Sense on deficits & deleveraging: Koo & Varoufakis
on July 4th, 2011 at 12:43 am
My focus is and will remain on explaining how the crisis came about, but in the middle of the crisis, government policies have the potential to either lessen the crisis or make it more extreme. Two of the best commentators on sensible policies to lessen the crisis are Yanis Varoufakis and Richard Koo.
Yanis (together with Stuart Holland) has authored the “Modest Proposal” to overcome the European crisis (the latest version is here in PDF: “The Modest Proposal“). Richard Koo recounts the Japanese experience with the bursting of its Bubble Economy and the many policy twists and turns afterwards in the Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession.
Richard argues this case with the empirical data provided by the unfortunate experiment that Japan has run in macroeconomics since its Bubble Economy burst back in 1990. Richard gave a keynote presentation at the Central Bank of Argentina conference last week, which I have posted on YouTube and reproduce below.
Both Yanis and Richard argue that government austerity at a time when the private sector is in a debt crisis is counterproductive. If the private sector is reducing its expenditure by deleveraging, then the same behavior by a government intent on “balancing the budget” will amplify the depressing impact of reduced private expenditure, thus deepening the crisis. Unfortunately this is precisely what the EU proposals for the PIGS are likely to do. Richard’s historically based analysis predicts that these austerity measures will deepen the crisis, and quite possibly result in increased rather than reduced government deficits, on the experience of Japan.
Yanis’s alternative Modest Proposal is to effectively have the European Central Bank behave as a true Central Bank. At present the ECB acts more like a financial disciplinarian than a Central Bank, since the only debt it directly funds is that of the EU itself–which is at the trivial level of about 1% of European GDP–while it imposes strict standards on how much public debt member states can carry on their own books (no more than 60% of their GDP) and how fast that debt can grow (budget deficits cannot exceed 3% of GDP). Member states are responsible for issuing and financing any debt they issue themselves.
In practice, these standards have been imposed very laxly, but in the current crisis they are being imposed with a vengeance on the PIGS, with Greece the country most in the firing line right now. Since it is almost universally acknowledged that Greece can’t meet these terms, the cost of Greek debt has blown out dramatically–further guaranteeing that it will fail to meet the conditions of the EU “bailout”–which of course is a means of paying Greek’s creditors, rather than Greece itself.
This is very different to the situation in the USA. If the European situation were imposed on the US, then each State in the USA would have to issue and fund its own debt for any budget deficit greater than 3% of GDP: there would be Californian bonds, Florida bonds, etc. You can imagine what the ratings agencies would do to those bonds, which would in turn guarantee that California and Florida would go bankrupt. Though the US States are in a parlous position, they are not formally bankrupt, while the US Federal Government is able to raise debt finance for itself and its States at near zero rates.
Yanis’s proposal is for the ECB to adopt the debt of its member states up to the 60% ceiling allowed by the Maastricht Treaty, and then to issue bonds to finance this debt which would then be serviced by the relevant member states. On the precedent of the US itself, this would result in highly rated bonds that would need very low interest rates, resulting in servicing costs that could be met by the PIGS–even by Greece (Greece would need special further arrangements since its public debt, when the last version of the Modest Proposal was published, was 87% of its GDP).
The Modest Proposal goes well beyond this single detail, and I suggest reading the full document since I don’t have the time to outline it in full here. It includes provisions to properly stress test the commercial banks that caused this crisis in the first place, to impose the pain of adjustment on the banks and their shareholders via equity transfers for any recapitalization needed to maintain solvency in the face of their toxic debts, and to finance infrastructure investment in Europe so that it can grow its way out of this crisis rather than deepening it by misplaced austerity.
Anyone who thinks that austerity is the way to go, on the basis of simplistic analogies to the situation of a household having to balance its budget or the like, should watch the presentation below by Richard Koo.
I listened to this idiot’s entire presentation and didn’t hear him mention ‘wage share’ even once. When Japan was an industrial powerhouse (1975) the wage share was very high. By 2005 it sunk to the same level as the other weaklings.
I’m certain this guy doesn’t understand that wage share is the first victim of inflation.
Here is a link to a 23 page IMF paper on wage share that doesn’t even mention the effect of inflation on wage share. Link
It is depressing that the influential are so clueless.
From Yves Smith: Greece’s forced fire-sale
“Up for sale are 39 airports, 850 ports, railways, motorways, sewage works, a couple of energy companies, banks, defence groups, thousands of acres of land for development, casinos and Greece’s national lottery. George Christodoulakis, Greece’s special secretary for asset restructuring and privatisations, said the sell-off would raise €50bn (£44bn) to help pay back the country’s €110bn bailout debt.”
http://www.nakedcapitalism.com/2011/07/look-what-you-can-buy-in-the-greek-liquidation-sale.html
“Foreign investors don’t want to invest in a country where there is no flexibility in hiring and firing people,” he said. “You don’t want to invest in a country in which you wake up and a new law has been passed which totally undermines and destroys the value of the investment you’ve just made.”
And from a glance at Australian news this morning it seems “leadership” is hot on the track of selling farms and tracts of agricultural land to “foreigners” and anything.s else that becomes of money demand while totally screwing everybody’s lives that were (repeat: were) associated with the live cattle business trade with Indonesia; that is now finished! Well, if you can’t get a tax off the ground, then sell something; an airport, ports, railways, etc., all gone, already!; Okay then, now sell the land!
And the above paragraphs appears to make Australia investor heaven; as the Federal Leadership can do anything it wants with the obedient workers serving the foreign masters and the foreign Masters totally loyal to “Leadership” – what can go wrong?
Just stick it to the Diggers and Veterans
Great “leadership”. Julia and the Wizards of Oz.
Only in the Land of the Bogan.
“Man can be destroyed, but not defeated.” Ernest Hemingway
It is certainly true that austerity will amplify the deflationary depression. That does not automatically mean that a nation in deep debt should continue to borrow and spend. IF the USA and Europe had strong balance sheets, THEN that might be a wise thing to do, IF they had followed ALL of Keynes macro prescription and SAVED during the boom years. Of course if they had there wouldn’t have been any boom years….
There is serious risk even at the present level of Sovereign debt that a rise to even nominal interest rates will result in a ugly feed-back loop of increased interest servicing costs leading to more borrowing to avoid austerity, resulting in even higher interest servicing costs, etc. This leads to currency collapse — hardly a desired result.
For economies with aging populations and a generational shift from saving for retirement, to “spending retirement savings” taking on more debt WILL NOT BE PAID BY FUTURE GROWTH, because even in good times growth will not be there with this demographic shift.
“The lack of political-economic stability is the single greatest threat to the future of everyone and the politicians will not even review what they have done. They blame the greed of corporations and charge the Justice Department to hunt down anyone who found a dime outside the country and did not report it, yet the SINGLE greatest factor driving jobs from American shores is political-economic instability. For the greatest difficulty presented by American politics is the ABSENCE of consistent tax policy for this nonsense of always attacking the rich to win office is pure Marxism.”
http://armstrongeconomics.files.wordpress.com/2011/06/armstrongeconomics-presidential-elections-2016-062511.pdf
It appears to me that political-economic instability is the preferred Sport of the Hunt of the Oz “leadership” but where the hunted are the domesticated and tame Bogan. It’s easier this way especially when your industries are all foreign owned and controlled, and a priori loyal to a continuity of uninterrupted looting, ad infinitum.
Steve,
Given your work showing that the financiers are the sharks, and that they are the major source of Minskian Ponzi-speculation that is the root cause of the economic destruction. Isn’t continuing to borrow and spend, just rewarding and enabling more Ponzi-speculative behavior?
Steve,
The rationale for imposing balanced budgets and austerity programs is that interest rates will fall because government will no longer crowd out private investment. If interest rates were to fall, it thus makes it easier for individuals, households and businesses to consume and invest, leading to a resurgence within the economy.
In the countries affected by economic disasters, their interest rates are already at record-low levels, meaning it would be unlikely to fall further.
We know that balancing the budget and implementing austerity programs is a ridiculous policy. The question is: is the concept of the government crowding out private investment by running deficits backed by empirical data or another piece of nonsense neoclassical doctrine?
I suspect “crowding out” is neo classical education. It is definitly taught in High School economics. Surely the Japanese experience is a direct evidence of the fallacy of crowding out theory.
“We know that balancing the budget and implementing austerity programs is a ridiculous policy”
well said phil,
whats even more ridiculous is the notion of crowding out.
when the government runs a financial deficit, the funds for purchasing treasuries , the government debt comes from creation of that deficit.
there is no crowding out.
hey warren,
i dont know where your coming from with this wage share stuff,
perhaps you would like to explain
but mr koo , is right on the money. amen
and i am sure you are charming fellow, so i dont think you should give us the opportunity to think any less of you , by you running someone down as an idiot.
when clearly mr koo is a well respected figure in the economic community
“There is serious risk even at the present level of Sovereign debt that a rise to even nominal interest rates will result in a ugly feed-back loop of increased interest servicing costs leading to more borrowing to avoid austerity, resulting in even higher interest servicing costs, etc. This leads to currency collapse — hardly a desired result”
sorry attitude check,
i am sure you havent gone to the dark side,
but the above paragraph wouldnt be out of place in a neo classical hymm err i mean text book.
you couldnt have described IGBC( inter temporal budgetary constraint ) more succinctly.
the problem is,
its all wrong,
and if you want the evidence just look at japan over the last 20years and america over the last 3 years.
apparently the bond markets dont realise they have been taken for a ride, and supply siders just like don dunstan are waiting for the interest rate hyper inflationary tsunami to come in,
they think it will happen any day now , once the markets come to their senses
well we are still waiting
For me the plan is lipstick on “PIGS”.
This proposal does not address the underlying trade imbalances within the EU. The Greeks will still have a trade deficit and the Germans a trade surplus even if debt stock worth of 60% annual GDP magically disappears from the balance sheets and the usury (interest) rate dictated by the “markets” is reduced. Resetting the debt bomb clock does not stop it ticking.
The proposal explicitly encourages Chinese “investment” in debt securities that is sending cargo in return for bonds and maintaining the trade deficit of the EU zone as a whole against the developing countries.
The main side effect is disabling the self-regulatory floating currency mechanism. The same poison has already made the American economy gravely ill. USD and EUR should freely float against the currencies of developing countries, balancing the trade in the long run. China would be unable to maintain a trade surplus if the exchange rate mechanism really worked. This global imbalance is exactly what is destroying the manufacturing in the peripheral EU countries. But we must not blame the Chinese. They only use the global trade structure already put in place by the Americans and Europeans for their own benefit.
BTW the same logic applies to countries within the EU zone. There is no imbalance between the Netherlands and Germany. They can share the currency. But there is an imbalance between Greece and Austria. This imbalance cannot be solved by deflating the Greek economy. It could be easily solved by introducing a floating currency in Greece.
The authors of the paper still believe that governments should finance themselves by borrowing from the “markets” and that saving brings about investment. We can leave these topics to Bill Mitchell.
The fact that George Soros supported the plan means that another Rose or Orange Revolution is on its way. Yes the plan seems to be plausible and might be implemented but in the end it will be either Drachma or DDR (Eastern Germany) I am afraid.
Mahaish July 4, 2011 at 10:10 pm
I suppose referring to Mr. Koo as an idiot was over the top. Sorry.
However, talking about printing hundreds of trillions of yen to support GDP while disregarding the wage share decline in Japan annoyed me. The policy decision to keep the yen weak to support exports meant that they imported the US inflation and then some. This, of course, led to the real estate bubble and crash.
The “strength” of a currency is related to the real components of it. Wages are real because they come from productive work. The “wage share” of GDP is maintained when labor productivity gains are captured in the form of higher wages. The “profit share” of GDP contains both real profits and inflation. A growing profit share means that the workers are stuck with the inflation bill in the form of higher prices whereas a stable or growing wage share means that real wages increase over time.
You know what else is counterproductive? Bailing out a criminalized bankster class. How about ignore or “deregulate” rules and laws which were intended to prevent this mess, pretty counterproductive too. Please don’t forget to mention it.
Why do I see more and more “clever” economists showing fancy graphs to just ignore the underlying problem and “go from here”. Which means somehow you make someone else than the gamblers en criminals pay! Even if it is after the fact.
The over leveraged and, according the time proved rules now discarded, insolvent institutions should go bankrupt. Now. We, and the governments, shouldn’t be threatened by those banks but the other way around; the financial infrastructure has to keep functioning, or else..
All you guys are doing is find ways to keep asset/price/debt bubbles from deflating and the status quo in tact. There used to be this function of money; storage of value. Is it out the window? The economic growth of the last 10 (30?) years was fake, please don’t find tricks to keep this charade going but find ways to dismantle the financial, wealth extracting machine. When we can’t rely on the value of money, well, I’ll call that counterproductive.
True, if nothing done to offset a major deleveraging then the fall in GDP will be larger. That’s a no brainer. But Koo’s presentation didn’t answer critics of unsustainable budget deficits. Nor did he address questions of unsustainable government debt. Japan’s debt to GDP ratio has just proven not to be an issue so far. But the story Japan has not played out yet has it. No one doubts that government spending can postpone a correction.
Japan faces an ugly future. Gross government debt approaching 200% of GDP. An aging and declining population which will need to draw on its savings rather than invest in Japanese Government bonds as health and medical expenditures rise. The need to finance major reconstruction to repair damage arising from the 2011 tsunami.
Koo doesn’t even suggest that Japan’s output level is sustainable even at current levels! Well not in the presentation anyway. His demand management model assumes that the true level of demand at which the economy must be maintained is the boom high. But he says nothing about whether any given level of output is sustainable. What if that was an artificial high due to the boom anyway? Does it make any sense to not let it drop to a level that is sustainable?
Koo doesn’t quantify a time period needed to stop the stimulus nor does he quantify it. He simply asserts that government spending should offset private sector deleveraging and that this may be need to be extended because of external factors. In his presentation he states that Japan’s stimulus spending needed to be extended because of the dot com bust.
My point is this: what good is a model that cannot quantify the level of stimulus that is adequate to maintain GDP at any point over time (except to say that it needs to match private sector deleveraging) and which cannot specify a time frame in which the economy would fail to require that stimulus. Moreover, it takes the post boom high as the natural sustainable level that GDP must be maintained. But wasn’t that an artificially high level in GDP due to loose credit. The Japanese story hasn’t played out yet. Last year Japan’s largest pension fund became a net seller of Japanese government bonds, a trend that will continue due to demographic factors.
Will Japan be able to maintain the stimulus for another decade and from where will the savings come? Surely funds need to come from foreign savers and will they be satisfied with a yield close to zero. Is that the correct price for lending to a government with a mountain of debt?
What is he saiding is blindingly obvious. It ammounts to no more than, If the government spends our money to offset the contraction in lending due to the artifical high of the stimulus it will postpone the correction.
Someone like Mish Shedlock would call Koo a Keynesian clown. I expect that ten years from now, Koo still be saying that it is still too soon to lower government spending. due to the global financial crisis. Koo has no answers.
Whoops
apologies for the proofos
“What is he <> saying is blindingly obvious. It amounts to no more than, If the
There is only one major matter that should be the Centre of discussion these days and that is the shutting of the whole Banking system and replacing it with a credit distributive system that does not centralize wealth by the imposition of Debt through Usury:
Some comments:
Foreword:
There is no competition between banks – only illusion with collusion and collaboration.
Banks:
1. Banks are given the privilege of being Commercial Private
Enterprises
2. Banks are given the privilege of being protected by Government
by all means even by the Military as well as receiving wealth as a
transfer from the people
3. Banks have the privilege of having Policy written for them so
suit the protection of their asset values as well as to increase
their asset accumulations.
4. Banks are privileged in all matters and are rated as a priority
to all other matters.
5. Usury centralizes wealth to a singularity or to the Banks, by
function and design.
6. Usury has been declared illegal many times and banned by Many
Nation States over the past ~3 millennium.
8. Banks, political “leadership” and bureaucracy is a sycophantic
relationship.
9. Banks, political “leadership” and bureaucracy are a predator and
criminal organization.
10. Banks, political “leadership” and bureaucracy are also agents
of the socio-economic oxidization processes.
Summary:
“Banks cannot be reformed. Banks can only be closed”.
1. Usury is a rotten system – when put in the hands of lesser men -
as it invariably occurs.
2. Naturally Bankers demands a Risk Free environment so they capture
(eagerly awaiting to be captured) political “leadership” and just tells them what to do.
3. The political “leadership” are eager to do the bidding of Banks
as it allows them to appear elite and washed while warmly draped in
wealth and power.
Summary:
It’s the system!
The Banking system sucks!
The Banking system is flawed and scientifically invalid as a socio-economic infrastructural functional tool as it favours only those that control the Banks – that is where political “leadership” plus in the case of Europe, the bureaucratic “leadership”, are merely useful fools and collateral and expendable cost s of doing business.
My Message: No Banking Reform – We need a totally new credit distribution System.
Banks cannot be Reformed. But they can be closed!
Let the dead bury the dead.
Speckie July 5, 2011 at 11:41 am
Most agree with your skepticism, from looking at the facts. Richard Koo has made one advance over the other Keynesian clowns. He has suggested that the high unemployment equilibrium is not due to “animal spirit” or irrational liquidity preference of Keynes (speculative-motive in Ch. 15 of the General Theory). Rather it is due to solvency or balance-sheet concerns, a rational and not an irrational preoccupation.
Central banks and regulators have been injecting liquidity into the global financial system throughout the crisis on the basis that it was a Keynesian liquidity problem. Later on, they had to admit secretly that it was a solvency problem. Central banks are mandated to manage liquidity and not solvency of financial institutions, which should be allowed to fail under the mantra of capitalism.
However, Keynesian interference of capitalism, through solvency bailouts, manages only to shore up balance sheets temporarily, because there remains a new liquidity problem: that of profits and cash flows of a going concern. The bad loans on the books do not provide income (revenue) against expenditure of depositors funding (cost), hence lack of profits and losses are in prospect. Non profitable banks are zombie banks, as no expansion of credit can take place, without increased equity from retained profits (in a fractional reserve system).
Richard Koo indcated that the rest of the world is “going Japaneezy” (to borrow Steve’s phrase), because everyone is avoiding writing off bad loans, even though they all said they knew better to make the “same mistake”. Richard Koo has also congratulated himself (for giving advice to the Japanese government) for avoiding a Japanese depression in the early 1990s. Like Japan, governments run large budget deficits to compensate for balance-sheet repairs of the rest of their economies, to avoid recessions.
He indicated (Exhibit 14, about a third way through his talk) that Japanese GDP had not fallen, maintaining an average zero real growth level for 15 years later, till 2005. He made the unproven assertion that the Japanese GDP would be a lot lower now, had there been a depression, falling into a low-employment Keynesian equilibrium. This ignores the creative destruction of a depression if allowed to work. The existence of stable depressed equilibrium is an assumption, not a conclusion based on sound dynamical theory. We would never know if a depression might have had V-shaped recovery, with Japanese GDP now (15 years later) being substantially higher.
In fact, Japan is a classic example of the failure of Keynesian economics: the politically easy option. Keeping the Japanese economy from falling into recession by running ever larger government budget deficits is merely “kicking the can down the road”. It is still the same zombie economy, with the same zombie banking system. The badly needed savings of a large and growing aging population have been stolen by its government through debt, which requires a shrinking population of future taxpayers to repay. The government debt Ponzi scheme will unravel with people living in old-age poverty. Not only is fixed interest investment a disaster, equity investment is worse, with the Nikkei still below 10,000, more than 20 years after it peaked at 38,000.
In Japan, there has been little to show for 20 years of Keynesian economic stimulus. Like lemmings, the rest of the world is following the teachings of another false prophet.
Self-explanatory, I hope:
“In the 1950’s [America was] the richest nation, the richest city on earth was Detroit. They voted for change and so now it is the poorest city in America. At the same time, the nation of South Korea, of all the nations on earth, was third from the bottom. Virtually the poorest nation on earth. It is now tenth from the top. If you understand the principle, the greater freedom, the greater the wealth, you can then put any nation [on this chart]. Now you can go to Tagusagopos, you can go to Buenos Aires, you can go to Cairo, you can go to Philadelphia and all you need to know is what percentage of the Gross Domestic Product is controlled by government, and the greater the government, the greater the poverty, and that’s all politics is about. Every day politicians say, “I can make a better decision for you than you can for yourself, and let me take your money away from you and make it on your behalf” and thus make the nation poorer.”
– Bob McEwen
(1950-) US Congressman (OH-R) (1981-1993)
Now as the Carbon Credit scam has been passed last night by the Senate, the Marxist Labour Government gets busy paying off its friends and nationalizing the losses so there is no doubt who is going to pay this Scam Tax and here is the first of your share at A$2.5 Billion:
“The Australian says the government might buy the Hazelwood power plant for $2.5 billion and shut it down. Why? Because it is Australia’s ‘dirtiest’ coal-fired power plant. $2.5 billion is a lot to pay for a toy you can’t play with.”
http://www.moneymorning.com.au/20110705/father-knows-best.html#more-5431
And the owners:
“GDF SUEZ has 218,350 employees worldwide and 2010 revenues of €84.5 Billion. Listed in Brussels, Luxembourg and Paris, the Group is represented in the leading international indexes: CAC 40, BEL 20, DJ Stoxx 50, DJ Euro Stoxx 50, Euronext 100, FTSE Eurotop 100, MSCI Europe, ASPI Eurozone and ECPI Ethical Index EMU.”
This really puts emphasis on Australian becoming the Nuclear Toxic Waste Dump for the World as promoted by John Howard and pursued by Julia Gillard in the arms of Tony Abbot and probably Mr Paradox, the Brown guy of the Green Party of perhaps the Green guy of the Brown Party: who cares…
Tell GDF Suez to shut down their own plant and clear the site of all contaminants at no cost of the Australian People: and Pay for the Carbon emissions until it is done! This should be full risk commerce!
What’s bankrupting a few farmers and truckers, ruining the lives of those in the beef and shipping industries and offering their Farms for sale to the foreign hot money investors seeking safe havens?
Just in a day’s work for “leadership” of Oz and they call it sound economics.
@steve
Do the models need an additional feedback loop here to explain the situation that firms with negative balance sheets dont invest at real zero interest rates when faced with possibles with positive NPV. Rationally why isn’t there an investment boom, either privately or publicly funded? Explaining that appears to be at the heart of our current predicament.
Thinking of the work on the macroeconomic effects of debt overhang on firms investment decisions See Occhino’s work http://www.clevelandfed.org/research/commentary/2010/2010-7.cfm
of course this relates to q as well (Hennessey)
Is there a possible explanation of the so-called marginal productivity of debt (palyi) here?
This is all looking very Austrian with the non-neutrality of money creating malinvesntment – though that by itself is not a bad thing.
@ Lyonwiss July 5, 2011 at 6:43 pm | #
“Central banks and regulators have been injecting liquidity into the global financial system throughout the crisis on the basis that it was a Keynesian liquidity problem. Later on, they had to admit secretly that it was a solvency problem. Central banks are mandated to manage liquidity and not solvency of financial institutions, which should be allowed to fail under the mantra of capitalism.”
An observation made after years in the business of helping public companies in insolvent situations:
These Companies formed Executive management cliques and as I dug into why this was happening it became clear it was for their collective grouping protection through a risk mitigation mechanism that needed no skills just common interests in mutual need. What they did was trade between each other, a priori, in the big end contracts and undertakings plus goods and services. Payments between them all were always prompt and the liaison’s tight. They formed big wheels of cash flows.
But for good and services outside the realm of the collective it was done at random and placed with smaller and weaker companies which could not afford payment delays and or non-payment. These companies were often savaged and unpaid and walls of protection erected and also issued legal threats and suits for any pretentious issues – just to get rid of them.
Now, when the CDO’s and all those other exotic CDS’s and funny stuff started surfacing on the visible horizon, I would say that many of these little ventures stopped fixing their collegial collectives problems and stopped the interchanges not knowing to what level of Debt was present in the other.
I must say, that the management of these public companies by their CEO’s and other executives was just plain criminal incompetence in the main but where the protective barriers (from creditors) were maintained high and strong fortified by legal and political influences.This was a management strategy.
And, t was the early 1990′s when it was pointed out to me, and I saw the evidence personally, that most of the large public Banks of Europe were technically bankrupt.
None of this is any surprise to me at all and I have absolutely no faith in the abilities of political and or bureaucratic “leadership” as all their words can be categorized as “farting through their faces” as they know nothing else.
“Will Japan be able to maintain the stimulus for another decade and from where will the savings come”
under sectoral balances in a sovereign currency regime speckie,
the savings will come from the government,
thats what deficits should be for , repairing balance sheets.
.
the government financial balance + the domestic private sector balance + foreign privste sector balance = zero.
so
under sectoral balances , the government financial deficit is equal to the domestic and foreign domestic private sector financial surplus
and the government with a sovereign currency doesnt have a financing problem for anything,
the question is ,
at what price level, so the skeptics go,
well check out where the price level has been in japan over the last 20 years.
richard koo , is right , we arent talking about the government creating a hyper inflationary hell,
what they were staring at was defaltionaryhole so big, that even two decades of budget deficits and government debt hasnt been able to fill .
same goes for the yanks,
its going to take them 10 years of continous deficits to repair their little balance sheet problem
@mahaish
Forgive my naivete but isn’t the problem of viewing the economy through an accounting identity that (at least in the real world where politicians make the decisions) it facilitates current and future misallocation of capital.
That process is already built into my models Andrew, since investment is a function of profitability, and profit is net of interest payments. An excessive level of debt drives investment to zero, even with zero official rates of interest–since the commercial rate will almost never be less than 3% higher than that.
hi myopia,
no doubt about it
government policy which usually requires spending is quite often symbolic and thus miss spent,
its about what the government believes in , and thinks what we ought to believe in, as oppossed to what works .
but
the bottom line is the money needs to be spent, sometimes
for instance we can all dredge up instances of poor spending decisions when it comes to the schools infrastructure program,
but the point is ,
whats a bigger waste of resources,
a few schools with halls they didnt need,
or
a whole cohort of subbies on the doll que, and a severe recession to boot.
i know which option i would pick,
Hi mahaish,
Thanks for the reply. But here is where I’m suffering a certain amount of cognitive dissonance and confusion.
The last decade (and more) we’ve had a massive expansion of private sector credit/money. Much of it malinvested and at some point this turned into a “Ponzi” type debt bubble. Now as we know from reading Steve’s blog much of this was not savings invested it was just money created out of thin air by banks.
Of course the bubble burst.
Now thinking of this in terms of the accounting identity does this mean government now has to match that money (created out of nothing for no good purpose) with it’s own money creation (out of nothing for it’s own purposes) ?