WSJ — Strain on the U.S. Economy

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Here is great short video interview with the Wall Street Journal explaining why 10 year US Fed bond yields are so low...

About David Lawson

-Worked as a real estate agent in 2009, have since left the industry because I now see that it is all fuelled by euphoric expections and debt -Started to become concerned about the global debt bubble after reading 'The Credit Crunch' by Graham Turner about a year ago and have since followed Steve Keens debtwatch blog -Competed a Bachelor of economics in 2004 specalising in iternational trade and finance -Lived in the USA for 5 years of my life, have witnessed first hand there frivolous spending patterns and watched our country become the same over the course of last 10 years
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57 Responses to WSJ — Strain on the U.S. Economy

  1. alainton says:

    @NeilW

    One of the prob­lems of expect­ing the sec­toral bal­ance approach to sup­ply all answers (as opposed to most) is that it focuses too much on the present — where those balences can be accounted — rather than port­fo­lio deci­sions on a rad­i­cally uncer­tain future — where they can­not. You say

    sav­ing … is com­pletely unnec­es­sary any­way in an endoge­nous money envi­ron­ment.
    Invest­ment doesn’t need sav­ings because it cre­ates its own auto­mat­i­cally when it hap­pens as a mat­ter of accounting.…Demand and strong expec­ta­tion of demand is what trig­gers investment.

    Yes invest­ment cre­ates sav­ings but sav­ings which is spent on a phys­i­cal asset which will not val­orise for a num­ber of years not in the present period, and we are talk­ing about cre­at­ing value to pay for pen­sions in the present period.

    Imag­ine a firm which is 20 years old, it has an asset which realises income which has a life span of 45 years after which it ‘cliff edges’ . As an accoun­tant how will you treat that asset on its bal­ance sheet? I imag­ine you will depre­ci­ate it over its life­time and rec­om­mend that the firm retains value (accord­ing to the fun­da­men­tal account­ing equa­tion) by invest­ing in another asset that will mature when the old asset ‘cliff edges’ — some port­fo­lio of gilts/bonds which will mature in 45 years and then be used to pur­chase an annu­uity to main­tain income. If that is too risk averse some mix of bonds and equities.

    Now delete ‘firm’ and put in ‘indi­vid­ual’. We are talk­ing about a pen­sion port­fo­lio. Seen from the per­spec­tive of eco­nomic agency it is entirely ratio­nal for that agent to invest to main­tain income, it would be very risky to assume that some future enlight­ened post keyn­sian gov­ern­ment will fund all pen­sions from cur­rent income. How­ever even such a gov­ern­ment would have to look for­ward to future lia­bil­i­ties to the econ­omy as a whole in a rad­i­cally uncer­tain future and make sen­si­ble poli­cies about how to encour­age port­fo­lios to be bal­anced in light of antic­i­pated future income demands, espe­cially from an age­ing population.

  2. RJ says:

    Yes invest­ment cre­ates sav­ings but savings”

    Not really cor­rect is it. Debt and only debt cre­ates savings.

    So debt (a finan­cial lia­bil­ity) always equals a finan­cial asset held by another party. Like money or Govt bonds.

    Money always really = sav­ings but it not always called sav­ings. The key is is this money asset that never reduces until debt is repaid (or Govt issue bonds) used for con­sump­tion or invest­ment (called savings).

    If for con­sump­tion it flows in one area (hol­i­days, food etc). If for invest­ment into another direc­tion like gold, sil­ver, bonds, shares, prop­erty etc.

    If we all decided to save less (direct our assets into con­sump­tion) then we would not need more debt.

    At present though we have too lit­tle debt to meet our needs for both con­sump­tion and future or deferred con­sump­tion held in so called investments.

  3. cliffy says:

    RJ,

    Given the above con­sider the below.

    If it is the case that if we con­sume more we will need less debt, what about if we need to con­sume more because resources are becom­ing scarcer, and tech­nol­ogy is not mak­ing up for the extra cost of extrac­tion, and so con­sump­tion goods are more expensive.

    I am kind of think­ing in those cir­cum­stances we would need more invest­ment and debt not less.

    How does that rec­on­cile with your above thoughts?

  4. alainton says:

    Rj
    You for­got about cru­soe type sav­ings (deferred consumption)

  5. RJ says:

    If it is the case that if we con­sume more we will need less debt,”

    Its if we save a lot less then we will not need an increase in debt. But if money and finan­cial assets con­tinue flow­ing (and being locked) into future con­sump­tion sav­ing assets like shares or gold or prop­erty etc then debt MUST increase. Oth­er­wise we will have insuf­fi­cient money flow­ing into con­sump­tion = unemployment.

    Govt’s really need to step up and pro­vide the debt. Fail­ure to do so = lots of unnec­es­sary suffering.

  6. cliffy says:

    RJ,

    What about the dynamic of bor­row­ing against Min­sky layer asset price increases in one econ­omy to pur­chase con­sump­tion goods in another coun­try with cheaper pro­duc­tion costs which through profit mar­gin accu­mu­lates finan­cial assets [abil­ity of busi­ness sys­tems to pro­duce] but no debt in that economy.

    How does that come out for you when you allo­cate the terms you use above to the sce­nario I describe?

  7. RJ says:

    I’m unsure what you mean. But

    Trade sur­plus coun­tries either

    Hold sav­ings in the trade deficit coun­try or
    For the Euro coun­tries suck money out of the trade deficit country

    But either sit­u­a­tion requires even larger debt in the trade deficit coun­try. To cover their own sav­ings require­ment but also sav­ings from the sur­plus coun­try (gen­er­ated from the trade surplus).

    It’s why the US must con­tinue to run large Govt deficits.

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