Saturday, 13 July 2013

Interesting take on debt

Dirk Bezemer, an economics professor, has an interesting take on debt and money. The first video basically summarizes the idea of endogenous money (money isn't just created externally or exogenously by central banks, but rather can be created - via the logic of double-entry bookkeeping & loans - by private banks). The key concepts, which run contrary to the way most economists look at money, is that money is debt and loans create deposits.

The second video is basically a summary of economist Hyman Minsky's "financial instability hypothesis". The idea is that rising asset prices are prone to unsustainable, speculative bubbles because as prices go up people buy more (rather than less, as is the typical price-demand relationship). To finance the purchase of increasingly costly assets, consumers will borrow more debt  which increases their purchasing power. With more purchasing power people continue to bid up the price and hence demand for the assets. This vicious cycle continues until people can no longer afford to service their debt, at which point the whole bubble collapses.

Real Housing Prices in Canada & the US.

Image Source: The Economist
(obtained via Krugman's blog)
A debt bubble like this lead to the collapse of the US housing market, which plunged the world into recession. Similar housing bubble bursts ravaged various European nations and has lead to tensions that are challenging the stability of the European Union.

Household debt and house prices in Canada, by the way, have gotten the attention of one Nobel Laurette in economics and an economist who predicted the US housing crash.

Cheerful thoughts, eh?

1 comment:

  1. Thank you for this post. These video's were very informative and really seem to make sense. Makes me a bit more nervous about our housing market!

    Syras Derksen