The Disaggregation of Credit

Monetary Realism starts with the understanding that there are two forms of money in our monetary system.  The most important kind of money is the kind we all primarily use – credit money.  MR calls this “inside money” because it is created inside the private sector through banks.  Banks create this money by extending loans.  Loans create deposits.  The other type of money is “outside money”.  This includes cash, coins and bank reserves.  It is created outside the private sector by the government and serves as a facilitating feature to impact the use of inside money.  For more on this please see here.

The dominant form of money in our monetary system is inside money or credit.  Our entire monetary system is based on credit since the vast majority of transactions occur in this form of money.  As we like to say, inside money “rules the monetary roost”.  Most economists get this relationship entirely backwards and build some sort of government centric model for understanding the monetary system.  They generally start with the idea of the money multiplier which implies that the central bank has some sort of control over the supply of money when the reality is that the money multiplier is a complete myth and the central bank actually has far less control over the supply of money than most presume.  MR flips this all on its head and starts with understanding the banking system and the fact that the money supply is almost entirely privatized in nations like the USA.  In other words, the money supply is controlled by an oligopoly of private competitive entities who battle each other for the demand for money (loans).

But all money is not created equal.  The private competitive nature of this arrangement can be both extremely positive and extremely disruptive.   This is elaborated on in a concept that originates with German economist Richard Werner.  He calls it the “disaggregation of credit”.  I don’t have the time nor the space to do it justice here, but I will provide my brief analysis with a MR flavor since it complements our work so nicely.

The demand and issuance of credit can occur for many different economic transactions and purposes.   This can involve productive and unproductive uses.  A simple example of productive uses would be a corporation that maintains a line of credit with a bank in order to pay its expenses such as salaries, R&D or other investments.  As we like to say with MR, “investment is the backbone of private saving”.   This is the essential idea behind understanding our central equation S=I+(S-I).  But there are also unproductive uses of credit.  For instance, when loans are made to meet the growing demands of speculative real estate purchases you get environments like 2003-2007 where asset prices simply inflate due to the extension of credit for unproductive uses.   This is the essence behind the idea of a disaggregation of credit.  It is essential to understand that all credit is not created equal.  Money can be abused for the purposes of profit.  This is not remotely surprising in a capitalist monetary system like the USA.  But this is not an excuse for not understanding this concept.

While most of the economics profession is busy building government centric models that figure out various ways to blame the government (or give it credit) it’s equally important to understand how the private sector itself can be the cause of this economic disequilibrium.  Understanding the design of the modern monetary system and the concept of disaggregation of credit is central to this understanding.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  1. This is beautiful. Cullen, MR is going to change the world. You don’t know it yet, but it will. Your description and understanding is so perfectly intuitive and comprehensive that I almost can’t believe no one has come up with it before.

  2. Ha. That’s a bit over the top. But I appreciate the sentiment. We’re just trying to describe the system for what it is. I don’t really think there’s anything ground breaking going on here. But thanks. :-)

  3. Wow, this seems like a fascinating topic. I hope you have many follow up articles on it. Intuitively it seems to make a lot of sense. For all the government’s faults, I have a hard time believing the libertarian line that “privatization” is ALWAYS a better path. For one, public works projects meant to bring DOWN the cost of doing business for everyone seems like a legitimate use of government spending to me (e.g. the highway system… having toll booths on “privatized” roads everywhere may be great for the rent-collectors on Wall Street, but not necessarily that great for private citizens or industry). Understanding what can go wrong with private credit extension sounds like a great place to start the examination.

  4. In the 80’s I worked for a large pharmaceutical company. Due to medicare cutbacks they layed off a lot of people. Mostly contractors at first, but then their own employees. Then some of the contractors were hired back. My business partner coined the phrase: “Contractors are the first to go, but the first to come back.” It was then that I learned that diversity is good in any organization. Contractors, Full time, Part time, etc. The same is true for most things. It adds resilience to any system.

  5. What you are doing shouldn’t be ground breaking, but it is. For as we all know, economics is long overdue for its Darwinian moment. Thanks for all your hard work Cullen.

  6. If the objective is to issue credit productively, it does indeed seem like the private sector (aka the banks) would do a better job than the govt.

  7. Yes, I always talk about “disruption”. It’s sort of a nerdy entrepreneurial buzzword these days. In order to make a big splash you need to disrupt something that’s become a permanent fixture in everyday life. It’s mostly applicable to new technologies, but I think it’s also applicable here. We need to totally shake the foundation of economics. And I think we’re suited to do it because we’re not in the institution of economics. We’re outsiders staring in banging on the windows and trying to shake the foundation. It needs to happen….

  8. Yes, perhaps, but I think Cullen is correct to describe it as an “oligopoly.” That has a deservedly negative connotation. I think what that implies to me is that any “oligopoly” has got to be tightly regulated because they’ve been granted an incredibly powerful government charter to create money… not something your average person or business can do. The idea that this oligopoly should be unregulated seems crazy to me.

  9. Yes, I agree. I think the key is understanding that capitalism is inherently unstable because of the nature of the relationship between profit seeking and risk. Banks, as the central piece of the system are not like normal corporations and can be particularly disruptive if their profit seeking business becomes excessively risky. I am all for the privatization of the money supply and I think that private competitive banking is superior to nationalized banking, but we must understand the nature of this so we can properly approach it. If private competitive banking is inherently unstable and we can’t rely on pvt banks to properly manage their risks then they must be constrained by what they can and can’t do (this is vastly different than most regulation in a capitalist economy because banks are so central to every day monetary transactions). I’ve proposed simple laws like a 15-20% down law on home loans. It seems to just make sense that one should have to post collateral on the largest purchase of their life. That’s risk management courtesy of the govt. But banks will never allow such a law to pass because it would hurt their potential profits….

  10. For once, I agree completely with the point. Not trying to boast, but this concept is precisely what I argued back in 2010 after understanding (and agreeing) with your and Bill Mitchell’s MMT articles. The key issue is that the US economy and even more so the markets, have become addicted to the unproductive use of credit (either by speculating on financial/real assets or by getting paid endless weeks of unemployment, foodstamps etc). That the US government will never become broke and fiscal deficits up to a certain point are good is beyond debate. That you can then take these concepts and argue that the US government can run deficits higher forever and that the Fed via QE can keep printing up money (yes, yes, I understand that they are not actually printing) is where this goes wrong.

  11. Haris, we’ve evolved way beyond MMT. Not sure if you’ve been around for all of that, but MR has taken what I think are the best pieces of many schools of thought and built an understanding of the monetary system from the ground up. Policy and prescriptive ideas are all secondary to the core piece of MR which is just descriptive. For instance, when I describe how the govt spends money I am simply describing the operational reality. They spend by taxing or borrowing. This involves two different processes. The first is taxing which requires taking from Peter to pay Paul. The other is borrowing which requires selling a bond to Bank A who on-sells it to Peter. The process is complex, but in essence, the bank buys the bond, the govt obtains the deposit and credits the bank with a security AND pays Paul on the other end. So the pvt sector ends up with a bond AND a deposit through what is really nothing more than a redistribution of money. This process is sustainable so long as there is demand for govt bonds. I don’t say that’s a guarantee (obviously in a hyperinflation the process could break down), but it’s important to understand how this works and why it works the way it does.

    Have you read all the updated MR material? I don’t think you’ll disagree with it. After all, it’s basically just a description of the way things are….

  12. Cullen’s not MMT. He hasn’t been for a long time. MR is totally refreshing. Some people like to knock Cullen for having been MMT. But that’s only because MR didn’t even exist.

  13. I should clarify and say “privatization combined with deregulation” which seems crazy for something as important and powerful as a special government charter to essentially create money.

  14. Right. There is certainly a difference between “productively” and “profitably” but the two often are at least somewhat aligned. They are definitely not mutually exclusive. Not that our system is ideal. Far from it. Banks can go crazy, obviously. Cullen’s proposals would sure help in that regard.

  15. I think if you really want to change the world, you guys need to start being more prescriptive. What’s the conclusion of your views? What’s really different about them? You’re only telling half the story by insisting to only be descriptive here.

    By refusing to engage in prescription, it makes it very difficult to see the revolution. Obviously MR is different from MMT, but only because it was born from MMT. It spends much of its efforts in direct conversation with MMT, refuting basic assumptions made by MMTers.

    To this end, MR has created its own definitions to attempt to describe “reality” but that doesn’t necessarily mean that they are the only way (or as I’ve argued even the best way) to describe reality. The definitions describe some parts of the financial system adequately but ignore the majority of it.

    Importantly, money (inside, outside or other) doesn’t rule any roost but its own. The real physical economy is all that matters. Money is an accounting mechanism to used to describe it.

  16. Money is primarily a medium of exchange. In my primer (which you claim to have read, but clearly didn’t digest) I spend an entire section describing the difference between “money” and “wealth”.

    I never claimed it was “changing the world” and I have never really wanted to change the world. I want to describe the world. I’ll let everyone else save the world through prescriptions. I’ve never claimed to be some super hero saving the world. I have only ever wanted one thing – to actually understand the world we live in and provide others with the same understanding. If everyone else wants to use those understandings to save the world then great. I’ve never even claimed my understandings are entirely right. I think they’re right, but it’s really up to the reader to decide whether they agree or not. I could be totally wrong. I am not arrogant enough to think otherwise.

    I am happy to help them understand things if I can provide something. But it was NEVER my intention to provide something world changing. I’m a teacher, if anything. Not a guy running around in spandex with a cape on. Trust me, if you saw me in spandex you’d barf through your nose. I am better suited for teaching, staying behind desks and informing. Maybe one day I will end up in one of the schools I am trying to change. But that’s as close to “world changing” as you’ll see me get.

  17. Indeed – good comments guys. Those of us who properly understand how the monetary system works seem to agree that there’s nothing wrong with its structure and its in fact a very good system. But its critical that banks are appropriately controlled to try and ensure their own profit motives don’t lead to behavior that stands to disrupt/damage the economy at a later date.

    Sadly, from my understanding of economic history this isn’t really going to happen – when things are good, nobody really cares why or whether its sustainable. We’re thus left to constantly suffer periodic busts like 2007 as poor lending/investing decisions from prior good times catch up

  18. Cullen, I understood this to be your/MR’s position for a long time (and I’m not sure what “Werner” has added to this). The question has always been what is considered productive or not productive. Who decides? Same debate during our housing bubble and, presently, everything being built in China. When Pettis talks about China he defines productive as a simple accounting definition: net discounted cash flows must be >0. Of course we can’t predict the future, so while the definition is accurate, it’s not easy to prove on Day 0. In the medium term, if banks don’t collapse, then in aggregate we could say the lending has been productive. (Of course, even if banks made slightly >0 profit, it’s possible our quality of life is better, so large profitability is not necessary, but that is a different discussion.) One could argue in hindsight that banks have not been profitable for the previous 5-10 years. Then the Fed was created to minimize uncertainty and maximize investment so that some potentially productive, but marginal, investments could be made. Then the Fed dual mandate created a situation where the likelihood of unproductive investments would be made, but this was traded off with maximum employment. When you get negative real rates, that is an implicit admission you want marginal or unproductive investment. So where does this leave us?

  19. SS, this article has nothing to do with QE. It describes how the money in the USA system is comprised of “inside money” (bank-created credit) and “outside money” (physical money and bank reserves). The piece discusses how “inside money” is the dominant type in the system and how, in their drive to turn a profit by making loans, sometimes banks can get out of control making too many loans for non-productive and speculative purposes, the “unwinding” of which results in an event like we saw in 2007.

    The FED’s “Open market operations” (which for some reason they have decided to give the fancy name “QE” to) adjust the level of bank reserves in the system (not to be confused with the bank’s loan loss reserves which are totally different). As Cullen has been describing recently, these are basically used by the banks to settle interbank transactions and are totally separate from the private sector.

    The Fed does OMO’s to control the level of reserves in the system and thus impact the interbank interest rate. They don’t “fund” anything, they don’t provide the banks more money to lend, they certainly don’t impact the demand for debt in the private sector, they don’t “gift” money to people out of helicopters. They simply adjust the mix of treasury bonds/”cash” in the interbank market and allow the Fed to achieve their desired “fed funds rate”.

  20. The comment was primarily directed at LVG. I read his comment and basically just wanted to know why and how? How does MR change the world?

    I think there are some really good elements to MR and I’ve never said any differently, but why does LVG see it as a radical shift? I feel that some prescriptive examples would be helpful.

    No spandex necessary.

  21. Does anyone describe the monetary system like MR does? The thing that I find so amazing about MR is that it flips the mainstream upside down. All this “money printing” and government based thinking is wrong. There is no such thing as the Fed or the Government printing money. You realize this when you learn MR. It’s the private sector that matters most. It’s almost like Austrian economics, Keynesians, monetarists and MMT all came together and collected their best ideas into one school of thought.

    I find it refreshing, liberating and best of all, educational and enlightening. Since learning MR through the eyes of Cullen I have completely changed my perpsective on how the world of money works.

  22. The term in engineering is “dynamically unstable”. Sort of like standing an egg on end. There isn’t a foundation to build on. When it tips it tends to tip more. So be prepared for constant movement, including overcompensation trying to attain a margin of safety.

  23. Scott

    MR (& MMT, MS) changes the world (albeit on a very small scale……for now) because it challenges the conventional fallacies and myths that is espoused and taught by neoclassical mainstream economics.

    I wouldnt call it a “radical shift”, because MR’s principals aren’t new things that nobody has ever said before.
    Its just that it has not been organized/structured in a way that is not only available to the masses in a much more reachable way (via the internet), but also in a way where the fairly average layman interested in economics can pick up.

    I’d also say, even though MR doesnt purpose explicitly *SPECIFIC* prescriptions (IE Job Guarantee to bring down unemployment), MR(either by accident or design) does so implicitly.
    Why? Because if you understand lets say sectoral balances, you’d see why it wouldn’t be wise for the government to run a surplus (or shrinking deficit) during a recession.
    This is more of a broad (implicit) prescription. IE- Government should run deficits if economy is slacking.
    Note how MR doesnt specifically say if this should be done via tax cuts (and which type of taxes….payroll vs top marginal), gov spending (infrastructure or JG).

    Hope I properly described MR (or at least how I see it….as I don’t fully consider myself either MR or MMT, rather a mix of both).

    Hope this helps.

  24. Cullen said “I don’t really think there’s anything ground breaking going on here.”

    One thing that is “going on here” is a cool, as in calm, disposition towards describing reality that in other media outlets is in short supply or missing altogether.

    I have been linking to your work for a while now from here: in an effort to help move these descriptions into a wider audience. I’m not alone, others refer to your work in the blogosphere. There is only one way to overcome ignorance and that is to offer a falsifiable theory and allow others to test it.

    Your work is happening at a time when other fields are also drawing up new descriptions of reality. Lawrence Krauss is another excellent educator and is, to use your image, “flipping cosmology on its head” with his “A Universe from Nothing”, and like Monetary Realism it has a small audience and a huge opposition, see:

    Cosmological reality may not be directly related to monetary realism, but the results of understanding our world on several levels helps me for one to make better choices.

    As Max Planck (1858-1947) offered, “A new scientific truth does not triumph by convincing its opponents and making them see the light, but rather because its opponents eventually die, and a new generation grows up that is familiar with it.”

    Thanks again Cullen for your tireless blog entries that you so freely provide.

  25. Wholly unrelated:

    Platinum coin WH petition circulating on twitter.


  26. Is a Boob Job productive? I have been thinking about this all day long.
    Think about it, a gal borrows the money from a bank to get a boob job, so money is created out of no where and funds her wish.

    Is a boob job productive? Well, the company who made them, sold them to doctors who implanted them ect.
    Kinda like I pencil but at “disaggregation of credit” level, OR is it?

    Does it really matter what we spend money on?
    If she lands a trophy husband who pays off her debt with his savings was it worth it?

    I don’t know but it seems like other aspect have to come into play like the actual flow or mere movement of funds in the economy.

    Perhaps this movement alone is special because it eventually finds a productive place.

  27. Its an interesting thought… All I know is that I won’t support any bank supervision legislation that includes the banning of loans for boob jobs!

    Perhaps that could be the part of some new fiscal stimulus package – free boob jobs for everyone!

    (Thinking about that a little harder, its probably very bad for overall worker productivity…)

  28. A’ha but is it bad for worker productivity? Perhaps it could motivate some workers to produce more to be able to afford the silicone version of the trophy wife.
    Perhaps a Platinum coin for men and free boob jobs for women is all we need to spur economic growth :)

  29. It depends. People often ask me “are you a supply sider or a demand sider”. I say, “it depends”. If the economy is operating below capacity then boob jobs are great because the borrowing results in income, spending, increased aggregate demand. If the economy is operating above capacity then the boob job is bad. But more specifically, I think the concept of disaggregation of credit is important for understanding how borrowing can be used to stoke asset bubbles and inflation. The thing about the early 2000’s is that the economy was operating above capacity for much of the 2003-2007 period.

  30. That’s gota be the best FRED chart I have ever seen.
    It helps this knuckle dragging neanderthal understand stimulus with regard to productive capacity.
    Thanks Cullen Your the best.
    This is why MR is a game changer, because it breathes CLARITY :)

  31. Just want to mention that the core of the MR desription of the system – inside money as the driver, reserve multiplier myth, using credit for speculation being disruptive etc. – has been described by Steve Keen much earlier. Mish, being an Austrian, adopted Keen’s views a couple of years before Cullen. Excluding their views on fiscal deficits and government default likelihood (Mish thinks deficits are mostly wasteful (redistribution or new credit all the same), and I agree mostly with him), there is no big difference between Mish and Cullen (Cullen understands better the mechanics of QE, etc., but there is no big principle difference, as I see it).

    The true revolution is that Cullen moved from the MMT dogma when it was starting to get popular to a better description of the system and moved a lot of people from the MMT train into MR with him. And Steve Keen made Paul Krugman look silly on their blog exchanges (and appeared later on the Capital Account as well).

    So to all the revolutionaries I would say – get to know Steve Keen.

  32. Sorry Cullen, but this is naive thinking a la the broken window fallacy. A non-productive activity remains non-productive, no matter what the level of nominal GDP.

    A second problem with your potential GDP chart is that it assumes this is the correct potential growth rate of the economy. This potential growth rate was in the past only achieved through expanding credit / GDP ratio. The latter expansion is unsustainable, but artificially lifts GDP (and thus the extrapolation of potential GDP from there). When credit / GDP ratio expansion stops, then the potential nominal GDP line dips exactly like the blue line above.

    You can fight this by expanding the fiscal deficits, but this has the following problems: i) the usefulness of govt spending is normally lower than that of the private sector, so you long-term potential growth rate declines; ii) the share of govt of the economy grows, so that one day you end up in socialism; iii) at the end the citizents bear the credit burden of the government (as you say 80% of the govt borrowing is borne by existing inside money), so this is just fighting a fllod with more water – instead of the private sector levering itself up, the govt levers itself on their behalf. Yet another central planing / command economy act. Understand, socialism and central planing do not work in the long term. The U.S. form is actually fascism, but the difference is minor.

  33. You guys are starting to catch up. Not only that banks are an oligopoly, but their losses are guaranteed by the public. Do I need to tell you that this invites asymmetric bad behavior? If you want to bear the losses as a public, then you should also participate in the profits. Or you should regulate and limit the losses and treat them as public utilities (which can remain private companies, but their sexiness will be gone).

  34. The Fed encourages misallocation of resources. Cullen said it in his interview as well.

  35. We start with the institutional design. That includes govt and the central bank. Keen doesn’t do this. In fact, Keen doesn’t properly understand govt (nor does Mish) & this institutional misunderstanding is in large part why they’ve remained so bearish (and wrong) in recent years.

  36. Ok so for example on the printing front–why is the Fed doing QE what is it really accomplishing and why (not just an explanation of the mechanics of asset swaps, but what does that really mean for the real economy)? Does MR view QE as a “positive” development? Should we be pursuing QE3? Is QE3 “enough”? Not enough? Too much? Totally inconsequential? If so, what should we be doing instead?

    I think some of these questions have been answered indirectly at times, but more direct answers and discussion of the application of MR might help provide a better understanding of MR itself.

  37. Probably they missed the role of the fiscal deficit in the Kalecki equation or the ability of fiscal deficits not to create crowding out in a balance sheet recession. Here you really added something important. Congratulations! But at least from an Austrian point of view what the government does is achieving slight positive GDP growth, while sacrificing the long term potential growth rate.

    And I was talking about their views of how the system works or economic principles, not about their market calls.

  38. A point that Mish also missed, was the effect of abandoning mark-to-market for banks. Mish thought that people would see through it and still distrust banks, but it was not the case. This was a very major change – it actually turned the market around, as it was still dropping after TARP and QE1 were announced.

    But yes, you may be really able to get all the best pieces of the different schools together (it was my wish sometime before). At least I am relatively assured that if enough evidence is provided you will embrace the more accurate view as happened with the move from MMT to MR.

  39. I understand the banks create money by making loans, but if the government’s policy is to protect the banks so their loans don’t go sour, then the lines between ‘government’ and ‘banking’ become blurred.
    Does the Fed represent the people (the government) or does it represent the banks? I would argue the later.
    As Investor X noted above, the public sector now guarantees losses in the private sector.

    MR appears to describe the system well, but I think it makes the two mistakes — 1) loans are equated with money (which is true only if there is never deleveraging), and 2) the assumption is: more loans will make the economy grow. There is very little discussion in here about how to devise a system that effectively allocates resources; it is more or less assumed the creating more money will solve problems.

  40. Johnny, you wrote “There is very little discussion in here about how to devise a system that effectively allocates resources; it is more or less assumed the creating more money will solve problems.”

    … I think that’s exactly what Cullen is talking about here in this article. He needs to revisit this and expand and give more details (I agree to that) but he’s flatly stating “But all money is not created equal. The private competitive nature of this arrangement can be both extremely positive and extremely disruptive.”

    It’s in the title of this piece… he’s calling this tendency the “disaggregation of credit.”

  41. Except, SS, that the banking system doesn’t levy taxes on me and the private sector doesn’t get all the press and legislative attention concerning debt crises and deficit spending. I think it may be that and MMT’s stronger emphasis on 1) the need for deficit spending, 2) the silliness of the debt ceiling, and 3) the fallacy of taxes funding spending that keeps its spotlight on the government side of the monetary system. I guess in that sense MMT is the SWAT team and MR is the cop on the beat.

  42. Agreed. But to minimize non-productive investment you have to have some criteria to define what non-productive means. Second, the Fed also has the power to minimize non-productive investment as well. For example, they could lower interest rates to 0, but require all mortgages to be 50% down payment, as a means to help the overall economy, but prevent speculation and overinvestment in housing.

  43. Cullen is a big proponent of deficit spending, which doesn’t produce long-term growth.
    He has said nothing about the Fed bailing out lenders, either directly or with zero interest policies, which have encouraged poor credit decisions. The best way to constrain a lender is to put him out of business when his loans fail.
    He hasn’t really touched on the huge growth of credit in the past decade which has not led to economic growth.

  44. You describe a system in which banks can create money with very little restriction and the federal government can borrow money right up until hyperinflation kicks in.
    I haven’t read much concern about either of this, and you’ve supported the bailouts (which rescued private lenders who made unwise loans in the mortgage markets) and continued federal deficit spending, which is not efficient borrowing.
    And you’ve indicated that you believe the economy will grow only when (federal and individual) borrowing picks up.
    Having described a system which broke down in this decade, I am surprised you are so optimistic about the next decade.

  45. The Fed does what is in best interest for the banks, not the overall economy or the population. So the Fed will never do what limits the profit potential of banks (maybe Volcker was the only exception – and we saw the results- 20 plus years of bull market). The Fed is there to make sure banks profits are privatized, while banks losses are socialized and the bonuses keep flowing. That is the most important role of the Fed. Its secondary role is to help the Treasury finance itself. Its all other roles are a smke screen for the first two roles.

  46. Charles Hugh Smith:

    Keynesian policy is to punish capital accumulation and reward leveraged debt expansion. Rather than enforce the market’s discipline and transparent pricing of risk, debt and assets, Keynesians have explicitly set out to re-inflate destructive, massively unproductive credit bubbles.

    This is why the Central Planning Keynesian policies has failed so completely, and why they will continue to fail. The Keynesians are not engaged in capitalism, they are engaged in the destruction of capital, productive investment and the open pricing of risk, debt and assets. The markets are not allowed to price risk, capital and assets, so the economy is crippled. The Keynesian model is a Cargo Cult, mired in a distant, romanticized past where Central Planning, intervention and manipulation were solutions rather than the root of the economy’s fatal disease.

  47. MR is just as strong/adamant about your points 1 and 2, and disagrees with #3 because you guys simply made that up. Taxes do fund spending that isn’t funded by deficits. Odd that you guy deny reality – I understand why you think that “taxes destroy money” and in a way that is a helpful idea, but it isn’t actually true.

  48. If only MR was understood, and then the government, the media and the populace began to talk about the real issues… like what is productive spending and productive credit. We’re still light years from that reality, but who knows, maybe like the trillion dollar coin it will make it big over night

  49. no, you are making massive assumptions about the future. This idea that deficits will increase forever, and socialism will take over, is an irrational fear that only looks at the size of social spending in the hard times we are having right now as how things will be during good times. Its getting tiring hearing smart people let their biases get the best of them.

    Smart gov spending would lead to an improving economy which will lead to less social spending. But nooooo…. we can’t have THAT discussion, we’ve got to argue about raising taxes or cutting spending rather than actually fixing things. You’re right, we shouldn’t just spend on anything like boob jobs or digging and re-filling ditches, but we do have to spend

  50. The austrian bias against gov spending is ridiculous. They are wrong, Mish is wrong. Yes, Gov can be a wasteful spender. But it was the private sector that caused the global financial collapse via the biggest possible wasteful spending imaginable – in support of bubbles. Sure, sure, sure Gov played a role. But PLEASE stop this austrian nonsense that Gov is always wasteful, and the private sector is always right. A 3 year old can debunk that nonsense. As Cullen has said in the past “being right matters” and I imagine that is why Cullen mentioned Mish and Keen’s market calls – sorry, they can’t be superior if they are wrong (for the record, I like Keen a lot, and think Mish is smart – but stopped reading him after realizing he was just an austrian fear mongerer at heart)

  51. what you guys don’t get is Cullen is writing the instruction manual – how the car works. A car can be abused – raced 100MPH around dead man’s curve, never bother to put oil in it, etc, and things go wrong. No sane person disagrees with you two that things are F’ed up right now. But this idea that since the gov isn’t the smartest spender they should stop spending is like telling the drunk driver to not move while he’s sitting on the train tracks and about to be destroyed. (i’m sure there are better analogies, but you should get the point). What we need is for the instruction manual to be read and understood – but right now outside of this site most are reading manuals about flying kites rather than driving cars (another bad analogy, but….). Stop fearing dead man’s curve when we’re stuck on the train tracks.

  52. hangemhi, is it really good to whiskfully lynch our Austrian brethren that are still stuck in the past as we were once along their side?

    As has been stated in the past, “There but for the grace of G_d go I. Should not we humble ourselves and admit that we all have been ignorant of the true operational functions of the monetary system and that by a grace higher than ourselves we have come to SLOWLY have our eyes opened for us… :)

  53. Written by someone who hasn’t the slightest idea what Keynesians actually want right now. Like so many horrid debate tactics on every topic these days (guns, lately) – you just completely make up what the other side wants, and then prove it to be stupid. Ugh

  54. I’m that idiot at the desk replying “someone on the internet is wrong” :) I can’t help myself sometimes. Off to bed now that’s I’ve been appropriated “CowPoked”