Home > Uncategorized > Modern Germany: founded upon a debt jubilee…

Modern Germany: founded upon a debt jubilee…

from Merijn Knibbe
Some people, like Steve Keen, write and talk about the merits of a debt jubilee. Does it work?

I found this article fascinating: the Marshall plan was not essentially a loan to European governments but a giant, massive, enormous jubilee of German war-time debts. And it worked…

Also, Krugman weighs in about a somewhat comparable event in Texas: the financing of the savings and loans crisis (a banking crisis): the equivalent of roughly 25% of Texan GDP transferred to Texas, as a gift. And it worked…

  1. June 18, 2012 at 3:17 am

    if you read chapter 8 of my 2009 book THE KEYNES SOLUTION:THE PATH TO GLOBAL ECONOMIC PROSPERITY you can read how the “Keynes Plan” presented at Bretton Woods developed principles for resolving international debt problems without austerity and creating further recession. You will read that although the US rejected the “Keynes Plan” at Bretton Woods, and instead the US proposed the IMF and World Bsnk as the solution to international debt problems, nevertheless, the US adopted the principles laid down by Keynes in the Bretton Woods “Keynes Plan” –rather than relie on the IMF — in the US development of the Marshall Plan and it was even more successful than Keynes had hoped for.

    I have developed a 21 century version of the Keynes Plans that does not need a Supra National central Bank (as Keynes discussed in his Keynes Plan) to solve thecurrent international debt crisis and restore global prosperity. My IMCU plan is developed in Chapter 8 of my book.

    Paul Davidson

    • davetaylor1
      June 18, 2012 at 1:33 pm

      So are your conclusions the same as or different from Steve’s, Paul? And as an aside from practical outcomes: as the theoretical roots of these seem to reach back to Keynes’s probability theory, how do you react to M E Brady’s conclusions in his Amazon review of your book?

      “One can’t use the Normal distribution to describe the time series data in financial markets. The underlying processes are given by the Cauchy distribution. Davidson vaguely realizes that they are not normally distributed, but fails egregiously to recognize that they are Cauchy”.

      After studying the form of the Cauchy distribution in Wikipedia I myself think Brady is right, though there is a different interpretation of Keynes’s uncertainty from his, and that is that probability is a complex (two-dimensional) measure of an approximation to complex truth (true and, at the present time, no errors indicated): one dimension of which is static (predicated on random timescales) and the other (predicated on uncertain timings) dynamic. Thus we have:

      Shannon’s information theory correcting the bit of random noise distorting information of as yet uncertain content;

      Neo-Classical economics picking out a few uncertain truths from a lot of seemingly random noise; and

      Keynes not merely stressing the information approach but (like Shannon)showing how to make good the cumulative effects of errors in those uncertain truths before they do too much damage.

      • June 18, 2012 at 5:28 pm

        Dave Taylor;

        Brady is someonewho uses Amazon to attack every economics book that does not represent his own idiosyncratic view.

        but lets take his coment seriously and see why he is wrong — according to Keynes. myself , and most of the readers of this blog..

        If one assumes that there exists a probability distribution which can be calculated today based on a sample of data drawn from historical data –whether this disributioion be a normal distribution, a Poisson distribution, a Couchy distribution or even a Brady distribution (if there is one)– and then one assumes that this identified distribution governs future outcomes, [If this probability distribution does not govern future outcomes, who cares what the distribution is?]

        If therefore one assumes that the identified probability distribution calculated from past data does govern future outcomes, THEN one is implicitly assuming that the future is already predetermined and therefore there exists “information” today which can reliably and correctly predict the future!!

        Wow! Instant riches awaits anyone who can correctly predict the future prices in financial markets!! So B rady must be a multi-trillionaire !! Or is hie??

        Why isn’t Brady rich if he knows the probability distribution which can predict the future? Any probability distribution which existed in the past (and therefore governed the past data outcome) and can be used to predict the future is an an ergodic stochastic process.

        Now my position is simple — following Keynes ! Simply put past probability distributions are not reliable predictors of a probability distribtuion that will generate future data outcomes– the system is nonergodic! WHY IS THIS IMPORTANT?

        Samuelson, Lucas, Taleb (and his black swans) mendelbrot and his fat tails distribution, and apparently even Brady and others have adopted the ergodic axiom as appropriate for some probability disribution because they want economics to be in the same class as the “hard sciences” such as astronomy.

        The science of astronomy is based on the presumption of an ergodic stochastic process that governs the movement of all the heavenly bodies from the moment of the “Big Bang” that created the universe to the day the universe ends. Accordingly statistical analysis using past measurements of the movements of heavenly bodies permit astronomers to predict future solar eclipses within a few seconds of when they actually occur

        . Nothing Congress, the President of the United States, the United Nations, or environmentalists can do will alter the predetermined dates and time for future solar eclipses.

        For example, Congress cannot pass an enforceable law outlawing solar eclipses in order to provide more sunshine and thereby enhance crop production.

        In an ergodic world, all future events are already predetermined and beyond change by human action today. ERGO: Get government out of the way and let free markets rule supreme.. The belief in an ergodic probability distribution process is fundamental to the belief in the “Laissez-faire” philospohy!! There is not role for government discretionary policy in an ergodic stochastic probability system.

        On the other hand , in a nonergodic world, human actions, assuming Congress is human, can create the future.

        Well Dave Taylor what is your choice ? Is the world of experience ergodic with a predetermined future? Or can we have government policies to create a prosperous future??

      • davetaylor1
        June 19, 2012 at 7:21 am

        So I understand your position, Paul, but you have obviously not attempted to understand mine, and seem to be misrepresenting Brady’s, whose problem was with your argument, not your conclusions. Why treat candid friends as enemies?

        The physical world IS non-ergodic. It is not by chance that water, gas, electricity and broadband arrive at my house, and I go down an existing road to my bank. The question now, with central government denying local government the right to ensure maintenance, is whether these services will continue to be delivered reliably. Subject to that, these details of my future, like those of the capabilities of my computer, or the probability of throwing a six with a six-sided dice, has already been determined. What hasn’t been determined is whether there is a virus in my computer program, and whether I have done something about it or let it contaminate all my software.

        However you look at it, Keynes actually did something about isolating the virus in economics and repairing the damage already done, which is why I keep saying he was anticipating Shannon, Wiener’s cybernetics and physical reliability theory based on correcting errors. As the latter involves the Poisson (a special case of the Cauchy) rather than the Normal distribution, Brady’s comment looks relevant.

        Sadly, Regan and Thatcher removed the Keynesian firewalls, the virus is once again causing chaos and things have already got so bad that we are beyond being able to contain them. We need to restart the economic computer with programming having the firewalls in place. However, so long as, it seems, no-one else but me understands the relevance to economics of the concept of error-correction and the Catholic sacrament variously called Confession, Penance and Reconciliation, we are not going to get truth, repentance and grateful appreciation of Keynes and (in the larger scene) Christ.

        In short, the choice you have offered me misses the point. The world we experience involves a mixture of true and misleading information, but in varying proportions. Shannon showed how a bit of untrue can be corrected, Boltzman the chaos which results from a lot of it. Until government policies are based on understanding this, the firewall principle of subsidiarity and the difference between government (cybernetic guidance) and dictatorship, their policies will continue to produce a decreasingly prosperous future.

  2. June 18, 2012 at 7:07 am

    Let me point out something: The world wasn´t that global and and closely interconnected in the 30s and after WW II as it is to today. And its gloabel markets weren´t dominated by just a few very large multinational companies and banks either (take a look at this ETH study: http://arxiv.org/PS_cache/arxiv/pdf/1107/1107.5728v2.pdf).

    Considering this, to me one important question comes up:

    How can a debt jubilee and/or any kind of stimulus (or “Marshall Plan”) help a country like e.g. greece, that doesn´t have any true “national champion”, to get international competitive and thereby find it´s way back to prosperity in a global economy caracterized as above?

    Don´t you believe the structure of global (and especially global financial) markets to be a core problem, that has to be solved first?


    • merijnknibbe
      June 18, 2012 at 7:46 am

      Well, for one thing, before the Euro government deficits were (in most European countries) financed to quite some extent by borrowing domestic savings, which meant that the (S-I)+(G-T) = 0 requirement was more or less a constraint (the formula states that savings by households and companies which are not used for investments are used for government spending, which means that there is no ‘glut of savings’ and total spending is roughly equal to total production). The Euro lifted/eased the (cultural, legal) constraint on national (private as well as government) borrowing which enabled larger deviations from the situation described above – and indeed, current acount deficits in some countries (and surpluses is onthers) increased to unsustainable levels. This (and other things) has to be changed, somehow – and not just (in my view: to the contrary) by cutting wages to increase ‘competitivety’. It’s not a labour market problem but an capital market problem. I think we totally agree on this.

      However… there is a debt and a debt deflation problem. An implicit assumption in all explicit and implicit expectations of the future was that nominal GDP would continue to grow at a 3 to 4% nominal rate in the medium run ‘forever’. Long story short: in quite some countries there was and is a 3 to 4% nominal CONTRACTION of GDP, in the medium run, since 2008: THERE IS MUCH LESS NOMINAL INCOME TO PAY BACK DEBTS THAN WE EXPECTED. Which might mean that, for instance, the price of existing debt (i.e. the interest rate) has to become ‘flexible’. I do now that the price of existing debt knows even stronger downward rigidity than the price of labour. But mind that while real wages are falling real interest rates are rising and are even (slightly) higher than before the Draghi rate cuts. A trillion of debt has to be renegotiated. Debt deflation is a real thing (surely when you include house prices in a price index).

      Aside: as house prices in Germany are not declining, contrary to those in many other countries, inflation including house prices in Germany might be quite a bit higher than in many other countries. But that’s at this moment just a thought that popped up.

  3. June 19, 2012 at 6:03 pm

    Dave Taylor:
    you seem to think that Brady and yourself are “candid friends” of mine (and Keynes?) who only have problems with my argument and not my conclusions.

    My immediate response is “with friends like that who needs enemies?”

    Let me just quote Brady to ask: “why you think he is a friend?”. Brady begins his Amazon review of my THE KEYNES SOLUTION book with the statement “This book has major errors”. Is that what a critical friend writes who, according to you, has a “ problem was with your argument, not your conclusions”. If he was really a friend he might say that he [Brady] has a better argument to reach my most important and valid conclusions about nonergodicity.

    But Brady really does not even understand the stochastic probability theory that underlies my argument. To show you he has not the slightest understanding, in his criticism of my book let me quote Brady again. Brady writes “Now nonstationarity is a necessary condition for nonergodicity. But nonstationarity processes can certainly be ergodic. Davidson is simply confused here.”

    Perhaps Brady is confused. Had Brady read A. M. Yaglom’s book, An Introduction to the Theory of Stationary Random Functions, and also H.O. A. Wald’s book Bibliography on Time Series and Stochastic Processes , Brady might have discovered that a stationary process can be nonergodic, and therefore nonstationarity is a sufficient (but not a necessary condition) for nonergodicity.

    Moreover, had Brady read Keynes’s essay on “Mr. Tinbergen’s Method”, he would discover that Keynes argued that Tinbergen’s method had a problem because all economic data used by Tinbergen was non homogeneous with respect to time . And nonhomogenity is a sufficient condition for nonstationarity. And nonstationarity is a SUFFICIENT condition for nonergodicity.

    But Brady wants to push his idiosyncratic approach using his uncertainty equation where there are possible a large number of degrees of uncertainty. Brady’s equation is U =f(w) , where U is the degree of uncertainty and w is a variable that apparently can take any value between zero and one. [If w = 0.99 what does that imply about the degree of uncertainty? Has a w=0.99 have anything to do with Keynes’s use of uncertainty?].

    There are too many other flaws in Brady’s review of my book to cite them all here but I must cite Brady’s statement that “Unfortunately, Davidson applies his nonergodicity assumption to the wrong market. Davidson applies it to financial markets.” [Emphasis added]

    Well after the collapse of all the probabilistic distribution based “Risk management” models developed by “quants” for use by all the major Wall Street bankers in the financial crisis of 2007-2008, one wonders what world Brady lives in.

    [I might add that in May I gave a presentation to PRMIA [Professional Risk Management Association] conference in New York. {Prima has 85,000 members world wide} . The presentation was based on why all their risk management computer models of financial markets failed. The talk went over so well that they invited me to be a permanent member of PRMIA – without having to pay any of their very high annual dues – and to provide them with further seminars on the problem of nonergodicity and Keynes’s liquidity theory applicability in financial markets, and the KEYNES SOLUTION. So, despite Brady claim that I applied nonergodicity to the “wrong market” , the big professional practioners in financial markets seem to think nonergodicity has a place in the understanding of the operation of financial markets around the globe.

    Now Dave your use of viruses in your computer is also a poor choice to illustrate your friendly criticism of my argument. Everyone knows that computers only work when they are preprogrammed on how to carry out projects in the future use of the computer. And even the computer virus has a built in preprogram!!

    But if you would take my astronomy illustration of an ergodic science seriously, you would understand if any economic process is ergodic, then the future is already pre programmed and predetermined by the built in stochastic process program, and no one, Congress, the President, the IMF, the Euro bank, Mrs . Merkel, etc can adopt any policy to alter the already predetermined future. So the future of the Euro is already predetermined and all the Euro nations are merely reading the scripted lines written by the stochastic preprogram – if Brady and you are right!

    Do you really believe economic processes are controlled by a specific probability distribution over time? If you do, then there can be no true uncertainty as Keynes claimed. And Keynes, although he did not know of the development of stochastic theory by the Moscow school in the 1930s – did implicitly argue economic processes were nonergodic because they were nonhomogenous with respect to time.

    What Keynes proposed was that government have certain policies that everyone can count on– namely a monetary policy that would maintain very low rates of interest and a government fiscal policy that was ready to step in and hopefully “cooperative with private initiative”[ THE GENERAL THEORY, p.378] to fill in any shortage of effective demand that may arise.
    Paul Davidson

  4. davetaylor1
    June 20, 2012 at 9:17 am

    Paul, perhaps I am wrong to judge Brady by my own standards, but I certainly have no intention to be your enemy and am candid because logically, one needs at least two points of view for each to be able to inform the other before commitments are made on the best available working hypothesis. My own reaction to Brady (or you) saying I was making “major errors” would be to find out what you thought they were and why you thought I was making them.

    My point of view seems to differ from yours in that my involvement with ergodic processes has been through Shannon’s founding paper on information science, understood in the context of physical processes. My involvement with Keynes’ probability theory likewise began when studying physical reliability theory against a background of dubious empirical philosophy and quality control. Yours seems to have been through mathematics. Your appealing to other mathematicians in defence of your own maths doesn’t resolve my difficulty here with your loose reference to a “stationary process”, when by definition a process is not stationary. What I see you referring to is stationary patterns in on-going processes (e.g. a whirlpool in a non-stationary river). What I refer to as FAR MORE SIGNIFICANT are the stationary banks of the river: Shannon’s “channels”. We will remain at cross-purposes if you don’t take that on board.

    In defence of Brady’s position as seen through your statement of it, I can see parallels in information theory, where a word is uncertain until its letters have been successfully decoded with cumulative probability approaching 1. Though Shannon’s theory spells this out as a sequential process involving correction of typos and other transmission errors, it can be physically performed by parallel or pipelined logic, though not by deductive logic, for which, if it is wrong, it is wrong. What I see this as having to do with Keynes’ use of uncertainty is that he was talking about the probability of mapping the logic (channels, banks, form of information) adequately, where his critic Ramsay assumed he was talking about mapping the content.

    I’ve had to reach my own conclusions on this, as I’ve never seen it discussed. This is one of those “gestalt” situations, Paul, where you either see it or you don’t, and if you haven’t yet, there is no shame in it.

  5. June 20, 2012 at 6:49 pm

    dave Taylor:

    The gestalt is simplr enough. Do you belive that human action can create the economic future (sfor example in George Soros’s reflexivity concept? Surely your gestsalt does not permit you to admit that the future is created by human action today– While for Keynes and myself and George Soros, the economic future is whatever humands today do to create future outcomes

    You apparently believe that the future is predetermined and the best policy can do is to create instituional firewalls to make it more difficult to reach this predetermined future? But in the long run the economy will read the predetermined future. OK?

  6. davetaylor1
    June 21, 2012 at 4:47 am

    Paul, thanks for engaging. I’m entirely with you on your first paragraph, but I also see that future human INACTION can cause any potential future to deca. More fundamentally, I see human action as mediated by human understanding, knowledge and thought, which can be perverted (as Keynes’s teachings have been) and not picked up by new generations. “What you don’t use you lose”. (I’m coming at this via Shannon and Weiner inventing forms of error correcting logic).

    In the second para you are putting a single point of view in my mouth, when the point of a gestalt is that I have two (seeing both things and processes), and in fact two at two levels: as reality and as references (perceptions, propositions) to it. A Boolean logic truth table for two propositions A and B has to account for either A OR B being true, or both, or neither.

    So what I actually believe is that the institutional structure (things) we have now will predetermine the future (economic process) unless we act now to change it, and even if we do change this the whole system will slip back into the path of least resistance (what is easiest for those running the system) unless we break up the whole system (using the example of firewalls) into parts small enough for deterioration in one part not to infect others, and for local compensation for local
    problems to evolve Ashby’s “requisite variety”. The label I have for this strategy comes from my Catholic background, where it is spoken of as the principle of “subsidiarity”. My perception of it began with trying to understand Keynes on probability.

  7. merijnknibbe
    June 21, 2012 at 6:29 am

    It’s interesting to quote Thomas Sargent on this:

    “Sargent and Wallace [31] describe a sense in which in might be difficult to imagine that a regime change can occur. As Sargent and Wallace discovered, thinking about regime changes in the context of rational expectations models soon leads one to issues of free will”

    Note 11 of http://www.minneapolisfed.org/research/wp/wp158.pdf

    And there we are, with many economists doing their utmost to instigate a regime change aimed at redesigning the world in a way consistent with rational expectations models which exclude such changes… How ironic.

    (I did not read [31], it is about “Rational expectations and the theory of economic policy”, published in the “Journal of monetary economics”, Vol. 2., no.2, April 1976.

  8. davetaylor1
    June 21, 2012 at 9:45 am

    Yes, Merijn. That’s why the economy’s focus on efficiency at the expense of reliability (c.f. Shannon) is so counterproductive. It cannot choose to correct its errors if it denies their existence.

    Incidentally, at #11, with obvious relevance to the plight of Greece, the way to build firewalls is to have local currencies as well as continental and world ones: i.e. credit (backed by RENEWAL of physical resources) specific to nations, localities, businesses and ultimately individuals, all these being responsible for their own balance of trade in the currency they are using. Greece could then trade internationally in Euros, finance public services and local trade in drachma, and sod the international asset-strippers.

    • davetaylor1
      June 21, 2012 at 1:25 pm

      Have followed your link, Merijn, and found the whole of it very relevant to debt jubilees. Note 41 seems to expand on your Note 11, adding the qualification “in a single economy” What I found particularly interesting were its references to international relief in real terms, (i.e. gold; but wasn’t the Marshall plan about providing capital equipment?); and by the League of Nations “changing the rules” with agreements on monetary rationing for governments. (With war-time rationing and rational public service pay scales, most Britons were by 1945 in better heart and shape than they had been in the 1930’s slump).

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