Wednesday, May 26, 2021

Modern Economics

From an article by Michael Hudson explaining why President Biden is refusing to cancel student debt ,

“The fact is, if the government were to write down all the student debt, it wouldn’t cost the government a penny right now. And that wouldn’t cost the banks a penny because the debt is owed to the government and the government would simply be canceling a future source of revenue.”


I think Mr. Hudson’s definition of “debt” needs to be refined, because it is not currently in contact with reality. “Future revenue” would be something along the lines of “no money has changed hands yet, but some day in the future you will buy something from me.”


Debt would be more like, “you have my money and I want it back.” So when you cancel that debt I don’t get my money back and therefor I do actually lose my money. If the government gets into the habit of randomly cancelling debts, it’s going to become really difficult to find anyone who will lend you money.


The key, of course, is that Mr. Hudson says that the government “it won't cost the government a penny right now,” which is a tacit admission that it will cost the government money in the future, namely when the student loans are supposed to be paid. But he doesn’t worry about tomorrow. “Carpe diem.” Seize today

3 comments:

  1. "Debt would be more like, “you have my money and I want it back.”"

    That's true if you borrow money off a private individual like your neighbour, but not when you borrow from a bank. The bank literally creates new money. I'm not saying that cancelling debt is necessarily a good idea, nor that a government that cancels lots of debt doesn't make itself less attractive to investors. The true cost of a measure like this is its effect on the government's credit-worthiness.

    ReplyDelete
  2. Oh, where do I start.. That article was tear inducing … meaning my eyes glazed over, never mind my brain.

    Not all student loans are owned by the US Govt. Some are. Other are owned by banks, but guaranteed by the Govt, so maybe indirectly owned? And there are privet lenders (back, etc) that make student loans with no connection to the Govt. I don't know how far "cancelling" student debt would work with some of these.

    I'm not sure how the above commenter get the idea banks are 'creating new money'. The Govt can print money. Dunno about banks.

    If Biden has the executive ability to cancel $10K, and not $50K? Why so? Is there a magic cutoff or something? If he can do one he should be able to do the other.

    If there is any cancellation, maybe it should be for those least able to repay it, since you can't get anything out of them anyway.

    I'm all for screwing the banks if at all possible. Make them pay for the bad loans. Oh and teach some financial know how and responsibility to young people... they'll need it later.

    ReplyDelete
  3. "I'm not sure how the above commenter get the idea banks are 'creating new money'. The Govt can print money. Dunno about banks."

    see
    https://en.wikipedia.org/wiki/Money_creation#Role_of_banks_in_money_creation

    This is how money has worked throughout the modern era (about the last 400 years?), but its origins go back further, at least as far as the Knights Templar (12th century or so).

    ReplyDelete