Freitag, 28. Juni 2013

The Debt Crisis

Dirk Bezemer (Univ. of Groningen, INET) has published a four-piece video series on the current economic crisis. Those videos are exceptionally well made, very clear, very good to understand.

He points out the important role that credit and debt play in an economy. He then distinguishes between the two alternative ways to use debt economically:

  • investment in production and
  • investment in speculation (buying assets and hoping for a rising asset price)

The video makes the case that the use of credit for speculative purposes increases the debt-to-income ratio (“debt burden”) of a society and that this can lead to a debt crisis when the debt service (interest, repayment) is too high in relation to income.

Predicate: “must see!”

INET webpage with the videos

Episode 1: Debt, A Great Invention

Episode 2: How Bubbles Grow

Episode 3: Why crises occur

Episode 4: The post-bubble economy


One small piece of nitpicking (does not affect the argument made in the movies): Prof Bezemer says: Money = debt. That is actually not correct. Money ≠ debt! Debt is normally about money. So both can not possibly be the same.

Modern money is a type of token issued by a government agency. Economic subjects are required by law to accept that kind of token (the “legal tender”) as means of payment.

Debt, on the other hand, is a contractual obligation (with a corresponding right) about a sum of money.

Now, sellers of goods may accept a debt claim, e.g. against a bank, as a substitute for money. But they don’t have to. They can theoretically insist on payment in “cash”. And in the case of a bank run they will do so.

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