Two prominent economics textbook writers have recently written that the Global Financial Crisis (GFC) shows that the world needs more economics rather than less.
Writing in the New York Times, Gregory Mankiw could see some need to modify economics courses a bit in response to the GFC, but overall he felt that:
“Despite the enormity of recent events, the principles of economics are largely unchanged. Students still need to learn about the gains from trade, supply and demand, the efficiency properties of market outcomes, and so on. These topics will remain the bread-and-butter of introductory courses.” (That Freshman Course Won’t Be Quite the Same, New York Times May 23 2009)
Writing on a blog The East Asia Forum, authors Doug McTaggart, Christopher Findlay and Michael Parkin wrote that:
“The crisis has also brought calls for the heads of economists for failing to anticipate and avoid it. That idea, too, is wrong: much economic research pointed to the emerging problem.
More economic research (and teaching), not less, is the best hope of both emerging from the current crisis and of avoiding future ones.” (The state of economics, East Asia Forum, May 21 2009)
What a load of bollocks.
The “principles of economics” that Mankiw champions, and the ”More economic research (and teaching)” that McTaggart et al are calling for, are the major reason why economists in general were oblivious to this crisis until well after it had broken out.
If they meant “Principles of Hyman Minsky’s Financial Instability Hypothesis”, or “More Post Keynesian and Evolutionary economic research”, there might be some validity to their claims. But what they really mean is “principles of neoclassical economics” and ”More neoclassical economic research (and teaching)”–precisely the stuff that led to this crisis in the first place.
Neoclassical economic theory supported the deregulation of the financial system that helped set this crisis in train. See for example this New York Times report on the abolition of the Glass-Steagall Act in 1999 “CONGRESS PASSES WIDE-RANGING BILL EASING BANK LAWS” (New York Times November 5th 1999). The reporter Stephem Labaton noted that:
The opponents of the measure gloomily predicted that by unshackling banks and enabling them to move more freely into new kinds of financial activities, the new law could lead to an economic crisis down the road when the marketplace is no longer growing briskly…
Then he observed that
Supporters of the legislation rejected those arguments. They responded that historians and economists have concluded that the Glass-Steagall Act was not the correct response to the banking crisis because it was the failure of the Federal Reserve in carrying out monetary policy, not speculation in the stock market, that caused the collapse of 11,000 banks. If anything, the supporters said, the new law will give financial companies the ability to diversify and therefore reduce their risks. The new law, they said, will also give regulators new tools to supervise shaky institutions.
This is a very apt description of the role of neoclassical economists over the last 40 years: every step of the way, they have argued for deregulation of the financial system. Now we have McTaggart and colleagues making the self-serving claim that:
The current crisis is a failure of regulation that calls for not more regulation, but the right regulation.
So the same economic theory that supported the abolition of Glass-Steagall, amongst many other Depression-inspired controls, is suddenly going to be able to do a volte-face and tell us what “the right regulation” might be? Garbage.
What is really needed is a thorough revolution in economic thought. First and foremost this has to be based on empirical reality, and from this perspective almost everything that current textbooks treat as gospel truth will end up in the dustbin.
Coincidentally, many non-neoclassical economists whose writings have been put into the dustbin by today’s economics orthodoxy will be back on the shelves once more. Minsky, Schumpeter, Keynes, Veblen and Marx don’t rate a mention in in most current economic textbooks; they had better feature in future texts, or by 2060 or so we’ll be back here again.
Though I’m clearly annoyed at Mankiw’s and McTaggart’s drivel, I’m not surprised by it–in fact I predicted it (I doubt that they can point to anything they wrote prior to the GFC that predicted it!). I said the following in an article “Mad, bad, and dangerous to know” published on March 12 2009 in issue 49 of the Real World Economics Review:
Despite the severity of the crisis in the real world, academic neoclassical economists will continue to teach from the same textbooks in 2009 and 2010 that they used in 2008 and earlier…
they will interpret the crisis as due to poor regulation,…
They will seriously believe that the crisis calls not for the abolition of neoclassical economics, but for its teachings to be more widely known. The very thought that this financial crisis should require any change in what they do, let alone necessitate the rejection of neoclassical theory completely, will strike them as incredible.
Sometimes, I would like to be wrong…
Finally, what lesson did neoclassical economists take from the Great Depression? That the Federal Reserve caused it via poor economic policy. Who do current neoclassical economists blame for this crisis? The Federal Reserve of course, for poor economic policy:
By 2007, fuelled by the Federal Reserve’s egregious policy errors, markets were moving into unsustainable bubble territory. The Fed by this time had realized the problem was getting out of hand and had moved interest rates up sharply—too sharply—and burst the house price bubble. (McTaggart et al).
But who staffs the Federal Reserve? Neoclassical economists of course…
Please, let’s not fall for this nonsense a second time. Keynes tried to free us from neoclassical economic thinking back in the 1930s, only to have neoclassical economists like John Hicks and Paul Samuelson eviscerate Keynes’s thought and re-establish a revitalised neoclassical economics after the Depression was over. This time, let’s do it right and get rid of neoclassical economics once and for all.
Believe me, I live in the very unritzy suburb of Granville in Western Sydney and prices have gone precisely nowhere in the last 12 months. An old property (fixer-upper) on a large block was on the market for about three weeks and now shows a SOLD sign, (asking price was around $450k). Someone out there has money because that place isn’t fit to rent out, so they obviously bought it in mind to invest further money into it. I’m guessing they bought it mostly for the land, and are not expecting a quick return. I won’t be in the least surprised to see a block of flats go up
In the USA, bit of a different story… they still have a few years of subprime resets to geth through before they even know where the bottom is.
Tel
your post is the sensible face of the argument that aac and steveZ are making. I don’t think there is anything wrong with what you are saying, I just wondering whether you realise how extreme the circumstances are today.
I hear the end of the world is nigh, come to think of it, been hearing that for some time. The GFC is a crisis of paper shuffling, and yeah innocent people get hurt by paper shuffling, but only until the rest of us start to wise up and start remembering that the financial world follows the physical world rather than the other way around. If bankers and economists lose credibility, that will not be a backward step for society.
To be fair, the USA has had it awfully good for a long time, so a few steps down for them will still leave them above the world average. Americans are very clever at reinventing themselves so I’m sure they will see the glass as half full even when there are a cracks running down the sides.
Tel
You mentioned “a very peculiar type of spread-spectrum delay where some participants react faster than others, a type of delay that does not exist in any control engineering that I know”.
This is quit common in very high speed electronic feedback loops (phase lock loop control) and it called the leading/lagging effect. It can be modelled it both in computer simulation and using physical electronics. It can be used to introduce sufficient phase change to prevent oscilation as part of a compensation network. In trying to understand feedback in the economy I suspect that the negative feedback which is incidental to securitisation is just like that but instead of causing stability in this case it has caused instability and triggered the current collapse before the effects of non linearities took over.
I will still contend that without this approach which is the only way to analyse the real world in which time in continually changing, most conjecture will prove fruitless. Time warp neoclassical economics will mainly result in unexpected consequences and people knowing of no-one who is able to predict anything. Neo classical economics is a waste of (cyber) space.
“… a lot of very intelligent people have spent a lot of time producing some quite impressive mathematical models in economics. It is a shame that they are utterly irrelevant to reality. Ironically, for a theory claims to be so concerned about allocating scarce resources efficiently, economics has used a lot of time and energy refining the analyses of economies which have not, do not, and will not ever exist. In other words, scare resources have been inefficiently allocated to produce waste.”
http://anarchism.pageabode.com/afaq/secC1.html
reason said
“Stop trying to make matters of conditional policy into questions of principle.”
Stop trying to set yourself up as judge, jury and executioner. You made your bed when you suggested to “Short aac”. If you think people come on this blog to have some sort of word game with delusional intellects then think again.
A stated truism with an implied false hood can mean one of two things:
i) that that person does not know, or
ii) that that person does know but have an ulterior motive – an agenda
Someone like iconoclast who seems well versed claims that deficits are an “accounting artefact”. What are people supposed to think; my bet is therefore that he/she is in the second camp and it’s important for people to know what that agenda is. Indeed deliberate misinformation should be shown up for what it is.
It simply credits the accounts of the banks/etc. from which it buys the securities Aac. As the clearing house bank of the system it has a limitless capacity to do so. If you’d like to see the technicalities of the interbank market explained fully then read this thesis by my Honours student Liam O’Hara.
The material in your honours student thesis applies to the U.S., correct?
No. It’s based on Australian practice, but similar concepts apply in the USA and all other OECD nations .
Thanks Steve for the link to O’Hara’s thesis.
When the RBA buys securities from a bank the securities themselves are the collateral. In the case of buying gov securities the backing is indeed the tax payer not an “accounting artefact”. In the case of bank notes the bank is the collateral. In the case of repurchase agreements (repos) the agreement is the backing – according to the thesis 96% of OMO is repos. Thus the RBA extending credit to commercial banks which in effect is like any other bank except its clients are commercial banks.
In the case of the US (and I assume Australia ) there are strict rules governing what securities can be bought. Were the rule adhered to then it would not be possible for the RBA to buy securities if there were no eligible securities. These rules however are in recent times being ignored and the Fed is buying toxic assets. I believe Australia is doing the same but on a smaller scale so far. It is this buying of toxic assets people should be mad as hell about because it is the tax payer, instead of the banks, that will end up footing the bill.
From Wikki http://en.wikipedia.org/wiki/Deficit
“If investors anticipate future inflation, however, they will demand higher interest rates on government debt, making public borrowing more expensive.”
This is being played out in real time in the US with the yield on their long bonds going up. With enough QE the Fed would own all of the long dated treasuries and we get a dollar crisis. Thus not even the most powerful nation on earth can ignore its deficit.
The choice for the US is whether to have an inflationary depression or a deflationary one – deficits do matter. Gold bugs and people like Max Keiser, Marc Faber, Peter Schiff are leaning towards inflation – time will tell.
I have been somewhat occupied by other matters delaying my retort.
Aac,
you assert:
“Let me guess, you have been reading ‘open market operation’ from Wikki http://en.wikipedia.org/wiki/Open_market_operations.”
You’re presumption, is true *only* in your exemplar of the world.
The reality is that my reasoning is founded on the gems of knowledge that have been distilled from reading material published by such authors as:
Karl Popper, Schopenhauer, Spinoza, Voltaire, Herbet Spencer, Friedrich Nietzsche, Thomas Samuel Kuhn, Clifford Geertz, Emmanuel Kant, René Descartes, David Hume,Socrates, Plato, Aristotle, Noam Chomsky, Martin Heidegger, John Dewey, W. V. Humboldt, Pierre Joseph Proudhon, G. W. F. Hegel, Karl Marx, Pierre Joseph Proudhon, Hilferding, Boudin, Adolph Wagner, Paul Sweezy, John Maynard Keynes, Irving Fisher, Hyman Minsky, Joseph Schumpeter, Benoit B. Mandelbrot, Nassim Nicolas Taleb, and of course Steve, and through my own DaSein.
Aac,
you are exhibiting what Thomas Kuhn succinctly captured in the following statement:
“What is said in rival paradigms is untranslatable and incomensurable in the other paradigm”
— Thomas Kuhn
and, so Aac,
“Firstly don’t fool yourself because you’re the best person at doing that.”
— (attributed to) Richard Feynman
Aac,
you assert:
“You already got 1 point for stating that the gov can create new money to service it debt. That is inflationary. You may think that that’s fine others would disagree.”
Again, the above consists of a non sequitur. Moreover, in this case you employ the fallacy of false cause, then you proceed to a straw man fallacy, and, finally to top it off, with an ad hominem.
You fail to comprehend, that the modern monetary system is based on a fiat currency and not a commodity currency, and thus the government does not “print money”.
You fail to realise, and comprehend the meaning, that the sovereign government has a monopoly in the issuance of it’s sovereign currency of a state.
You fail to realise that the sovereign government can move into deficit, under the circumstance that the non-government sector is not willing or able to sustain economic activity at its maximal productive capacity, and that a priori fact is a non-inflationary measure.
You do not seem to understand that fiscal policy has the property of being able to allow the government to target specific areas of the economy and demographics in society that may be affected by economic contraction.
You appear to believe that the government has no means available to it to drain base money that is injected into the economic system.
You simplify the economic system down to something that has no resemblance to what exists in the reality.
You simply fail to think critically.
Aac,
you assert:
“You just said that the gov probably does not know that it does not have to pay back its debt. You have confirmed that how I say it works is indeed how it does work. But of course you know better, better than every single gov on the planet.”
Aac, you really are a glutton for punishment aren’t you
.
Your sub-prime argument, which again is based on so many logical fallacies, I don’t know where to begin. Diough, suffice to say, it is ironical that you assert that on this site which attempts to expose the idiocy of the mainstream economic thought, and the reason why people like Steve Keen, Robert Shiller, Dean Baker, Nouriel Roubini saw what all the other clown economists’ did not see, does not seem to concern your good self!
“So please tell us that our taxes going up in order to service the debt or interest rates going up in order to service a loan or inflation as in the 80s is just a figment of our imagination. You obviously believe that it ok for CBs/gov’s to inflate money at will. Of course you do know that all of the extra reserves is just sitting there.”
Aac,
the government does is *not* required to pay back the deficit, since it is an accounting artifact, the monies spent by the government *may be required* to be drained out of the economy when the economy recovers and commences to exhibit inflationary tendencies. Take note, the above states *may be required*, since this will depend on factors, some of which are not in the hands of the sovereign government, some of which are:
1. do the economic agents revert back to their secular savings rate, which appears to be what is happening.
2. depletion of input commodies, in particular the energy commodities, that is a supply side shock, as in the 1970s’ oil shock.
3. export competitiveness.
4. Fiscal and monetary policies followed.
Taxation and interest rate management are the mechanisms available to government for the purpose of draining excess base money when the economy in a state of full employment and is striking the envelope of the full productive capacity of the economy.
In addition, taxation, or rather fiscal policies to be more complete, is also a tool used by governments for reasons of social engineering. That is it is a mechanism used by government to alter human behaviour.
Since, the neo-liberal clowns have dominated economic thought and have had the ear of government, they have perpetuated fiscal policy objectives that have ensured that the wealth elite through institutionalised corporate welfare have ensured that a larger and larger disparity exists within society. That is the elite have skewed the system, via neo-liberal economic policies, to lay greater and greater claim to the output of the economic system, forcing the middle and low economic strata of society to be forced to take on further and further debt as an attempt to maintain their living standards.
Aac, knowing how the dynamics of modern monetary system actually operates, one can then begin to do some “puzzle solving”. One can then begin to ascertain how the economy will actually respond, to what the neo-classical clown economists will perceive, in their exmplar of the economic world, to be the corrective course of action, but in reality be dismal failures.
“You have a little mechanical paper knowledge of CBs work but you admit that the way they actually work is different in practice. You then state that governments are fools for not taking the chance to rip people off. No wonder people are screaming for the gold standard and for the abolishment of CBs. It would then make non-productive pretentious people irrelevant.”
Aac,
you really do not seem to be able to keep away from your ad hominem arguments, do you?
Gold, what a joke, that would be a complete disaster.
Aac,
I am still waiting on the following from you:
Can you provide evidence, as opposed to factoids, of your assertion that the government of the PRC has indicated this to the USG, and not what some clown in the msm might be pontificating?
With reference to my question on you’re assertion the “2/3 number”, as you put, you state:
“I heard the 2/3 number (bonds going to foreigners) on the ABC Q&A which was not disagreed with. Oz, oh that’s shorthand for Australia, does not publish who it sells bonds to as the US does.”
Your answer appears to be founded on a rhetorical device of appealing to a higher authority, however, I do not consider what is said by some on the ABC Q&A as sound evidence.
I will respond to the other parts of your assertions later, gotta go…
I have a few more minutes, so I will expose the next of your fallacies Aac. You assert:
“I guess also that the spread between corporate and gov bonds is another unreality. The logic does not add up. The only way for deficits not to affect corporate bonds is for banks then loan corporations money. But that means that the banks determine which companies get money which doesn’t.”
The spread between IG corporate and government treasury paper is rightly due to the risk premium, not because of this b*s crowding out neo-liberal garbage.
Next episode.
Aac, you assert:
“I guess also that the spread between corporate and gov bonds is another unreality. The logic does not add up. The only way for deficits not to affect corporate bonds is for banks then loan corporations money. But that means that the banks determine which companies get money which doesn’t.
Acc,
I do not understand your logic, please explain how you conclude the following:
“The only way for deficits not to affect corporate bonds is for banks then loan corporations money. But that means that the banks determine which companies get money which doesn’t.”
“Again the argument boils down to those who believe in big government/banks and removes the right of the people to decide who and whom gets money.
Again, admit your agenda – what is it – are you for more government or less.”
Aac,
the neo-liberal ideology and brainwashing has been so effective and so well entrenched that society, save the elite strata, has bifurcated into what appears to be two cohorts, these being:
1. the group of don’t know, don’t care.
2. the group of care, but don’t think critically enough to recognise that the wealthy elite are screwing us to the hilt and we begin to fight amongst ourselves, rather than ensuring that the actual target of our displeasure is the wealthy elite. I would also say, if you are reading this, you are not in the cohort of the wealthy elite.
Take for example, the USG bailout of the elites in the banking and finance industries, started by the Bush administration and then *perpetuated* by the Obama administration is to re-liquify, and thus save, the wealthy elite fools, with the support of the neo-liberal clowns, from their gambling forays of the recent past, whilst leaving the middle class to “eat dust”.
In a capatilist economy the wealthy elite should now have been wiped out, stock holders, bond holders in these financial institutions, they should all be heading for the poor house. The government would only be required to guarantee bank deposits and nationalise the bank, and that is it.
The remaining economic agents that are the real entrepreneurs, who would supplant the failured cohorts, occupy the void that would have been left by these failured thieves, if they were left to wallow in their own failures.
Aac, you ask:
“Again, admit your agenda – what is it – are you for more government or less.”
Aac, I am for just government, that allow a true capatalist system under a fiat modern monetary system to operate. Currently we do not have this, what we have is a oligarchic kleptochracy. I am against unjust enrichment, which is exactly what is happening under our noses.
In short:
“Politics is the shadow cast by big business over society, and if you do things that attenuate the shadow, you really won’t affect the substance, you won’t really do much.”
— John Dewey
“The man who gets angry at the right things and with the right people, and in the right way and at the right time and for the right length of time, is commended.”
— Aristotle (384 BC – 322 BC)
We need to get really angry, and make sure that these clowns in government and the wealthy elite do not get away with this.
The politicians and the wealthy elite, which are just the obverse of the same coin, can only get away with this, if the masses remain ignorant and insist on being obscurantist of what is happening in the world around them!
This is what Aristotle stated 2000 plus years ago:
“Where some people are very wealthy and others have nothing the result will be either extreme democracy or absolute oligarchy, or despotism will come from either of those excesses.”
- Aristotle (384 BC – 322 BC)
We are being screwed and most of us don’t even know it.
iconoclast,
It is good to see you are passionate, but keep in mind that political and economic beliefs are similar to that of religious beliefs: the right, center, liberal and progressive sectors are unlikely to convince each other that they are correct.
Aac, you ask:
“Where does the RBA get the money to buy/sell gov/bank securites in order to defend an interest rate target.”
The government being the sovereign of the state (politia) is a monopoly in the issuance of it’s sovereign currency.
Save the above truism, the important point to recognise is that it is the ability of the government to inject and drain, that is, create and destroy base money and thus influence economic activity by intervening when necessary through fiscal and monetary policy to spend money, and thus, purchase goods and services available in the economy.
As reason has suggested, the requirement is to replace debt money with more base money. The only way for this to happen is for the sovereign government to spend on goods and services and thus allow existing debt to be extinguished. However, the issue how will this money be distributed to ensure that there is not unjust enrichment. Furthermore, the prescient point that Steve has made is that the amount of debt in the system is so great that it is a viable approach, when a Minsky moment is triggered, since the rate of debt destruction is asymmetric to that of debt creation. Moreover, the rate at which base money is being expanded is insufficient to offset the rate of destruction of debt money.
Currently, the neo-liberal clowns, thought that they could combat deflation by merely expanding base money and thus preventing the velocity of money from collapsing, using their theories based on the quantity of money.
As Steve has shown they failed to realise that the transmission channel, via their fractional reserve theory of banking and the money multiplier, is not working, for reasons obvious to those who understand what is occurring.
Fiscal policy is the only other alternative, but this has a time constant which is much greater than the time constant exhibited by the process of debt destruction.
For us Engineers, it’s like having a transistor forward biased across the base-emitter junction, without having the collector-emitter appropriately biased, so even if we inject base current, we’re not going to get an amplification of collector current, ie, Ic=Hfe.Ib will not occur.
Correction to the following:
“Furthermore, the prescient point that Steve has made is that the amount of debt in the system is so great that it is a viable approach, when a Minsky moment is triggered, since the rate of debt destruction is asymmetric to that of debt creation. Moreover, the rate at which base money is being expanded is insufficient to offset the rate of destruction of debt money.”
Furthermore, the prescient point that Steve has made is that the amount of debt in the system is so great that it is *not* a viable approach, when a Minsky moment is triggered, since the rate of debt destruction is asymmetric to that of debt creation. Moreover, the rate at which base money is being expanded is insufficient to offset the rate of destruction of debt money.
Iconoclast,
I’m seconding Phillip’s comment about how you refer to people with different political positions to you on this list. I enjoy the fact that discussion on this list is generally civil, compared to what I have witnessed on other lists, including for example the Mises list where I have been engaging in debate recently.
By all means engage in debate here, but refrain from flourishes that are insulting to other list members.
Sure Philip, Steve, I accept your point.
I do get passionate, when I listen to the arguments put forward by politicians, who enrich the wealthy, whilst the vulnerable demographics of society are being left to twist in the wind.
Tel, you state:
“China will merely diversify their customer base, work on some internal infrastructure projects and mildly raise their standard of living (then gather together for group cussing at those dastardly Americans who don’t keep promises)”
I would say the Asian development model, based on Asian countries suppressing domestic demand, whilst expanding their export production base to achieve and maintain significant current account surpluses is dead.
The obverse side of this coin, that is, the current account deficit countries have now shut down that component of the capital flow circuit. This will force a significant readjustment and dent the ability of the current account surplus countries to continue with this model.
The Chinese have productive capacity in excess of their domestic demand, they will have to go through the painful path of readjusting their economy from a heavily export oriented economy to that of a more balanced domestic/export based economy. However, it appears, based on current anecdotal evidence (see Michael Pettis site, http://mpettis.com/) that the Chinese are resisting this adjustment.
Tel you have put forward the following to retort my previous argument:
“Just briefly, as a private citizen I can easily escape bankruptcy. I do the very simple thing of writing I.O.U. on a piece of paper and signing it. I can make an unlimited supply of these IOU papers and use them to cover any and all of my debts. EXCEPT, some day might come where someone does not want my IOU and refuses to take it. I can’t force them to accept it so they turn to the law to demand something better.
When a government prints money (or goes into deficit, or any way you want to shuffle it) they are writing IOU on a piece of paper, just the same way I can do as a private citizen. The ONLY difference being that government has the power to force the local citizens to accept the IOU and local citizens have no where else to turn for justice.”
The paradigm you have put forward, of putting yourself up as an example to that of a sovereign government is incongruous.
You presume that others within society would have a desire to accept your iou, over the alternative, which is the currency issued by the state.
Secondly, the currency issued by the state has a use value, being its ability to be used to extinguish liabilities brought against economic agents by the sovereign government and its agencies, that is taxes, fines, levies, rates etc., which only accept the currency of the state as the form of payment, your iou does not.
The government has the right to issue currency, but also has the right to drain money from the economic system, you do not.
These limitations, in which you have also pointed out, makes your argument logically unsound and thus is an enthymeme argument.
“Our government does not have the power to force foreign citizens to accept their IOU, so foreigners will only accept our currency if and when they believe there is some value in doing so. Money printing must ultimately cause devaluation of the money being printed and then cause inflation for the locals.”
Tel,
If Australia continues to supply and expand the tradable goods that it can offer to the global market, and that these goods continue to be in demand, then it’s currency will maintain its stability or possibly even appreciate. If not then its currency will depreciate accordingly. This is the purpose of a floating currency exchange system.
The readjustment of AUD is a possible outcome, if Australia is not able to successfully compete on a fair basis. The latter, however, is premised on countries that are currency manipulators and have poor labor standards be sanctioned in a manner that is a disincentive for them to continue to do exhibit these tendencies. Empirical evidence, to date, demonstrates that such a mechanism, through the WTO, has been impotent.
“As a nation, we could easily default on foreign loans (regardless of the denomination), all we need is a decent defense force, and to be willing to have people grumble in future (but they will still buy iron, zinc and food). They probably won’t lend to us any more.”
A government would default on loans to foreigners if it has irresponsibly borrowed in foreign denominated currency. The non-government sector defaulting on foreign loans is called bankruptcy, the creditor should have been more cautious in the first place.
If foreigner’s lend to us, in excess to us lending to them, then our capital account is in surplus, which thus infers, our current account is in deficit. So if they stop lending to us, is actually a really, really good thing, this will force our current account deficit to begin to fall rather than continue to rise.
“As I’ve said before, I’m buying gold and running a debt with a home loan and I’m 100% sure that the Labor government and QE money-printers will not just bail me out but leave me reasonably well off in the process. Buy hey, by all means knock me off my stool, I dare you… run a giant deficit and show me how it does not result in inflation.”
Tel, good luck mate, you’ll need it. BTW, notice that gold has not been going anywhere, and has only been supported by uninformed rational fear.
Aac, you say:
“When the RBA buys securities from a bank the securities themselves are the collateral. In the case of buying gov securities the backing is indeed the tax payer not an “accounting artefact”. In the case of bank notes the bank is the collateral. In the case of repurchase agreements (repos) the agreement is the backing – according to the thesis 96% of OMO is repos. Thus the RBA extending credit to commercial banks which in effect is like any other bank except its clients are commercial banks.
In the case of the US (and I assume Australia ) there are strict rules governing what securities can be bought. Were the rule adhered to then it would not be possible for the RBA to buy securities if there were no eligible securities. These rules however are in recent times being ignored and the Fed is buying toxic assets. I believe Australia is doing the same but on a smaller scale so far. It is this buying of toxic assets people should be mad as hell about because it is the tax payer, instead of the banks, that will end up footing the bill.”
Prior to the current financial calamity, the RBA, the Fed. Reserve, and other central banks had very strict requirements, with regards to the collateral they accepted before forwarding credit to banks that have reserve accounts with their respective central banks. But recently, the RBA has broadened what they consider acceptable. The Fed. has created all manner of lines of credit, under TARP, PDCF, TLSF, CPFF, MMIF etc. that are being used to provide liquidity and to throw a life-line to essentially keep these insolvent financial & banks from collapsing, and saving the stock holders and bond holders from their gambling forays, and thus essentially being able to unjustly lay claim to the future output of the economic system, which therefore means that the rest will not have that claim.
Geitner, with his laugable stress tests, is attempting to pretend that these zombies are solvent, what a joke!
Aac you say:
“It is this buying of toxic assets people should be mad as hell about because it is the tax payer, instead of the banks, that will end up footing the bill.”
See, in my previous post, what Aristotle has to say about getting angry!
iconoclast said
“the government does is *not* required to pay back the deficit, since it is an accounting artifact”
Maybe I’m just a simpleton but if I bought Australain government 2 year bonds and sat on it for 2 years whilst receiving the coupon rate that the government is within it’s right to not pay the principle. This is the meaning I am getting from your words – can you confirm please.
Aac,
This is a different story. The principle will be paid back to you.
I think that what he wrote about was that the government can for example buy work from my wife (who works for the public sector) by crediting our bank account and there is no need to borrow money for that by selling bonds or extract money from other people by collecting taxes.
In that case the spending will not be covered by borrowing / taxation and the amount of M1 will increase.
Now the key point:
Under certain circumstances this may lead to inflation but under other circumstances this will not lead to inflation.
Could Steve comment on this if I am wrong?