2012-07-14blogspot.com

I think the second part of Keen's idea about controlling debt in the future tied to GDP growth (or anything else for that matter) would fail miserably.

A free market, not government mandated fiat money is the solution. We certainly do not have a free market now. Instead, we have fiat mandate, compounded by fraudulent fractional reserve banking.

We tend to agree. Suggesting simply more variants on "active" management of major economic aggregates, or worse, connecting one (the GDP) to another (debt) is sure to be extreme folly. The record has already shown that when it is desired to benefit the prime "stakeholders" (first: those who profit off of economic management; second, politicians and the government, and finally, the more greedy and opportunistic of the general populace), such guidelines and measures are easily tweaked, cheated, and abused. Just look at our government's questionable inflation figures.

The benefit of sound money (for which a gold exchange standard does not qualify) is that it's a total systemic shift to a self-balancing monetary, banking, and trade arrangement. Too much lending and too-low interest rates balance on the one hand with gold inventories on the other; banks deposits balance with gold backed currency (either private or public), and foreign exchange values of currencies balance with gold flows.

Of course, it can be abused, but as long as this is the "main" footing of the system, imbalances and abuses will tend to "wash out".

The big drawback? It would be inconvenient for the politicians and entrenched business and financial interests. To sell a more "flexible" system of the sort we have (unlimited money printing), they tell us we need an "elastic currency" to save us from financial crisis and economic downturn. Well, how is that working out?

That all said, we are more supportive of something like a "debt jubilee" than Mish because it harks back to a natural process of washing out of bad debt in the economy writ large. Optimally this should be done in a way that does not excessively reward the profligate; thus it should be done in a manner sensitive to obvious measures like cash flows, and on a case-by-case basis. A nice way to do a major part of this would be (at least in the US) to do what could have been done prior to 2005: let bankruptcy courts take care of it. Unfortunately for mortgage holders, the banking lobby managed to get mortgage "cram downs" in bankruptcy made illegal at that point. It was thought this would make issuing (mortgage) debt to consumers willy-nilly a can't-lose proposition.

We ask again: how's that working out for them?



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