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Thread: Can debt ever be repaid.

  1. #1

    Default Can debt ever be repaid.

    A few years before the WWll in 1933, a paper appeared by professor Irving Fisher that is probably the most brilliant and important economic analysis since Adam Smith's , "Wealth of Nations. "
    Fisher made the startling claim that amidst economic depressions and crises [then as now], that you can never repay over indebtedness. The reason is, with huge levels of debt comes a fall in prices, which makes it even more difficult to pay off debts incurred in the first place. This was a Copernican moment in western thinking.
    What Fischer was saying, is that as people start to pay off debts prices fall, thus creating 'a bigger dollar' .
    The liquidation of debts cannot keep up with the fall of prices, the very effort for people to pay off their debts increases it. The more debtors pay, the more they owe, the more the boat tips up and you try to right it, the more it is infact capsizing.
    Fischer was writing at a time when there was a lot of unemployment, huge debt and declining wages, which is very much the profile we have today. It seems to me that if Fischer were to look at the present situation , he would see the same factors operating and the same truths being illustrated which he set out in his paper of 1933, ["The Debt Deflation Theory of Great Depressions"]. If anyone thinks that the trillions of dollars of debt that the West owes, thinks can ever be repaid, not only are they mistaken, Fischer would say, they are living in a fantasy world.
    One of his key findings was that wages are not a liability in economic terms. From 1929 to 1933 wages declined by 55%which only prolonged the depression and mad the debt burden worse. All large loans are bad loans as the Medici banking family found out in the fifteenth century. Companies with huge debts cut wages. This reduces demand by reducing the amount of money to people who could buy their products and these get the economy moving again. Fisher said the classical system was wrong because you couldn't assume in a depression that lowering wages will maintain demand. Reflation which simply puts money in the hands of bankers who largely caused the problem in the first place will not work. We found this out to our cost after 2008.
    Fisher can be said to have overturned Smith himself. Because he said if a company acts in what it thinks are its own economic self interest during a depression/recession it will be catastrophic for the nation as a whole where Smith as you recall said the day would be saved by the "invisible hand" - whose chief characteristic is that it remains invisible or non-existent.
    Last edited by Mister H; 25-06-2020 at 07:50 AM.

  2. #2
    Super Moderator rebbonk's Avatar
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    Oct 2017


    That, makes a lot of sense to me, though I'm no economist. I have long thought that our present capitalist system is flawed, but I see nothing viable, nor the will, to replace it.

    I think the post mortem on the outcome of present events is going to be very interesting.
    Of course it'll fit, you just need a bigger hammer.


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