Oh my, Paul Krugman edition

• Tweet

• Tweet

“Keen then goes on to assert that lend­ing is, by def­i­n­i­tion (at least as I under­stand it), an addi­tion to aggre­gate demand. I guess I don’t get that at all. If I decide to cut back on my spend­ing and stash the funds in a bank, which lends them out to some­one else, this doesn’t have to rep­re­sent a net increase in demand. Yes, in some (many) cas­es lend­ing is asso­ci­at­ed with high­er demand, because resources are being trans­ferred to peo­ple with a high­er propen­si­ty to spend; but Keen seems to be say­ing some­thing else, and I’m not sure what. I think it has some­thing to do with the notion that cre­at­ing mon­ey = cre­at­ing demand, but again that isn’t right in any mod­el I under­stand.” (Min­sky and Method­ol­o­gy (Wonk­ish), March 27, 2012)

Then ear­li­er this month, this argu­ment turned up in his mus­ings about the sec­u­lar stag­na­tion hypoth­e­sis:

“Start with the point I’ve raised sev­er­al times, and oth­ers have raised as well: under­neath the appar­ent sta­bil­i­ty of the Great Mod­er­a­tion lurked a rapid rise in debt that is now being unwound … Debt was ris­ing by around 2 per cent of GDP annu­al­ly; that’s not going to hap­pen in future, which a naïve cal­cu­la­tion sug­gests means a reduc­tion in demand, oth­er things equal, of around 2 per­cent of GDP.” (Sec­u­lar Stag­na­tion Arith­metic, Decem­ber 7, 2013)

Don’t get me wrong: I’m glad that Krug­man may final­ly be start­ing to sup­port the case that I (and some oth­er endoge­nous mon­ey the­o­rists like Michael Hud­son and Dirk Beze­mer) have been mak­ing for many years: that ris­ing debt direct­ly adds to aggre­gate demand. If he is, then wel­come aboard. Though there’s doubt as to whether John May­nard Keynes ever uttered the words attrib­uted to him that “when the facts change, I change my mind – what do you do sir?”, I’m hap­py to accept this shift in that spir­it.

To read the rest of this post, click here.