing disinvestment and economic inactivity and leading to colossal amounts of needless suffering and a relative decline of the western world.

[Nick Rowe]

JP: suppose the price of the asset rose, to eliminate the (risk- and liquidity-adjusted) yield spread, but in response the government simply raised the future target price (put-option strike price?) for the asset (or increased the coupon proportionately) to bring the yield back up to its original level. (That's basically what we have with inflation targeting. If inflation falls below target, the CB adjusts the implied future target price level down by the same amount).

[Nick Rowe]

Benoit: yep. And, ironically, it is the hard money people who are making Mutual Fund Marxism most likely. I almost feel like accusing them of being crypto-commies.

[jonathan]

Nice post.

However, you seem to be combining two concepts here: the "secular stagnation" idea that the return on money is above the return on capital, and that the government implements monetary policy by buying and selling private assets.

But the second idea seems to involve a sort of radical QE. Under conventional monetary policy, the government increases the money supply by buying government bonds, reducing the liabilities of the government. In the case that the return on money is above the real return on assets, this is analogous to people buying money from the government using real goods, which the government uses to finance current consumption (reduce taxes, or raise spending).

Then the government doesn't end up controlling all private investment. Instead, it just crowds out enough private investment until the return on capital rises to equal the return on money. It's no different than normal crowding out from issuing government bonds that serve as a substitute means of saving to private capital.

(By the way, my own view, which I think you agree with, is that the fundamental solution to secular stagnation is to decrease the return on money, i.e. set a higher inflation target. You can think of this as just following the Friedman rule. The Friedman rule says we should set the inflation rate so that the return on money equals the return on capital. With sticky prices, this becomes "set the return on money equal to the natural rate of interest." Normally we think that the natural rate of interest is positive, and so the Friedman rule implies deflation. But if the natural rate is negative, then the Friedman rule implies inflation!)

[Max]

Money demand is a function of seigniorage, sure. But roughly 0% seigniorage for years has not caused an explosion in the quantity of currency. And this is as low as seigniorage can get without interest-bearing currency.

[Max]

Also, I don't think Marx would approve of using taxation to transfer wealth from workers to capitalists. :-)

[Nick Rowe]

jonathan: thanks!

"However, you seem to be combining two concepts here: the "secular stagnation" idea that the return on money is above the return on capital, and that the government implements monetary policy by buying and selling private assets.

But the second idea seems to involve a sort of radical QE."

The second idea is (one) cure for secular stagnation. The central bank either buys private assets (when it runs out of government bonds to buy), or the government prints more bonds for the CB to buy, and spends those bonds on either private assets or building its own assets (which amounts to much the same thing).

"Then the government doesn't end up controlling all private investment. Instead, it just crowds out enough private investment until the return on capital rises to equal the return on money."

OK, but if the government just issues unfunded mutual fund shares (helicopter money), while keeping the rate of return on money constant (by promising to buy it back) it is using future tax revenues to fund the otherwise unfunded mutual fund. (I think that's right). But it would, as you say, increase the return on private assets via crowding out (assuming Ricardian Equivalence is false).

"(By the way, my own view, which I think you agree with, is that the fundamental solution to secular stagnation is to decrease the return on money, i.e. set a higher inflation target. You can think of this as just following the Friedman rule."

But if people are never satiated in liquidity and safety (which seems plausible), then unless the government earns a lower rate of return on managing assets than the private sector, the Friedman Rule implies Mutual Fund Marxism. (To put it another way, I think there's an ambiguity in the Friedman Rule, depending on whether or not the government is worse at managing assets.)

Max: Seigniorage depends on the yield spread. And we are seeing a (mini) explosion in central banks' balance sheets.

Marx was behind the times. He should have read money and finance, and forgotten all that silly revolution stuff. ;-)

[jonathan]

> But if people are never satiated in liquidity and safety (which seems plausible), then unless the government earns a lower rate of return on managing assets than the private sector, the Friedman Rule implies Mutual Fund Marxism. (To put it another way, I think there's an ambiguity in the Friedman Rule, depending on whether or not the government is worse at managing assets.)

Ah, I see what you mean.

I agree that if the government is just as good at managing investment as the private sector (or, equivalently, that public and private spending are perfect substitutes), *and* the government has an advantage in creating a safe/liquid asset that the private sector cannot match, then the optimal policy is the Marxist Mutual Fund.

However, I would say that the reason we find the MMF idea unpalatable is that we implicitly reject the first premise. As Summers said, the government is a lousy investment bank.

(Incidentally, why does this argument rely on secular stagnation? Shouldn't it always hold, at least when the government has access to lump sum taxes?)

[Nick Rowe]

jonathan: Ah! We are on the same page, I think.

"(Incidentally, why does this argument rely on secular stagnation? Shouldn't it always hold, at least when the government has access to lump sum taxes?)"

What I'm saying is that secular stagnation is the result of the government doing this. Now you could argue that the government "did nothing", and kept on targeting the same 2% inflation as before, and that it was the rest of the economy that "did something", by lowering the yield on its own assets. But then we get into trolley problems....

[jonathan]

Nick: I don't think we've *quite* converged yet. My problem is with this sentence:

"So we would have a permanent recession, unless the government implemented Mutual Fund Marxism, by buying up all the assets in the economy in exchange for government-issued money, to eliminate that excess demand for government-issued money."

I agree that this would be true *if* government spending were a perfect substitute for private spending (equivalently, government were just as good at asset management as the private sector). But in this case, there's no problem, because the MMF outcome would be optimal!

But I don't think this is true. Under the (to me more plausible) assumption that government spending is an imperfect substitute for private spending, the choice is between depression, and *somewhat* increasing government spending/investment. You would only need to increase G to the point that you crowded out just enough private investment that the return on capital equalled the return on money. Thus the government mutual fund wouldn't have to be that big, and maybe buying up government debt would be enough.

Or you could just raise the return on money. I think everyone prefers this, if you can implement it.

(I don't think implementation issues are *just* a trolley problem, since there is disagreement about the effects of the various switches, and whether the Fed controls them.)

[Majromax]

> Suppose the government issued a financial asset that, adjusted for risk and liquidity, promised a higher rate of return than any alternative asset. The government can do this, because it has the power to tax. Everybody prefers holding that government-issued financial asset to any other asset.

> There would be an excess demand for that government-issued asset. The only way to eliminate that excess demand would be for the government to buy up all the other assets in exchange for that asset

Real or nominal return? The distinction is important if later on this asset is a medium of exchange and unit of account.

If you're suggesting the government is promising real return, then the government can't do this in general, since real output is limited by supply-side factors and can grow relatively slowly on a per-capita basis.

In fact, the conditions in which the government can promise this seem like precisely the same set of "r < g" conditions where a sustainable Ponzi scheme is possible.

[Nick Rowe]

jonathan: "You would only need to increase G to the point that you crowded out just enough private investment that the return on capital equalled the return on money."

A permanent increase in G, in a NK model for example, has no effect on the natural rate of interest.

Majro: "Real or nominal return?"

Real. 2% inflation targeting, for example, means that currency pays minus 2% real.

With the ability to tax, governments can always promise a higher rate of return than the private sector, plus added safety (not to mention liquidity).

[Frank Restly]

Nick,

"The only way to eliminate that excess demand would be for the government to buy up all the other assets in exchange for that asset."

Or sell a different asset for the medium of exchange.

"..should we blame the government for issuing a financial asset that promises a more attractive rate of return than other assets."

We should blame government for selling financial assets that guarantee a rate of return.

[JP Koning]

"Would private financial institutions, that lack the power to tax, ever do the same thing?"

I don't think that private financial institutions would issue liabilities that promise a more attractive rate of return than other competing liabilities. Since banks make money on the spread between borrowing and lending, an excessively high borrowing rate would cripple them.

[Too Much Fed]

“Now let's suppose that particular government-issued financial asset is also used as the medium of exchange. An excess demand for the medium of exchange causes a recession. Each individual tries to ensure that the flow of money leaving his pocket is less than the flow of money entering his pocket, so the stock of money in his pocket increases over time. This is possible for each individual, but impossible in aggregate (unless the government increases the aggregate stock sufficiently quickly over time), but the attempt by each to do something they cannot all do causes a recession.”

I want to defend my real AD is not unlimited comment from a while ago so that it is not a stupid question.

“Each individual tries to ensure that the flow of money leaving his pocket is less than the flow of money entering his pocket, so the stock of money in his pocket increases over time.”

Let’s say there are rich entities doing this. Other entities are doing the opposite with currency denominated debt. Suddenly, the other entities stop going into currency denominated debt and want to break even with the flow of money, while the rich entities keep doing what they did before.

What happens in the economy is there are some entities that end up short of MOE, and some other entities that end up with plenty of MOE but do not want to spend it because they have enough stuff. The rich entities keep on adding to their stock of MOE taking the MOE out of circulation in the real economy. The economy is not all a shortage of MOE and not all plenty of goods/services. It can be a combination.

A few entities are in the Garden of Eden, and most are not in the Garden of Eden.

[Nick Rowe]

JP: But a mutual fund (or a bank for that matter) may have liabilities that are more liquid and safe than their assets, and so more attractive despite having a lower yield. But the government has an inherent advantage, because it can tax.

[Denis Drew]

In a high union density (or a high co-op, that is employee owned) market consumers may pay more for less goods from firm "A" -- causing some of firm "A"employees to lose jobs; and because consumers who continue to patronize firm "A" in spite of higher prices now have less money to spend over at firm "B", some employees will be laid of at firm "B" also. If the employees of "A" now hide their new pay raises under their mattresses that will be the end of the economic effects.

But I'm guessing that the employees of firm "A" will have a propensity to spend their new incomes at firms "X", "Y" and "Z" -- and "B"-- creating jobs for the laid off employees of "A" and "B." And the prepetual motion dollars just keep going round and round -- as long as they keep circulating among people with the same (middle class?) propensity to spend.

In a union shorn economy like the US too many dollars travel to (very, very) high income consumers whereupon their velocity drops way off because they simply cannot figure out where to spend them all.

In a union shorn economy too few of those perpetually moving dollars go to (low, low) bottom incomes leading to social disintegration which results in lower and lower productivity of potential employees -- or discourages legitimate employment altogether because in this country at least even median pay has dropped so low -- and drains the rest of the economy applying massive remedial programs (which includes jails).

[Majromax]

@Nick Rowe:

> With the ability to tax, governments can always promise a higher rate of return than the private sector, plus added safety (not to mention liquidity).

Can we work through an example here? I don't see how, under general circumstances, a government can maintain the credibility of its promises in this situation.

Imagine we have one consumer good (apples), one stock of capital (land), and labour that uses capital to produce the consumer good. Initially, we live in a barter world without money.

The exchange rate between land and apples will find some equilibrium, so let's say that one acre of land is worth 100 apples and produces a net profit of 2 apples/year to its owner, giving a natural real rate of 2%.

Now, a government steps in and does as you describe, introducing a financial asset that pays 3% return in real terms, at a fixed price level of $1 per apple. (We'll assume that interest is paid on money for the sake of convenience.) We'll start, like many governments do, by ignoring the cost of this promise only to make the books balance after-the-fact.

Immediately upon receiving this news, one acre becomes valued at 150 apples or $150, which would make people indifferent to owning either land or dollars. This is less than what it would have cost to clear a new acre for farming, which suggests that over time the amount of capital will decrease. (But we can also ignore that for now.)

Now, in harvest season the landowners' money receives interest, and the owners and workers (who received $1 per wage-apple as before) go to the market. They'll be surprised to find that the market does not clear at $1/apple. This is where the government must step in to hold the price level steady, and it can only do so by taxing dollars and running a net surplus.

In fact, making the market clear at $1/apple requires taxing back precisely as many dollars as was paid in interest beyond the real rate of return.

So, while the government can promise whatever it wants as a pre-tax rate of return, I think accounting leaves it unable to promise a post-tax real rate of return in excess of the natural rate. In fact, the depreciation-of-land argument suggests that it might be able to achieve its target over the long term, but only by imposing a loss of marginal capital, so that the real rate of a marginal investment is further to the left on the diminishing returns scale.

[Majromax]

> Immediately upon receiving this news, one acre becomes valued at 150 apples or $150,

Minor addendum: I meant to say that one acre becomes valued at $66 or 66 apples, since the acre still produces a real yield of 2 apples but is now valued at 3% return.

[Roger Sparks]

Here we postulate that government can issue a valuable product. The additional stipulation that the product is the most desirable product available adds an element of invincibility to the postulate. We postulate that government can, at almost no cost, issue a very valuable product.

Next, we postulate that there will be excessive demand for this product. Now we have introduced an element of uncertainty into the discussion. What in the world might excessive demand be referring to? If government can produce a valuable product for (near) no cost, what other product (that must be produced at a real cost) could also enjoy excessive demand ? Perhaps water in a desert could come to enjoy unusual demand but could it ever be described as excessive demand ?

We go on to postulate that this valuable product may trade as a medium of exchange. Of course this really happens when government prints money. But why should we relate this to excessive demand? More realistically, government has created a valuable product at (near) no cost and has used that no cost product to purchase other products that do have a real cost to produce. Government can produce as much of this product as needed to meet the demands of government. How can we call this to be excessive demand on the part of those who first receive this valuable product issued by government?

We continue on to (correctly?) observe that excessive demand for money causes a recession. A recession that might be labeled as "secular stagnation". Whoa! We have a intellectual conflict here. We have printed money to accomplish the needs of government (which presumable must put more people to work) but (at the same time) we have created a recession! There is something wrong in our logic.

At this point we could depart from your narrative. We could look more carefully to all those who do not get the first effects of this wonderful government issued valuable product. We could look at those who get the product by second hand exchange .

The second hand exchange group must compete to get this product. Competition is fierce within this group and some do better than others. This competition can lead to a wonderful abundance of competing goods, and theoretically can lead to severe price competition. The second hand exchange group will follow a very different economic path from the path followed by the first effects group.

Will we ever come to "Mutual Fund Marxism"? I think it is possible if the first effects group effectively marginalizes the second hand exchange group. This would be a political choice.

[Frank Restly]

Majromax,

The government can promise and deliver whatever rate of return it would like (real or nominal). Assuming that all claims are paid from tax revenue (no Ponzi finance), then the only problem is that all claims cannot be paid simultaneously. For instance, the Canadian government could sell you an inflation linked bond with a 20% real return that will come due in 30 years. And then they could sell your neighbor a 31 year inflation linked bond and his neighbor a 32 year inflation linked bond with the same rate of return. The last guy in line gets a bond that will mature in several million years.

If we place a limit on the duration of claims, then you are correct - there is a limitation to the real return a government can offer. And this should just make sense - a government could try to sell a gazillion dollars in 4% inflation linked bonds that all come due next year and find out they don't have enough tax revenue to pay all claims.

[Nick Rowe]

Majro: assume for example the government imposes a lump-sum tax (a poll tax), and uses the proceeds to pay a percentage subsidy to those who hold the government-issued financial asset. The representative agent gets back a subsidy equal to what he pays in tax, but the tax/subsidy still affects his incentives. If your argument were correct, then no subsidies (or taxes) would ever have any effect on behaviour.

If the government imposes a percentage tax on the same good on which it provides a percentage subsidy, then yes it's a wash, and it has no effects.

Or am I missing your point?

[Kaleberg]

As a rentier I can't help noticing that there is already a pretty big yield spread between government-issued money and other assets. The yield on cash money is 0% and the yield on deposits is not far above that. The yield on corporate bonds, agency bonds, equity investments, rental housing and the like is much higher. Depending on the level of risk I want to deal with, I can get anywhere from 2% to 10%.

Of course, there is inflation in the price of these assets as the only demographic left with any money to spend is the extremely wealthy, so they are bidding down the effective yields. Still, they are way above the yields on government-issued money.

[Nick Rowe]

Kaleberg: true. But take those risky assets yielding 10%, for example. That means 10% if all goes well, but less than 10% in expected value, since things might go badly. And if you are risk-averse, so will only accept a fair bet if you get compensated, the risk-adjusted yield is even lower.

[ThomasH]

More important than a higher inflation target would be evidence that the Fed takes seriously the one it supposedly had. The price level is below it's pre-crisis trend, so we need several quarters with an inflation rate greater than 2% to get it back on target. Once the price level is back on target will be time to ras rates to keep it from going above target. With the policy uncertainty there is, no one can plan on what the rice level will be in the future.

[Nick Rowe]

Roger: "More realistically, government has created a valuable product at (near) no cost and has used that no cost product to purchase other products that do have a real cost to produce."

The revenue the government gets from printing money (aka seigniorage, or the inflation tax) has a Laffer curve, just like all taxes. At low inflation rates, and nominal interest rates, it is low, and approaches zero as nominal interest rates approach 0%. Your "first effects" vanish, and may even go negative, at the limit I am talking about. They would be bigger at a higher inflation rate with higher nominal interest rates (though, as with all Laffer curves, they vanish again at the other, Zimbabwean limit).

Thomas: true, but that is a rather US-specific perspective on what is a more global question.

[Jussi]

I'm with Majromax, I do not understand how the government can own all assets _and_ "promise a higher _real_ rate of return than the private sector (assuming the goverment doesn't manage the assets better than the private sector)". It is not a credible promise. Something IMO doesn't add up.

[Tel]

Now let's suppose that particular government-issued financial asset is also used as the medium of exchange. An excess demand for the medium of exchange causes a recession. Each individual tries to ensure that the flow of money leaving his pocket is less than the flow of money entering his pocket, so the stock of money in his pocket increases over time. This is possible for each individual, but impossible in aggregate (unless the government increases the aggregate stock sufficiently quickly over time), but the attempt by each to do something they cannot all do causes a recession.

Can anyone explain to me how it is possible that a private banking system, can create private debt without any government assistance, and the aggregate level of financial instruments (i.e. bank accounts, i.e. private debt) can very easily grow, and yet strangely it is completely impossible for such private debt ever ever ever to be paid back down to a lower aggregate level by any method without somehow government getting involved?

Here's an example:

JOE: Hey that's a nice load of apples you are growing on your tree this year, I'll buy them for $100.

BILL: OK, that sounds reasonable, here's the apples.

JOE: Errr look, I haven't actually got the $100 right now, I'll owe it to you.

BILL: Ummm, your oranges should be ready in a few month's time, I'll take those in payment when the time comes.

JOE: OK, no problem.

*** TOTAL AGGREGATE PRIVATE DEBT IN PLAY = $100 (JUST INCREASED FROM $0) ***

BILL: Hey Joe, those oranges look good, I'll take those to settle our debt.

JOE: I'd love to hand them over, but ummm, government you know... what can I say?

BILL: Government stole your oranges ?!?

JOE: No no no, if I was to hand over the oranges and settle the debt, you see total aggregate private debt would go DOWN and we all know that's impossible because your income is my spending and vice versa, and Krugman says so, only government can fix this.

BILL: Well give me the $100 you owe me then.

JOE: Yeah buddy look, ahh, same problem, private debt would go down. Just have to get the government involved, nothing else for it.

BILL: I have a few ideas about creative uses for an orange tree, after we give that a try see how your feeling about the whole government thingy.

[Nick Rowe]

Jussi: there's one asset. The government buys it, and issues shares in the government-owned corporation that owns that asset. The government then taxes (say) labour, and uses the proceeds to subsidise the shareholders (or, more realistically, to insure those shareholders against losses if the assets lose value).

Tel: start with $0 debt. Then I borrow $100 from you, I spend $100 more than my income, and you spend $100 less than your income. Next year I pay back the debt, I spend $105 less than my income, and you spend $105 more than your income. (Or $100 less/more if we add/subtract the $5 interest in "income".)

Paul Krugman's model worries about what happens if the debtors want to spend less than their income, but the creditors don't want to spend more than their income, and the rate of interest does not fall enough to ensure equilibrium.

[Jussi]

Nick: Ah, okay. I see now where you come from. A bit nitpicking but the real return of all the assets is still the same - only the return between human and physical capital/assets has been changed. But great post/insight anyway.

[Majromax]

> Majro: assume for example the government imposes a lump-sum tax (a poll tax), and uses the proceeds to pay a percentage subsidy to those who hold the government-issued financial asset. The representative agent gets back a subsidy equal to what he pays in tax, but the tax/subsidy still affects his incentives. If your argument were correct, then no subsidies (or taxes) would ever have any effect on behaviour.

This makes sense. Under your system, the marginal return on a dollar is still 3% (for example), but the average return is limited by real factors because of the lump-sum tax.

I still think my constructed example pokes a small hole in your argument, but it's a less-significant one: since the price of land in apples (and dollars) can change, the government would not have to buy up all other assets. If the government's promises regarding return were believed and the financial good offered no additional benefit (such as liquidity) over land-ownership, then it would not even need to issue the money at all, nor would it consequently need to levy any tax to pay off liabilities.

Still, however, the effects on capital formation would apply, in that by guaranteeing a return and letting the market clear marginal land would depreciate or go undeveloped.

[Tel]

So just rereading the following:

This is possible for each individual, but impossible in aggregate (unless the government increases the aggregate stock sufficiently quickly over time), but the attempt by each to do something they cannot all do causes a recession.

That seems to me like it's saying "impossible" as meaning, cannot ever happen under and circumstances, don't even try, furgeddaboudit.

Tel: start with $0 debt. Then I borrow $100 from you, I spend $100 more than my income, and you spend $100 less than your income. Next year I pay back the debt, I spend $105 less than my income, and you spend $105 more than your income. (Or $100 less/more if we add/subtract the $5 interest in "income".)

Yup, seems to work like it says on the box, private aggregate debt grows and shrinks as necessary.

Paul Krugman's model worries about what happens if the debtors want to spend less than their income, but the creditors don't want to spend more than their income, and the rate of interest does not fall enough to ensure equilibrium.

Ahhh, now that's a subtle but significant difference. Now we have an "if"... so if those wealthy creditors don't want to buy what the debtors are able to produce then the debtors won't be able to pay back their debts. Perfectly true that. Paying debts is not impossible at all, but constrained by preferences and economic opportunity. Quite an important difference if you think in terms of understanding the problem before attempting to fix it.

So the real question here is whether a few uber rich misers can gum up a banking system to the point where the normal economy cannot operate. I would argue that the whole purpose of a financial industry is to make sure that can't happen. The miser stacks her money into the bank, and the bank lends that cash right out again for some business venture. Does the bank care that this miser stubbornly refuses to make a withdrawal? Heck no, they love the idea, no withdrawal means less reserves required to cover it. Then they slap a bunch of daily limits and other constraints to ensure the miser can't change her mind about being a skinflint... Bob's yer uncle, system does its job.

What if the debtors are such deadbeats that no one wants whatever they produce? Well, now you do have a problem, but debt is a symptom here, not a cause. Anyway, we have an answer to that one as well... bankruptcy destroys debt (i.e. destroys money). You end up with write offs, assets marked down to market... system still does its job, even when the answer ain't pretty, you still get the accurate results that reflect the reality on the street.