Archive for November, 2009

Encroach on the territory of error

November 27, 2009

If you see an error, and find that you can correct it, then correct it.

More on debt

November 26, 2009

There is another way of looking at debt.  That is by dividing the stock of debt at a time into domestic (or internal) debt and external debt.  Domestic debt is that owed to residents of the economy.  (A resident is one who has a centre of economic interest in the economic territory of the economy.)  External debt is borrowings by residents from nonresidents.

So now we really have a matrix domestic/external; private/public.  I will leave the task of identifying the components of each of the cells as an exercise for the reader.  The public/external cell consists of transactions such as the Chinese purchase of Treasury Securities issued by the US general government.  The public/ domestic is like Calpers and its bond funds.  (I wonder where Bill Gross and PIMCO fits in here).  Private /domestic is household borrowing for mortgages and private /external is external commercial borrowings.

So the moot point about all this is that is does not matter who or what sector the borrower and lender are in, what matters is what is done with the sum borrowed.  Has it been frittered away in luxury consumption, or has it been put to work wisely, increasing utilities for all after some time?

So there is good debt and bad debt.  Saying more would take one into the realms of debt-by-debt analysis which I once heard the World Bank was doing.

What is debt?

November 25, 2009

Putting it down in black and white just to clarify thoughts:

The total debt is made up of private debt and public debt.  Private debt is what the private sector owes (to whom?) at a point in time.  The public debt is the debt of the general government sector.  A broader concept would be something like the private sector borrowing requirement (PSBR).  Is this so?  Must check.

Anyway, the private debt is debt in form of credit card debt, mortgage debt, overdrafts, etc.  It is owed mainly to commercial banks.  Since the commercial banks are mainly a conduit (albeit an amplifying one) of the deposits of others in the private sector (leaving aside for the moment government deposits in banks) the private debt is actually a lending of the private sector to the private sector mediated by banks.

The public debt is another matter altogether.  It is the borrowing by the government from the private sector and borrowing  by the government from the central bank.  To the extent that the borrowing by the government from the central bank is satisfied by creation of new money, this is adding permanently to the money supply and is thus inflationary.  This is the so called ‘monetized deficit.’  To the extent that government obligations satisfy a demand for claims on future production (the savings motive) that part of the public debt sold to the private sector satisfies a useful social function by allowing people to plan their retirements.  But the part of the public debt funded by creation of new money puts purchasing power in hands that add to the final demand for goods and services without having been caused by a restriction of consumption on anyone’s part.  There is no matching saving in the private sector for the increment in final demand that the additional money infusion is causing.  That is why deficits are generally bemoaned.  Because they are inflationary.

So the debt is good as long as it is private (on second thoughts, credit card debt is not a good thing all the time ) and the debt is bad as long as it is monetized.

But there is more to the story than this.  There is a concern for the stability of the purchasing power of the medium of exchange and store of value. Undoubtedly.  But fears of paying back the debt are surely overdone.  The debt has to be serviced.  Doubtless.  But inflation eats away at the nominal value of the debt, and the intergenerational transfer is not that onerous.

But the best part of the story is that the debt is basically a social relation between the labours of savers and the labours of dissavers.  It is a political matter.  It transcends mere economics.

Note on excises in Indian WPI

November 25, 2009

Excises are included in the prices (but rebates are not) elicited for the Indian WPI.  Ex factory gate prices include excises.  Just to clarify what I wrote a few posts ago.

From H.15

November 20, 2009

Yields in percent per annum

Federal funds (effective) Nov 18  0.11 

Eurodollar deposits (London)  Nov 18  0.30 

Bank prime loan  Nov 18  3.25 

U.S. government securities     Treasury bills (secondary market)

4-week    0.04 

6-month  0.15 

http://www.federalreserve.gov/releases/h15/update/

Does this mean a bank can borrow in NY at .11 %pa and deposit in London at .3%pa and lock in an arbitrage profit?  If it does not mean that, why does it not?  Is this what is meant by the carry trade?

Some confusions

November 18, 2009

In this US recession, (stats needed, NBER start date) the savings rate in the US has gone up!  Not as you would think, people drawing down on their savings to make ends meet.  (Need figures for  savings rate here).  Makes one wonder about the composition of savings.  Who saves.  (Need stats here for the composition of savings or savings by household.)

Further, excess reserves of banks have shot up.  They are not lending.  What gives?  The risk free rate is way down to zero, but money is not available at that rate.  Only the banks can borrow at that rate.  What gives?  Project: make a list of rates in the US economy.  Start with the Fed Funds rate, and move up the rate spectrum.  What is the US PLR?