The Real Ponzi Scheme: Private Debt

November 21st, 2011

Steve Keen was recently interviewed by Larry Elliott, Economics editor of the Guardian.

Keen’s argument is that the sovereign debt crisis is merely a symptom of the real cause of the problem: an exponential increase in private debt as a share of national income. In the early stages of a credit cycle, the private sector borrows to fund investment that pays for itself, but in the euphoric bubble phase borrowing is used to speculate on rising asset prices. Debt grows much faster than income but those borrowing the money assume they will be able to pay off what they owe from the rising capital value of their assets. This model of growth, in other words, is no more than a gigantic Ponzi scheme, named after the fraudster who paid out investors with money raised from the next wave of suckers.

Ultimately, of course, private debt and interest charges on that debt needs to be paid off from real-economy income. Asset prices can’t rise forever.

Economists will tell you that gross debt levels don’t matter because one person’s debt is another’s holdings. (Net: zero.) They ignore it.

But if the gross private debt is too large, the real assets in the real economy can’t generate enough income to pay it off. Not really complicated, conceptually.

People gnash their teeth about government debt (which in a sovereign-currency nation never needs to be, never is, paid off), but U.S. private debt hit 300% of GDP just before the crash. Same thing — at a lower but still historically unheard-of level in … wait for it … 1929.

via Rolls-Royce tastes lead to fiat money – time we wean ourselves off high debt | Business | The Guardian.

  1. Foppe
    November 21st, 2011 at 15:19 | #1

    Huh? I sort of understand how they can talk themselves into ignoring issues of unequal distribution, given all of the assumptions they accept, but how do they rationalize ignoring rent extraction/payment? Is that another corollary of “all the money in the system is spent automatically as there are no savings, and it is irrelevant how/where/on what/by whom money is spent”?

  2. November 21st, 2011 at 16:25 | #2

    “Ultimately, of course, private debt and interest charges on that debt needs to be paid off from real-economy income.”

    My friend Adam Smith wrote: “The interest of money is always a derivative revenue, which, if it is not paid from the profit which is made by the use of the money, must be paid from some other source of revenue…”

    In other words, the interest cost is a parasite feeding on “the wages of labour, the profits of stock, or the rent of land.”

    “Economists will tell you…”
    Second time I’ve heard that, lately. Got a link or two handy?

  3. November 21st, 2011 at 16:58 | #3

    @The Arthurian

    Off the top of my head: Steve Keen quote beginning “couldn’t convince”.

    If you find anything similar (Mankiw’s textbook?), would love to see it.

  4. November 22nd, 2011 at 00:49 | #4

    Mankiw?? Mankiw was in diapers when I took macro. From my copy of Campbell McConnell’s Economics (6th edition, 1975): Private and public debt were of about equal size in 1947. But private debt has grown much faster… If you insist upon worrying about debt, you will do well to concern yourself with private rather than public indebtedness.

    McConnell apparently sees no reason to worry about debt, himself. But he doesn’t quite say it doesn’t matter.

    My copy of Mankiw’s Macroeconomics (4th edition) in the index under “debt” lists only “Debt, government. See Government debt”. Under “private” the index lists only “Private saving”. He ignores debt.

    Economists obviously ignore private debt. So does the internet. My god, so does the internet. But I just don’t see that as the same as economists saying total debt doesn’t matter. Petty, perhaps, but the argument one must use to convince them depends on what they think and say. If they say it doesn’t matter, then you must convince them they are wrong. If they only ignore total debt, they thankfully they are not explicitly “wrong” and need only to open their eyes.

    I have long thought that the ignorance of total debt arises from incomplete analysis at the popular level as from Ross Perot (1992): “In June, 117,000 more Americans were thrown out of work… The Federal debt is now $4 trillion… We add about $1 billion in new debt every 24 hours. Does anyone think the present recession just fell out of the sky?”

    Debt equals recession?

  5. November 22nd, 2011 at 07:25 | #5

    @The Arthurian

    Thanks for looking at the hard copy of Mankiw. I Searched Inside on Amazon, found that he has *a whole chapter* on government debt, but nothing much I could find on private debt. I thought maybe I was just missing it.

    Just searched Krugman’s Macro. Same thing.

    Good point that they just ignore it. They just haven’t thought about it much, really. Funny, what with Fisher and Minsky and all that…

  6. Clonal Antibody
    November 22nd, 2011 at 07:38 | #6

    I have learned a great deal on debt by reading “Hypertiger Wisdoms.” She and Elaine Supkis are very interesting from a number of points of view.

  7. nanute
    November 23rd, 2011 at 07:23 | #7

    Here’s a nice little summary of Mankiw’s textbook by the Stand Up Economist.

  8. November 23rd, 2011 at 07:46 | #8


    Thanks, love that. He was actually my daughter’s high school economics teacher! Great guy.

    But I think it imparts more amusement than enlightenment.

  9. nanute
    November 23rd, 2011 at 09:18 | #9

    You are welcome. Agreed.

Comments are closed.