Steve Keen's Debtwatch

Discussion (51) ¬

1. 
   jrbarch

   June 7, 2009 at 5:41 pm | #

   Willem Buiter – latest post: “I am particularly intrigued by Lara Resende’s argument that this downturn is different from all past downturns, including the Great Depression of the 1930s, because of the continuing high level of private sector indebtedness, and that under these conditions neither monetary policy nor Keynesian fiscal policies are likely to be effective. But judge for yourself”.

   Great read – http://blogs.ft.com/maverecon/2009/06/after-the-crisis-macro-imbalance-credibility-and-reserve-currency/
2. 
   Philip

   June 7, 2009 at 6:02 pm | #

   Someone should delete the above comment…

   Mark Blaug sums up conventional economic theory well:

   “Modern economics is “sick.” Economics has increasingly become an intellectual game played for its own sake and not for its practical consequences. Economists have gradually converted the subject into a sort of social mathematics in which analytical rigor as understood in math departments is everything and empirical relevance (as understood in physics departments) is nothing. If a topic cannot be tackled by formal modeling, it is simply consigned to the intellectual underworld.” (pp. 12-13)

   “Economists are loath to examine their assumptions by the use of survey techniques, by simply asking agents what they believe or what they do, because Friedman’s methodology gave economists the false impression that nothing can ever be learned by such means. Perhaps the real trouble is our age-old belief, going back to Ricardo, that economics is essentially a deductive science, in which we infer economic behavior on the basis of some assumptions about motivations and some stylized facts about prevailing institutions, suppressing even the temptation to ask whether these are descriptively realistic assumptions and accurately chosen facts. It is high time that economists re-examined their long-standing antipathy to induction, fact-grubbing, and fact gathering before, and not after, we sit down to theorize.” (p. 30)

   Blaug, Mark. 1998. “Disturbing Currents in Modern Economics”, Challenge, Vol. 41, No. 3, pp. 11-34

   Joseph McCauley sums it up:

   “To be quite blunt, all existing ‘lessons’ taught in standard economics texts should be either abandoned or tested empirically, but should never be accepted as a basis for modelling. It is important to understand what economists have done previously mainly to avoid making the same mistakes.” (p. 603)

   McCauley, Joseph L. 2006. “Response to ‘Worrying Trends in Econophysics’”, Physica A, Vol. 371, No. 2, pp. 601-609
3. 
   Christopher Dobbie

   June 7, 2009 at 10:56 pm | #

   jrbarch,

   Reading that blog entry I came across an assertion that I wouldn’t mind fleshed out.

   So if anyone can give me an explanation of how this is so, please do. I’m curious to the mechanism for this pronouncement.

   “While chronic inflation is essentially a question of excessive debt of the public sector…”

   i.e. how is chronic inflation caused by government debt?

   Extracted from the end of the 15th paragraph.
4. 
   Christopher Dobbie

   June 7, 2009 at 11:22 pm | #

   Also,

   “It is thus understandable that China, the largest withholder of American public debt bonds, does not feel comfortable and proposes the creation of a supra-national reserve-currency.” (End of para’ 26)

   Here’s another curiosity; how would the “Cavaliers” expand credit in such an environment?
5. 
   MACCA

   June 8, 2009 at 9:15 am | #

   http://www.washingtonsblog.com/2009/06/economists-and-other-experts-are.html

   “The economists are ill qualified to analyse the current economic situation since they lack the overview of historians such as himself.

   “There are economic professors in American universities who think they are masters of the universe, but they don’t have any historical knowledge. I have never believed that markets are self correcting. No historian could.”-Niall Ferguson.

   ““The Government’s business is in sound condition.”
   Andrew W. Mellon, Secretary of the Treasury
   -December 5, 1929

   RESERVE BANK AREAS FORECAST NEW YEAR
   Despite the obvious slackening of the pace of business at the close of the year, leaders in banking and industry throughout the country maintain an optimistic attitude toward the prospects for 1930.
   -January 1, 1930

   “The worst is over without a doubt.”
   James J. Davis, Secretary of Labor.
   - June 1930

   ‘BUSINESS CYCLE’ SEEN AT NEW PHASE; Bankers Hold Downward Trend in Markets Indicates Recovery Is Near. DENY ANALOGY TO 1920-21 Economists Point to Superior Credit Conditions Now, Holding Easy Money Points to Revival.
   -July 6, 1930

   ………..etc etc.
6. 
   ak

   June 8, 2009 at 9:42 am | #

   The first results from the EU elections have arrived. There is a significant swing to the right or far right. If the same happens elsewhere (in the US) it is easy to predict what’s going to happen next.

   You guys do not need to buy gold at least during the next phase of the crisis. The risk of inflation is getting lower. Buy a gun instead. I predict even more competition between social groups and countries. There is a brutal Polish proverb saying “before the fat guy slims down the slim guy will die”.

   I think that this is also the end of the New Labour ideology in the UK. I hope that this message will be understood by the local followers in Australia however it might be too late already (despite the current popularity of the Prime Minister). Your mandate to stay in power is based on the preservation of the illusion of wealth for everyone.

   The mandate to seize power for the right wing parties is that they don’t care – as long as my wealth (or my illusion) is preserved.

   My observation is that economics as a science in this context is irrelevant. It can only play a role of the fig leaf. The world will once again be based on a pure free competition and a race to the cliff edge (of exhausting global resources and damaging the environment). To understand this the economics from 18th century is good enough. Whoever runs faster can push the opponent off the edge. So let’s run or get carried on the Chinese back!
7. 
   MACCA

   June 8, 2009 at 10:09 am | #

   ak,

   Unlike Europe with it’s disparate peoples, languages, cultures, bankster families, various brutal histories with extremeist politics (and wonderful food!), Australia has a home grown cohesion borne of people who escaped the crap of Europe and elsewhere to start anew. That breeds a certain resiliance and tenacity.

   Humble and new as it is, there are some very strong centrepoints to our small history that can be invoked in times of extreme adversity to uniting effect, like that which we will be shortly encountering. The benefit being that we are an island nation , all of us raised in the belief that we sink and swim TOGETHER. Yes there will be strata among our mob and strains will emerge- but *together* we will remain- you don’t need to doubt that.

   I wouldn’t be so confident to say that of Europe however.
8. 
   MACCA

   June 8, 2009 at 10:52 am | #

   Aligned with Australia’s unfolding collapse in trade….;

   http://www.globalresearch.ca/index.php?context=va&aid=13874

   “Has the Chinese Economy Really Recovered? The Signs are Mixed.”
9. 
   jrbarch

   June 8, 2009 at 6:12 pm | #

   Hi dobther – I’m just a casual observor (as I guess you are or you wouldn’t have asked the questions?) so please take my understanding as such (pundits feel free):

   A govt. runs a country into debt, and exhausts its own and its population’s capacity to service the debt now and in the future. If the debt is deemed irrecoverable the country’s currency collapses.
   Before this happens the govt. may issue more (and riskier) debt until buyers lose confidence. The govt. is then forced to either implement savage spending cuts incurring greater wrath from the people, or ultimately default on its debt.
   The last option before default is to try and inflate away the debt, inflation reducing its nominal value. This is done through increasing the money supply thus devaluing the currency. Some economists believe this is the strategy Larry Summers will rely upon if he takes over as next Chairman of the Fed from Bernanke; which is an international concern as the dollar is an international store of value.

   This is why China in uncomfortable holding US bonds. To the degree the dollar collapses, so too does their investment. They want a supra-national reserve currency in which they can store value.

   Am sure there are many other factors. Cheers …
10. 
    Philip

    June 8, 2009 at 6:17 pm | #

    I think that European citizens have moved to the right because of the apparent failure of left and liberal European political parties to deal with inequality, the GFC and related economic issues. Even the ultra-right BNP in the UK has been gaining popularity.

    Unfortunately, as John Dewey pointed out long ago, alterations in the shadow will not change the substance. Right, centrist, liberal or left politics isn’t likely to change much until the substance is finally confronted and democratized. Criticizing government, whether it is justified or not, will not achieve much.

    Niall Ferguson is an interesting academic, and has been accused of historical revisionism (which isn’t necessarily wrong). I’ve got his Ascent of Money, but haven’t watched it yet. It should be interesting.
11. 
    evan

    June 8, 2009 at 8:27 pm | #

    New article from Michael Pettis, an expert on China based in Beijing. Steve gets a mention…

    http://mpettis.com/2009/06/stimulus-%E2%80%93-at-what-cost/

    “As badly as Chinese exports have been hurt, and exports were down 22.6% year on year in April, Chinese exporters have still done much better than other exporting countries in Asia and elsewhere, suggesting that they have managed to avoid much of the brunt in the contraction in global imports, led by the contraction in the US. This, as I argued in last week’s entry, has as much to do with credit and interest rate policies as it does with any inherent competitive advantage.”
12. 
    Frank

    June 9, 2009 at 8:24 am | #

    Have a look at this

    http://www.technocracy.ca/simp/man-hours-distribution.html

    Like Fisher, seems to me that these guys from the 1930s and 1940s knew more about economics than we do today.
13. 
    Frank

    June 9, 2009 at 8:27 am | #

    I love this quote, I really love it:

    ” In the distribution to the public of the products of industry, the failure of the present system is the direct result of the faulty premise upon which it is based. This is: that somehow a man is able by his personal services to render to society the equivalent of what he receives, from which it follows that the distribution to each shall be in accordance with the services rendered and that those who do not work must not eat. This is what our propagandists call `the impossibility of getting something for nothing.’

    Aside from the fact that only by means of the sophistries of lawyers and economists can it be explained how, on this basis, those who do nothing at all frequently receive the largest shares of the national income, the simple fact is that it is impossible for any man to contribute to the social system the physical equivalent of what it costs that system to maintain him from birth till death-and the higher the physical standard of living the greater is this discrepancy. This is because man is an engine operating under the limitations of the same physical laws as any other engine. The energy that it takes to operate him is several times as much as any amount of work he can possibly perform. If, in addition to his food, he receives also the products of modern industry, this is due to the fact that material and energy resources happen to be available and, as compared with any contribution he can make, constitute a free gift from heaven.

    Stated more specifically, it costs the social system on the North American Continent the energy equivalent to nearly 10 tons of coal per year to maintain one man at the average present standard of living, and no contribution he can possibly make in terms of the energy conversion of his individual effort will ever repay the social system the cost of his social maintenance. It is not to be wondered at, therefore, that a distributive mechanism based upon so rank a fallacy should fail to distribute; the marvel is that it has worked as well as it has. “
14. 
    ak

    June 9, 2009 at 8:50 am | #

    Gloves off. This is the possible cost of reducing carbon dioxide reductions according to Australian economist and Reserve Bank Board member, Warwick McKibbin:

    “The US can expect to shave 2.5 per cent off its GDP by 2050 if it introduces the House version of its cap and trade scheme, compared to doing nothing”

    “Personal consumption would be reduced by between $US1 to $2 trillion on present values over the period. Employment levels would be cut by 0.5 per cent in the first decade with big impacts in the coal, crude oil and electricity sectors, the study found.”

    “Professor McKibbin’s model looked only at the US economy. But in remarks after his presentation he warned that Australia’s abatement costs would be five times those of the US because of its dependence on coal and the lack of substitutes like nuclear power.”

    “The big message Professor McKibbin and his fellow researchers want to stress is that different schemes with different mid-term targets can have different and quite significant economic impacts.”

    “What we have demonstrated is that flexibility matters. You can end up with the same outcome for the environment with much higher cost if you don’t have flexibility,”

    “So if you announce targets and you stick to those targets year by year, without allowing any banking or borrowing or allowing any inflow or outflow [of permits] across borders, you can end up imposing much higher costs for no additional benefit.”

    http://business.smh.com.au/business/new-laws-could-shave-25-off-us-gdp-mckibbin-20090609-c136.html

    I can only believe that the model he used was based on the neoclassical economics. His message makes sense to me – rules should not be applied blindly but it is the end result what matters.

    Steve,
    How reliable is his model?

    I have 2 comments:

    1. If the system is so inflexible what will happen if the oil physically becomes less available?

    2. Has anyone spent even a minute trying to address the real issue:

    Why the economy has to grow? Why do we depend on the increasing consumption level especially with relation to energy? What if it cannot grow and it shrinks 5-10% for example due to the GFC? Are we condemned to 10-15-20% of unemployment?

    I personally don’t care if my real income shrinks by 5%. But in fact I am better off the crisis especially in the deflationary scenario. I anticipated the downturn and locked up my salary in a company which has a stable market position. My wife has a public sector job.

    Can you see the problem? For maybe 30-50% of the society the recession/depression will be beneficial. For maybe 30-40% it will be bad (if somebody has to find a new job and it is getting paid less as a result). But for 10-20% it may be a disaster as they will be permanently unemployed. (I made up these numbers this is just an example).
15. 
    Anarcho

    June 9, 2009 at 7:23 pm | #

    As a revolutionary, I cannot help thinking that the title of this post should be: An economic revolution begins…

    Counter-revolution invokes pictures of Tsarist generals destroying soviets and hanging peasants, Lenin crushing Kronstadt, Franco’s troops shooting anarchists in Zaragoza’s bullring, Soviet tanks in Hungary, and so on.

    Surely, as the aim is to transform economics for the better, it should be a REVOLUTION? Particularly as many of our problems come from the neo-classical counter-revolution against Keynes which produced the post-war neo-classical “Keynsian” synthesis that Joan Robinson attacked?
16. 
    gaday

    June 9, 2009 at 10:03 pm | #

    Frank,
    You remind me, that Ayn Rand said all that and more in her philosopical “Objectivism”

    She covered every principle of mans’ rights in production and worth, intellectual ownership within any trade, emotionally as well as commercially.

    They are excellent principles and cannot be denied to the high minded moralist.

    However we suffer reality. That is the World is controlled by “power lust” and this includes Greed That is why a new economic system is needed and legislatively introduced to effectively give people the right to feel secure with the commitments they wish to undertake. Not too much for a society to expect from their elected representatives, I would think.

    Elected Govts have a lot to answers for. The rot is there, not with the people.
    Abe Lincoln said “God must have loved the simple people, because he made so many of them”
    He was right, He did not mean dumn, or disadvantage, or incapable of thought. he meant productive people that want security in their elected leaders carrying out their role to protect their faith in having elected them. Sorry for the rave ole boy but philosophy unless put to reality is no different to “wishin’ an’ hopin”
17. 
    mahaish

    June 9, 2009 at 11:11 pm | #

    all this talk of trading and financial imbalances between the US and china gots me to thinking.

    what happened last time china got involved with trade with the west.

    it isnt the late 70′s and deng ,but the late 18th and early 19th century.

    according to some, during this period china was responsible for anywhere between 20 to 30% of global manufacturing output, care of its daliance with the british and other european empires.

    what happened.

    the chinese produced all manner of finery for europe, such as tea and silk. in return for their troubles the british gave them opium , and lots of it.

    and when the chinese protested to much, the british re negotiated their trading relationship with the chinese through the pointy end of a barrel of a gun, extracting major trading concessions from the manchu’s. and hence we had what are now refered to as the opium wars.

    it didnt end there.

    we had ,a tottering and corrupt qing dynasty, unrest in the country side and humiliation at the hands of the british,

    enter stage left a messianic madman named hong xiuquan circa 1847, and the beginings of what is now refered to as the taiping rebellion, a major civil war that raged up and down the chinese country side for over 15 years, and claimed anywhere between 20 to 40 million lives, which probably makes it the second bloodiest war in history after world war 2.

    in one of histories minor ironies, the tai ping were ultimately put down by the qing with the help of the british in the form of commander charles “chinese” gordon.

    ultimately the actions of the taiping served as an example to mao himself

    the moral of the story is this,

    as china negotiates its way through these treacherous waters towards modernity and hegemony , what is its response going to be to percieved injustices and obstructions in the global trading environment towards it, and what will the internal consequences be.

    will they be racked by internal revolution again, will they shun outsiders and become insular again, or will they try and gain consessions from the rest of us through the barrel of a gun.

    the past is very interesting and not very encouraging , lets hope the future is less interesting and more encouraging, lest we resurect that old confucian curse “may you live in interesting times”.
18. 
    Steve Keen

    June 10, 2009 at 8:15 am | #

    Well, on this point we do differ Anarcho–though on most intellectual issues, I am in considerable agreement with you.

    I’m an evolutionist as regards society; in economic theory I am too, and if any decent evolutionary process had been applied to neoclassical economics then it would have become extinct in the 1930s. Instead it was kept on intellectual life support by absurd assumptions and its supplicant role in justifying inequality in a capitalist system.

    That life support involved an intellectual counter-revolution directed at Keynes’s ideas, led primarily unknowingly by Hicks but also Samuelson, and later knowingly and deliberately by Friedman and then Lucas and Sargent etc, and described as such. Hence in an academic sense using the term counter-revolution I’m using their term back against them.

    Now having thought about it, you’re probably right about the semantics here too!
19. 
    jamesb

    June 10, 2009 at 8:32 am | #

    Steve,
    Will the talks/proceedings be available online? I’m sure many of us who won’t be able to make it would at least be interested in reading the plenary papers after the fact.
20. 
    mahaish

    June 10, 2009 at 2:28 pm | #

    i’m not sure we should couch anything in terms of revolution or counter revolution.

    we dont want to scare away the chickens.

    it would be nice if the messege itself was enough for most people,

    but it isnt, sometimes

    and its important , how its delivered,

    and in most things of this nature its best to come in under the radar,

    the more unconventional and radical the messege, the more re assuring and conventional we should appear,

    lest we be accused of being radical priests,

    obviously things get bad enough sometimes that there is no covering them in honeyed words.
21. 
    MACCA

    June 10, 2009 at 2:29 pm | #

    Steve,

    Gerard Jackson contends (strongly) that Australian GDP is calculated incorrectly. Your comments on this?;

    http://www.brookesnews.com/090806ausrecession.html
    “Their second failure is to grasp the fact that GDP greatly underestimates total economic activity. Once we take into account spending between firms we find that consumer spending as a proportion of total spending drops from about 60-64 per cent of GDP to about one-third. Therefore it is business spending that drives the economy and not consumer spending.”

    “It follows from the previous reasoning that if account were taken of inter-firm spending then the national accounts would show that the economy is contracting.”
22. 
    Christopher Dobbie

    June 10, 2009 at 3:00 pm | #

    Steve,

    “…if any decent evolutionary process had been applied to neoclassical economics then it would have become extinct in the 1930s.”

    That’s not necessarily so, can I draw your attention to Richard Dawkins work on Memes, it’s then easy to see how it has survived and continues to flourish.

    A case in point in the animal kingdom is the peacocks tail, not regarded as a utilitarian piece of evolution but without it you’re toast in the peacock world.

    His analogy of a constant room temperature being maintained by the input of a heater and that of an air conditioner serves well to illustrate that you can achieve a wide variety of outcomes as long as you have the means to offset the other variable. Turn up the heat, lower the temperature with the conditioner to keep it where you want it. Only when you run out of that ability will things change.
23. 
    BrightSpark1

    June 10, 2009 at 4:04 pm | #

    dobther

    One tool which became well understood in the 1930′s was mathematics which described the behaviour of dynamics systems with time. For the last 80 years neoclassical econimists have chosen to ignore time as an important parameter. If their discipline had evolved in the right direction (or rather at all) the effects of time and feedback would now be well understood. Now they are clearly lost in the wilderness of mathematical ignorance, they don’t even know what they don’t know.

    They like to think of hidden hands, while they have been misquoting Adam Smith with his hidden hand of the market, the hidden hand of Old Man Time has defeated them.
24. 
    MACCA

    June 10, 2009 at 4:42 pm | #

    This is what happens when you fail to manage the data correctly. Obama’s spin machine needs an overhaul (perhaps Kev can consult for him?);

    http://michaelscomments.files.wordpress.com/2009/06/stimulus-vs-unemployment-may-corrected.gif

    Obama’s predictions on unemployment are WAY off the mark, just like their Govt revenue projections. So how far off the mark are their Budget spending and Deficit pprojections? One wonders.

    This is why deficit spending is wrong and decietful. It is always based on inherently wrong politically inspired erroneous projections. Ken Henry, Swan and Rudd – are you taking notes?
25. 
    Philip

    June 10, 2009 at 4:43 pm | #

    Going on from what Steve and Anarcho were saying, evolutionary change isn’t always a smooth process. Stephen Jay Gould called this term punctuated equilibria, where evolution would be gradual for a long time and then in a short period, a great amount of upheaval would occur.

    I think that economic and social systems may show a tendency like this. Things are going along smoothly until a fit occurs which causes rapid change. Events such as rebellion, strikes, workplace occupation, refusal to work, etc are examples of this. Many of us today greatly benefit from such actions.

    Even if neoclassicism were to be thrown into the garbage and something better replaces it to make capitalism less inefficient and less inequitable, there still remains a problem: business as a system of power. Are firms going to stop externalizing costs, rent-seeking and committing crime? It won’t matter if the new economic theory is near-perfect in understanding how real markets work, because capitalism as a system of domination and hierarchy isn’t going to let go of its power over society if we ask it nicely.

    If a revolution or rapid evolution needs to take place in economic theory, a greater one needs to take place to democratize capitalism.