Category Finance
Average debt in Lake Wobegon
In Lake Wobegon, all the children are above average height. And the average household has $100,000 debt. Both those sentences are wrong in exactly the same way.
Government borrowing, private spending
1. "If a private firm decides to borrow more and increase its investment spending, aggregate demand will increase." 2. "If government decides to borrow more and increase its investment spending, aggregate demand will increase". 3. "If government decides to borrow more, and lend to a private firm to increase its investment spending, aggregate demand will […]
How do we reduce our debt/income ratios? The paradox of debt.
It's a common theme that the financial crisis was caused by too much debt, relative to our incomes. So if we want to get out of the crisis, we need to reduce our debt/income ratios. How? For an individual, the answer is easy and obvious: spend less, save more, and pay down debt. But for […]
Default, expected default, and wealth
Actual default on existing debt reduces aggregate wealth a bit; expected default on existing debt reduces aggregate wealth a bit; but expected default on new debt reduces aggregate wealth a lot. Redistribution of wealth from creditors to debtors may reduce aggregate wealth a lot. Default is a symptom of that problem.
Loanable Funds and Liquidity Preference; DeLong vs. Fama
This is a (probably hopeless) attempt to clarify the debate between Brad DeLong and Eugene Fama over whether an increase in government spending, financed by borrowing, will increase aggregate demand. There's something important that's missing from the debate: the rate of interest; and money.
Debt and Wealth
Does an increase in debt mean a decrease in wealth? There's the accounting question, which should help us keep our heads straight. But there's also an economic question: what is the causal relation between debt and wealth?
Average Debt and Representative Agents
The representative agent is sometimes a useful conceptual fiction. What's the income of the average Canadian? How many hours does the average Canadian work? It's not just theoretical macroeconomists who ask those questions. But it is a useless fiction when we ask about debt. Or rather, at best it's useless; at worst it's dangerously misleading.
“The Bank of Canada should peg the TSE 300” – revisited
"The Bank of Canada should peg the TSE-300" is the title of a Carleton Economics Department working paper I wrote in 1992. (Sorry, but no web version available; this was in the olden days when all we had was paper, and when the TSX was the TSE.) Given the recent turmoil in financial markets, and […]
The 15-year old Liquidity Trap
Macroeconomists think of the zero lower bound liquidity trap as something that only became a problem in 2008 (Japan aside). JKH, a commenter on this blog, says it became a problem for banks about 15 years ago. "An interesting aspect of gap management is that the zero bound for interest rates has been a critical […]
Hair of the Dog
"Too much debt got us into this mess, and now central banks are trying to get us out of the mess by lowering interest rates to get us to borrow and spend more?" It sounds very much like the cure for hangovers: "take some hair of the dog that bit you". At best, drinking more […]
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