Tuesday, May 18, 2010

Austerity - The Consequences

I am going to start this post with a comment from Suzy, given on my last post:
Cynicus what do you think about the theory that nothing now can save us. As is being made clear the austerity measures - that you seem to support are causing deflationary problems on a massive scale in the countries they are being used in. This means the markets are jittery about possible double dips and jittery about Greece entering a horrible recessionary scenario.

So it seems we are damned if we cut and damned if we don't. And what is worse - default or ten years of depression - which is what some commentators think Greece now faces.
The problem identified by Suzy is indeed a real problem - damned if we do, and damned if we do not. It will not have escaped the notice of readers that the word 'austerity' appears to be the word of the moment. This is a report from Forbes which is headlined as 'Austerity - the New Worrisome Buzzword':

Dictionaries define austerity as economic restriction, scarcity, sternness, hardship.

No wonder then that people in Greece and Spain are taking to the streets in protest of the austerity measures required of countries accepting aid from the EU/IMF rescue plan announced a week ago. Among the austerity measures are pay cuts, cuts in pensions, later retirement ages, and fewer government services.

The push for austerity adds to concerns that the rescue from record government debt loads may be as negative for the economies of Greece, Portugal, Spain, and Ireland, and therefore the fragile overall European economy, as actual defaults on the debts might have been.

In the U.S., worries over the austerity programs in Europe have overwhelmed the positive U.S. economic reports that have been coming out. Among the worries is that bank and investor losses on government debts in Europe could undermine confidence in global financial systems again.

The report goes on to say that the State of California is also implementing 'austerity' measures, and it is also apparent that 'austerity' measures are also in prospect in the UK. Ireland has already implemented such measures, and Italy appears to be in process of measures. What we are seeing is a grand beauty contest, in which sovereign states are in competition, one with another, as to who will be in receipt of further credit. The exception, of course, is the US, which is still relying on the irrational belief that it is a 'safe haven'. Regular readers will know that I have always expected a reaction to crisis would be to initially flee to the illusory safety of the US, and this is what has taken place.

What we are seeing is that we are now in a situation in which 'austerity' measures are taking place simultaneously, and that demand for goods and services will (in aggregate) start to fall as the austerity measures bite. This has led to a lot of talk about Fisher's debt deflation theory, and fears of deflation are commonplace in many reports. The following is a sample of the kind of discussion that is very common:

Germany is pressing other eurozone countries to push ahead with brutal austerity measures to slash their budget deficits. Spain, Portugal and Greece have already announced their austerity measures, while Italy is expected to soon announce tough budget cuts. Meanwhile, to comply with its new balanced budget laws, Berlin will have to slash its budget deficit by about $US13 billion each year for the next five years.

There are worries that this strong contraction in government spending in the eurozone will force many economies into recession, making it even more difficult for countries to collect the tax revenues they need to stabilise their debt levels. Steep declines in economic activity will put additional downward pressure on prices and already there are signs that prices are falling in Portugal, Spain and Ireland while underlying inflation in Germany is close to its lowest levels in more than a decade – making it even more difficult for countries to service their debts.
I suggest that you re-read the second paragraph. The argument is this:

  1. If a government reduces the quantity of borrowing, the economy will contract.
  2. If the economy contracts, there will be less tax revenue.
  3. If there is less tax revenue, debt servicing will be more difficult.
  4. Stabilising debt levels needs borrowing to be continued.
All I can say to this extraordinary thinking is ??????! Are they serious? In order to stabilise borrowing, there is a need for more borrowing, to increase activity, such that some of that borrowing ends up back in the hands of the government as tax revenue so that they can service the borrowing that they are undertaking. Apparently, this will stabilise debt levels.

Within the article quoted above is exactly the dilemma proposed by Suzy. Damned if they do, and damned if they do not. Governments have the option of continuing the high borrowing until, finally, investors take fright, or they cut back borrowing to sustainable levels, and see the GDP go down as a result of reduced borrowing - and then see the tax revenues fall, causing further tightening, and all the while seeing their debt to GDP ratio move in the wrong direction, thereby further alarming investors.

Within this scenario is a problem, which I now feel I am endlessly repeating. This is that countries have mistaken growth in GDP for real growth, when the reality that the growth was not in their ability to generate wealth internally for consumption, but a growth in their consumption of the output of other countries. When you borrow $1 billion a year from China, you can purchase Chinese goods to that value. However, as with all borrowing, China would expect to get the $1 billion back, and with interest, which means an equivalent amount of output from your own economy. If we think of it in simplistic terms, we are borrowing 50 million colour televisions from China, and must repay in (or the equivalent of) 55 million televisions. When we make our repayment to China, unless we have an economic miracle, we will have less of our output for ourselves. A proportion will be returned to China.

What we have in effect is a situation where we appeared to be 50 million colour televisions richer, and now we no longer have these, and in addition, we are having to return some of our own output of colour televisions to China (I know, we do not make them anymore). We immediately feel a loss as we commence living on our own output, and that output available for consumption is further reduced due to having to apportion some of it to repay our creditors. The 50 million televisions were never our output, though we believed this to be the case. Because we never realised this was not our own output, we are now in a situation where there is resentment at the prospect of falling living standards, and reaction against living within our means, and paying our debts.

What we now have is a situation in which we are having to face some tough decisions. For the countries that have the ability to devalue, they can do so. However, if they want to continue to have access to credit, they must devalue at the cost of paying much higher interest on their debt. In particular, where government borrowing is in the economy's own country, the repayment is made in devalued money (think of returning three quarters of a television in return for the one that was given as a credit) and, unsurprisingly, creditors will protect themselves against the risk of you doing this again. In addition, this lowers the standard of living of everyone in the country which has the currency devalued. I always give the example of the person who enjoys imported Belgian beer having to pay more for their beer to illustrate this. This simple pleasure takes a greater proportion of your wages, and you are therefore literally poorer.

The above scenario is, of course, inflationary, and we are seeing climbing inflation in the UK, which has seen a steady devaluation of the £GB. The inflationary effects are taking place despite the contraction of the economy. A long, long time ago, I asked myself the question of whether we could expect inflation or deflation. I pointed to a falling £GB outstripping the impact of the contraction of the economy, and this is what has taken place. In a letter to the Chancellor, explaining inflation being above target, the Bank of England has recognised this impact (belatedly).

Interestingly, the Bank of England is still talking of 'spare capacity' in the economy - what they are not talking about is whether that capacity might have any utility. In a crude example, if we think of a shop worker who has been made redundant, how might the worker be spare capacity. If retail was structurally over-represented in the economy, and the economy has corrected the credit fuelled over-capacity, what is this worker 'spare capacity' for? Can they go and work in an engineering works? The same might be said of a wholesaler to the catering trade, which has seen business grow at a rate fuelled by excess credit expansion. They might have 'spare capacity', but it is pointed at the wrong sector.

At present, the only way that this 'spare capacity' might be utilised is if a government keeps pouring borrowed money into the economy to soak up this spare capacity. However, the reality is that the capacity must eventually disappear. At some point, the credit will stop, and we are seeing this taking place. For many countries, they are under threat of a complete halt to further credit. The only solutions to the problems is to re-balance their consumption and output, and that means to move from living on credit to generating surplus to repay the credit. The problem is that this can not be achieved overnight, and without considerable economic destruction. The expansion of sectors that were reliant upon credit will have to shrink to a size which is appropriate to the economy.

The solutions to these problems are varied. In the countries locked into the Euro area, in the end, it must mean wage cuts which will allow them to export. In countries that have currency independence, they can 'inflate their way out of trouble' through devaluation, thereby commencing a process of increasing inflation internally, and thereby indirectly lowering wages to allow their economies to become competitive. In doing so, they will pay a high price for any further borrowing. You may note, that this still means reduction in wages, and simply means that the wage cut is not in quantity of money but undertaken through lowering the value of money.

However, there are signs that inflating out of trouble may not be the chosen solution. It seems that austerity is the more probable route, and that will mean wage cuts. It may be remembered that making a saving of £50,000 a year with one redundancy is the same as cutting the wages of many workers by £1000 each. In both cases, the wage cut is real, only in the former case it is concentrated in one person (the provision of unemployment benefits is, of course, a complication, but we will leave that alone for the sake of simplicity). There are some problems in implementing across the board wage cuts, such as minimum wage laws and the provision of benefits. I will explain.

In the case of a minimum wage, the floor of a minimum wage worker will also influence the wages of higher paid workers, such as their supervisors, or the manager who manages the supervisor. In each case, there is a necessity of a differential and a floor on the overall wages is therefore set by the minimum wage. Benefits also create a minimum wage as follows (from my first post, A Funny View of Wealth):

As mentioned before, all things in the UK are not equal due to the minimum wage, but also because the UK employer needs to compete for labour with the UK benefits system (which is an indirect minimum wage that applies to anyone entitled to social welfare benefits). This system allows an individual to remain economically inactive, or to choose an option of accepting a low paid job for very little real remuneration despite a major increase in the expenditure of their labour. In such cases the value of the labour expended is far below the minimum wage as it needs to be calculated as the weekly pay minus the benefits, to give an actual wage for the work done. The rational person in this situation might reasonably ask whether the loss of their free time to work is worthwhile for what will often be little financial incentive as, in this situation, the UK worker is often working for extremely low wages[10].
The problem with these minimum wage effects is that they have potential to displace lower wages into high unemployment. It encourages a system of haves and have nots. The upside is that it encourages organisations to do more with less labour, thereby encouraging improvements in productivity, but does so at the cost of throwing individuals to the scrap heap of unemployment. Whatever happens, however it takes place, wage cuts are on their way - whether concentrated into unemployment or shared more equitably over the workforce.

The real problem in these scenarios is that everyone seems to be looking to exports as the route out of the global economic crisis, whether China, Spain, the UK or the US. Just looking at the US and China, China has enjoyed an export boom partly based upon credit provision to the US, and its industry is directed in part to servicing those US customers. In other words, China has used massive provision of credit to support an export sector that does not have enough customers. As such, it must also eventually adjust. As 'austerity' takes over, their export sector will suffer. As such, China will do everything it can to support the export sector, rather than risk unemployment at home. They need to keep exporting. At the same time, the US are seeking ways to compete in export, and are now facing a China that seeks to continue to win in the export game. A similar scenario can be painted for the PIIGS and Germany.

In the examples above, I am simplifying, but the essence of the problem is as I have put it here. Competition on labour costs is on its way, with the aim of winning the export game. However, not everyone is going to win in an export game when many of the markets that previously drove exports are going into decline. Whilst continued borrowing by debtor countries might prop the system up for a little while longer, it does not alter the fundamental imbalances that the credit boom created. All over the world, there are industries pointing at markets that simply can not afford to consume the goods they have been consuming in recent years. They do not have the capacity to both repay and consume at the same rate as they were when the credit taps were wide open. As these markets contract further, as austerity bites, each country will seek to generate competitive advantage. In the case of the major debtors, they will have to, one way of another, cut their wage bills.

But what happens if more and more countries are doing the same thing - whether directly or indirectly through devaluation? How does it end?

The answer to this question lies in the eventual re-balancing of the world economy, and in particular a re-balancing in the allocation of resources available for consumption. I have given an explanation of why this is a problem in earlier posts, and it is too long to detail here. In short however, the amount of commodities in the world has yet to catch up with the new input of labour represented by the emerging markets. If the labour force increases without a commensurate increase in resources, then there must be a period of hyper-competition. This hyper-competition was emerging but was masked by the credit boom. However, if you want to understand this, I suggest you read one of the posts on the subject, such as this one on Huliq.

Having said that there should be a re-balancing towards the emerging markets, this is to ignore one thing. The losers in this process do not want to see this happen. This is where politics, and in particular geopolitics come into play. How the game might play out is, in many respects, dependent upon how world leaders address the problem. How they might react as the economic crisis continues to unfold, and fully reveals itself, is going to be highly unpredictable.

Note 1:

Within this mess, we have the further complication that the US is seen as a law unto itself. Whilst they have similar structural problems to many countries faced with crisis, their problems are still being hidden under the irrational rush to safety to US assets. They are still on the path of borrowing to support their economy, and to generate the tax revenue to support their repayments, and to gradually lead their economy to the point at which investors finally take fright. Where California is leading, the rest of the US will eventually follow.

Note 2: Some replies to comments on the last post

Ginger Tosser: Yes, the US is currently a safe haven, but they have the same problems as elsewhere......it is only a matter of time.

Kiwi: I long ago proposed Norway as the best bet.....stable government, resource rich, large sovereign wealth fund....but even then we can never be sure in the chaos that we are now seeing.

Ian: I have a few moments where I have metaphorically held my breath, asking is this the big plunge?

Anonymous on the Scorched Earth: There has been considerable commentary on the state of what was inherited by the new UK government. It is a good opportunity to get the skeletons out of the cupboard and address the real scale of the problems in the UK. I have not yet commented on the election result, as I am waiting for more firm policy details.

A Real Black Person (yes, that is the commentator's posting name): I liked your pithy comment on Dubai, as follows:

But still, it makes one wonder what compelled them to start building very lavish and exquisite real estate properties for rich people that don't exist?
An extreme example of pointing in the wrong direction, unless they manage to market these to the new wealthy....

General: I have worked up the list of comments, and that unfortunately is all I have time for. However, some interesting links and comments as ever....I am always impressed with the quality of the comments.

Note 3: There is an error in the Huliq article, if I recall correctly. A section should read 'zero sum game', not 'zero sum gain'.

26 comments:

  1. Re the "scorched earth" post I made on your last thread.

    I agree, the full scale of what Labour did needs to come out. Unfortunately, other parties will say the disclosures will be for political gain and exaggerated meaning doubts will be put on the veracity of such if they are used as an excuse for further spending cuts.

    There is evidence however - as reported in the Guardian, civil servants gave written protest to some of the orders they received at the latter end of the Labour government.

    Cameron has ordered an audit into all this, I just hope that when the results are announced that Labour is not able to convince the populous that it is a political stunt.

    http://www.guardian.co.uk/politics/2010/may/18/civil-servants-labour-spending

    Also, as I said before, the reaction of the markets to the news that the UK is in a worse state than previously disclosed causes me worries. The fact that there is very large amount of CDS being written against the UK mean the markets sense weakness in the UK economy. The sharks are circling, lets hope the UK doesn't let blood into the water.

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  2. Anonymous: Thanks for the link. That this was in the Guardian says a lot....

    The point of my comment was to note how, now that RPI is flying high, there has been a shift in the message...when CPI was relatively high in relation to RPI, RPI was emphasised in the explanations for QE. Now RPI is sky high, central bank policy, on the same principle, should be raising interest rates to tackle RPI inflation. Strange that the emphasis is back on CPI, now that it is relatively lower than RPI (albeit already climbing well beyond the rate set by policy).

    Funny how the statistics that are emphasised are selected according to the need for policy justification. However, these are the same people who can swing the fate of the economy, and who will no doubt be the new uber-regulators of a new 'stronger' banking regulation regime...These are the same people who said that government debt was effectively 'risk free', who have....need I go on?

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  3. This is like a dog eating its own tail, or trying to use exhaust fumes from an engine as fuel to be fed back into it.

    We are spent out. Fact. We owe money. Fact. We will repay the money by printing money. fact. Debt does not repay debt. Fact.

    Lets move forward and innovate.

    Grow hemp for food, fuel and industrial material (and jobs)

    Exercise more to improve our health and lessen our dependence on a bankrupt health system. The body can make its own medicine.

    Work together more to bring back the community spirit that has been deadened by our addiction to individual display, that was never sustainable in more ways than one.

    Accept that we have to pay back this debt and it may take up to 25 years to do it. If we work together, we could be back much quicker as the worlds first advanced and SUSTAINABLE economy.

    Peace be with you

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  4. I suspect the markets have already factored-in most if not all of the consequences of Labour's Enron accounting policy. That debts were being kept off the books has been known about for a long time, the only difference is that now we will get actual figures rather than estimates. I would be surprised if the true position is substantially different from the estimates.

    Many thanks for your comment over on my shabby corner of blogoloy.

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  5. CE

    Throughout your post is a strong implication that growth is the normal state of things, and that we are at a temporary hiccup that will eventually iron itself out. You say:

    "...however, the amount of commodities in the world has yet to catch up with the new input of labour represented by the emerging markets. If the labour force increases without a commensurate increase in resources, then there must be a period of hyper-competition."

    In other words, once the supply of oil, copper, rare earth metals and so on doubles to match the size of the global workforce then we can all resume growing our economies again; instead of one colour TV for every man, woman and child in Britain, we can import two, so life will be much better for everyone.

    What if growth never returns? What if global 'growth' was nothing but a giant Ponzi scheme all along, that depended on accessing not only greater and greater amounts of energy and natural resources, but perpetually greater numbers of low cost workers and would-be consumers? What if this scheme has now imploded as Ponzi schemes always do?

    As your previous anonymous commenter says, shouldn't we begin to think the unthinkable and be prepared for a really radical change in the way we regard the future?

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  6. 1. If a government reduces the quantity of borrowing, the economy will contract.
    2. If the economy contracts, there will be less tax revenue.
    3. If there is less tax revenue, debt servicing will be more difficult.
    4. Stabilising debt levels needs borrowing to be continued.
    All I can say to this extraordinary thinking is ??????! Are they serious? In order to stabilize borrowing, there is a need for more borrowing, to increase activity, such that some of that borrowing ends up back in the hands of the government as tax revenue so that they can service the borrowing that they are undertaking. Apparently, this will stabilise debt levels.



    But you seem to misunderstand the argument. The economy requires a large stimulus until it recovers enough to return to strong growth from the private sector. In a global recession, individual countries will require internal domestic growth.
    When strong growth returns, unemployment falls, cutting the cost of automatic stabilizers like welfare, and tax revenues rise, which eliminates budget deficits and possibly creates surplus, allowing the total debt to be reduced. Rising GDP also makes the government’s debt to GDP ratio smaller.

    When you borrow $1 billion a year from China, you can purchase Chinese goods to that value. However, as with all borrowing, China would expect to get the $1 billion back, and with interest, which means an equivalent amount of output from your own economy.

    But China doesn’t expect to get back the 1 billion in output at all. It has more US dollars than it knows what to do with. It wants a financial asset to park its money in: US treasuries.
    The analogy doesn’t work.

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  7. This comment has been removed by a blog administrator.

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  8. CE. Yes I did notice the change in emphasis on CPI over RPI, it happened in the previous months figures as well.

    I think any government not least this coalition one would stick to using the previous ones massaged figures until it had looked at all the real financial figures for itself and worked out its policy, so unless they decided to target inflation (doubtful at this early stage) I do not think this will change soon unless politically expedient.

    The Con-Lib coalition is probably going to complicate this a little, and despite the policy agreements they have made, how the policy is put into action and how the parties will work together is still an unknown.

    Details of the coalition deal have been published,

    http://www.cabinetoffice.gov.uk/media/409088/pfg_coalition.pdf

    which might help you for when you decide to do a write up of what you think of the new government and how they will try to manage the economy, which I look forward to.

    As you pointed out, some sections of the media have their own biases and are influenced by different factions, so getting a different perspective from such as yourself is handy to cut through the crap that the media provides.

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  9. CE, Great at work as ever.

    I think most of us who have a very good grasp of common sense but a less well educated set of MMT skills cannot help but start to see the glaring obvious error in the current economic environment.

    Surely alot of the proposed 'debt' growth theories rely on just a country or region being compromised......not the whole world that does the majority of consuming.

    Like many others i cannot see how the countries that do the majority of consumption (i.e provide export led growth through devalued currency) can help each other out. None of them have any spare money.

    I keep hearing that as long as the indebted country has its own fiat currency it cannot become insolvent(i.e UK, US etc). That may well be the case, but whats the point if your trading partners (i.e Europe, US) doesnt have the same flexibility.

    It may be a schoolboy error but this whole 'money is debt' (there was a good online powerpoint presentation of this early on in the financial crisis) theory that relies on FRB ( Fractional Reserve Banking) to keep the wheels turning seems a little bit futile.

    We all have more money now or should i say better standards of living than our previous generations ever did, less people live in poverty than ever before......where on gods great earth does this all cashola come from?????

    To coin a phrase.....I just don't buy it,do you?

    Cheers

    Phil.

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  10. I love this comment:

    'But China doesn’t expect to get back the 1 billion in output at all. It has more US dollars than it knows what to do with. It wants a financial asset to park its money in: US treasuries.'

    So the Chinese govt will allow its nations factories to endlessly produce goods for the West to consume, and pile up more and more US Treasuries, and NEVER want to get back the labour those dollars represents? What happens when the Chinese people demand more Western style social care, pensions etc? They will (rightly) ask 'Why are we working ourselves to death, in hell-hole factories, so lazy foreigners can have cheap TVs? We want that wealth back here so we can spend it on ourselves, and the Westerners can work to support us instead.'

    Money is just a store of labour - a way of translating todays production into tomorrows consumption with the maximum efficiency. I dig my neighbours garden , he gives me £20. I may put it in my bank and save it for a rainy day, or I may spend it down the pub immediately. Its my choice. It was my labour.

    The same goes for nations. The Chinese may be happy for now to continue receiving bits of paper for their efforts, but at some point that will change. The boot will be on the other foot then.

    We in the West have borrowed to consume. We have little to show for our borrowing. And just as a person who lives on borrowed money looks very wealthy while the borrowed cash rolls in, so does a nation. We will find out soon how wealthy we really are. And its not anywhere near what most people think.

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  11. A very quick note, as I found this quote today from Jeremy Warner of the Telegraph:

    'The end game of this financial crisis has been called prematurely so often over the past three years that I hesitate to say we seem fast to be moving towards a final denouement. But that’s the sense you get from markets, where the feeling of impending doom is tangible.'

    http://blogs.telegraph.co.uk/finance/jeremywarner/100005818/now-france-dons-the-hair-shirt/

    What can I say? When a mainstream commentator says this, we know that we are on the edge. Are we about to fall off? I can not be sure, but as each day goes by, the chances increase...

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  12. Cynicus - Thanks very much for the reply to my question.

    I understand where you are coming from - that we cannot borrow our way out of debt. I suppose what I was saying is that the 'markets' (yes the millions of individuals the media refer to as an almost all powerful deity) 'demanded' austerity - so governments gave it to them but then the markets went even crazier in worries over the austerity.

    It is that which really seems madness itself. The markets kept telling Greece it had to cut - when it did they got worried the cuts would lead to a severe recession.

    We have this tonight from AEP in the Telegraph:
    ''This is a global deflation scare and people need to get ready for falls in US and European bond yields to 2pc.''

    And this from Edmund Conway in ''The Great Depression 2''.
    ''The world should be discussing deflation, not inflation.'' (RBS spokesperson).

    So suddenly it is not inflation or debt or anything else spooking the chickens, it is deflation.

    One comment in the Telegraph made me smile - ''from now on every time a politician or banker mentions the word cuts or austerity the markets will plunge...we need to get printing.''

    I don't know what the answer is. I do know that in the early thirties when Hoover did nothing - things got a whole lot worse. I also know that you cannot apply normal economic house management to a crisis as complex and severe as this one (i.e. cuts and austerity and bringing down the debt will make everything okay). I know that Clinton inherited a big deficit and he got rid of it by growing the economy and not by cutting.

    But what I don't know is did Clintons actions have some sort of effect on where we are right now? If we try to grow our way out of this by Keynsian measures will we completely implode? Could we really just crank up the printing presses and inflate our way out of this without risking currency collapses and total social meltdown?

    I don't know the answers. I am not as sure as Cynicus is as to what is the right economic track to take. But I do agree with you Cynicus that the biggie is how nations now react to what is unfolding. It doesn't take a genius to work out that from such uncertain economic times can come great turmoil and civil unrest (apparently there is rioting in Germany that is just not being reported and in Spain) that leads to geo political consequences, which in the worst case scenario can lead to major, world wars. Doesn't bear thinking about really.

    Suzy

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  13. Cannot help but concur with CE's post. It is looking extremely ugly at the moment (not only economically). I am stunned that people continue their daily lives without the slightest of inkling.

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  14. But you seem to misunderstand the argument. The economy requires a large stimulus until it recovers enough to return to strong growth from the private sector. In a global recession, individual countries will require internal domestic growth.
    When strong growth returns,

    xxxxxxxxxxxxxxxxxxxxxxxxx

    Interesting. You wrongly assume there was growth in the first place? There was none. It was just phantom wealth.

    What is the meaning of stimulus? It means more public debts which requires more taxes to be extracted from consumers in the nea future. In any case, doesn't much of this stimulus end up in speculation? In other words, create more phantom wealth?

    There cannot be any real growth when consumers in developing nations are earning peanuts while manufacturing stuff for Westerners who have lost jobs and must go into debts to afford these "cheap" stuff. Simply, consumers on both sides are broke.

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  15. The underlying problem is that there are too many people in the world, a huge proportion of the economy, and peoples jobs is reliant on the production and consumption of utter crap, hence the drive to get the consumer shopping again. Unfortunately this would only delay the inevitable, the more I think about and read on this subject the more I think that we are completely unable to do anything about it. We have a high cost economy caused by an affluent society that can afford health and safety, and all the other myriad non jobs that cost. You only have to look at the British steel industry, they have the 'safest' steel in terms of human injury/death but its so expensive it can't compete with the third world steel where life is cheaper. No doubt they had similar discussions when the Roman empire collapsed, unfortunately we then entered the dark ages for 300+ years.

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  16. If I were in the German Govenment,i would demand more than an IOU from the Pigs. I would demand some tangable assets ,Minerals,oil,gold,or Land,,as Security,for guaranteeing a loan.
    If not the loans will end up being a gift from the industrious German People.

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  17. I always like reading the blogs CE, keep it up, but perhaps be willing to look into a few alternative ideas, still it gets some great discussions going.

    http://www.marketoracle.co.uk/Article19660.html
    Short article link above which should appeal to most readers on here.


    It seems a lot of people on the comments are gluttons for punishment and self-denial. Its great to preserve your wealth and encourage self-control around debt but without examining the concept of what these various debts are you are simply chasing the proverbial tail.

    A small elite is swallowing your wealth and the solution to this is to chop low paid jobs, pension provisions, and investment in already underfunded education, r+d, technology, roads, rail etc? Dont fall to double-think.

    http://www.ucm.es/info/ec/ecocri/cas/Febrero.pdf

    An MMT article for your perusal. I tried to post this on your blog LK but it seems one cannot post as anonymous on there so I will have to set up a google account in order to, unless there is a way you can amend this.

    Hugh

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  18. @Suzy: I'm afraid we have reached a point where there are no good outcomes only bad ones. The trick is to find the least bad one and aim for that.

    My guess is that consists of a devaluation of the debt via inflation, while hopefully preventing the total breakdown of society. Rather like the 1970s. It means savers will be crucified, the old sacrified on the altar of the young.

    But its 'better' than a debt deflation 1930s style Depression, soup kitchens etc. The masses will not be as docile now as they were then. The potential is there for urban areas to become no-go zones.

    Equally if the money printing/sterling collapse gets out of hand, we could get true hyperinflation as in Weimar Germany/Zimbabwe today. And that would be just as bad. A loaf of bread could cost tens if not hundreds of pounds. Govt would not be able to keep up with price increases. Benefits would be insufficient for people to feed themselves.

    We need to steer our nation through the Scylla and Charybdis of Depression and Hyperinflation, and if we succeed in avoiding them both, consider whatever else happens as a good result, however bad it may feel.

    ReplyDelete
  19. Reply to Sobers

    So the Chinese govt will allow its nations factories to endlessly produce goods for the West to consume, and pile up more and more US Treasuries, and NEVER want to get back the labour those dollars represents?

    Of course, it buys goods now and may want to buy more goods in the future.
    But its US treasuries are NOT simply a claim on US goods: the US dollar is the world’s reserve currency, or have you forgotten? China can purchase anything on world markets that are denominated in US dollars. This costs the US nothing.

    But China’s trade surplus is so vast they simply don’t spend all of the US dollars on goods: the government chooses to put what’s left over in US treasuries. This is a simple fact. Anyone who denies it is ignorant.

    What happens when the Chinese people demand more Western style social care, pensions etc? They will (rightly) ask 'Why are we working ourselves to death, in hell-hole factories, so lazy foreigners can have cheap TVs?

    Then they will consume more from overseas, including the US, reducing their trade surplus, and stimulating demand for US and other world goods, which will be a good thing for the US, because it will increase their exports and lower their trade deficit.
    I am astonished that you think this will be some kind of major catastrophe.

    It precisely what is needed: I would welcome it.

    By the way, the US is the largest manufacturing nation in the world. They have plenty of things to sell China.

    Money is just a store of labour - a way of translating todays production into tomorrows consumption with the maximum efficiency.

    Money is a medium of exchange, a unit of account and a store of value.

    The idea that money is simply a “just a store of labour” is a vast oversimplification.
    The “labour theory of value” is utterly mistaken – and the core of Marxism by the way.

    Cynicus’ variant on the labour theory of value, in which he believes that value is both caused by subjective factors and by labour is logically inconsistent.
    Value cannot be subjective andalso caused by labour.

    ReplyDelete
  20. Reply to Mwarang'ethe

    Interesting. You wrongly assume there was growth in the first place?

    Of course there was real growth over the past 20 years in tradable goods and services. To deny this is ridiculous.
    Of course, there was also excessive debt as well - and growth caused by asset price inflation.

    If you read any of my earlier comments you will know that I advocate financial regulation and industrial policy to restore real growth, as well as fiscal stimulus

    It means more public debts which requires more taxes to be extracted from consumers in the near future.

    Nope, it means a return to strong growth and rising tax revenues and surpluses. This allows governments to pay back debt without necessarily raising taxes at all.

    In any case, doesn't much of this stimulus end up in speculation?

    Not if you regulate financial markets, and adopt trade and industrial policies.

    There cannot be any real growth when consumers in developing nations are earning peanuts while manufacturing stuff for Westerners who have lost jobs and must go into debts to afford these "cheap" stuff.

    This is the result of flawed macroeconomic policy and deluded Western governments infected by neoliberalism.
    Yes, collapse of manufacturing is a serious problem for some Western countries. Trade and industrial policies are necessary.

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  21. I am enthused that the new coalition government has targetted all the civil liberty infringements as one of its first goals and the deregulation and lower taxation of business as its other.

    Whatever else goes on and whatever "falling out" may turn up later - this was a great way to start.

    One of the things that make the UK a great place to work and do business are its traditional freedoms and its open-minded society. By reversing the ill-advised trends of the last decade this will help us a lot.

    By making the country a better place to bring your business we are starting the fight back to encourage wealth-creation again.

    There are certainly dark times coming but for the time being I am a little more hopeful we can get through them.

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  22. I think the reason we are in this mess stems simply from the welfare state and expansion of the public sector and a concomitant lack of taxation of the super-rich.

    For many years the UK has produced millions of unskilled workers who are unwilling to work and incapable of producing anything of any use. The public sector, the employer of last resort, had to step in to employ these people in meaningless jobs. We need a gradual reduction in public sector employment and a rapid reduction in welfare payments, combined with a plan get these people retrained (if possible). Work gives people a sense of purpose and self-respect and therefore the benefit of getting people into meaningful employment helps both the state and the individual.

    ReplyDelete
  23. Nouriel Roubini has a new book called Crisis Economics:

    In Crisis Economics the economist Nouriel Roubini offers a crash course in financial reform. Politicians, he says, have been much too deferential to the myths and powers of the financial system. Roubini proposes extensive regulation of asset-backed securities – and a possible banning of the more complex derivatives – as well as separating retail from investment banking. In the UK this would mean a partial reversal of Thatcher's "big bang" of the 1980s, which set the City free from previous financial controls.

    http://www.skidelskyr.com/site/article/advice-for-a-new-government-a-reading-list/

    ReplyDelete
  24. Apparently the weaker pound isn't such a bad thing:

    [UK] Manufacturing output rose 2.3pc from February, the biggest jump since March 2002, the Office for National Statistics said on Tuesday. Economists, surveyed by Bloomberg, had predicted a 0.4pc increase .... The pound has dropped about 25pc against a trade-weighted basket of currencies since the start of 2007. “Manufacturers have been benefiting from the weaker pound, and the sector has been a bright area in the recovery,” Howard Archer, an economist at IHS Global Insight in London, told Reuters.

    http://www.telegraph.co.uk/finance/economics/7709710/UK-manufacturing-output-for-March-jumps-most-in-eight-years.html

    But, since austerity and deflationary policies are being imposed in the Eurozone and probably soon in the US, this recovery might not go on for long. The UK stills needs more domestic growth by producing more of what it consumes.

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  25. I think there’s two ways of looking at this. The first way, is to look at the past two years actions and carry them forward - it would be fair to assume these actions are simply aimed at maintaining the status quo. With this, ever expanding big government - paying, I might add, ridiculous wages to civil servants - is too connected with the banking establishment (‘no bank shalt take a haircut’), large corporate interests and the elite. The policy decisions are made so as not to offend these actors, whom generally represent the top 2% of the population. With this, as we all seem to be saying - judging by the previous comments - the future, at least for 90% of the population doesn’t look too rosy. High inflation (currently), coupled with rising unemployment, the general 'profit over people' mentality of big business, regressive taxation / low taxation for the 'elites' and (short of a miracle) no core drivers for 'real' growth as there is now, no longer any room for more personal debt.

    However, the alternative is the direct opposite of what G. Brown and the other 'globalist' politicians have been directly preaching against for the past two years. We need to increase domestic production, this can only be done by using, gasp, trade barriers of a sort, this goes for all western countries - the distortion placed on the world be china, and to a lesser extent India have is a root cause of the problem. There is never any possibility of competing with economies ruled by despots - labour will always be cheaper and more 'efficient' the more despotic its political structure. Even if it were even an EU trading block or just the UK placing import tariffs to propagate real internal growth, this could be a short to medium term solution to the issue. And, when china et al place the same value (H&S etc) on labour as the west does - then we can trade.

    I think this coupled with, again, absolutely massive financial reform - glass stegal and all, take the ability, or at least provide an alternative to the debt monopoly the financial institutions currently enjoy. Huge health and education reform - along the lines of what CE has already discussed. Then, more progressive taxation - including land reform (taking the tax away from labour, and onto the rentier economy)...

    With this, I believe we could be on our way on to a solution. Hope this fuels the discussion somewhat.

    D

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  26. D - I liked your ideas. I too agree we need trade barriers back in place. Not of course to try and start a trade war but over the last thirty years since Reagan and since the UK and US embraced 'neo liberal' economics - trade barriers and trade regulation has been swept away. This was good for finance but it hollowed out the real economy.

    To the poster who said about welfare - yes it is a problem but you cannot cut sixty pound a week anymore! It is already the lowest in Europe! People couldn't eat. What needs to be cut is welfare for big families (who can claim a lot) and middle class welfarism - tax credits for those on above 30k say and child benefits etc.

    The only way to address the issue of the actual unemployed is to create jobs. You cannot do it the other way around - you cannot bring in punative measures to make people work when there is no work. It will result in severe unrest. It also damages the economy - the poorest spend all their income - they have to - cut it even further you take even more money out of circulation (yes I know it is money that is being paid for by other tax payers - but it is being spent in the wider economy whereas if you cut benefits thats less money in Aldis - Aldis goes bust more unemployed people!)

    More and more reports of us actually facing severe deflationary issues - including AEP and now Jeremy Warner in the Telegraph starting to seem to think this may indeed be an issue.

    I think the cuts announced with even more to come so soon in June are rattling even some cuts fans.

    Suzy.

    ReplyDelete

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