[PEN-L:2008] Re: Megaeconomic diagnosis

[Trond Andresen <Trond.Andresen@xxxxxxxxxxx>]

Peter Dorman on the PKT list (this also goes to the list PEN-L) says:

> .....If Keynes were surveying the current
> situation, would he be inclined to write a book entitled "The Economics of the
> Debt", calling attention to the macroeconomic parallels between the burden
> imposed on Germany by the Treaty of Versailles and the burden imposed on much
> of the third world by accumulated debt?  I ask because I'm intrigued but don't
> really know how far this analogy can be taken.

I just want to point out that my indebtedness diagnosis includes not
only third world debt. Included is also indebtedness within the richer
countries. And also any financial asset/debt relationship, i.e. not
only bank loans but bonds, stock - all sorts of securities who give the
holder a claim on future dividends from some debtor source.

Financial polarization is proceeding within the richer countries, not
only between rich and poor countries. It also proceeds within the poor
countries.

I think the indebtedness explanation also sheds light on the
explosive growth of financial sectors worldwide: When society gets more
financially polarized, there is an increasing market for mediating and
handling of debt/asset relationships.

I have launched these views on and off for a couple of years now, and I
still haven't heard any explanation why the reasoning is wrong. I have
a suspicion that the simple accumulation mechanism of compound interest
(dividends) leading to exponential* asset/debt growth, known since
ancient times and condemned by f.inst. Aristotle, in The Bible and the
Qura'an, is considered too quaint (can a serious modern economist
support an explanation which is recognized already in the Old
Testament?) and too trivial, to play a central part in explaining the
dynamics of complex, modern capitalism.

It is IMO a case of not seeing the forest for all the trees.

One important factor that IMO confuses the issue for many economists,
is the phenomenal real growth observed in most countries for a
significant part of the last 50 years. But such growth may occur, and
may give all members of a society increasing living standards, IN
PARALLELL WITH INCREASING INDEBTEDNESS.  The presence or absence of
productivity increase and production increase has no important bearing
on the financial polarization process.This process is fundamentally
similar in antique society and today, as long as money and interest is
present. And the crisis one bogs down into is also essentially the
same. In antique societies, which were static agrarian ones, the debt
crisis led to catastrophe with people being sold off for slavery/dying
from hunger. Under modern dynamic capitalism, real growth is (or has
been) so fast due to technological developments that the effects of
indebtedness are ameliorated. But financially the mechanism is similar
and just as serious, and as i said in an earlier message, if further
polarization due to accumulation shall be (homeostatically) held in
check _only_ by a high rate of insolvencies ensured by feedback from
the fragility that follows from indebtedness, then the world (in an
average sense) will stay bogged down in this situation.

One solution (beside large scale debt forgiveness; a "jubilee") is to
lower the interest rate. One may show that an interest rate

i < d * (1-s)/s

ensures a reversal of polarization, i.e. debts are paid off faster than
they may accumulate.

Here

i = average interest rate [per cent/time unit]
d = average rate of repayment [per cent/time unit]
s = average creditor savings rate out of incoming financial flows [per cent]

Thus low savings rates and/or high rates of repayment allow a higher
interest rate without polarization occuring.

-------------------

* Note that an exponential path is characterized by a small slope
for a fairly long initial period, before it explodes. Thus polarization
may proceed (slowly) for decades without alarms being raised.


regards,

Trond

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