Word of the Day: Rentier

Rentier (REN-TEE-AY from the French) is an important concept. It refers to wealth created by control of the economy, not capitalist competition and innovation. By definition, competition would produce lower prices and promote innovation, but the rentier faction captures government and passes regulations to quash such things.

In short, their wealth is an artificial construct protected by law. They may act like capitalists, but they are not. They derive their income from rents, not real achievements.


Michael Hudson has a fascinating article detailing the need to take such things into account in economic models.  Because economists are lousy at predicting human corruption and irrationality!

Here's the introduction:

"By promoting a misleading view of how the economy works, the above omissions lead to a policy that fails to prevent debt bubbles or deal effectively with the ensuing depression. To avoid a replay of the recent financial crisis – and indeed, to extricate economies from their present debt strait-jacket that subordinates recovery to the overhang of creditor claims (that is, saving the banks from taking a loss on their bad loans and gambles) – it is necessary to explain how credit creation inflates housing and other asset prices, while interest and other financial charges deflate the “real” economy, holding down commodity prices, shrinking markets and employment, and holding down wages in a downward economic spiral. We are dealing with two price trends that go in opposite directions: asset prices and commodity prices. It therefore is necessary to explain how credit expansion pushes asset prices up while simultaneously causing debt deflation."

Book Review: Debt: The First 5,000 Years

What is money? Does it represent debt or stored value? And your answer to these questions carries a lot of implications.

In Debt, the First 5,000 Years, David Graeber follows in a long line of people that argue that money is debt/obligation, all economies are centrally planned in fact and so let's make the economy work for us.  

One reviewer's take follows:

"In advancing his thesis, Graeber introduces a number of anthropological and philosophical themes alongside a historical narrative of change. While the early chapters of the book engage with such subject areas as ‘Primordial debts’, ‘A brief treatise on the moralgrounds of economic relations’, and ‘Games with sex and death’, the latter half of the book is given over to a discussion of the changing role and nature of money and debt from the Axial Age (800 BCE to 600 CE) to the present day.

Three themes emerge as noteworthy for the economic historian: the myth of barter; the link between the introduction of coin as money and military activity; and long-run swings in the use of bullion versus credit money.

His conclusion is that the gradual extension of commercial or market exchange, primarily as a result of military imperialism, succeeded in reducing all moral obligations to a financial value, and in the process destroyed the ‘baseline communism’ that Graeber believes to have been the foundation of all social relations."

And this boils down to: 

"Only when we realize that paying one’s debts ‘is not the essence of morality’, but merely our current human arrangement, can we agree to change that arrangement for the benefit of us all."

Well, that's one take on the nature of money, and one you'll see asserted from time to time.

Book Review: Debt and Economic Renewal in the Ancient Near East

I've been thinking a lot about the implications of debt so I turned to financial history.

So I found this book Debt and Economic Renewal in the Ancient Near East. It's a collection of well-written essays about debt in (mostly) Mesopotamia. The ideas of credit, debt, and private ownership of land (obviously related to the first two ideas) were just getting started.

If you invent debt, then un-repayable debt will soon follow. Mesopotamia dealt with this problem with the concept of the debt jubilee - the forgiveness of debt by the king, usually the first act of the new king to engender goodwill.

But was it an altruistic gesture? We can never know, but scholars speculate that jubilee was more about keeping men available for army service instead of forever laboring on their debt.

The main heading for our books on debt is located here.  Features research on the history of debt and primary resources.

Debt and Economic Growth: NBER Working Paper

Came across this fascinating working NBER paper from heavy hitters Carmen Reinhart, Vincent Reinhart and Kenneth Rogoff entitled "Debt Overhangs: Past and Present."

The authors examine if high levels of debt impact economic growth. The answer is yes, making it hard to grow out of debt. You either take 20 years of stagnation to come out of the debt hole or there is a  cataclysmic event (probably related to the failure of the previous status quo) such as war or collapse that resets the system.

The authors use data from several advanced economics, tracking the amount of debt relative to GDP and how long subpar economic growth persisted.

By the way, we have the NBER database of working papers available here. Can't get it for free on the internet.

Consumer Credit and Debt: Current and Historical Data

Understanding credit and debt is the key to the modern economy.

So, here are some multi-year statistical series out there for you. Things like credit outstanding, amount used, and more.

(The following are .gov sites)

Consumer Credit and Payment Statistics (streamlined presentation of Fed data below)
Consumer Credit and Finance Company Data from the Fed
Personal Savings
Flow of Funds from the Fed Reserve (measures households)
Consumer Credit Out There

You can also search FRED, the data machine from the St. Louis Fed. A pre-done search for all results with "credit" is here.

And

Here is our collection of books, optimistically called consumer credit in our official library speak. Bankruptcy and Personal Finance are also good subject headings.

Book Review: Busted: Life inside the Great Mortgage Meltdown

You may know business, but do you know personal finance? It's actually a whole different skill set.

So today we're going to read a book that shows you what NOT to do.

Busted: Life Inside The Great Mortgage Meltdown is a sad and in hindsight predictable tale of the consumer real estate excesses of 2000s America. The land where credit was inexhaustible and enormous home mortgages just didn't matter. In fact, critics of this debt-doesn't-matter mentality were widely derided. It goes to show you that a culture can develop temporary insanity.

This is the story of a New York Times business (!) reporter who attempted to keep up with the Joneses. He bought a house with a disastrous adjustable rate mortgage, continued to pile up huge credit card debts (with the assistance of his materialistic second wife), all while paying out punishing amounts of alimony and child support to his first wife and children.

Eventually reality came a- knockin'.

No, this is not a book with abstract theories but rather a personal history of America's experience with debt.

Read it to absorb the cultural milieu of the time and also to remind yourself that a culture can be very, very wrong.

Keep your eyes open out there!

Weblink to Niall Ferguson Explaining Financial Crisis Background

Niall Ferguson is a popular historian that's hosting an excellent series on PBS entitled The Ascent of Money.

Lotsa cool stuff about the role of money and credit in shaping society and Niall makes it easy to follow. Recommended for you to get a sense of how this stuff works in real life.

You can watch the entire 4 part series on the official PBS web site here.

Part Four is dedicated to the current financialization crisis.