Analysing the Global Debt Bubble … (its all about the blog)
As an economist, I do something very unusual: I treat money seriously. Though this is hard for non-economists to believe, economists have it schooled into them that “money doesn’t matter” –that it is just a “veil over barter”, there to make it easier to swap commodities than it would be if you actually had to find someone who had what you wanted, and wanted to sell what you wanted to buy … (about 1/2).
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About2/2: … The argument that persuades them goes something like this: ”what would happen if you simultaneously doubled all prices and all incomes? Nothing!”
In other words, if consumers are rational (now there’s a much abused word, but I digress), they shouldn’t care about the absolute prices of goods, just their relative prices. So doubling all prices and doubling a consumer’s income shouldn’t cause her to do anything different (but of course, changing relative prices would alter behaviour).
Bollocks. Double all prices and my income, and I’d be much better off because my mortgage payments would take less of my income (even if interest rates were also doubled). That’s because I’m in debt–I have a mortgage. And you can’t simply double interest rates to reach the same outcome as doubling prices, because debt repayment dynamics make the whole thing “nonlinear”: include debt seriously in your analysis of consumption, and the “veil over barter” vision of money collapses. But this “inconvenient truth” is omitted from economics–not because economists are deliberately hiding it, but because they have deluded themselves about the nature of money.
I take it into account, and as a result I get a very different picture of how the economy operates than do conventional (”neoclassical”) economists.
I use this blog to post monthly reports on debt levels in Australia and the USA.
Further reading: … (full text).