Markets are "natural" …financial intermediation
Lifted from the comments from an Ezra Klein article in the Washington Post comes an interesting idea that is not only currently debated, but also ties into ‘markets are “natural” idea’…
Paul Andrews comments:
Yes – lots of saving and borrowing, often in goods rather than money. When money is included its often only a fiat monetary base exchanged by the government for goods, with no banking sector and therefore no deposits created by lending, no M1, M2, M3. No shadow banking sector etc.Refer to this BIS summary on fiscal dominance from December 2011
A quote: “Starting with financial intermediation, recall that banks play no role whatsoever in macroeconomic models of the pre-crisis era. These traditional models are based on the distinction between nominal and real quantities, and there are interest rates. But the only friction is the one associated with nominal price changes, so inflation and inflation control become the focus. (If it is costly to change prices, inflation creates a deadweight loss.) And, since the model is devoid of banks, there is no private debt. As I suggested at the beginning, the macroeconomic models of the future, with their added focus on financial linkages, need to have a rationale for debt as distinct from equity.
We need to understand why the predominant financial contract is a loan or a bond rather than equity. In fact, we need a clear understanding of the optimal debt/equity ratio for the economy as a whole. We know that high levels of debt can lead to disaster for a society, but beyond notions from crude empirical work, we don’t have any idea what the right level of debt is. A rich enough macro/monetary/financial model will tell us the answer.”
“We need to understand why the predominant financial contract is a loan or a bond rather than equity.”
There area myriad of tax laws that alter the relative prices of equity relative to debt. Although I’m not sure of specific numbers, I’d venture that a thorough study would show the preferential treatment is heavily weighted towards debt. Correcting the over-reliance on credit/debt is an immensely important topic for economics to pursue.
Maybe there is no “right level of debt”.
Maybe there is no “right level of debt”.
Maybe there is no “right level of debt”.
The massive deficits of the 48 months from 4/08 to 4/12, 10% to 15% of GDP, were an existential necessity for the political economy. If Uncle Sam had not borrowed and spent that money nobody else would have because nobody else could have or wanted to. The same holds true for all Western nations. The rolling soverign debt crisis is the natural result. i will remain agnostic on the corelation between soverign debt and growth long term but the fact is for any short term for since 08 budgets near balance would have meant systematic dislocation. That is social unrest and self reinforcing deflationary debt contraction.
Perhaps one reason for such preferential treatment in the law is that holding equity makes you a partner with other equity holders, while holding a bond makes you a master over them.
Perhaps one reason for such preferential treatment in the law is that holding equity makes you a partner with other equity holders, while holding a bond makes you a master over them.
Perhaps one reason for such preferential treatment in the law is that holding equity makes you a partner with other equity holders, while holding a bond makes you a master over them.