Friday, April 9, 2010

Fiscal Chickens Coming Home to Roost

This is my third attempt to post. Each time I finish a post, it seems events are overtaking me, which says a great deal about the volatility of the current situation. One of the elements that prevented the publication of the last attempt at a post is a report by the Bank for International Settlements (BIS), which I found through a Telegraph report. The report is of particular interest, as this comes from a mainstream institution, and makes very worrying reading. In fact, many of the points made in the paper are a mirror of the arguments that have been made on this blog, since the day that the blog was started. I will review a few of the key points.

The overall thrust of the paper is to look at the developed economies that are currently running large fiscal deficits, so that there is considerable focus on the PIIGS (Portugal, Italy, Ireland, Greece and Spain), as well as on the US, UK and Japan. One of the early points that is made is that the current deficits are not simply a temporary aberration, but are structural in nature:
Even more worrying is the fact that most of the projected deficits are structural rather than cyclical in nature. So, in the absence of immediate corrective action, we can expect these deficits to persist even during the cyclical recovery. (p3)
One of the longstanding arguments of this blog is that the UK, and other economies, must undertake reform of their economic structures, and I long ago suggested some reforms for the UK which would, over the medium term, see reductions in government expenditure, whilst maintaining health and welfare systems (NHS, Education, Benefits , taxation). These posts were specifically made due to the absolute necessity to reduce the structural deficits, and redirect activity in the UK economy into real wealth creation.

Another theme of this blog has been to continually ask where the growth in economies might actually come from. Whilst the mainstream economists make their projections of future GDP growth, what is notably absent from such projections is exactly where, or what sector, might conceivably produce such growth. On a couple of occasions, including in a comment in the Guardian comment is free section, I have challenged anyone to offer a sector that might produce these magical projections of growth. On each occasion I have done this, I have been met with silence. Apparently, growth will just happen, because it just must. It might be noted that I am not talking about the so-called 'growth' which results from massive government borrowing, which is really just a growth in debt. This is what the BIS report says:

We doubt that the current crisis will be typical in its impact on deficits and debt. The reason is that, in many countries, employment and growth are unlikely to return to their pre-crisis levels in the foreseeable future.8 As a result, unemployment and other benefits will need to be paid for several years, and high levels of public investment might also have to be maintained. (p4)
Aside from the weasel words at the end, in which the word 'investment' is used, the message is very clear. There is no reason for the magical growth to take place. In fact, the report goes on to give very clear reasons later for why growth is likely to be constrained in the future, due to the cost of servicing massive deficits:

The distortionary impact of taxes is normally further compounded by the crowding-out of productive private capital. In a closed economy, a higher level of public debt will eventually absorb a larger share of national wealth, pushing up real interest rates and causing an offsetting fall in the stock of private capital. This not only lowers the level of output but, since new capital is invariably more productive than old capital, a reduced rate of capital accumulation can also lead to a persistent slowdown in the rate of economic growth. In an open economy, international financial markets can moderate these effects so long as investors remain confident in a country’s ability to repay. But, even when private capital is not crowded out, larger borrowing from abroad means that domestic income is reduced by interest paid to foreigners, increasing the gap between GDP and GNP.
What they are really discussing here is the downward spiral. The cost of the borrowing now, even if fiscal reform were undertaken, is going to have a long term impact on the ability for economies to grow. If the debt binge continues, the problem of the downward spiral will be more acute.

Another point made in the paper again echoes the theme of this blog, but also reflects the views of many other commentators and analysts. The cost of pensions and health care are, due to demographic factors, and the rising cost of health care, about to explode. At this very moment in time, governments should not be running deficits, but running surpluses to fund these future costs. The BIS report puts this more delicately as follows:

The related unfunded liabilities are large and growing, and should be a central part of today’s long-term fiscal planning.

It is essential that governments not be lulled into complacency by the ease with which they have financed their deficits thus far. In the aftermath of the financial crisis, the path of future output is likely to be permanently below where we thought it would be just several years ago. As a result, government revenues will be lower and expenditures higher, making consolidation even more difficult. But, unless action is taken to place fiscal policy on a sustainable footing, these costs could easily rise sharply and suddenly. (p16)
Another problem seen by BIS is that, although the deficits are unsustainable, the bond markets are too short sighted to see this yet, as their time horizons are too short. However, they warn that 'the aftermath of the financial crisis is poised to bring a simmering fiscal problem in industrial economies to boiling point' (p1). Their point is much like the analogy of the steady appearance in cracks of in a dam of belief that I have often used. It is the belief of the markets that bonds invested in the developed world are 'safe', even though the fiscal policies of many economies are completely unsustainable. Eventually, the bond markets will realise their mistakes....the cracks in the dam of belief in the 'safety' will eventually lead to a deluge.

As for the possible reactions of government to their unsustainable fiscal position, they also contemplate the idea that governments will seek to inflate their way out of debt, with money printing one of the options in the indirect default armoury. They do not put it as bluntly as I do, but the message is clear:

Finally, looming long-term fiscal imbalances pose significant risk to the prospects for future monetary stability. We describe two channels through which unstable debt dynamics could lead to higher inflation: direct debt monetisation, and the temptation to reduce the real value of government debt through higher inflation. Given the current institutional setting of monetary policy, both risks are clearly limited, at least for now. (my emphasis - p17)
Overall, their report makes alarming reading, but I suspect that nothing in the report will surprise the regular readers of this blog. What might surprise readers is to see the same arguments that have long been made in this blog now appearing so clearly in a publication from mainstream economists. I strongly recommend reading the report in full. With the exceptions of a few places, it is a relatively easy read for those who have a reasonable grasp of economics (and most readers of this blog seem to have a very good grasp, so the report should pose no problems).

Whilst many of the concerns expressed in the report have long been the subject of this blog, it is interesting that such a highly respected organisation should write this report at this time. Evans Ambroise-Pritchard of the Telegraph noted, correctly, that the UK is seen by BIS as particularly vulnerable:
Britain emerges in the BIS paper as an arch-sinner. The country may have entered the crisis with a low public debt but this shock absorber has already been used up, exposing the underlying rot in the UK's public accounts.

Tucked away in the BIS report are charts and tables showing that Britain faces the highest structural deficit in the OECD club of rich states, with a mounting risk that public debt will explode out of control.

Interest payments on the UK's public debt will double from 5pc of GDP to 10pc within a decade under the bank's 'baseline scenario' before spiralling upwards to 27pc by 2040, the highest in the industrial world. Greece fares better, and Italy looks saintly by comparison.

The BIS said the UK's structural budget deficit will be 9pc of GDP next year, the highest in the advanced world. A primary surplus of 3.5pc of GDP will be required for the next twenty years just to stabilize the debt at the pre-crisis level.

In the context of this report, it is interesting to take a view on the current UK election. What first struck me on this journey through the UK news was a recent report of nervousness in markets about the £GB, leading to a fall in the currency:

"The sensitivity of sterling to election news is likely to increase over the next month – while it has appreciated recently, we think a further significant advance from these levels is unlikely until the uncertainty around the election is resolved," said Adarsh Sinha, an analyst at Barclays Capital.

One trader said: "It's been a phoney war for months and the markets are all over the place. We just need some details to work from, not just this wish-list stuff, or it's just going to get worse over the next few weeks."

Ratings agencies have already warned that the UK's prized top AAA credit rating is under threat unless a credible fiscal plan is put forward soon after the election.

This nervousness is inevitable, with both the Labour Party and the Conservative Party both offering little to reassure the markets. Even in the Guardian, we have this from Simon Jenkins:
We have had the hilarity of health service spending being protected by "a £1bn cut in sick leave among NHS staff" (Labour). We have had an extravagant pledge of "a right to a new school" (Tories). We have had free care for the elderly (Labour), tax cuts for marriage (Tories), new trains for all paid for by more potholes (Liberal Democrats), no rise in VAT (Tories), no more council taxes (Liberal Democrats) and any cancer drug you like paid for by holding down national insurance on the NHS (Tories).
This is from David Wighton of the Times:

On the other hand, they [the Conservative Party] don’t want to cast doubt on the Treasury’s forecast that growth will shoot up to 3.25 per cent next year. Most City economists reckon this is way too optimistic. And, privately, the Tories probably agree. But if they admit that growth will almost certainly be lower they are faced with a big problem.

They will have to come up with even more unidentified cuts in public spending, promise further tax increases, or admit that they will cut the deficit by less than Labour promises to do — none of which is a big vote winner.

And finally, we have this from the Telegraph, written by Jeremy Warner:

On fiscal consolidation, the Labour Government's plans are widely thought inadequate as well as unduly reliant on taxing wealth creators more heavily. Meanwhile, the Opposition has struggled to deliver a coherent message on either deficit reduction or tax.

One moment the Conservatives promise to make deficit elimination the priority, the next they pledge to reverse the Government's planned rise in National Insurance, but with no credible explanation of where they will find the money.

There is a commonality to all of these reports and analysis, and that is that the politicians are living in a world of fantasy, and that the bond markets have recognised this. Both Labour and the Conservatives are just not telling the truth - that there must be real austerity, and that the UK is on the edge of a precipice.

Alongside this news, the situation in Greece continues the roller-coaster ride, with news that there is capital flight from Greece, and surging bond yields. Meanwhile, the Euro continues to weaken as fears spread in the wake of the Greek crisis. What we are starting to see is the fiscal chickens coming home to roost in Greece, and the same process is now threatening the UK. Now that the election process has commenced, there is still no sign of addressing the fundamental problem that investors need firm commitment to action, not wish lists. I am perhaps repeating myself, but where Greece leads, the UK may well follow, at least if the election continues on the current trajectory. A good summary of the situation again comes from the Telegraph:

Labour now promises £15bn of public sector efficiencies – which begs the question of what it has been doing for the past 13 years? Now, Cameron's efficiency chief, Sir Peter Gershon, has topped that, claiming the Tories could deliver another £12bn. That implies up to 40,000 job cuts – though talking about them is hardly a way to voters' hearts.

And that's the problem. Are we really in for four weeks of campaigning on just about everything but the central issue? Public spending this year is expected to reach a stonking £704bn – a figure the CBI believes Britain could cut by £130bn over time. How you cut it is a key political battleground – always assuming career politicians have any idea how to go about it.
The reality is that, one way or another, the fiscal chickens laid by the UK government are coming home to roost. As the BIS report points out, there is a reluctance from politicians to address the problems, and that they only seem prepared to do so as a result of an external push. The big question that this raises is not whether there will be a push, but when the push will take place, and how bad the fallout might be.

65 comments:

  1. Lord Keynes:

    I have followed your comments on the blog closely. It seems that your view that borrowing and printing of money is sustainable is being tested in the markets. I also note that, with the devaluation of the £GB, inflation in the UK looks set to climb further....we will see how this all works out.

    http://business.timesonline.co.uk/tol/business/economics/article7092867.ece

    General: I would like to thank all of the readers for the many comments. I would like to respond more, but the process of writing the posts has been a bit demanding (i.e. writing three whole posts, and then only being able to publish one). I would, in particular like to thank those that have addressed the arguments of Lord Keynes. As long term readers will know, I did take on this task before, but found that the sheer volume and scope of Lord Keynes comments was simply too much to respond to....As such, many thanks.

    I would also encourage Lord Keynes to keep up the comments, as it certainly does no harm to see a different perspective.

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  2. The BIS paper is fundamentally flawed

    The BIS paper you cite is as follows:

    Stephen G Cecchetti, M S Mohanty and Fabrizio Zampolli, “The future of public debt: prospects and implications,” BIS Working Papers No 300, March 2010..

    I am glad this paper is receiving discussion, as I have read quite a bit about it.

    As it happens, the paper has been debunked by Post Keynesian economists:

    Marshall Auerback and Rob Parenteau, “Operation Twist, Part Deux?” New Economic Perspectives from Kansas City Blog, March 30, 2010

    Bill Mitchell, “Another economics department to close” Billy Blog, March 30th, 2010

    There are 3 reasons why the BIS paper is wrong:

    (1) First, they fail to distinguish between EU countries with no currency sovereignty or domestic central bank (like Greece and Italy) and countries with full currency sovereignty (like the UK and the US).

    (2) Secondly, and most importantly, the BIS authors fail to understand that central banks have the power to control the yield curve.

    If they are concerned about yields on long term bonds, central banks can implement a modern version of “Operation Twist” (a 1961-1965 Federal Reserve policy to flatten the yield curve).


    3 Thirdly, even if you accept the logic of the BIS paper (that interest servicing will bankrupt the US or UK), this has been debunked by Krugman in the case of the US:

    Paul Krugman, “The Dogbert theory of the debt”

    Take a look at the graph of the historic costs of servicing government debt.

    The worst period in the cost of debt servicing was in the 1980s and 1990s: and yet the US wasn’t bankrupted.

    Even on the worst projections – and these are the worst projections – the cost of servicing government debt would return to the position it was under Reagan and Bush senior by 2015, and be slightly higher by 2019.

    But the cost of interest servicing now and in the next two years will be historically low.

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  3. Re:The BIS paper is fundamentally flawed
    1) What are we going to do - devalue until everything is OK?
    2) What are we going to do - print money until everything is OK?
    3) Oh now I'm reassured. It's only a few hundred billion here, a few hundred billion there, and if a cartoon dog can use this trick, it must be a trick.

    Some people think that there is a fairy godmother in the world who will finance 'rich' countries deficits, at a loss, forever. Maybe Lord Keynes would like to lend to a government running a deficit, with more than half of the economy being the government, with a vulnerable currency? I sure as hell won't and I am responsible for a small part of the 'flight of capital'.

    We've had to temporarily print money to fund the deficit and as the global recovery starts it will become more expensive to un-print this money.
    There also is serious competition from other governments trying to borrow money (e.g. India at 8%) and anyone thinking rates here will stay at 4% is optimistic.

    Also, predictions for the UK tax-take are optimistic. If tax receipts rise to 2007 levels, we will still need £100 billion in govt. cuts to break even. Say 30% of this spending was reclaimed in tax, that's another £30 billion gone. 30% of that, another £10 billion.
    So, the UK government is spending about £140 billion too high. Still, that's only about 3 million public sector workers to make redundant.

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  4. Lord Keynes said: >>As it happens, the paper has been debunked by Post Keynesian economists:
    <<

    Which tickled me. Isn't that a bit like flat-earthers debunking the North Pole?

    On a more serious note - if any political party came out and said: "Don't worry, you'll all be fine. We've got a plan to fix what's wrong but 40,000 will lose their jobs" I can't imagine them ever winning. Not that I'm suggesting such a thing is necessary...

    It's pretty sad that none of the political parties can speak plainly. But the problem is that the media-controlled commentary and the self-professed experts (like our own Lord Keynes) are leading the country astray with their mad talk of "borrowing that isn't borrowing" and "sustainable printed money".

    All the "post-keynesian" voodoo aside, economics is pretty simple. Outgoings should not exceed income.

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  5. Reply to Steve Tierney

    Isn't that a bit like flat-earthers debunking the North Pole? …. All the "post-keynesian" voodoo aside

    Quite amusing … But the fact that you do not address the points I made and resort to ad hominem abuse suggests that you are desperate and have no response.

    Ad hominem abuse is easy – I could just as easily have used it in my original post, and said something like “the Tories are economic illiterates peddling snake oil medicine and live in the 19th century” etc etc etc.

    But this would be no argument and would add nothing to the discussion.

    The US and UK (unlike Greece) have independent central banks and monetary policies – I assume you don’t seriously deny this??

    The claim that interest payments will bankrupt the US is refuted by Krugman:
    On the worst case scenario US interest payment burden as a percentage of GDP will return to level it was at under Reagan and Bush senior and then slightly higher by 2018/2019.
    There is no reason to think that this will bankrupt the US, as a country that spends so much on its military (as well as useless wars abroad) can easily make savings there.

    So where is your line by line refutation of Krugman??

    The fact that a central bank can set interest rates and can control the yield curve at longer maturities is proven beyond any shadow of a doubt by Japan.

    Here you have rock solid empirical evidence from the real world to support the statement I made above.

    Despite Japan's QE and high debt to GDP ratio there has never been any hyperinflation there or government bankrupcy.

    Care to refute this?

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  6. Reply to Ian

    1) What are we going to do - devalue until everything is OK?
    2) What are we going to do - print money until everything is OK?


    No, you don’t understand much about my argument. I have already said in previous posts that the idea that devaluation and waiting for export led growth in a world recession is stark raving mad. You need domestic growth – making domestically what you import.

    I favour discretionary monetary and fiscal policies, but that is only part of the solution.

    The UK would need to

    1. Audit its banks and clean their toxic assets.
    2. Re-introduce effective financial regulation like Canada has always had (and surprise, surprise, Canada never had any banking crisis in 2008)
    3. Large fiscal stimulus to bring down unemployment and increase business activity
    4. Adopt aggressive trade and industrial policies and rebuild manufacturing and output of tradable goods and services to bring down the trade deficit.
    5. A education system more like Germany with greater emphasis on vocational training


    Some people think that there is a fairy godmother in the world who will finance 'rich' countries deficits, at a loss, forever.

    You certainly need foreign exchange for a current account deficit – if you don’t get a capital account surplus to finance the current account deficit, then you have to use up your foreign exchange reserves - which is unsustainable.

    That’s why industrial policy to domestically produce more consumer goods is the answer.

    Maybe Lord Keynes would like to lend to a government running a deficit, with more than half of the economy being the government, with a vulnerable currency?

    It is strange then that people keep lending to Japan?? Care to tell me why Japan can still borrow from money markets??

    Also, I think you are somewhat confused about modern economies: it is fact of life in every industrialised nation that government spending is a massive part of GDP.

    If you look at government revenue as a percentage of GDP you get the following figures:

    Denmark 50.0%
    Sweden 49.7%
    Belgium 46.8%
    France 46.1%
    Finland 43.6
    Austria 43.4%
    Italy 42.6%
    Germany 40.6%
    Netherlands 39.5%
    United Kingdom 39.0%
    Israel 36.8%
    New Zealand 36.5%
    Canada 33.4%
    Australia 30.5%
    United States 28.2%
    Japan 27.4%


    List of countries by tax revenue as percentage of GDP

    Denmark, Sweden and Finland are successful economies that run current account surpluses and that have substantially lower unemployment than the US or the UK, yet nearly half of all GDP is taken as taxes and spent by the government.

    Germany, a manufacturing powerhouse and very wealthy country, takes 40.6% of GDP as tax revenue.

    The UK is actually around the middle, not the higher end, of the spectrum.

    By contrast, Haiti only takes 9.4% of GDP as tax revenue (before the earthquake, I might add), and what is it?? An economic basketcase!

    There is absolutely no evidence whatsoever that large government spending and a huge role for government in the economy has a harmful effect on trade or economic growth or prosperity.

    In fact, the less the government spends as a % of GDP the more likely it is to be a poor, impoverished third world country.

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  7. Some other comments on teh main post

    Another theme of this blog has been to continually ask where the growth in economies might actually come from. Whilst the mainstream economists make their projections of future GDP growth, what is notably absent from such projections is exactly where, or what sector, might conceivably produce such growth.

    There is an obvious answer: the consumer goods UK citizens import. The UK needs to start consuming less from overseas and making more domestic goods, which means manufactured goods. That means incentivising investment in these areas by tax breaks, subsidies, cheap credit, non-tariff and (if necessary) tariff barriers – just South Korea or Japan did to create manufacturing.

    I might pose this question to Cynicus:
    Under the policies you recommend, Where do you think growth will come from?


    From export-led growth?
    How will that work in a global recession with low demand? How many years will it take?

    Another point made in the paper again echoes the theme of this blog, but also reflects the views of many other commentators and analysts. The cost of pensions and health care are, due to demographic factors, and the rising cost of health care, about to explode. At this very moment in time, governments should not be running deficits, but running surpluses to fund these future costs

    The issue of aging populations is not a fiscal one. It’s about real resources and productivity growth:

    Bill Mitchell, “Another intergenerational report – another waste of time” Billyblog

    As usual, people can never predict how technology will increase productivity and even the provision of services in the future. To take just one example, artificial intelligence and robotics offer mind bending opportunities for increasing wealth and providing services to the elderly.

    A smart US government would be investing heavily in IT now – a mission-to-moon-style project to advance robotics and AI.

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  8. Lord Keynes: I have noted that, for example, you have attacked the Austrian economists and any view with which you disagree, and endlessly cite economist 'x' or economist 'y' in support of your many arguments. However, you cherry pick the economists that support your views, the statistics that support your views and so forth.

    In doing so, you ignore the fact that those who disagree with your views also cite mountains of empirical evidence in support of their analyses. It is perhaps overused, but Disraeli's comments about damned lies and statistics is still pertinent.

    In the end, each economics perspective trots out their own support from the numbers, and each perspective seeks to refute the perspective of the other side. They can not all be right. The problem that I find in your commentary is that you are insistent that others do not have the empirical support for their arguments, which is simply not the case.

    For example, you keep on insisting that high levels of debt might be supported. However, in a scholarly work, Kenneth Rogoff provides a mountain of data to suggest that this is not the case. No doubt you will then reply to this with author 'x' has debunked his work, but will also forget that there are authors busily debunking the work that you cite.

    In the end, we must select the arguments and measure them against the world as we can best see it. For example, right now, Greece is teetering on the edge as those with money to invest are increasingly doubtful about the risks in lending to this country. All of the economic theory in the world will not persuade these potential investors that Greece is a good bet. When their money is on the line, they just look at risk and return.

    The same can be said of those pulling their money out of Greek banks. It is their own money, and they simply do not think Greece is a safe place to keep their money. There is competition for the money that they hold...everybody wants it....so why leave it in such a risky economy. Again, no theory is going to dissuade them.

    In summary, citing economist 'x' or 'y' only goes so far. There are always plenty of economists out there with different positions, presenting different evidence and analyses to that which you cite.

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  9. Reply to Steve Tierney 2

    But the problem is that the media-controlled commentary and the self-professed experts (like our own Lord Keynes) are leading the country astray

    This statement too is rather amusing…

    I don’t claim to be a professional economist or an “expert”, and never have.

    I am an informed member of the public who simply summarises, cites and refers to the work of professional academic Post Keynesian economists, such as

    1. Paul Davidson, Professor of economics University of Tennessee.

    2. Victoria Chick, Emeritus Professor of Economics at University College London..

    3. L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City

    4. Bill Mitchell, Research Professor in Economics and Director of the Centre of Full Employment and Equity at the University of Newcastle, NSW Australia..

    5. Steve Keen, Associate Professor of Economics & Finance at the University of Western Sydney.

    6. Dr. Thomas Palley, PhD. in Economics (Yale University).

    7. Marc Lavoie, Professor in the Department of Economics at the University of Ottawa .

    8. Robert Pollin, a professor of economics at the University of Massachusetts-Amherst.

    … and the list could go on. You could also add the work of the former Tory Robert Skidelsky, emeritus professor of political economy at the University of Warwick, England.

    If you bother to read my posts, you will see I often simply quote the work of these people or link to it or give the gist of it.

    They are qualified academic economists who have spent their lives studying economics and publishing books and articles about economic issues.

    Now having said that, I admit happily that it does not mean they are actually right.

    But, if you talking about professional credentials, they are just as qualified as any New Classical, Neoclassical, monetarist or Austrian school economist, and indeed more so since they have an outstanding record on having predicted the current crisis.

    Do you, for example, know why many people are now reading the work of Hyam Minsky, an outstanding Post Keynesian economist who developed an amazingly relevant critique of financial markets called the financial instability hypothesis?

    I suspect not…

    By the way, what qualifications do you have yourself to talk about economics as a Conservative?

    You have an economics degree, perhaps?

    Or are you really just an “informed commentator” like most people on this blog?

    And do you subscribe to any actual school of economic theory? Austrian economics, perhaps? Thatcherite monetarism? New Classical economics?

    You seem to agree with Cynicus Economicus a lot, but he is rather honest about not being a professional economist at all (which, I should add, is perfectly fine with me, since arguments and evidence are things that matter in debate).

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  10. Apologies, I should have mentioned Carmen Reinhart along with Rogoff, and the book is titled 'This Time is Different'.

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  11. On Carmen Reinhart and Kenneth Rogoff, This Time is Different 1

    Some starting thoughts:

    Lord Keynes …. However, you cherry pick the economists that support your views, the statistics that support your views and so forth.

    I cite the work of Post Keynesian economist mostly, because I agree with their starting assumptions and methodology. This is no more “cherry picking” than your citing of New Classical BIS reports, neoclassical journalists or Austrians without citing Post Keynesian responses to them.

    In the end, we must select the arguments and measure them against the world as we can best see it.

    Absolutely correct. Arguments and evidence matter. For instance, Krugman in the blog entry I linked to above shows that in the worst case scenario the burden of US interest servicing will simply return to where it was under Reagan and Bush or slightly above it. There is no convincing reason to think this will bankrupt the US. The evidence is presented there. I have not seen anyone refute it. Please do try - I enjoy good argument.

    For example, right now, Greece is teetering on the edge as those with money to invest are increasingly doubtful about the risks in lending to this country. All of the economic theory in the world will not persuade these potential investors that Greece is a good bet.

    Correct. Post Keynesians agree that Greece is in a bad way, and if it remains in the EU and follows neoliberal economic policies it will have even worse problems.

    However, in a scholarly work, Kenneth Rogoff provides a mountain of data to suggest that this is not the case. No doubt you will then reply to this with author 'x' has debunked his work, but will also forget that there are authors busily debunking the work that you cite.

    There are indeed important criticisms of Carmen Reinhart and Kenneth Rogoff book This Time is Different:

    Marshall Auerback, “It Takes Two to Tango: Look At The Numerator and Denominator” March 5, 2010

    Deficits Don’t Matter? The (Supposed) Experts Speak

    Bill Mitchell, “Hyperbole and outright lies” Billyblog

    Bill Mitchell, “Watch out for spam!” Billyblog

    To some examples:

    1. Reinhart and Rogoff claim that countries with a gross public debt over 90% of GDP tended to grow a lot more slowly.

    But in the case of the US their empirical data is based on the years 1945-1949, abnormal years because the US was converting from a wartime economy to a peacetime economy.

    It is obvious that you can’t seriously claim that debt levels over 90% of GDP will slow down a US peacetime economy when the only example you have to prove this is a highly abnormal transitional period of growth from wartime to peacetime production. Of course growth was lower …

    2. They don’t distinguish between government debt borrowed in a foreign currency (which Post Keynesians agree is very bad) and debt denominated in a domestic currency. There is a world of difference between the two, yet Reinhart and Rogoff conflate them, and then claim that the Third world debt crises (which are nearly always caused by debt denominated in foreign currency or the need to maintain a fixed exchange rate) are proof of their thesis and that Western nations are on the road to being the new Argentina. But the US and Japan have virtually no debt denominated in foreign currency. Ergo their situation is vastly different.

    If you have references or links to work that “debunks” Auerback or Mitchell, that’s great – I am happy to read it and respond.

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  12. Lord Keynes:

    I think you miss the point of the blog - it is not an academic blog, but rather my best understanding of the world. I form my own views, and if an academic or mainstream economist is in agreement, all well and good.

    You start from looking at academic perspectives and work from there - I start with what I see - and then sometimes find academics agree with me, or an academic has already said/thought something I already thought (or already thought/said it better). I do not subscribe to any economic school, but simply see what seems to 'fit' from any source, whether academic, a blog, a newspaper commentary, or anything really.

    The trouble is that academic economics has not come out very well in this mess. No doubt you will say that the post-Keynesians got it right, but then the other group that got it right, the Austrians, you argued do not use empirical evidence etc. which is really to say that you just don't agree with them. I have read Austrian articles, and they do indeed offer empirical support for their ideas.

    As such, I will stick with formulating my own views on the evidence I see before me, with a pick 'n' mix approach to theory and evidence without any fixed position, and take the best rational and logical approach that I can manage to formulate my own views.

    I will leave it there. As ever, I welcome your posts, as it is indeed good for readers to see the other sides of the argument.

    ReplyDelete
  13. I start with what I see - and then sometimes find academics agree with me, or an academic has already said/thought something I already thought ... I do not subscribe to any economic school, but simply see what seems to 'fit' from any source, whether academic, a blog, a newspaper commentary, or anything really

    This is an approach I have no problem with at all. In fact, I welcome such an approach as a breath of fresh air.
    Perhaps my last posts were a bit unclear on my view.
    I don't believe your approach is any less valid because it is not academic - my main point was just that my approach in following a well known school of economics is also valid, which some other people seemed to question.

    The trouble is that academic economics has not come out very well in this mess.

    I think it is better to say that mainstream school of economics (namely, new Classical, neo-classical, and monetarist schools) came out very badly.
    The heterodox schools like Post Keyensianism and the Austrians are hardly mainstream - are any of Obama's advisors Post Keyensians?

    No doubt you will say that the post-Keynesians got it right

    Yes, they did.

    but then the other group that got it right, the Austrians, you argued do not use empirical evidence etc. which is really to say that you just don't agree with them.

    The pure Austrian approach is a priori and the founding fathers of Austrian economics like Ludwig von Mises seriously believed that their theories were not subject to empirical testing.

    Or as Hayek argued: Austrian economic theories can "never be verified or falsified by reference to facts. All that we can and must verify is the presence of our assumptions in the particular case."

    I have read Austrian articles, and they do indeed offer empirical support for their ideas.

    Yes, I have noticed this too. That many Austrians do actually use empirical evidence suggests to me that they realise that there is something fundamentally wrong with the methodology of Mises and Hayek.

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  14. Lord Keynes

    Over the last couple of years, the way I have come to see the economy is as an N-dimensional system with many unknowns, and the added unpredictable component of human psychology. This is why I was astounded to finally hear it confirmed last week that Gordon Brown's ideas are so small that they are at the level of manipulation of a single variable to the exclusion of everything else. Suddenly everything becomes crystal clear! The emperor's new clothes are revealed.

    One thing I have noticed about many of your arguments is that you, too, see 'causation in correlation' from a single dimension of this multi-dimensional system. So, in today's comments you draw a conclusion from the percentage of countries' GDP that their governments spend. To me, that is just one dimension out of a very large N, and on its own means nothing. It is similar to all the arguments we hear about government debt-to-GDP ratio. Is this, on its own, significant, or does it only mean something when we consider a country's total external debt? I suspect the latter, and even then it won't tell the full story, such as does the country have a suitably-educated workforce, or has it recently squandered a one-off windfall of oil money, thus flattering its GDP and debt figures.

    We could then go on to argue about another of CE's central points: that GDP is, itself, inflated by borrowing so that the underlying size of an economy may be *much* smaller than the raw GDP figure indicates. This, to my mind, is a real 'elephant in the room' that seemingly no one but CE has ever mentioned. If it is true - and it looks like it is - your statistic earlier, and all measures concerning GDP are rendered meaningless. What is your view on that?

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  15. On Prediction

    On the issue of who predicted the crisis, you have to be a bit more critical.

    After all, Marxists claim that their theory predicted the crisis:

    The present financial crisis, which was predicted by the Marxists long ago, is the direct result of a long period of uncontrolled speculation, which produced the biggest bubble in history …. Marx pointed out long ago that the ideal of the bourgeois was to make money out of money, without going through the painful process of production. In the last period they appeared to have achieved this idea … In the USA, Britain, Spain, Ireland and many other countries, the banks invested trillions in speculation, especially in the housing sector. This was the basis upon which the sub prime mortgage scandal arose and flourished, generating unimaginable amounts of fictitious capital .... In recent years the Federal Reserve pursued a policy of deliberately keeping interest rates low (they were even negative in real terms at one stage, considering the level of inflation). This was irresponsible from an orthodox capitalist point of view. It created the housing bubble and thus laid the basis for the present crisis.
    World capitalism in crisis – Part One .

    I hasten to add that I do not subscribe to Marxism, and do not think this present crisis was “predicted” by Marxists.

    Just like Austrians, Marxists are always predicting crises – you know the old joke about Austrians they “have called seven of the last four recessions.”

    Just because some Marxists predicted the housing bubble, this doesn’t vindicate their underlying theories, which are:
    1. The labour theory of value,
    2. The view that the rate of profit tends to fall, and
    3. that socialism is inevitable.

    All of these are demonstrably wrong, as is the entire Marxist project.

    Furthermore, I would suggest to you, just because some Austrians predicted the theory they deserve a hearing, but their underlying theory is not necessarily vindicated at all.

    Of course, the same applies to Post Keynesian. Is their underlying theory valid?

    For instance, the financial instability hypothesis?

    In my view, yes. Others can take a different view.

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  16. Reply to Lemming

    that GDP is, itself, inflated by borrowing so that the underlying size of an economy may be *much* smaller than the raw GDP figure indicates.

    As I have argued before, private debt is fundamentally different from public debt.

    I simply don’t agree that growth built on government spending is “debt driven” in the same way the private debt is – the money spent into our economy by the government is effectively debt free fiat money. The debt held by the government is largely rolled over and declines rapidly as a percentage of GDP because the economy grows and booms. Some of it is even retired by central banks with money they create in their normal operations to control interest rates.

    As Marshall Auerback argues

    Debt to GDP is a ratio and the ratio value is a function of both the numerator and denominator. The ratio can rise as a function of either an increase in debt or a decrease in GDP.

    Marshall Auerback, “It Takes Two to Tango: Look At The Numerator and Denominator” March 5, 2010

    So yes: you are right. Take away the growth from private debt and GDP decreases and the government debt to GDP ratio rises. I am perfectly well aware of this.

    Post Keynesian economists write about it all the time: Steve Keen posts endlessly about it, and what it means.

    That the collapse of a debt bubble will have terrible effects on an economy is standard theory in Post Keynesian economics: the first person to write about was Irving Fischer and then Hyman Minsky took it up and refined the theory and produced his financial instability hypothesis.

    The creation of large asset bubbles due to excessive private debt is a fundamental problem that Post Keynesian economists are very concerned about – it was a major cause of the Great Depression and there were many depressions in the 19th century that had the same cause.

    Take Australia’s depression of 1891-1894. Australia had no central bank and a “free” banking system in the 19th century (both of which Austrian economists applaud – it’s their idea system).

    How did it end? There was a massive property and stock market bubble in the 1880s which collapsed in 1890/91. The depression that followed went on for years and was probably worse than Australia’s Great Depression in the 1930s.

    Unfortunately, there was no “evil” central bank or regulated banks to blame for this. It was entirely a free market failure.


    In a crisis where GDP collapses due to excessive private debt the government has to step in and prevent a depression: by employing people in useful ways like building public infrastructure and increasing social spending.

    If you don’t, then you get brutal debt deflation. What happens is that wage cuts and deflation increase the real value of people’s debt: they can’t service it and both debtors and creditors go bankrupt, which spills over into the real economy causing bank runs and collapses and massive contraction in demand.

    The worst effect is that normally profitable and productive businesses are destroyed.

    The point you raise is, in a sense, one of the most fundamental ones in Post Keynesian economics.

    Thanks for raising it.

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  17. Lord Keynes: you make various suggestions, including:

    3) Large fiscal stimulus to bring down unemployment....

    How would you stop this from just sucking in more immigrants? We recently learned that almost all of the extra jobs created since 1997 have gone to foreigners.

    4) Adopt aggressive trade and industrial policies.... to bring down the trade deficit.

    How can we do this without leaving the EU?

    Martin S

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  18. Lord Keynes

    If everyone is well aware of the worthlessness of the GDP measure (and you have just pointed out it is worthless!) why do people quote debt-to-GDP ratios endlessly - yourself included?

    I don't know what criteria investors really use to determine the risk and potential returns of lending into a particular country, nor how economists assess the health of an economy, but after what you've said, an awful lot of them must just be pretending that debt-to-GDP ratio is one of the main measures.

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  19. Given that money is just a 'means of exchange' then the easiest way to expand the economy is simply to print it. If nothing changes, this will cause inflation on the simple premise that more money chasing the same amount of goods will cause prices to rise.

    However if you import many millions of immigrants and redistribute the new money through government schemes into the hands of these new immigrants then effectively the population doesn't have any more money per head and inflation won't be forced upwards.

    This assumes that at the same time the supply side of the economy is increased to meet the higher level of demand of the increased population. Probably starting with a government led house building boom and infrastructure such as roads & railways etc. Add on food production etc etc

    So if you want to know how the British economy will expand - open door immigration and printing money and then state directed industrial expansion.

    I think the Government will do the immigration expansion, I think they will increase the money supply. Do you think they have any chance of coordinating the rest of it? - not a chance in million in my opinion.

    The likely result is a more over populated Britian with a poorer quality of life for all concerned, but that won't stop our politicians from doing it!

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  20. Dear Sir

    May i propose that our problem is linked to our primary liquid fuel source, crude oil, its usage in running our infrastructure, and our unaddressed issue regarding the north sea oil peak and decline, that has been occurring since 1999. As we now have to import 60% of our energy this imbalance creates an ever expanding deficit. Most people can see this as common sense, and not a byzantine concept like is currently spouted.

    The Hemp Plant can provide a new foundation for growth in this country through its use as a biofuel and raw material for industry, in addition to being a nutritious food source. The industrial strain of hemp is currently considered a narcotic drug and requires a home office licence to grow it. Its a bit like requiring a licence to grow nettles, competely absurd for a harmless, yet incredible asset. Perhaps we should put god in prison then for letting hemp grow wild!!!??? Allow this plant to be grown, and you have a new souce of growth without destroying what we currently have (and won't have for much longer unless a change comes).

    Growth can only come from a new energy source. That energy source can be Hemp biomass. It requires minimal inputs, would need about a 10th of the uk land acreage to meet crude oil consumption through conversion to methanol.

    You want to know where the growth will come from , this is it. All that has to be done is FOR PEOPLE TO DO SOMETHING ABOUT IT, NOT RELY ON THE CORRUPTION THAT RUNS THIS COUNTRY. WE DON'T NEED TO BUILD ANYTHING ELSE OR BORROW ANYTHING ELSE, JUST GROW HEMP TO GIVE THE UK A NEW BACKBONE. If you know anone who can get this plant into the public eye then please get to it, its the only way out of this.

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  21. I'm glad Lord Keynes has shown us his manifesto for economic recovery. Because I can actually agree with it, or certainly a fair bit of it. It might actually work. To be honest it seems to be rather like what the Chinese are doing right now, and they are doing OK.

    However, thats not the point at issue. Not one of the parties who run this country are suggesting doing anything other than borrowing (or printing) huge amounts of money, and hoping something will turn up. No ideas on industrial policy, on encouraging manufacturing, on swapping imported good for home grown ones, on improving the system of education.

    Why? Partly because we can't. We are in the EU, and free trade rules. We can't favour our own manufacturers over foreign ones. There are all sorts of rules and regulations that emanate from Brussels that hinder manufacturing in this country(and other EU countries), which do not apply to goods imported from China. We are hamstringing ourselves with mad climate change ideas, while the Indians and Chinese build new power plants daily.

    The other reason its doomed to failure is that the UK is a consumerist society. It has been moving inexorably that way for the last 50 years. Buy now, pay later is the cry. The concept of saving in order to buy in cash later is as foreign to young people today as Latin mightbe, if they had even heard of it.

    To try and change that, also to alter the entire education system from an 'all shall have prizes' ethos to one of meritocracy and downright eliteism is inconceivable. It isn't going to happen. There are no votes Lord Keynes manifesto, because it involves pain, restructuring, change, hard work, building for the long term, not the fast buck. Such a system could be imposed by a benign dictator perhaps, with a low scale police state to keep a lid on protests. But in liberal democracy, with as generous a benefit system as our, never.

    So we are just planning to borrow more and more money, without changing any other part of the UK economic structure. How is that going to solve our problems? It won't, which is why I argue against it.

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  22. Reply to Lemming 2

    If everyone is well aware of the worthlessness of the GDP measure (and you have just pointed out it is worthless!) why do people quote debt-to-GDP ratios endlessly - yourself included?

    I never said GDP was a "worthless" measure. You misunderstand.
    What I said is:

    1. government debt is not the functional equivalent of private debt and GDP growth based on government spending is not "fraudulent." Money spent into the eocnomy is like debt free fiat money. The "debt" is the government's and it is largely riolled over and always has been. It is strong growth that rapidly reduces the debt to GDP ratio, until it becomes a quite small relative to GDP.

    2. Excessive private debt (say, based on asset bubbles) can indeed boost GDP in an artifical manner, but the solution to that is to substitute government spending for private spending when asset bubbles collapse, until the economy can be restored to sustainable growth.

    Want some examples? The US public infrastructure is crumbling.
    The American Society of Civil Engineers (ASCE) has been warning about it for years.

    So what to do in the face of the collapse of the housing bubble and all that lost GDP?

    It is obvious: repair the infrastructure, make productive use of unemployed or underemployed labour. The US has the idle domestic labour, resources, machines, and skills to do it.

    The the idea that you need to borrow money from foreigners to employ your own domestic resources is absurd. In the case of the US, it is doubly absurd because the US dollar is the reserve currency - it can purchase anything it wants from overseas in a way that countries like the UK cannot (because they require foreign exchange reserves).

    A credible international solution to the global recession would actually be a new Marshall plan. Unfortunately, today's political leaders are jellyfish unfit the scrub the shoes of the post-WWII Western leaders.

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  23. Lord Keynes

    Like Sobers, I too am not hostile to your ideas on industrial policy etc. I don't think that Adam Smith's invisible hand is capable of spontaneously producing an optimal result from so complex a system as the economy even if all the participants have access to perfect information. Indeed, the discussion on how increasing debt temporarily inflates GDP shows that statistics can be of little value even if they haven't been 'fiddled' (which they all have!).

    However, again today your starting point is that growth is a certainty and from this flows the argument that all debt and 'investment' will be easily affordable in the future.

    The obvious question is: what if there is no growth? This could be for a variety of reasons, including the Big One: the supply of oil has peaked. Why do you have no doubt that growth will occur?

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  24. If you accept Modern Monetary Theory at face value and that a government with a fiat currency can essentially print its way out of this crisis (subject to the capacity limits of the economy in recession), the question still remains as to what to do afterwards.

    If the private sector does recover, then the public sector must retreat. That means that the public sector spend right now must be project based - the extra spend must have a finite lifespan. That doesn't work for healthcare or eduction, and so the spend there must be balanced with taxation.

    For the UK I don't see a credible plan to *reduce* public sector spend as things recover, and as far as I can see that means the public sector will end up with all the good staff and wages much higher than the equivalent private sector ones. That's either a recipe for inflation or mass immigration.

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  25. As a private investor I looked at the UK's debt position several years ago and thought I didn't like the look of it, so I moved my money abroad. I persuaded my mum to do the same thing. It's not just the government debt, it's also the personal debt and company debt.
    All it takes is growing numbers of other investors to come to the same conclusion, then there will be a capital flight and a collapse in the pound.
    Lord Keynes often quotes Japan as a country where government debt has not caused a problem, but it is a dangerous comparison. The Japanese government just borrowed the money from its citizens by emptying their Post Office accounts and issuing bonds. That well is running dry as savings rates have fallen. They do still run an export surplus, so it may be that they can borrow a little longer, but essentially they are just going to max on another credit card. One day, like all debtors before them, they run out of credit cards.

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  26. "One day, like all debtors before them, they run out of credit cards."

    Except that they have an infinite limit credit card - the Yen. Japan can print currency and buy all Yen denominated bonds in existence for cancellation.

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  27. Lord Keynes,

    The "School of Economics" to which I subscribe is called the "Don't Spend More Than You Earn" school. You may not have heard of it, but its practiced by successful businesses and families and individuals all over the world and has been so for much of history.

    The economists whose eminent actions I enjoy are every person who has managed to make something and then sell it at a profit without trying to justify the practice in endless paragraphs of technobabble.

    You can talk and quote and talk some more all you wish. You can challenge me to join you in your "debunking" and economics wordplay. Meanwhile, every time you write reams of this misleading stuff here you aren't doing it somewhere else. I consider that a job well done.

    For me - nothing you say, nobody you quote and no technical term (no matter how large or impressively grand it may be) changes these most simple of rules. You can't make something from nothing. Don't spend more than you earn.

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  28. Lord Keynes,

    Just a couple of other points. You ask what qualifications I have to speak of economics for the Conservatives.

    I don't claim to "speak for the Conservatives". I speak as a free individual with the right to an opinion. The fact that I am a Conservative has nothing to do with it. I have no economic role within the Conservatives at this time and do not claim to have.

    As for what you call "Ad hominem abuse" - I don't believe I "abused" you at all. If you think this mild commentary is "abuse" you haven't been on the internet long enough.

    ReplyDelete
  29. This debate has been YouTubed:

    The Neo-Keynesian Religion
    http://www.youtube.com/watch?v=TtoavxJvsU4

    ReplyDelete
  30. Found this news interesting.

    IMF Increases Backup Rescue Facility 10 times,from $50 billion to $550 billion.

    Sovereign crisis chickens coming home to roost?
    Ironically Greece is a new participant :/

    http://www.imf.org/external/np/sec/pr/2010/pr10145.htm

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  31. @Lord Keynes: I enjoy reading your comments, but I'm repeatedly left thinking 'where is the humanity?'

    I haven't read Rogoff and Reinhart, but it occurs to me that you might dwell on their title, particularly when you cite previous debt records. This time *is* different - from post-WWII and the height of the US-led fight-back in the Cold War. The massive expansion of state debt undertaken in the past few years has not been in response to an external, existential threat, like Nazi or communist domination of continental Europe. There was a clear interest for investors to underwrite the Allied efforts to liberate Europe in the 1940s, to reconstruct it subsequently, and to check communist expansion in the post-war period. Why should they just go on funding 'western' consumption and self-gratification - as opposed to ensuring the preservation of our fragile civilisation - when we promise them vanishingly little in return, other than various devalued currencies and glib lessons in 'growth'?

    As to your comments on technology: I'm not sure if you are familiar with the term 'Hope for the best, plan for the worst'? The advantages of technological innovation should be viewed as a bonus. It strikes me as sheer folly to make them central assumptions in growth estimates. What if the assumed advances don't happen? And what if other countries - with better R&D or commercial espionage capabilities - get there first? Whither advantage when compared with a country with that technology *and* lower labour costs and more realistic expectations of pensions, welfare etc?

    A case in point is your view of technology in providing care for the elderly, which seems to rely on robots - presumably designed, built and maintained by smaller robots.
    I am still coping with the disappointment of not holidaying on the moon, as suggested by 1970s futurologists, and am somewhat sceptical. I didn't enjoy wiping my dying grandfather's arse as his bowels disintegrated, but there is dignity in performing such disagreeable tasks for your loved ones, and I'm more likely to do it respectfully than a robot. Be that as it may...

    It seems to me that a 'solution' to the 'problem' of care for the elderly is that cultural attitudes will shift - a much cheaper option, and something that your rather dessicated ideas do not properly address. There is already a - no doubt well-intentioned - programme of redefining a 'useful' as opposed a 'valuable' life, coupled with a raging neophilism typified by yesterday's Labour manifesto launch, which priviliges an ill-defined 'future' (good) to be shaped by the 'now' (best) in contrast with the 'past' (bad, uncivilised, cf 'capital punishment is the hallmark of anuncivilised society' - really? Britain was less civilised in the 1950s than now? You don't need to be a sherry-drinking, sepia-tinted Foyle's War fan to see the absurdity of that proposition, but it has surprising traction in 'modern' Britain).

    It might not be long before gerontophobia is an implicit, and then explicit, cultural view, just as 'homophobia' has been moved to the margins. The loosening of the ties between the generations is implicit in the cavalier attitude of the debt junkies, who happily draw from future wealth to consume today. The loosening of what might be called 'horizontal' ties is evident from the decline of mutual society, and the way the state trespasses ever more into parts of life that wereonce the mainstay of the family and informal ties. Where the state cannot 'solve' a 'problem', it redefines it, so it can.

    So I would expect to see the elevation of geronticide to a mark of civilisation before I see robot carers wiping arses up and down the country.

    Herbert Pocket

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  32. A must view clip relevant to this discussion-"Fear the Boom and Bust" a Hayek vs. Keynes Rap Anthem:

    http://www.youtube.com/watch?v=d0nERTFo-Sk

    Of course we do not expect Lord Keynes to get it, and I expect he will have an answer for this also.

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  33. Reply to Herbert Pocket

    I haven't read Rogoff and Reinhart, but it occurs to me that you might dwell on their title, particularly when you cite previous debt records. This time *is* different - from post-WWII and the height of the US-led fight-back in the Cold War. The massive expansion of state debt undertaken in the past few years has not been in response to an external, existential threat, like Nazi or communist domination of continental Europe. There was a clear interest for investors to underwrite the Allied efforts to liberate Europe in the 1940s, to reconstruct it subsequently, and to check communist expansion in the post-war period.

    If mass unemployment and economic collapse is not a severe threat, then what is? As if letting about 22% of the workforce remain unemployed (which the US is now basically doing) is not an outrage and disgraceful waste of human labour – the very essence of a crisis.

    Incidentally, the very fact that we avoided a new Great Depression is proof of the effectiveness of fiscal policy.
    And as for the WWII debt, in the case of the US, it was largely members of the public who bought government bonds.
    And when that wasn’t enough the US won World War II by having the Fed print money to fund government spending.

    In 1942 and 1945, the vast majority of government spending was by central bank monetising of the deficit, as you can see in the book above. So in fact I and you and our forebears have our freedom from Japanese and fascist tyranny because of fiat currency and the sovereign power to create money.


    Why should they just go on funding 'western' consumption and self-gratification - as opposed to ensuring the preservation of our fragile civilisation - when we promise them vanishingly little in return, other than various devalued currencies and glib lessons in 'growth'?

    Who is “they”? Foreigners own only about a third of the UK’s government debt . Two-thirds is domestically owned.
    So basically you mean “will British people and British institutions continue to buy British government debt that is used to fund basic infrastructure and social services and prevent a severe recession – and hold debt which is … owed to themselves.”
    I leave you to anwser it.

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  34. Lord Keynes

    "As if letting about 22% of the workforce remain unemployed (which the US is now basically doing) is not an outrage and disgraceful waste of human labour – the very essence of a crisis."

    Some would argue that people who are unemployed are motivated to "get on their bikes" [(C)Norman Tebbit], and that although they are receiving benefits, productive business is not burdened with having to fund perpetual 'make work' schemes. In the long run it generates growth. I'm not saying I think this is "The Right Thing to Do" [(C)New Labour], just that it is an argument...

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  35. This has always been an enjoyable way to get a better insight into our economic condition. Most of the other sites I visit take a US centric view. However Martin Armstrong's latest article is on Britain see http://www.scribd.com/doc/29743227/From-the-Hole-10-the-Fate-of-Britain-4-8-10 or go to http://www.martinarmstrong.org/economic_projections.htm for all his work. I hope people realise how easy it is for them to publish their views on the internet when they see what Martin has to do to get his work out.
    Also it would be interesting if cynicus does a piece on the gold and silver manipulation story which seems to be ignored by the MSM but can be found here http://www.huffingtonpost.com/nathan-lewis/its-ponzimonium-in-the-go_b_519893.html and zerohedge have been covering any new developments. It does seem that the attempts to keep the dollar strong are starting to come undone.
    This in my mind at least links in with some of the comments by Lord Keynes about Britain having an advantage over Greece and the over PIGS as we have a sovereign currency where the bank of England can control the number of pounds and the interest rate and even monetize the debt. But isn't there a danger that people will stop wanting to swap their goods and services for pounds (interestingly a unit of wealth for tangible stuff a well as our unit of currency)? The tenner in my pocket is just a 'promise to pay to the bearer on demand... ten pounds sterling' but the only way to get something tangible for it is to swap it with someone else who would only be accepting it because they believed that they two could swap it for goods or services at a future date. If that belief is shaken in enough people it would do huge damage to the currency and economy.My rambling point being that economic recovery would need a sound currency which isn't helped by monetizing the debt or manipulating the yield curve as these can lead to a loss of faith. Consuming less than we produce or defaulting seem to be the only options now.
    Carrying on as we are relies on a healthy demand for UK government debt so thanks to Lord Keynes for the BBC link detailing who owns UK debt. The British people seem to hold only a negligible amount which I presume is premium bonds and such. The debt held in Britain is by insurance companies, pension funds, banks (including the BoE!) and other financial institutions. What I'd like to know is how much of this debt was bought due to regulatory requirements to hold gilts as part of their reserves? And those foreigners wanting government debt have a huge choice with many up and coming countries offering a higher rate than the UK.
    fiatpete

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  36. Reply to Lord Keynes @7.22pm:

    As I said: this time it is different.

    "If mass unemployment and economic collapse is not a severe threat, then what is?"

    Pay attention, please. I did not say we do not face a severe threat. I said there is no "external, existential threat". The economic crisis is a threat to material standards of living in The West, but that is utterly different from the threat that rival, totalitarian political systems posed to our very way of life and common assumptions about freedom of speech, association and conscience. The high level of debt post-WWII was necessary to defeat that external threat, and thus create the conditions for a better future, as manpower and resources were redirected from defeating an enemy to rebuilding and then improving a domestic economy. Civilisation owes a debt to US leadership and materiel against the threat from German imperialism, Nazism and Soviet communism. It would be unreasonable to blame the Nazi or Soviet threat on the electorates of the UK or US, and stretching a point to hold their governments responsible.

    In contrast, the UK government chose to run up a relatively large pre-crisis debt for nothing more than the creation of an expensive welfare state which few but UK citizens can ‘enjoy’. The UK govt can make no plausible claims on the gratitude and support of the free world for that. It ran up the bills because it assumed that growth was perpetual; it has added massively to that debt in an apparently equally blase fashion. But that debt has been taken on solely to maintain the existing order: it has singularly failed to articulate what the post-crisis state will look like, other than to continue implausibly to say that it can, apparently with minimal pain, return us to the pre-lapsarian days of endless growth. And why should investors risk their money for nothing much more than maintaining the unrealistic welfare expectations of an aging and underemployed British population?

    If we adopted some of the policy recommendations you outline above, we could indeed begin to see some justification. But the policy response so far to this crisis is inadequate because so many of those responsible for creating the conditions that amplified the *internal* *systemic* threats remain in office. And yet rather than confront the situation honestly, they create smokescreens to suggest we *do* face an external threat. Look at the way govts have attempted to create an adversarial narrative, to create a tangible enemy onto whom to project blame. The bankers. ‘America’. (Clinton or Bush, depending on your persuasion.) Regulators. Speculators. Hedge funds. 'The NWO'. As I said: if a state cannot or will not act to address a problem as it exists, it will try to redefine the problem until it appears that it can, even if this does not actually solve anything.

    Herbert Pocket

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  37. Reply 2 to Lord Keynes @7.22pm

    War bonds:
    Faced with an external totalitarian threat to the nation’s very existence, war bonds could be issued and the spirit of patriotism invoked - from a much more homogeneous nation state - to address that *external* threat. Brits even swallowed a default on govt bonds in 1932, because there was that sense of patriotism - and of a common threat to all - to appeal to.

    It is much harder to make people suffer an increase in taxation, decline in living standards etc when the problem is at least in part systemic or internal - not least when increasing numbers of UK residents do not share common civilisational values, and indeed when the electorate accepts political bromides and is reluctant to accept that it shares an element of the blame. More so when the state has for years been taking more money from the private sector to ‘invest’ in public services - yet we read that health service productivity has actually declined since 1997. Or do you think there is an infinite tolerance among British taxpayers for the confiscation of current wealth for increasingly implausible promises of future returns?

    As an aside, the 'we're all in it together' rhetoric rings rather false in the current crisis. Under Soviet or Nazi domination, citizens would have suffered more or less equally - though clearly some would have collaborated and thus preserved a version of security. Not so today. We look at our politicians – one of whom, unlike I would guess 95% of her constituents, could with apparent ease furnish the Exchequer with a £13,000 cheque to repay money misappropriated from the taxpayer - and conclude that the politicians who helped get us into this mess are pretty unlikely to undergo the privations that we will if taxes rise and wages fall.

    Foreign-owned debt:
    You say 'only' a third of UK govt debt is held overseas. That is a very cavalier use of 'only'. 'Overseas' holdings are still the second largest group of creditors: I suggest it would not be inaccurate to describe them as ‘indispensible’, especially given the finite capacity for taking more wealth from domestic households.

    And, as the link you provide clearly illustrates, UK *households* hold a miniscule amount of govt debt anyway. Good luck getting the average contemporary UK resident to stump up yet more money to lend to the govt, on top of the taxes they already pay, and with a retail and services industry to sustain. To what spirit would you appeal? And what would you call them? 'Gordon's second chance bonds'? 'Fairer future bonds'? ‘Multicultural investment tokens’?

    "So basically you mean 'will British people and British institutions continue to buy British government debt that is used to fund basic infrastructure and social services and prevent a severe recession – and hold debt which is … owed to themselves.'"

    Thanks for trying to make me ask a question I didn't ask, but let me re-phrase my original one: What happens to govt spending plans if even *half* of that 30% of foreign-owned debt holders decide there are better investment opportunities elsewhere?

    And if you will allow me a further question: What allowance does policy make for the *human* response to a crisis - of trust, confidence, risk aversion? How confident is the Chancellor of his assumptions about future growth and an endless appetite overseas for UK govt debt – not when he's being interviewed on television, but when he's sitting at home at ten o’clock at night with whisky and with no one but his own conscience and his god to answer to?

    I leave you to answer that.

    Herbert Pocket

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  38. Reply to Herbert Pocket 2

    I said there is no "external, existential threat". The economic crisis is a threat to material standards of living in The West, but that is utterly different from the threat that rival, totalitarian political systems posed to our very way of life and common assumptions about freedom of speech, association and conscience.

    Just because it is not an "external, existential threat" does not lessen the argument for state intervention in anyway.

    The high level of debt post-WWII was necessary to defeat that external threat, and thus create the conditions for a better future, as manpower and resources were redirected from defeating an enemy to rebuilding and then improving a domestic economy.

    You mean it was necessary to run up huge debt to GDP levels during the war, which then fell rapidly after the war, as you can see here.
    In contrast, the UK government chose to run up a relatively large pre-crisis debt for nothing more than the creation of an expensive welfare state which few but UK citizens can ‘enjoy’.

    This statement is utterly false. Look at this graph.

    All post World War II governments except that of John Major operated with falling debt to GDP ratios. Then under our Tory friend John Major the debt to GDP ratio started to rise again, and peaked under the first years of Blair, then fell again significantly under new Labour.

    It rose again slightly after 9/11, the post 9/11 recession, the Afghanistan war, and the Iraq war, but was at historically low levels before the crisis of 2007-2009 hit.

    You can't escape that fact: the debt was at historically low levels

    You can’t talk about absolute levels of government debt without reference to the debt to GDP ratio. It doesn’t matter that absolute levels rose – the important statistic is the debt to GDP ratio, which fell, and therefore the real burden of the debt was falling.

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  39. Reply to Herbert Pocket 3

    It is much harder to make people suffer an increase in taxation, decline in living standards etc when the problem is at least in part systemic or internal

    If you engineer a return to high growth there is no need for increases in taxation. Growth increases living standards, not decreases it.

    Under a more progressive taxation systems, the burden of taxation falls on the rich and super-rich anyway.

    You really think a person who earns 1 million a year and who suddenly has to live on 500 000 a year is going to the poor house? My heart bleeds …

    Under Soviet or Nazi domination, citizens would have suffered more or less equally - though clearly some would have collaborated and thus preserved a version of security. Not so today. We look at our politicians – one of whom, unlike I would guess 95% of her constituents, could with apparent ease furnish the Exchequer with a £13,000 cheque to repay money misappropriated from the taxpayer

    Quite, so. More progressive taxes is the cure.


    'Overseas' holdings are still the second largest group of creditors: I suggest it would not be inaccurate to describe them as ‘indispensible’, especially given the finite capacity for taking more wealth from domestic households.
    Two thirds of the debt is domestically held – the majority of it.

    What happens to govt spending plans if even *half* of that 30% of foreign-owned debt holders decide there are better investment opportunities elsewhere?

    If you looked at the BBC website I linked to, you would have noticed in the next graph that in 2009 the amount of debt held by overseas creditors did actually fall significantly.

    No collapse has ensued.

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  40. Progressive taxation, where the 'richer' you are the more taxation you pay doesn't work.

    In theory it redistributes wealth and makes society 'fairer' but it just doesn't work - it just creates inflation and ends up making the poor poorer.

    The 'rich' are economically powerful. If you tax them more they just ask for higher wages and they get it because they either own the business or the business can't operate without them.

    These extra costs are simply passed on in the prices business charges for its products and services. Or the business reduces costs by reducing it's workforce at the bottom end of the payscale

    The ordinary man in the street just ends up paying more and probably can't get himself a pay rise to compensate or perhaps loses his job into the bargain.

    The end result is simply that the gap between rich and poor in terms of wages just keeps getting bigger. The rich keep themselves ahead of the game, the poor continue to get squeezed.

    It's much better to reduce taxation and cap wages - much better to pay a Chief Executive £100k and tax them 20% than pay him £160k and tax them at 50%.

    The extra £60k is only passed on to the end consumer causing a spiral of inflation.

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  41. Response to Mr Welldodgy

    The 'rich' are economically powerful. If you tax them more they just ask for higher wages and they get it because they either own the business or the business can't operate without them. These extra costs are simply passed on in the prices business charges for its products and services ...

    There is no empirical evidence for any of these claims. The US had very high tax rates after WWII, yet during that period had the highest period of growth, output increases and rises in standard of living.

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  42. Reply to Lord Keynes @7.52pm.

    My, you are a one for straw men. I’m not arguing against state action. I’m not pleading for millionaires. I’m trying to explain to you why “this time is different” from the precedents you cite, and trying to get you to question the assumptions you cast, it seems somewhat blithely, around. I accept that I am probably wasting my time: your frequent use of ‘progressive’ and your evident faith in the onward march of society toward plentiful, sunlit uplands indicates that you do not seriously entertain the idea of regression. This is a common enough view, of course, but it fails to take account of the fact that, for long periods of our modern history, civilisation was far from secure, and that onward march was by no means guaranteed, and the alternative to debt was civilisational extinction, or circumstances as near to it as to make no odds.

    “You mean it was necessary to run up huge debt to GDP levels during the war, which then fell rapidly after the war, as you can see here.”
    No, I mean what I wrote, although it would probably have been better expressed thus: “The high level of debt post-WWII was a necessary consequence of the need to defeat that external threat.” Post-war debt levels were high, albeit falling, whether in absolute terms or in relation to GDP. The reallocation from manpower and resources, once the immediate external threat from Nazism had been addressed, offered an opportunity for growth. The UK also retreated from empire during this period, which cut our outgoings in relation to our income; and the US umbrella in Europe enabled us to maintain only a modest standing military, even as the threat from Soviet communism waxed. Whither the luxury of such redirected resources now?

    You still haven’t suggested where growth actually will come from in the UK economy *as she is now*. You decently and sensibly make your own proposals, but the main political parties show no sign of discussing, let alone implementing, the sort of things you suggest, so that is effectively a version of the Irish travel advice that ‘if I were going there, I wouldn’t start from here’. So why, in the absence of a plausible, practical *plan* (as opposed to ‘aspirations’), should people simply assume that the growth will happen?

    Debt to GDP.
    The Major govt arrested the increases that occurred in the early 1990s, and Labour was elected on the grounds that it would continue with those plans. UK debt to GDP began growing again in 2002. (Just as Brown diverged from Clarke’s spending plans, I believe.) That, as I wrote, represents “a relatively large pre-crisis debt” – in absolute terms and in relation to GDP. Now, anyone can be clever with hindsight, but expanding debt in the boom years makes sense really only if you genuinely believe – against historical evidence and human behaviour – that there will be no bust.

    The chart you link to does not show a ‘historical low’ in the immediate pre-crisis period: it was lower in the late 80s up to around 1992. And the trend line from 2002 was up, before the crisis intervened. Assuming that crisis had been averted for the next few years, at what point do you think the Labour govt would have accepted that it had reached an optimum debt-to-GDP level? (And when do you think the public would start seeing a practical return on the Labour ‘investments’?) Do you think it likely that they would have found academics prepared to argue that, because there had been high levels of debt-to-GDP before, we could go on increasing it – maybe even to the 1940s highs? I can’t tell you, and you can’t tell me, partly because the situation changed – and who would have thought *that* might happen..? – but also because the people responsible for deciding and implementing policy are humans, with all the frailties and vanities to which we are prey, which economic theories seem so often to overlook.

    Herbert Pocket

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  43. Reply to Lord Keynes @7.22pm Part 2

    I will not revisit the frequent arguments here about the nature of GDP, but it seems likely to me that the GDP boom over which the 1997ff Labour government presided depended on an expansion of private sector – particularly household - debt. That makes tax rises harder to impose in a bust, regardless of its causes. Not just your ‘progressive’ taxes on millionaires, but taxes on everyone with a job in the UK, particularly those in the private sector, and those who are coping with mortgage repayments only because base rates are so low at the moment. And I’m not just talking about absolute income tax increases, but the recent de facto increase by not raising the thresholds of the bands.

    Foreign debt:
    I assume the decline in foreign holdings fell because there is a finite supply and the UK banks incl the BoE were increasing their holdings. As soon as the issuance increased, foreign holding increased. I am happy to accept your point that there appears to be no significant decline in demand for UK debt at the moment. But your final comment could do with the addition of a ‘so far’: it would show you had conceded the possibility that your theories might be in some way contingent on the behaviour of people who are not governed by the conclusions of academic treatises. (Although I see you use “if” once or twice. This, perhaps, is a start.)

    And I note that you have as yet made no reply to many of my earlier comments about your assumptions of the return to growth, technology and cultural attitudes. Clearly this cannot because you do not have the time. That being so, I would be grateful if you would humour me by returning to them, as I am genuinely interested.

    As to your reply to Mr Welldodgy: Do you think US citizens might have accepted high taxes post-war because they had just achieved victory in a major war, as a nation, and their nation was engaged in a new struggle against another totalitarian ideology? To say nothing of the growth of US industry to service the requirements of the war, which could thus be turned outwards to export, not least to the defeated and ruined powers of Europe? Do you think people are more tolerant when they can see the proximate causes of the problems were at least to a degree external to society - at least more tolerant than when faced with high taxes because of the failures and vanities of their own governments and business leaders?

    Regards

    Herbert

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  44. Lord Keynes

    I used to think that you must be highly perceptive and really know your stuff, and that if I asked enough questions I might begin to understand what you were talking about.

    I thought we'd made a connection when we discussed debt-to-GDP ratio the other day. To re-iterate: you agreed (I think) that massively rising debt might not affect the sacred debt-to-GDP ratio *at all* because GDP would be temporarily boosted by an amount similar to the borrowed amount (both numerator and numerator increasing with no indication of whether the GDP growth was 'sustainable', or any distinction between 'investment' and spending). Therefore debt-to-GDP ratio means very little.

    Then today you go and use the previously discredited (by you) debt-to-GDP ratio to 'prove' another argument in another of your single dimensioned statistical correlations which you imagine to be causal.

    I am seriously beginning to wonder if I should hold out any hope of learning anything from you after all...

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  45. Lord Keynes may call himself a Post Keynesian but his views seem pretty standard Keynes to me. I'm still waiting for a reply to my question as to the limits of our borrowing under his economic management - what % of GDP, or any other metric, would be the outer limit beyond which it would be dangerous to continue? Or whether he considers there is no limit to the level of borrowing a nation may take on?

    Similarly how much QE cash should the BoE consider printing, and at what point would even he call a halt? Or should there be no limit to the speed of the printing presses either?

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  46. Reply to Anonymous 2

    The reallocation from manpower and resources, once the immediate external threat from Nazism had been addressed, offered an opportunity for growth. The UK also retreated from empire during this period, which cut our outgoings in relation to our income; and the US umbrella in Europe enabled us to maintain only a modest standing military, even as the threat from Soviet communism waxed. Whither the luxury of such redirected resources now?

    Sure, retreat from empire helped postwar growth.
    The sources of post war growth can be found in effective financial regulation (to prevent asset bubbles), discretionary fiscal and monetary policies, and Keynesian demand management.
    Since the Soviet Union collapsed long ago, and the threat from terrorists cannot be fought by conventional armies but by police and intelligence services, the UK actually ahs less need for a military now and less need for military spending. Therefore it has plenty of space to redirect
    resources.


    You still haven’t suggested where growth actually will come from in the UK economy *as she is now*.

    Yes, I have – repeatedly. The manufacture of consumer goods.

    That, as I wrote, represents “a relatively large pre-crisis debt” – in absolute terms and in relation to GDP …. The chart you link to does not show a ‘historical low’ in the immediate pre-crisis period: it was lower in the late 80s up to around 1992. And the trend line from 2002 was up, before the crisis intervened.

    That doesn’t change the fact that the debt levels were historically low. It wasn’t “a relatively large pre-crisis debt” at all historically – but a small one.
    No amount of special pleading will change this fact.

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  47. Reply to Lemming

    To re-iterate: you agreed (I think) that massively rising debt might not affect the sacred debt-to-GDP ratio *at all* because GDP would be temporarily boosted by an amount similar to the borrowed amount (both numerator and numerator increasing with no indication of whether the GDP growth was 'sustainable', or any distinction between 'investment' and spending). Therefore debt-to-GDP ratio means very little.

    Debt to GDP is meaningful and certainly is before the mid-1990s afetr which there was an explosion of private-debt fuelled asset price inflation in many countries.

    All uses of debt to GDP ratios before the mid 1990s can be assumed to be accurate.

    The distortion of GDP since then is no doubt a factor, but you can’t seriously claim that all growth was debt fuelled.

    Even if you believe the debt to GDP ratios did not fall in the UK after the 1990s at all, the debt level was still historically low in 1995.

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  48. Reply to Anonymous 3

    And I note that you have as yet made no reply to many of my earlier comments about your assumptions of the return to growth, technology and cultural attitudes. Clearly this cannot because you do not have the time. That being so, I would be grateful if you would humour me by returning to them, as I am genuinely interested.

    Given that technological development is at the heart of productivity growth, we know what is needed: higher government investment in education and R&D, more direct funding of projects to increase industrial productivity, aggressive industrial and trade policy, infant industry protectionism, import substitution industrialization – precisely the policies that made Japan or South Korea or Taiwan rich.

    Do you think US citizens might have accepted high taxes post-war because they had just achieved victory in a major war, as a nation, and their nation was engaged in a new struggle against another totalitarian ideology?

    No doubt part of the reason – hardly the only one though.

    Do you think people are more tolerant when they can see the proximate causes of the problems were at least to a degree external to society - at least more tolerant than when faced with high taxes because of the failures and vanities of their own governments and business leaders?

    Come on. Have you forgotten your history? Remember the events of 1929-1933???
    There was no external threat. US capitalism collapsed. That was entirely internal. Mass unemployment, banking collapse, starvation etc. The fear that many people had after the war was that there would be a return to the Great Depression – a not unjustified fear if governments had gone back to 1920s policies or 19th century capitalism.
    Ever heard of Truman’s fair deal?.
    You don’t think that this outstanding vision of a just society by Franklin Delano Roosevelt did not resonate with people who were fed up with the failed and brutal realities of free market economics???

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  49. I have a new post on my blog on the Austrian theory of inflation for anyone who is interested:

    http://socialdemocracy21stcentury.blogspot.com/2010/04/austrian-theory-of-inflation-myths-and.html

    I welcome criticism.

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  50. Where is the money coming from that is currently bailing out those countries with large deficits? Seems to me that there is plenty of money around - the creditors. The question I have is why is this money in the hands of creditors rather than the countries who need it for productive purposes? The problem is I think that money has now become a commodity in itself rather than a means of transaction. Until we find a mechanism that stops individuals/organisations using money unproductively many countries globally are at risk. It is called usury.

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  51. Reply to Sobers

    I'm still waiting for a reply to my question as to the limits of our borrowing under his economic management - what % of GDP, or any other metric, would be the outer limit beyond which it would be dangerous to continue? Or whether he considers there is no limit to the level of borrowing a nation may take on?

    I have already answered this question before.

    what % of GDP, or any other metric?

    Trying to give a specific limit for all countries in all times in terms of debt to GDP ratio is about as stupid as trying to give a specific limit to amount of weight people chose to lift in a gym. If you are built like Arnold Schwarzenegger, you can lift a huge weight, but only a small one if you’re built like Woody Allen.

    It is the same with economies: different sized economies in different states at different times can take on larger debt levels than others.

    If you have a huge current account surplus, and most of your debt is internal (like Japan) your debt levels can be very high.

    If you are the world’s biggest economy with huge resources and a currency that is the global reserve currency (the US), then you also have a big space.

    no limit to the level of borrowing a nation may take on?

    Of course there is a limit: the size of debt servicing and real resources in an economy.

    I have already answered the same question asked by here in the comments:


    http://cynicuseconomicus.blogspot.com/2010/01/gdp-growth-debt-and-current-accounts.html.


    @Lord Keynes: just for future reference, is there any limit to govt spending and levels of debt in your economic theory? If so what is it?

    Of course there is a limit to the government consumption of real resources (either goods and services).

    That limit is reached when we have full employment, strong economic growth and signs of inflation.

    Then it is time to rein in spending, curtail bank lending by raising reserve limits or soaking up excess liquidity or even introducing a tax based incomes policy.

    When there is a severe supply contraction, on the other hand, government deficits are a bad idea, and should not be done.

    However, in times of depression and severe recession, when much productive capacity is unused, the government can, and should, run large deficits to stimulate the economy.

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  52. Reply to Sobers 2

    Lord Keynes may call himself a Post Keynesian but his views seem pretty standard Keynes to me.

    I wonder where you learnt your Keynes from.

    Try this to start with:




    Similarly how much QE cash should the BoE consider printing, and at what point would even he call a halt? Or should there be no limit to the speed of the printing presses either?

    You seem to think I only advocate QE as some kind of solution to everything. I don’t. In fact the limitations of QE are well known:

    http://bilbo.economicoutlook.net/blog/?p=661.

    I place much greater emphasis on fiscal policy:

    The UK would need to

    1. Audit its banks and clean their toxic assets.

    2. Force them to repay the bailout money

    3. Re-introduce effective financial regulation like Canada has always had (and surprise, surprise, Canada never had any banking crisis in 2008)

    4. Large fiscal stimulus to bring down unemployment and increase business activity

    5. Adopt aggressive trade and industrial policies and rebuild manufacturing and output of tradable goods and services to bring down the trade deficit.

    6. A education system more like Germany with greater emphasis on vocational training

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  53. Lord Keynes

    Do you subscribe to the idea of 'Peak Oil', or of natural limits on the availability of other resources?

    What if, because of such limitations, economics became a 'zero sum game' with all countries competing against each other for materials and energy? What if the oil price spike (that happened to coincide with the economic crash) was a recurring feature of any future resurgence of global growth? Would you still advocate high levels of debt and spending as the engine for growth?

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  54. Yes, the oil on our planet is obviously a finite resource, but my feelings on peak oil are expressed in this article:

    http://www.counterpunch.org/zadeh10012008.html

    The 2008 oil price spike was the result of new form of speculation:

    http://econ.bus.utk.edu/faculty/davidson/challenge%20oilspeculation9wordpdf.pdf

    Speculators hijack oil market, Sunday Times, September 12, 2004
    http://business.timesonline.co.uk/tol/business/article481363.ece

    Banks hoard oil in storage tanks
    http://peakoildebunked.blogspot.com/2008/05/355-banks-hoard-oil-in-storage-tanks.html

    Basically, one has to distinguish between these two ways that oil is sold:

    (1) Futures markets in London and New York that trade the right to buy oil at a predetermined point in the future; this “paper” market, the main stamping ground for speculators, acts as a benchmark for the price of oil in the second market

    (2) The direct physical market, crude bought direct from oil companies.

    That fact is that from 2004 investment banks and other large speculators have been aggressively moving into the second market (“the physical market”) not just the first, and were apparently hoarding oil, and:

    In the most recent sustained run-up in energy prices, large financial institutions, hedge funds, pension funds, and other investors have been pouring billions of dollars into the energy commodities markets to try to take advantage of price changes or hedge against them. Most of this additional investment has not come from producers or consumers of these commodities, but from speculators seeking to take advantage of these price changes. The CFTC defines a speculator as a person who “does not produce or use the commodity, but risks his or her own capital trading futures in that commodity in hopes of making a profit on price changes.”
    The large purchases of crude oil futures contracts by speculators have, in effect, created an additional demand for oil, driving up the price of oil for future delivery in the same manner that additional demand for contracts for the delivery of a physical barrel today drives up the price for oil on the spot market. As far as the market is concerned, the demand for a barrel of oil that results from the purchase of a futures contract by a speculator is just as real as the demand for a barrel that results from the purchase of a futures contract by a refiner or other user of petroleum. ….
    By purchasing large numbers of futures contracts, and thereby pushing up futures prices to even higher levels than current prices, speculators have provided a financial incentive for oil companies to buy even more oil and place it in storage. A refiner will purchase extra oil today, even if it costs $115 per barrel, if the futures price is even higher …. In turn, once major oil companies and refiners in North America and EU countries begin to hoard oil, supplies appear even tighter lending background support to present prices.”


    F. William Engdahl, Perhaps 60% of today’s oil price is pure speculation
    http://www.globalresearch.ca/index.php?context=va&aid=8878

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  55. Lord Keynes

    I think that the author of the Counterpunch argument perhaps doesn't understand the 'Peak Oil' thesis. That is, it is not that the oil is "running out" but that the supply in barrels-per-day may not be able to expand beyond a certain point. In itself that would not be a huge problem, but a characteristic of our particular version of the free market economy is that it is basically a Ponzi scheme that must collapse if it doesn't expand. Isn't that what the Peak Oil proponents are worrying about?

    It may be that the 2008 oil price spike was caused by speculation, not limits on oil supply (I wouldn't know), but what if these speculators repeat their trick every time the economy recovers a little? In a sense the reason for the spike is irrelevant as long as it can keep happening.

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  56. Reply to Lemming

    There is an easy solution to future price spikes: the US and Japan can release 10% or so of the oil in their strategic petroleum reserves. This would deflate the rising price of oil and burn speculators:

    The US government can test this speculation and likely force futures oil prices down, perhaps even well below $100 a barrel,
    by a strategic use of the world's largest emergency supply, the US Strategic Petroleum Reserve (SPR).
    As of May 2008 the SPR held 701 million barrels (96% of capacity). If the United States was to dump say between 70 and 105 million barrels on the future market, it is likely that speculators could lose a significant amount of money, while the U.S. would earn billions of dollars on the sale of oil .... Moreover it would not be the first time that strategic use of the SPR prevented run away crude oil prices. After Desert Storm in 1991, 21 million barrels from the SPR was sold over 45 days. As a result world oil prices was barely disturbed despite the interruption of crude oil supplies from Kuwait and Iraq. Again after Hurricane Katrina shut down U.S. crude production in the Gulf of Mexico ( approximately 25% of total U.S. oil production), the release of 11 million barrels from the SPR assured stability in the world's markets for crude oil.

    http://econ.bus.utk.edu/faculty/davidson/challenge%20oilspeculation9wordpdf.pdf

    And even if you chose not to use SPRs, financial market regulation of speculation could achieve the same effect.

    Problem solved.

    As to the issue of peak oil, I have to read more about it.

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  57. My Lord Keynes, you're quite the politician aren't you? They never give a straight answer when a good few pages of unprovable waffle will do either.

    I'm not asking what the safe borrowing limit (as a % of GDP) is for all the nations of the world, in all conditions. I want to know what the safe (acording to you) borrowing limit for the UK, at the moment, is. A figure if you please, or at least a range. Not a list of subjective economic metrics.

    And if you do advocate QE, a figure for the UK, at the moment, that we should not exceed in printing to stimulate the economy.

    If you cannot (or will not) produce such figures, I will be forced to assume that despite your obvious theoretical economic knowledge, you know little about the practicalities of economic governance.

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  58. Reply to Sobers

    I want to know what the safe (acording to you) borrowing limit for the UK, at the moment, is. A figure if you please, or at least a range.

    For the next few years, 80% to 120% is reasonable.

    And if you do advocate QE, a figure for the UK, at the moment, that we should not exceed in printing to stimulate the economy.

    You clearly have not read my comments. I don’t advocate QE as a way to “stimulate the economy.” Only fiscal policy can do that.

    QE can be used to recapitalize banks, but the banks are “zombies.” You need to audit them fire the management, and clean them up as well.
    QE generally just creates excess reserves – they sit at the central bank and don’t do anything if they banks are insolvent or have bad assets on their books.

    The whole idea that QE is a way to stimulate the economy is debunked anyway in the article I linked to:

    While some point to the quantititative easing experience in Japan between 2001 and 2006, the reality is that it was highly expansionary fiscal policy not the monetary policy gymnastics which kept that economy from deflating and allowed it to return to stronger growth in recent years (until the crisis hit) .... We should be absolutely clear on what the BOE is doing. It is buying one type of financial asset (private holdings of bonds, company paper) and exchanging it for another (reserve balances at the BOE). The net financial assets in the private sector are in fact unchanged although the portfolio composition of those assets is altered (maturity substitution) which changes yields and returns.

    http://bilbo.economicoutlook.net/blog/?p=661.

    No money is “printed.” The central bank exchanges one asset (government bond, corporate bond) for another (excess bank reserves).
    Yes, this can prop up the bond market and control the yield curve.

    So what?

    Central banks have always had this power. The US Fed exercised this power in the 1960s in “operation twist”.

    And under the 'tap system' of issuing government bonds after WWII, a number of Western countries like Australia for many years actually had their central banks purchase government bonds when they weren't all bought by private bondholders.

    The system is explained by Bill Mitchell of Billyblog:

    [around 1981] the Australian Office of Financial Management was set up as a special part of the Federal Treasury to management federal debt. Previously, bond issues were made using the “tap system”, whereby the government would announce some volume of debt it wanted to issue at a particular rate and then sell whatever was demanded at that yield. Occasionally, given other rates of return in the financial markets the issue would not be fully subscribed – meaning some of the Government’s net spending would be covered in an accounting sense by central bank buying treasury bills (government lending to itself!).
    The neo-liberals hated this system and regarded it providing no fiscal discipline on government. They knew that by linking deficits $-for-$ with private debt they could more easily mount the debt hysteria and maximize their pressure on government to cut deficits and withdraw from the market.


    http://bilbo.economicoutlook.net/blog/?p=3416

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  59. I want to know what the safe (acording to you) borrowing limit for the UK, at the moment, is. A figure if you please, or at least a range. Not a list of subjective economic metrics.

    There is no need to borrow anything. We can print whatever money we require to settle our sterling debts whenever they fall due. There is no need to issue debt at all. The currency exchange rate will buffer things *as long as* the policy is executed rationally (ie government absorbs spare capacity that isn't being used by the private sector - and releases it as soon as the private sector requires it).

    The standard ratios are irrelevant. We need to get away from financial numbers where they are divorced from the real issues for real people. Is there a job for those who want one? Can we house everybody at a sensible price? Are we educating and skilling people sufficiently for the future prosperity of the country?

    Beyond those sort of things (essentially fixing market failures with self-stablising policies) government should eliminate friction where it can and generally get out of the way.

    What we really need more than anything else is a government that realise that interventions are fraught with danger and need to be designed as self-stablising. If you need the wisdom of Solomon to execute a policy, then it will not work.

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  60. @ Lord K

    Bill at Billy Blog is smoking his socks. A little truth & then off he goes spinning you into La La land.

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  61. Neil,
    Nice points.

    Neo-chartalism and MMT are indeed insightful perspectives on modern monetary systems.

    I have a great deal of sympathy with the approach, but under the present system of liberalised capital accounts, countries with current account deficits face limits on how far they can run their economies along MMT lines.

    Maybe I am wrong - I would like to think so, but I suspect you need a return to discretionary capital controls and an completely new and reformed IMF that actually steps in and rescues countries facing Forex shortages with US dollars or special drawing rights given without any strings attached (that is, no brutal deflationary policies).
    In that world, we would have a system closer to Keynes' vision of the international monetary order.

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  62. I have a great deal of sympathy with the approach, but under the present system of liberalised capital accounts, countries with current account deficits face limits on how far they can run their economies along MMT lines.

    There are always limits, and I fail to see how free capital flow is a problem. Either the exchange rate is an adequate buffer (in which case MMT may hold) or it isn't (in which case MMT is probably rubbish).

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  63. Neil Wilson, Lord Keynes: Very interesting and challenging - in a good way. Certainly MMT/neo-chartalism is hard to grasp if one has been 'indoctrinated' - especially belatedly - in classical economics.

    Isn't the problem with MMT effectively a moral one? If sovereign governments with a fiat currency can create money, apparently in perpetuity, does that not break the link between labour and reward? Can you get away with unilateral MMT - in a world where other inter-related economies run on a classical lines?

    If I understand MMT correctly, taxes become a way of altering/coercing behaviour - which many people of Bill Mitchell's political position would describe as 'violence' if imposed by a political system with which they disagree. Dick Cheney said 'deficits don't matter'. Presumably they matter only if the govt is using them to fund things you approve of.

    How do we explain to the electorate that we pay taxes pretty much only because the state thinks it knows how we 'ought' to live?

    And Neil Wilson especially: How do you deal with people who don't want a job? Isn't there a danger that the country's whole economy could become - literally - a welfare state? Or a self-financing, expansive totalitarian empire?

    Too many questions perhaps.

    The Bellman

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  64. People who don't want a job (but are otherwise able to do so) don't have to have one, but they should get nothing from the state to support them. I struggle to see how any other position is defensible if there is a 'Job Guarantee' on offer.

    If the profit motive is still there, and the 'Job Guarantee' is well designed (ie it only does things for where the market has genuinely failed - with a mechanism by which the private sector can 'object' to the public sector generating work in a particular area) then the private sector will generate jobs that are better value than the ones on the Jobs Guarantee. That would then reduce the size of the deficit automatically.

    A state cannot print money without limit. If this is out of kilter with the private sector then you will generate inflation.

    Taxes simply 'burn' the money that is printed (with interest paid to the central bank on the 'monetary rate' treated as just another tax). If you burn as much as you print then you have a balanced budget.

    There is nothing in MMT that tells you how to tax. It just says that a state is not really financially constrained if it has a floating exchange rate. Instead it is constrained by the real goods and services available in the economy.

    As I see it the general line is that we should stop messing around with financial pieces of paper and spend directly in the real economy instead.

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  65. Mr Welldodgy, Would you agree with the notion that the cost from the rich was not passed on in inflated prices but in the form of debt? This notion would explain the growth of finance in developed countries and the acceptance of consumerism becoming more important than wealth creation.
    Wealth creation is difficult. It involves a lot of education, and R&D dollars. Both the private and public need to work together to generate wealth creation, something that is lost amongst the libertarians here.

    Improving lifespan doesn't mean a thing if it just amounts to more dependents for society to take care of and the same levels of energy ,food, and clothing being produced. In case you're wondering, I'm not advocating gerontophobia but at some point in the future, simply taking care of the elderly will equal mean a significantly lower standard of living if some things don't improve. Words like useful and valuable are very subjective terms to use because there will always be someone out there who doesn't think your life is useful or has much value. Christians will tend to place Christian lives above non-Christians. Liberals will tend to do the same. Back to my main argument, An aging population would not be such big problem if there wasn't so much contempt in the world along ideological and cultural differences. There will certainly be enough people on the planet to take care of the elderly in the future but I think cultural differences will keep some of that demand from being met. This is more likely a problem for Western countries that aren't multicultural.

    Herbert Pocket: The state has to "trespass" because of the following trends. People are living longer. Families have been getting smaller. Children are seen as burdens rather than assets in developed countries nowadays. Parents are not counting on their children to take care of them in old age entirely. Families don't necessarily have the time or medical expertise to take care of the eldery. Those are the trends. There has been a breakdown in social ties that is directly tied to modern life itself. Things that used to be done free now cost money. Everything has become infected with self interest. Even within nonprofits, there's a notion of, "what's in it for me"? Competitive salaries are now a regular component in leadership positions in nonprofit organizations. If the government isn't taking over something that used to be in the realm of family, the private sector is. If a robot can safely wipe someone's bum then why shouldn't it? What's the nonsense about the robot not being able to wipe it 'respectfully' ?


    It's known that in other countries ,2nd and 3rd world countries, people live with their parents until they're married and take care of them in old age. However, those societies are collectivist. Western societies are individualistic. At this time it's extremely unlikely that Western societies will change their value systems.

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