Winterspeak is Right: Economists Don’t Understand that Debt Matters. And Inflation Does Too.

He’s not exactly right (in this case) that “Economists don’t understand accounting,” but they do have some very odd ideas about it.

He quotes Steve Keen:

I couldn’t convince several of the academics in the audience of the importance of private debt: they kept coming back to “one person’s debt is another person’s asset, therefore the level of debt doesn’t matter”. They therefore argued vehemently that the distribution of debt was important, but its aggregate level was irrelevant.

And observes:

the total (gross) quantity of financial assets can expand and contract, while the total (net) quantity of financial assets remains the same.

The economists understand that gross and net are different, but they claim that because net doesn’t change, gross has no import or effect. Does that follow?

Since inflation profoundly shifts the buying power of gross debt holders relative to debtors (think: one percent of a fifty-trillion-dollar stock of gross debt/credit, per year), one might expect the quantity of that gross debt to be a significant issue in analyzing the state of the economy.

In sheer quantity, this wealth-shifting effect (which is immediate and permanent) utterly overwhelms the paltry effects on income flows that economists obsess about, even while they’re claiming that those income/wage effects are an “illusion” (at least in the long run).

To repeat myself: inflation is to financial assets (especially bonds/debt — the majority of the financial asset stock) what decay and depreciation is to real assets.

If it weren’t for inflation, nobody would invest in real assets, and the rich really would own everything (instead of almost everything).

If you want to better understand the effect of gross private debt on the economy, run don’t walk to read Chapter 13 in the brand-new second edition of Steve Keen’s Debunking Economics: The Naked Emperor Dethroned. While you’re about it, send copies to anyone you know who’s interested in economics — especially impressionable young students who are prone to swallowing all the swill uncritically.