It’s Hard Being a Bear (Part Five): Rescued?

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I’m happy to admit that I underestimated how strongly governments would respond to this financial crisis. Dramatic reductions in interest rates, huge fiscal stimuli and—in the USA and UK—expansion of government-created money, have all had a positive impact on the economy and asset markets (both shares and houses).

In his recent essay, Australian Prime Minister Kevin Rudd estimated that the rescues were the equivalent of roughly 18 percent of global GDP over a 3 year period, which is an unprecedented level of expenditure by governments.

Eichengreen and O’Rourke’s comparison of today to the Great Depression gives the most balanced assessment of how effective these policies have been at the global level.

They have clearly turned around stock markets. Six months ago, world stock markets were 50% below their peak, a far worse performance than during the Great Depression when, at the same time after the peak, they had only fallen 10%. By the beginning of September, markets had recovered to be only a couple of percent below the comparable 1930 position of a 30% fall.

Industrial output has also turned around. Six months ago this was 13% below the peak level, worse than the 1930s position of an 11% decline. Since then it has risen to be only 10% below, while at the equivalent time in the 1930s, industrial output had fallen 20% from its 1929 high.

So has the government cavalry ridden to the rescue? If the crisis were one simply of liquidity, the answer would be yes. A government stimulus can overwhelm the impact of a credit crunch, and the innate dynamic of a productive economy can re-assert itself after such a crisis, leading to renewed growth.

But this not merely a crisis of liquidity. It is one of excessive private debt, on a scale that is also unprecedented: the USA is carrying US$41.5 trillion in debt on the back of a US$14 trillion economy, proportionately 70 percent more debt than it had at the start of the Great Depression. In December 2007, the private sector swung from ramping up debt levels as it chased speculative gains on asset markets, to retreating from debt as the asset bubbles burst.

In the space of a year, private debt went from adding US$4 trillion to aggregate demand, to subtracting US$165 billion from it. Private debt had ceased being the economy’s turbocharger and had instead become its flooded engine.

While economic outsiders like myself, Michael Hudson, Niall Ferguson and Nassim Taleb argue that the only way to restart the economic engine is to clear it of debt, the government response, has been to attempt to replace the now defunct private debt economic turbocharger with a public one.

In the immediate term, the stupendous size of the stimulus has worked, so that debt in total is still boosting aggregate demand. But what will happen when the government stops turbocharging the economy, and waits anxiously for the private system to once again splutter into life?

I am afraid that all it will do is splutter.

This is especially so since, following the advice of neoclassical economists, Obama has got not a bang but a whimper out of the many bucks he has thrown at the financial system.

In explaining his recovery program in April, President Obama noted that:

“there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks – ‘where’s our bailout?,’ they ask”.

He justified giving the money to the lenders, rather than to the debtors, on the basis of “the multiplier effect” from bank lending:

the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth. (page 3 of the speech)

This argument comes straight out of the neoclassical economics textbook. Fortunately, due to the clear manner in which Obama enunciates it, the flaw in this textbook argument is vividly apparent in his speech.

This “multiplier effect” will only work if American families and businesses are willing to take on yet more debt: “a dollar of capital in a bank can actually result in eight or ten dollars of loans”.

So the only way the roughly US$1 trillion of money that the Federal Reserve has injected into the banks will result in additional spending is if American families and businesses take out another US$8-10 trillion in loans.

What are the odds that this will happen, when they already owe more than they have ever owed in the history of America? The next chart inverts the usual portrayal of America’s debt to GDP ratio by inverting it: the top of the graph represents zero debt, the bottom, a debt to GDP ratio of 300 percent—which is just shy of the current ratio of 292 percent.

If the money multiplier was going to “ride to the rescue”, private debt would need to rise from its current level of US$41.5 trillion to about US$50 trillion, and this ratio would rise to about 375%—more than twice the level that ushered in the Great Depression.

This is a rescue? It’s a “hair of the dog” cure: having booze for breakfast to overcome the feelings of a hangover from last night’s binge. It is the road to debt alcoholism, not the road to teetotalism and recovery.

Fortunately, it’s a “cure” that is also highly unlikely to work, because the model of money creation that Obama’s economic advisers have sold him was shown to be empirically false over three decades ago.

The first economist to establish this was the American Post Keynesian economist Basil Moore, but similar results were found by two of the staunchest neoclassical economists, Nobel Prize winners Kydland and Prescott in a 1990 paper Real Facts and a Monetary Myth.

Looking at the timing of economic variables, they found that credit money was created about 4 periods before government money. However, the “money multiplier” model argues that government money is created first to bolster bank reserves, and then credit money is created afterwards by the process of banks lending out their increased reserves.

Kydland and Prescott observed at the end of their paper that:

Introducing money and credit into growth theory in a way that accounts for the cyclical behavior of monetary as well as real aggregates is an important open problem in economics.

I couldn’t agree more, but unfortunately they—and neoclassical economists in general—did bugger all about it. On the other hand, the Post Keynesian group, of whom I am one, have continued to try to construct models of the economy in which credit plays an essential role.

I’ve recently developed a genuinely monetary, credit-driven model of the economy, and one of its first insights is that Obama has been sold a pup on the right way to stimulate the economy: he would have got far more bang for his buck by giving the stimulus to the debtors rather than the creditors.
The following figure shows three simulations of this model in which a change in the willingness of lenders to lend and borrowers to borrow causes a “credit crunch” in year 25. In year 26, the government injects $100 billion into the economy—which at that stage has output of about $1,000 billion, so it’s a pretty huge injection, in two different ways: it injects $100 billion into bank reserves, or it puts $100 billion into the bank accounts of firms, who are the debtors in this model.

The model shows that you get far more “bang for your buck” by giving the money to firms, rather than banks. Unemployment falls in both case below the level that would have applied in the absence of the stimulus, but the reduction in unemployment is far greater when the firms get the stimulus, not the banks: unemployment peaks at over 18 percent without the stimulus, just over 13 percent with the stimulus going to the banks, but under 11 percent with the stimulus being given to the firms.

The time path of the recession is also greatly altered. The recession is shorter with the stimulus, but there’s actually a mini-boom in the middle of it with the firm-directed stimulus, versus a simply lower peak to unemployment with the bank-directed stimulus.

Why does this model show that it’s better to give the money to the debtors than the lenders, in contrast to the case that Obama was sold, that it’s better to give it to the bankers?

Because the “money multiplier” model is effectively a mechanical, static, equilibrium model of the economy. Give the banks excess reserves, and they will lend them to the public, which will happily take on the debt. Once the reserves are fully lent out, the economy is back to equilibrium again.

In contrast, my model is a dynamic, non-equilibrium one, where the “circular flow” of money and goods is properly accounted for. In this system, you can think of the different bank accounts in the system as like dams with pipes connecting them of vastly different diameters.

When a credit crunch strikes, the pipes pumping the bank reserves to the firms shrink dramatically, while the pipe going in the opposite direction expands, and all other pipes remain the same size.

If you then fill up the bank reserves reservoir—by the government pumping the extra $100 billion into it—that money will only trickle into the economy slowly. If however you put that money into the firms’ bank accounts, it would flow at an unchanged rate to the rest of the economy—the workers—while flowing more quickly to the banks as well, reducing debt levels.

So giving the stimulus to the debtors is a more potent way of reducing the impact of a credit crunch—the opposite of the advice given to Obama by his neoclassical advisers.

This could also be one reason that the Australian experience has been better than the USA’s: the stimulus in Australia has emphasized funding the public rather than the banks (and the model shows the same impact from giving money to the workers as from giving it to the firms—and for the same reason, that workers have to spend, so that the money injected into the economy circulates more rapidly.

This model can explain some aspects of the current US data that are inexplicable from the conventional, neoclassical point of view—the key paradox being that while base money (“M0”) has been increased dramatically, there has been almost no movement in broader measures of money (“M1” and “M2”). If the money multiplier argument were correct, the increases in M1 and M2 would have been multiples of the increase in M0, as Obama was led to expect.

In fact, the expansion in M0 has been met by a fall in the credit-generated component of the money supply: since M2 includes all of M1 and M1 includes all of M0, this is clearer when we substract the double-counting out. M1 has actually contracted almost as much as M0 has expanded, while the expansion in M2 has been less than a third the size of the growth in M0.

The “money multiplier” has also collapsed—a mystery from a neoclassical point of view, but entirely predictable from the “endogenous money” perspective.

Obama has been sold a pup by neoclassical economics: not only did neoclassical theory help cause the crisis, by championing the growth of private debt and the asset bubbles it financed; it also is undermining efforts to reduce the severity of the crisis.

This is unfortunately the good news: the bad news is that this model only considers an economy undergoing a “credit crunch”, and not also one suffering from a serious debt overhang that only a direct reduction in debt can tackle. That is our actual problem, and while a stimulus will work for a while, the drag from debt-deleveraging is still present. The economy will therefore lapse back into recession soon after the stimulus is removed.

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488 Responses to It’s Hard Being a Bear (Part Five): Rescued?

  1. MMitchell says:

    – Sorry second line should be “do NOT really believe in efficient markets”

  2. MMitchell says:

    Something else to make one more enamoured with our lowest-price, externalise costs capitalist system, even the most environmentally friendly nations seem to be involved in this travesty:

  3. soho44 says:

    Hi from the States,

    A question for all Australian posters here. How do you feel about your MSM’s economic coverage? Here, you have the “standard” sources:


    Now, aside from Bloomberg, since all the rest are corporate owned, naturally the various board of directors don’t want the on-air staff to tell the truth about the market. This forces me to go abroad for accurate information/perspectives.

    Do you feel like you’re getting accurate information? At times I still see/hear/read the corporate line about economic recovery. But overall, it’s worth it to spend the time doing it (to make up for the propaganda that the MSM puts out here.

    So far the only decent business show seems to be SBS’s “Dateline.” Can’t remember the presenter’s name, though.

  4. pjbink says:

    Well the evidence is there are a lot of benefits with free markets, MMitchell. Where would you rather live – North Korea or South Korea? West Germany or the old East Germany? The heavily regulated and unionised sytems we had in the 1960’s and 70’s (particualy here and the UK) lead to a lot of problems also – namely stagflation. Ie low growth, high unemployment and high inflation. The trick seems to be to manage markets, but do so in a way that is effective and that the ordinary people benefit.

  5. MMitchell says:

    Sorry, you seem to have mis-understood me. I agree with free markets wholeheartedly, it is just that it seems that neo-classicals talk-the-talk but don’t walk-the-walk in relation to free markets. I agree that the ordinary people should benefit also, but they don’t with for example (I used this earlier) monopoly electricity suppliers but competing privatised retailing of those supplies. My earlier question was how can having three administrations, three times the marketing and three armies of door-to-door sales people for an essentially monopolised, state regulated resource, be efficient? It was to this question that Ak sent his reply.

  6. MMitchell says:

    Sorry – I misunderstood that you were refering to my comments on the Monbiot post. I don’t believe in big global private corporations. I believe free markets only work when you have true competition, i.e lots of small competing firms. Furthermore, industry should be localised whereever possible. Large organisations, particularly those with heavy or critical responsibilities such as toxic waste disposal should be either public, or heavily supervised private orgs. Given the fact that any large org gains political power (threats of mass sackings, large donations etc) I prefer public in these cases.

  7. Steve Keen says:

    It’s a bit more complicated pjbink.

    The major intervention in the economy was made by the Federal Reserve in rescuing the financial system from its own follies from ’87 on. Neoclassical economists dominate that institution and its equivalents overseas–including Australia. The actual theories are a mess, but they have largely been following the argument that there is a natural rate of interest, and their role is to keep the economy from being overheated by their fiscal brethren that can”t be so well contained.

    With this mindset, they have tried to reduce the government’s fiscal input to the economy while simultaneously believing that their theories gave them a simple tool to restrain inflation.

    On top of that there have of course been the pork barrels you note–but all the way the politicians have been following the lead of neoclassical economists. This applied with the deregulation of finance and the Savings and Loans fiasco for instance. So while what the government has done has to some extent gone against a “hands off” approach to markets, the general tenor of policy has been driven by neoclassical theory.

  8. Philip says:


    “But it is not just economists, what about governments and policy makers, perhaps the economists can delude themselves, but why would governments support these policies and watch jobs and industries disappear, national sovereignty being eroded and their tax base undermined?”

    Unfortunately, regulators, politicians, businesspeople, entrepreneurs, and the common person have either been taught GET or rely upon the ‘expertise’ of persons educated in GET.

    Politicians certainly do not like jobs being outsourced and industries disappearing. However, this is seen as the ‘inevitable’ outcome of ‘efficiently’ functioning markets as GET predicts.

    As to why ‘governments support these policies’, important decisions over investment and business operations are largely determined by concentrated private capital, with decisions made by unelected and unaccountable corporate central planners for their own benefit. Politicians only have so much control over the economy.

    What we have is essentially corporate mercantilism with huge centralized command economies (corporations) integrated with one another, closely tied to state power, with its grievous effects imposed upon the majority of people.

    “Governments are made of greedy, power seeking people…”

    The problem is the nation-state itself, not the politicians who inhabit it. As the anarchist PJ Proudhon said:

    “To be governed is to be watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded, by creatures who have neither the right nor the wisdom nor the virtue to do so. To be governed is to be at every operation, at every transaction noted, registered, counted, taxed, stamped, measured, numbered, assessed, licensed, authorized, admonished, prevented, forbidden, reformed, corrected, punished. It is, under pretext of public utility, and in the name of the general interest, to be placed under contribution, drilled, fleeced, exploited, monopolized, extorted from, squeezed, hoaxed, robbed; then, at the slightest resistance, the first word of complaint, to be repressed, fined, vilified, harassed, hunted down, abused, clubbed, disarmed, bound, choked, imprisoned, judged, condemned, shot, deported, sacrificed, sold, betrayed; and to crown all, mocked, ridiculed, derided, outraged, dishonoured. That is government; that is it’s justice; that is it’s morality.”

    John Beverly Robinson. 1923. “General Idea of the Revolution in the Nineteenth Century” (London: Freedom Press, 1923), pp. 293-294

    I think that says it all about government.

    “This explain why neo-classical economists are so prolific nothing like being in favour with the rich and powerful.”

    Yes, GET has no scientific validity but has immense utility to the rich and powerful.

    “They get money from wealthy individuals and corporate donors for their parties which allows them to gain that power.”

    If economists were honest, they would analyze in great detail the results of political campaign contributions. The greatest return on investment is not investing in the bond or share market but rather legally bribing politicians. Private capitalism has turned democratic government into a supermarket where politicians can be bought off like commodities to the highest bidder.


    As Keen and Minsky’s work have shown, even without the intervention of the state, capitalist markets will still result in a toxic buildup of private debt used to speculate on rising asset prices. Yes, governments have made the problem worse but they are not the ultimate cause of it.

    Markets can never be truly free because the rich are opposed first and foremost. In order to maintain their private power and privilege, they require the extensive involvement of a highly interventionist and powerful state to protect them from market discipline. This has always been a constant since the inception of private capitalism. Bankers are no exception and lead the pack.


    “…and either take it for granted or maybe perhaps think that it all magically appeared suffer from a sense of entitlement.”

    Rights under private capitalism are never given, they are always won. It is a testament to the courageous and continuous struggle of its victims that we can take the aforementioned things as granted. These things certainly didn’t appear by magic. If those before us simply accepted their conditions and were apathetic, then Australia would look a lot more like India.

    Entitlements like health care, education, etc. make the foundations of a decent society. I don’t think it is a sign of ‘greed’ or ‘dependence’ any more than if a woman has an ‘entitlement’ or ‘excessive right’ to step outside the kitchen or open a bank account (such things were not the case long ago).

  9. debtjunkies says:


    Do you then think that if government policies and outcomes were then based on the theories of those like yourself, minsky and others of a similar vein, that a market based system could generate sustainable outcomes for the economy.

  10. burrah says:

    Could someone venture an opinion about new Keynesian models?
    a) Are not Keynesian enough
    b) Just right
    c) Too Keynesian.
    My knowledge of formal economics is too outdated and I feel I need to get up to speed.

  11. ueberbaer says:


    “comfortable lifestyle” – Families with both parents working fulltime, the children in full day care to be able to pay for that lifestyle in their mcMansions and their nice cars.

    “of good health” – the health system is suffering a terminal decline. Cancer, diabetes, alergy rates etc, etc on the increase. Food quality diminishing over the last 50 years. Because we need cars to get anywhere, we suffer from a lack of exercise. We work more and play less.

    “nice cars” – really something worth living for? Fuel guzzling v8, v6 and a totally car dependent society?

    “abundent food” – dependent on imports, ongoing soil erosion and depletion (dust storm anyone?) diminishing nutritional value in vegetables, pestizides & fungizides residues, sinking water tables, food bowl Murray Darling on the verge of collapse, etc, etc.

    “good paying jobs” – incomes in real term adjusted for inflation going down over many years now. Young aussie laborers “bumped” off by foreign temporary resident subcontractors with ABNs. Growing rate of unemployment, economy on the brink of massive decline.

    “relative security” – has the level of relative security increased over the last 50 years? I think not. Just consider the anti terrorism laws past 2 years ago.

    “social” – I don’t think notable improvements in the level of social interactions or services have been made over the last 50 years.

    “transport infrastruture” – you mean roads for cars? what about public transport (a joke), trains etc? What about walkable cities & towns? Or do you mean large ports for mining exports?

    “healthcare” – not a week without some shocking story in the news on the decline of the level in health care. Costs for healthcare on the increase.

    I guess I am an Gen Xer but let me tell you that I am working since the age of 14 when I moved away from my parents home as a live-in apprentice. Never been unemployed and also worked for everything we own. So I am not responding to you in this manner because I feel personally attacked.

    So you have accumulated wealth through hard and diligent work and now are appalled by the Gen Yers with their low work ethics. Consider this: They have not been born like this. Like all humans/animals they have been shaped by their environment. An enviroment that has been crated by their ancestors. You. And I.

    All the wealth that has been created over the past 70 years have come at a cost that is not tracked in any ledgers.

    For a very good visualisation of the true cost of “Stuff”, consider watching this very good clip: “The Story of Stuff”.

  12. ak says:


    “The problem is the nation-state itself, not the politicians who inhabit it.”

    How ane when are you going to solve “the problem”? What if a few “nation-state” problems (like China for example) turn out to be too big or too hard to abolish?

  13. Rustypenny says:

    d2d – post #321

    “Boomers and Gen X are still going to struggle to accumulate assets. Boomers struggled early (70? – 80’s) but since then have seen assets go skyward.”

    Define ‘struggle’. A lot of mythical language appears to be in finding its way in intergenerational debate regarding the ‘struggle’ baby boomers went through.

    If getting a job and then accumulating assets that are not scarce is a struggle, I’d hate to think what the GD/WWII generation went through.

    There is nothing exceptional about the general life progression of baby boomers. Their parents were born in a depression and had to fight a world war. They also worked MUCH harder. 6 days a week was the norm.

    The higher welfare reforms and making 5 days a week the working norm was pretty much put in place by Chifley. To pay for this, the GD/WWII genration saw their top marginal tax rates at 60% during their peak earning capacity, all to pay for free university degrees and free childcare.

    No when the baton of obligation is passed on, tax rates go down and ‘user-pays’ comes in for services that hve universal benefit of varying degrees.

    We are also seeing the return of much unpaid overtime and working 6 days a week again.

    So I can’t say I buy the concept of ‘struggle’, its the norm that everyone does throughout the phases of their life. It’s part of a chronological sequence.


    “They have sold this to their gen x children who are now the struggling middle income mortage belt. Gen Y have sat back and seen the whole “working battler” lifestyle played out by their parents and accordingly they will reject the lifelong goal to build up assets.”

    Or…. it is simply unattainable at present. A previous claim, a pearl of wisdom so to speak, is for ‘avoid the Mcmansions, settle for a cheap property as your first property’.

    This ‘cheap property’ just doesn’t exist. Even in places like Sydney, 3 bedroom apartments in Liverpool cost $300,000.

    And I’m not pointing this out in terms of location snobbery, it’s that if relatively well off middle income non-home owners are resorting to Liverpool because even this is 6 times average earnings, then where do the non-english speaking, mimimum wage earners, the single parents, the partially invalids go? There is very little lower than this price.

    “They will consume today and worry later – except that later may never come. They are a mobile generation and want a varied lifestyle. This means that they will not want to get bogged down to property and set life choices.”

    How can they realistically be expected to choose property?

    I’d say it’s more of a sympton of financial nihilism. If the perceived life/financial security is not attainable, then behaviour which pursues the opposite in terms of being self-destructive in terms of pursuing this life/financial security.

    When hope doesn’t exist, this is quite understandable.

    “Eventually the back of the ponzi scheme will be broken because a large chunk of this generation will not play ball and will not buy the Mcmansions being sold by the gen x children of deceased boomers.”

    They’ll buy it, just the demand will not meet this supply, thus downward pressure on prices will occur.

    “Then we may be able to see change in the way the property ponzi is managed. Price to earnings ratio’s will come down, tranfers taxes will come down and property will again been seen as something of a lifestyle choice that meets other objectives rather than a speculative investment.”

    Steve has to walk to Mt Kosciosko because his prophesising abilities failed to take in all variables. There are too many variables for your above claim to be considered a viable statement.

    For starters P/E ratios coming down?

    I doubt that. Earning probably will come down, but then I would predict prices would too, keeping P/E’s the same.

  14. TheWord says:

    Thanks for that, Steve.
    The point of my query (whether your model can reproduce an Argentinian experience) is getting to the heart of whether we can expect deflation or inflation. We know that your model can predict a deflation in the future, however if it can also reproduce a South American-style inflationary surge, then perhaps we can more closely analyse what are the essential determinants/decisions which result in one experience, or the other.

  15. KBH says:

    ueberbaer – please, no parsing of what I said, without due regard to the whole. So often in debate & discussion words & ideas are taken out of context. The comparison was with harder times of the past, and with the developing world where people are struggling to survive.

  16. Steve Keen says:

    They are neither new nor Keynesian. They are neoclassical models with nominal wage rigidity used to explain unemployment. A waste of time.

  17. Steve Keen says:

    TO some degree, but all I’m talking about is taming the financial system. We still have problems with the sustainability of the production system on a finite planet (though I don’t want to re-ignite the global warming impasse here), and if we ever solve that then the issues of distribution of income still remain.

    What I would hope though is that large-scale financial crises could be made a thing of the past.

  18. Philip says:


    I’ve thought of an interesting economic experiment that can be performed in the classroom. Take a class of high-level economic and finance students (3rd-4th year undergrad, masters, PhD) and break them up into small groups, perhaps 2-3 students per group.

    Then assign a chapter out of the conventional microeconomics textbook to each group. Their assignment for the semester is to test the validity of the models presented within the chapter they are assigned. The assignment output will consist of a report and presentation.

    The result of such an experiment will be that many of the models can be trashed and a new book, Debunking Economics: Student Edition, can be made!


    I am not going to ‘solve’ any such problems myself. It is up to people to organize themselves together to decide what they want to do and how to accomplish it.

  19. debtjunkies says:


    My comments were intended as an observational interpretation of the situation as i see it unfolding over the next 10-20 years.

    Matbe I should have said it this way:

    Gen Y, realising that they can only afford to buy out the back of bourke (no offense intended to anyone) will adapt their lifestyle goals and views and choose to rent and enjoy the inner city and beach side lifestyle, saving their spare cash and investing it as they can.

    This will then lead to an eventual rethink of the way society as a whole views property ownership and accordingly government (as the representatives of society as a whole) will adapt their policies to reflect these changing views of society.

    As for prophesising, isnt that what most of the peolpe here are doing, trying to throw up differing views as to possible outcomes yet with no real chance of wider acceptance.

    I think that is the reason most of us are here, we understand there is a real problem but no one except the handful here seem to take the same view.

    I am also hopeful.

  20. The Outback Oracle says:

    “For starters P/E ratios coming down?

    I doubt that. Earning probably will come down, but then I would predict prices would too, keeping P/E’s the same.”

    Zero and negative (after tax) real interest rates ensure high P/E ratios, more and more leverage in an effort to produce some sort of return.
    What has been engineered in the past, and what is trying to be engineered again (or kept inflated?)is earnings coming down, Prices going up, and the ‘gap’ filled by credit.

    What a wide-ranging and interesting discussion this has been! Thanks to everyone.

  21. Debt2death says:

    Oi… Rustpenny @321 is debtjunkies not me. Now that this debate seems to be back to the generation game..

    My take is that the govnt has made a ‘cradle to grave’ deal with the boomers. They paid their due so they are entitled to their pension as far as I am concern.

    Imagine contributing circa 9% of your wages/salaries to the welfare state, all your life, and then turn round to be judged by everyone..

    Not cool……

  22. KBH says:

    RE Business Earnings.
    On a business level, it is not all that difficult to maintain profitability/earnings in a declining market, if you are quick to reduce costs (fixed & variable). At the beginning of a slowing environment, often raw materials & some costs & services come down too (eg Metals, Fuel, freight etc). The other boost comes from weaker competitors falling away, leaving the stronger with a sudden lift in sales, and reduction of competition.

    I suspect this is what we have seen in the past 12 months, and why many businesses have been able to report reasonable profitability.

    The real issue is keeping the revenue line high, which is tough in the current environment of reduced spending. That is what most business fear, as once the revenue line approaches the break even point, then businesses are forced to draw down against their capital, thus devaluing their balance sheet valuations.

    If things continue to slow & revenue continues to drop, then collapse comes quickly after that.

  23. scepticus says:

    Buiter advocates turning public debt into public equity. I still think this leaves the problem of the default leaving open the door for hyperinflation.

    “Finally, I would propose that instead of issuing traditional government fixed or variable interest debt instruments (including index-linked instruments), governments instead issue real-GDP-growth-contingent bonds. These instruments are not new. GDP growth warrants were issued by Argentina following their most recent external debt default in 2002.

    As a simple example, government debt could be of the fixed nominal value, variable interest rate type where the interest rate equals the growth rate of nominal GDP plus some constant. Provided the real GDP and GDP deflator data cannot be manipulated by the borrowing authorities, and provided a rule is devised for handling GDP revisions, this would reduce real interest rates on the public debt when real GDP growth and/or inflation were low. Should nominal GDP growth go negative (by an amount greater than the constant in the interest rate formula), this would be handled as a reduction in the amount of debt outstanding, so negative interest rates would not be a problem. GDP growth-contingent bonds are probably the closest we can get to ‘equity in a nation’. And turning public debt into public equity would be a major enhancement of the policy arsenal of governments in the current phase of the global cycle. This equitization of the public debt would reduce the real burden of debt financing when it is needed most, during a downturn and when deflation threatens.”

  24. KBH says:

    Q4 is always an interesting time for US company’s. Being a financial year end, it stands as the measure in most senior managers performance bonus packages. In a large Corp could be 200% of base salary for the CEO, with proportionally lower % within the structure through to middle & lower management.

    So the corp’ officers are highly incentivised to reduce costs, and boost the bottom line.

    The downside for the general employee is reduced overtime, and in some corp’ time off without pay. The downside for society/economy is that the general employee is not going to spend, out of either reduced disposable income or out of fear. Although the business may appear to be more profitable, the price may be paid elsewhere by the whole.

  25. Philip says:


    “All the wealth that has been created over the past 70 years have come at a cost that is not tracked in any ledgers.”

    Very true. If detailed cost analysis could be performed to discover and monetize (where possible) the costs of the private sector (negative externalities, state protection, crimes, etc.), many industries and most medium-large firms will not have made a single cent in profit in their entire histories.

    If such cost analysis can be performed on every corporation in the ASX 500, I would suspect that not one of them has created a single cent in profit once all their costs have been factored in.

    Such firms/industries are not wealth creators, but wealth extractors, which have the goal of concentrating as much wealth of society into the hands of its managers and owners (top 10% of income ‘earners’ and asset holders) whereas most costs are imposed upon the bottom 90%.

    My own research into the pharmaceutical industry has discovered 41! costs that are imposed upon individuals, society, taxpayers and consumers. Economists like to pretend that the only cost in this instance is a temporary scheme of monopoly pricing.

    The pharmaceutical, software, petrochemical, finance, transportation, banking, and mining industries (among others) would collapse tomorrow if they had to internalize their costs.

    Economists don’t bother to factor such costs into their economic analysis of markets. The problem is twofold: (1) because the costs are so large and extensive, aggregating and monetizing them takes an extraordinary amount of time, and (2) realizing such costs exist immediately undermines the supposed ‘efficiency’ of capitalist markets.

    Economists don’t bother with such analysis because it is the quickest way to an early retirement. Part of the bankruptcy of neoclassical economic theory is that it assumes that firms internalize their costs and that if they do exist, they are small in scope and can be easily handled.

    The standard proposal of dealing with such costs is the ludicrous ‘Coase theorem’. It advocates the problem as the solution – more markets!

    Unfortunately, the costs imposed by the private sector, with the help of government which looks the other way and pretends such costs don’t exist, are the rule rather than the exception. Capitalist markets provide strong incentives for firms to impose their costs onto others. The bigger the firm, the more power it has to externalize costs.

    Firms hire accountants, tax lawyers and economists to figure out profits, losses, revenues, tax, etc. which are then detailed in annual reports. Guess how many professionals are allocated to detailing the costs that the firms externalize? None.

    As two economists put it:

    “…the fact remains that in postfeudal history a plausible case can be made that no economic failure has contributed more to the waste of productive resources than misallocations of markets uncorrected for external effects.”

    Albert, Michael and Robin Hahnel. 1990. A Quiet Revolution in Welfare Economics (Princeton University Press).

    Steve’s work would certainly help to diminish the endemic costs of one industry, the financial industry, to everyone’s benefit (apart from managers and shareholders, of course).

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