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Obama's Back In: Does He Succumb To Popular (Ignorant?) Opinion Like The Europeans Or Make The Tough Choices
Many have asked me if I believe in austerity measures or the Keynsian approach of spending out of recession. I have stated, time and again, that the question is loaded - hence the answer can never be sufficient. When you are trying to go from your home to the market across town in a crowded urban environment, you cannot make the trip successfully by deciding ahead of time that you are just going to make left turns (austerity? Austrian?) or right turns (stimulus? Keynsian?). You come to an intersection and you make the turn that's necessary to get you where you want to go. It might sound overly simplistic and common, but I'll be damned if common sense is one of the most uncommon things I've come across over the last 7 years or so!
On that note, there does appear to be a misunderstanding on how government finances work as compared to finances in the private sector. The government is not a for profit player that competes directly with those in the private sector, but is instead a universal support network that benefits from the success of the private sector. Hence, the government must work in the best interests of the private sector in order to thrive. This sometimes entails taking the other side of the trade to ensure that a trade can take place. One pundit who has done a good job of explaining this through pretty charts that explain the peculiar situation that we are now in (a balance sheet recession), is Dr. Richard Koo of Nomura Securities. See the FT.com article abstract:
In 2008, Barack Obama told the US people the nation’s economic crisis would take a long time to overcome. In 2012, many of those voters are losing patience, because they have not been told why this recession has lasted so long or why his policies were the correct response. Here is the missing explanation – based on not only the US experience, but also that of Japan and Europe.
Today, the US private sector is saving a staggering 8 per cent of gross domestic product – at zero interest rates, when households and businesses would ordinarily be borrowing and spending money. But the US is not alone: in Ireland and Japan, the private sector is saving 9 per cent of GDP; in Spain it is saving 7 per cent of GDP; and in the UK, 5 per cent. Interest rates are at record lows in all these countries.
For those who may not get the gravity of this statement, it makes no sense to save money with a negative risk/reward proposition, unless of course the saver does not see it that way. One must save if savings are in deficit, and the risk to invest funds is considered greater than the benefit of having said funds in the first place. We are still attempting to wade through the bursting of a massive bubble, and we are playing defensive - not offensive. In other words, are Americans seeking return OF capital over return on said capital? We are over-leveraged, and to effectively delever you cannot borrow more money or take the risk of aggressive investments. This is so even if investment capital is being offered at zero interest rates. Mr. Koo illustrates the consequences of such behavior eloquently...
However, if someone is saving money or paying down debt, someone else must be borrowing and spending that money to keep the economy going. In a normal world, it is the role of interest rates to ensure all saved funds are borrowed and spent, with interest rates rising when there are too many borrowers and falling when there are too few.
But when the private sector as a whole is saving money or paying down debt at zero interest rates, the banks cannot lend the repaid debt or newly deposited savings because interest rates cannot go any lower. This means that, if left unattended, the economy will continuously lose aggregate demand equivalent to the unborrowed savings. In other words, even though repairing balance sheets is the right and responsible thing to do, if everyone tries to do it at the same time a deflationary spiral will result. It was such a deflationary spiral that cost the US 46 per cent of its GDP from 1929 to 1933.
Those with a debt overhang will not increase their borrowing at any interest rate; nor will there be many lenders, when the lenders themselves have financial problems. This shift from maximising profit to minimising debt explains why near-zero interest rates in the US and EU since 2008 and in Japan since 1995 have failed to produce the expected recoveries in these economies.
For some reason, the Fed doesn't seem to get what Mr. Koo and BoomBustBloggers do!
With monetary policy largely ineffective and the private sector forced to repair its balance sheet, the only way to avoid a deflationary spiral is for the government to borrow and spend the unborrowed savings in the private sector.
Wait a minute! The EU states are definitely borrowing, but they are not redploying the capital back into the private sector, they are simply bailing out banks! In addition, the banks are not deploying the capital into the private sector, they are simply sitting on it, just as Mr. Koo stated they would in the article excerpt above! So, after trillions of borrowing, there's no surprise why there's just relatively pennies making it into the private sector. What Mr. Koo and many who follow Keynsian economic theories seem to forget to include, is that upon borrowing the money to plunge into the private sector, you have to have a plan for paying said monies back. When you borrow said monies and simply waste them (ex. perpetual dead bank bailouts) you create a truly structural problem. Simply ask Greece, or see How Greece Killed Its Own Banks! and then move on to...
As The Year Comes An End The Ability Of Greece To Kick The Can Mirrors The Chances Of A Man With No Feet
Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.
Greece_Primary_balanceGreece_Primary_balanceGreece_Primary_balance
The primary balance looks at the structural issues a country may have.
Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!
Greece_Primary_deficit_copy
On to Mr. Koo's diatribe...
Recovery from this type of recession takes time because the flow of current savings must be used to reduce the stock of debt overhang, necessarily a long process when everyone is doing it at the same time. Since one person’s debt is another person’s asset, there is no quick fix: shifting the problem from one part of society to another will solve nothing.
The challenge now is to maintain fiscal stimuli until private sector deleveraging is completed. Any premature attempt to withdraw that stimulus will result in a deflationary implosion – as in the US in 1937, Japan in 1997, and Spain and the UK most recently.
Japan’s attempt in 1997 to reduce its deficit by 3 per cent of GDP – the same size as the “fiscal cliff” now facing the US – led to a horrendous 3 per cent drop in GDP and a 68 per cent increase in the deficit. At that time, Japan’s private sector was saving 6 per cent of GDP at near zero interest rates, just like the US private sector today. It took Japan 10 years to climb out of the hole.
Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.
The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings, to keep the economy from imploding and to provide income for businesses and households so they can repair their balance sheets. Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.
I have ventured along these lines several times in the past. Here is the subscription research that I feel is best poised to take advantage of the guaranteed mistakes to be made ahead, simply click your industry/sector for the most recent research (note, non-subscribers will only be able to view free reports, you may click here to subscribe)...
- Consumer Discretionary
- Banks & Financial Services
- Insurers, Insurance & Risk Management
- Real Estate
- Retail
As for whether Mr. Koo is correct in the application of severe austerity when one should be trying to prime the pump....
Greece Is To Pathogen As Cyprus Is To Contagion As Spain Is To Infected...
CNBC reports Greece Austerity Strike Will Hurt GDP Further even as Cyprus Expects Bailout as S&P Cuts Ratings to Junk:
Cyprus said on Wednesday it expected talks to start with lenders on badly needed aid next week, as ratings agency Standard & Poor's pushed it deeper into junk territory, implying domestic political expediency lay behind a delay in clinching a deal. One of the smallest nations in the euro zone, Cyprus sought European Union (EU) and International Monetary Fund (IMF) aid in June after its two largest banks suffered huge losses due to a write-down of Greek debt.
Well, our Contagion Model showed clear paths of the knock on effects of Greek infection, and we haven't even gotten started with the economic pathogen party yet!
Although it seems as if Tyler is being a smart ass, he couldn't be farther from the truth. Reference my piece Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! concerning the accuracy of the IMF's baseline scenarios...
image005.pngimage005.png
And back to the ZH post:
....Breakdown of IMF deleveraging forecasts for the three scenarios, of which the realistic one is highlighted:
- Under weak policies, the withdrawal of foreign investors accelerates to twice the pace seen since 2009. Periphery spreads widen by about one standard deviation above the baseline.
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The problem with all these ideas is the amount of time to make them work - if they do - and the annying fact that life has a way of throwing a spanner in the works.
And therein lies the problem.
Even if this plan works, confidence will erode before it becomes effective.
Its all trying to prevent a crash that should have happened, would have happened and it would have all been over by now.
You know who you could trust, who was solvent and who was full of it.
Its a bit like waiting in a que for 5-10-20 years. Sooner or later people just give up.
I think the market will do the same.
Bumma is on the Golf course ...more times than George bloody Bush was ..the only thing Bumma gives his policy direction to is a golf cart!
He's a full-time puppet and talking head auto-cue reader ...zippo to do with policy making or direction or the chaotic process of pleasing all the thieving scum in the Senate and CONgress with pork on the side to get a bill voted through
when America needed leadership from their President on the budget farce where was Bumma?
Golf course ...of course.
Outside of being highly disrespectfule, you guys are considerably off base. This is not about spending, it's about not leaving the country imbalanced. If everyone saves, who's left for the other side of the trade to create revenues. I'm in favor of austerity and stimulus, simultanesouly. Yes, i know that's not simple enough to fit into your sound-bite style mentality (you know, you "keynsian this", you "Austrian that"), but as I said in the article above, there are very few places you can go just by making left turns. As a matter of fact, if you make enough of them you will end up going nowhere (that's a full circle for those of you who are too busy hurling insults to actually independently use your brain).
Greece is a perfect example of the folly of spending money to bailout already dead banks, and then starving the economy to death using austerity measures. The revenue side of the equation will never rise to expectations until the next global bubble artificially inflations numbers. The problem is by then the seeds of the next problem will have already taken root before the detriment from the last problem has been cleared.
Reggie,
most morons here seem to be content with blaming the "boomers" for everything, while, simultaneously bashing Obama/dems for blaming everything on Bush.
Their belief is that food/guns/gold is all they need, while laughing at the "Mayan Calendar" idiots.
Reggie, your article implies a necessary 'save' for those who own the risk (i.e., debt). While it seems a passe idea today, there is a place in the world for allowing those who take on risk to absorb said risk, taking a loss now and then.
Austerity is necessary, debt reduction is necessary, saving is necessary, and allowing bad debt to fail is necessary. Shifting risk onto the backs of the taxpayer is not required, it only serves TBTF.
I understood your article. What I want to know is, what is the fix? What do we as Americans have undertake in order to make it work.
Give a suggestion - we can all still write.
Mostly, what I see is complaining, this isn't right, that's wrong, etc. Why can't there be an direction we can all move in and advocate to happen.
Work together, solve the problem, would that be so bad?
Austerity is not Austrian. Austrian economics is a descriptive science not a policy prescription.
The austerians are definitely not Austrians. They favor austerity to suck the economy dry to pay back the bankers. Most of the Austrian economists I've read say that these countries need to stiff the banksters and default. They may have used Austrian insights to come to this position but it isn't an Austrian perspective per se.
Your left turns metaphor simply doesn't compute. Stiff the banksters by defaulting on the debt and slash spending, regulations, and taxes, and you will stop the vast sucking sound of gross misallocation of resources being conducted by central banks, big banks, and governments in Europe.
I love Reggie but what he is saying is correct in order to maintain the status quo. The FIRE industries need Dr. Koo's prescription to survive. Reggie is saying we need austerity and stimulus in order to keep wage slaves working and paying rents...rents for insurance, maintaining 401 K's phony valuations, cable and TV service, property and excise taxes, and every other sumptuary law thrust upon every low and middle class citizen. Reggie is just looking out for Reggie which is only natural and I for one can't fault him. Without austerity and stimulus working as a lid on a boiling cauldron of crony shit stew, a lot of bankers, financiers and politicians will eventually lose their heads...and I mean literally lose their heads.
FTW
Reggie I've enjoyed your insights tremendously over the years. I usually agree but have to disagree on this. I think this is a good simple litmus test on Keynsian vs austrian - "lack of borrowing causes decreased demand (Keynsian) or lack of demand causes lack of borrowing (Austrian)
I believe in this article under my litmus test you fall on the Keynsian side. As a small business owner I have to disagree. In my world there is nothing but evidence for the Austrian side - lack of demand causes lack of borrowing. GDP growth the past 4 years has been around 1%. Remove the public GDP portion and private has seen zero growth. My two businesses have flatlined in terms of revenues which I would expect in a zero gdp growth ZIRP environment. I am not in DC and do not have government contracts. The only way my businesses growth would exceed national private GDP growth is by market share growth. I try harder than ever for that but so are my competitors! And while my revenues have flatlined in sync with national private gdp growth costs, taxes and compliance continues its relentless march higher.
The Keynsian solution is borrowing. I have an SBA loan on one company but the company will probably fold in a year unless PRIVATE GDP growth gets to 5-6% or I can take market share from some other business owner and have them go out of business. I could borrow $1 billion and it would not help me inure net income to repay the loan - THE DEMAND IS NOT THERE AND ME BORROWING GOVT MONEY WILL NOT CREATE DEMAND.
What do I believe will casue emand to increase? Two things - 1) total debt to gdp must drop to 100% (public/private) 2) real interest rates must be 2% or higher
Two simple things that virually guarantee a vibrant growing economy. How do we get there? Not by Keynsian pushing on a string with debt pushing or govt stimulus but by eliminating ZIRP and allowing all bad debt to flow through the system. Why will this not happen? Because it would crush Wall Street - who seem to be Obamas best friends, it would expose the stock market to reality which may cause a drop and a recognition of unfunded public pensions liabilities and it would leave the Fed to recognize the trillions of crap it actually now owns.
This will NOT happen. Banks and Wall Street will be protected along with public pensions and government budgets by ZIRP, QE and printing money. Keynsian policies will not help most private business owners like myself. It will only help those who get a warm feeling about government and central planning.
I am not a big Romney fan but as a private business owner I did feel that there was a small chance that he would side with private business as opposed to Wall Street, unfunded public pensions, and government waste. However with Obama now as President I would be okay going over the fiscal cliff. My businesses will be finished in a year or two anyway without GDP growth (which Obama has proven inept at). And my standard of living as someone who relies solely on private resources (no govt contracts, no public pension) has already dropped 50-60% since 2007/2008. The fiscal cliff would dramatically drop GDP and would disproportionately hit those at the government trough (seems fair since my peers and I in private have been HAMMERED the past 4 years. And it would get us much closer to the two factors i mentioned above that would get us to a vibrant economy where entrepenuers like myself who rely on private demand could prosper
duplicate
FAITH IN OUR POLITICAL SYSTEM IS LOST SO NO ONE WILL INVEST IN AMERICA ITW TOO CORRUPT
OBAMA DOES NOT GIVE A SHIT ABOUT ANYONE AND THESE NEXT 4 YEARS WILL BE A PARTY FOR HIM AND MOOCHELLE
Oh Bumma most surely does give a shit about people, all suicide socialists and miserable marxists have an innate interest in other peoples money and have developed a highly moral storyline to justify thieving it, because lefties are too lazy and/or too stupid to obtain through their own efforts
watch the Tax Hikes in 2013 in the US suck businesses (and the middle class) dry and drive many to the wall
USSR and Commie China or suicide Socialist country anywhere (see Greece) grind-down to bankruptcy here we come
Reggie, with respect to your point that "if everyone saves, who's left for the other side of the trade to create revenues,": this is misleading because 1) there is still a base level of consumption that people will always engage in in order to live, and 2) you're not allowing the feedback of the natural pricing mechanism of the market to work. In a market that the government didn't manipulate interest rates, such low rates that we have today would signal an abudance of capital to invest. But as dumb as Americans are, I think most people still understand that we are wildly overleveraged at both the household and government level. People understand that governmental debt is their debt and must be repaid in the future via taxation or inflation. Thus, what I think people are doing is, instead of illogically saving as you seem to think they are doing, they're girding themselves for the future as they understand that we have some heavy liabilities to settle at some point. Finally, I think they also realize that to provide capital to service industries of the past, like banking, finance, education, etc. is illogical, as these are the industries that need restructuring (i.e. massive liquidation) the most. If the economy were allowed to reorganize itself - which obviously it hasn't because the government and the Fed continually pour current and future tax dollars into vast money pits - I think you would see people more willing to deploy capital rather than hoard it for no discernable purpose as you seem to think they are doing.
You've answered your own question and agreed with me in the same statement. I assert that long term ZIRP has broken the market pricing mechanism, and you state...
'nuff said!
and you're not allowing the market mechanism to work by a policy of Govt pumping money into consumers or SME's
stop meddling Mr. Middleton
there is no economy and no need for economists, only markets ..they are what they are, take the rough with the smooth and leave well alone
Reggie - Love reading your work but I disagree. The part where I have a real issue with your thought exercise is the left turn idea. The market should tell you which turn to make and it does it with pricing. If there is no one for the other side of the trade, this is the most important part of pricing and it is sending a strong message. It means it is not worth anything at that point in time.
Are you saying pricing is not an efficient message mechnism? Yes - I tend to be more Austrian in my thought process, but not always. This post from you surprised me.
I'm not Austrian or Keynsian, I'm just REggie. I'm saying that ZIRP has broken the market pricing mechanism, so if you rely on market pricing in an environment where the market pricing mechanism is broken, then you will be unduly surprised...
"I'm just REggie." It is why I like reading your stuff.
not always
'If everyone saves, who's left for the other side of the trade to create revenues.'
Err, you seem to forget that savers supply capital, the whole economic game starts there, it doesn't start at the other end with spending/borrowing.
Time to move to the next paradigm where frivolous spending/lending/borrowing will be regulated (by the gold price).
No offence, but this stuff is way above your pay grade Reggie, it's geopolitical monetary evolution we're witnessing, not a run-of-the-mill cyclical dip to be followed by recovery. Keynes will be wholly discredited, don't tie yourself to their beliefs.
Unless you want to be discredited yourself of course?
"Err, you seem to forget that savers supply capital, the whole economic game starts there, it doesn't start at the other end with spending/borrowing."
If that capital is employed with zero percent return (negative on a real basis) then there's little incentive to employ said capital. Did you skip over entire paragraphs of the article??? Thanks for assuming what my paygrade is, but I'm too dynamic to even be in the paygrade system, so your logic is off.
ZIRP has literally broken the risk/reward dynamic, true market pricing and the monetary transmission system. Your talking as if this is not the case.
"ZIRP has literally broken the risk/reward dynamic, true market pricing and the monetary transmission system. Your talking as if this is not the case."
Yes and instead of ending ZIRP by central bank and big bank deleveraging you just propose giving people money.
The fact is that the US spends about $60,000 per poor family per year in welfare transfers. If this is not stimulating economic recovery neither will your proposed handouts.
Obfuscating Reggie. You want the Fed to dish out some cash to Joe Public so they can go a spending binge.
That is a sign you are as mad as the rest of them.
You need to study a bit of history, see how all ponzis end.
You seem to be suggesting then, that if the prevailing market return avaialble is zero/negative, then consumption should be forced. And thus if consumers are unwilling to consume, the government must consume for them. Not only does this introduce the problems of politics into the marketplace, you're forgetting that government = taxpayers and that eventually the taxpayers must repay the deficits of the government. The answer is not to force consumption, but to allow the market to clear itself, which means allowing rates to rise to where they should be. That will mean massive restructuring as jobs in finance, housing, education etc. are lost, but it will also mean opportunities for savers to deploy their capital into industries that produce net benefits to society. And this is where the "lost" consumption will eventually come from.
No, I didn't say that, you did. ZIRP is an attempt to force consumption of consumer goods and risky financial/real assets, an attempt that I disagree with long term. The government can prime the pump without forcing consumption of risky assets.
At what point was this not the case?
Exactly, and I'm not forgetting this but emphasizing this. That is why Greece will collapse because the government spending that took place was wasted on dead banks. If the government put the resources into small and medium business and exports in lieu of propping up zombie banks, then one could respect a return on the .gov investment from revenue streams stemming from increased GDP. Unfortunately, there are no returns to be expected from propping up zombie Greek banks that are going to collapse anyway.
"If the government put the resources into small and medium business and exports in lieu of propping up zombie banks". Are you talking about Greece?
Reggie, they have a name for the small and medium business in Greece: submerged and half-submerged economy (funnily here in europe in some languages we talk about black and gray economy, btw).
In my experience, that's the whole point of Greece's troubles: they don't pay taxes and half of their employees are "unemployed".
On the other side I'm not sure what you mean with "the gov putting resources in the SME", in every country I witnessed that is the part of the economy that would like the gov to just keep away. They are the "laissez faire" people, the "just let me do".
But your finger is in the wound, nevertheless: all this regulation and bailouts are for Big Biz, and seldom in favour of that part of the economy that is seriously vibrant and innovative.
Too bad that financialization has bred the super-fast from-the-garage to-the-stars "FaceBook" companies that make the jump to TBTF Big Biz.
Anyway: your analysis is based on increasing expenditures and non-increasing tax receipt. From my point of view Greece can increase easily their tax receipts.
Agree pumping good money after bad into banker bums is a complete waste but so is your mis-directing it, through a corrupt system of idiots in Govt, into small-medium sized business Reggie.
That's no different to Govt supporting Solyndra, GM or GE, just the scalle is smaller
We've had easy-money policies anyway, too many business are carrying too much debt. The Govt encourages this through the Tax Code rewarding indebted businesses with writing off debt and/or interest and punishing profitable ones by theiving their earnings.
Nothing has made our economy more unstable than easy money (debt) and tax breaks for debt-laden companies. It's perverse. There's going to be another shockwave of Co's going down next turn-down because they're literally trading off tax breaks on their debt
No Govt stimulus thanks. No meddling. Govt goons get the fuck out (of everything)
the best Govt is zero Govt ....it's called Freedom and it works wonders
I believe that Reggie is grappling with the current dynamic:
Negative real interest rates
Massive risk-aversion by big business due to depressed demand, uncertain future prospects (aka very poor investment psychology)
Refusal of the banks to serve as a credit transmission mechanism
The question is, how to repair this situation? Reggie (correctly) says that we'd be better off giving Joe Consumer some piece of the deficit spending action, versus just letting the banks absorb it all into their toxic balance sheets.
I don't know if Reggie necessarily believes that this is the best solution. Debt write-downs combined with sound money, fiscal discipline (not necessarily austerity-- just a balanced budget), would likely have more bang for the buck, but Reggie's point that austerity for the population combined with massive debt-fueled subsidies for the banks will accomplish nothing, because of the poor investment psychology out there, and depressed demand, is correct.
Exactly!!!
i understand the theoretical, my corporation could use some capital to upgrade systems, capture larger market share, hire employees etc. and we have excellen credit and no debt. but if we were to borrow money it would probably be at 12% interest.
the savings rates, the treasuries rates, and zirp have very little to do with the reality of small business.
since the banks seem to be the non-conductors, perhaps there is a way to go around them so that capital can be obtained and respent into the economy.
'Debt write-downs combined with sound money, fiscal discipline (not necessarily austerity-- just a balanced budget),'
And yet this is what Europe are doing, and you criticise them?
Hmm.
That is not what Europe is doing. Europe is bailing its banking system, providing no stimulus outside of the bankings system, and instituting extreme austerity on those states that don't have the political might to fight back. Big difference.
europe is bailing out its banking system, yes.
no, it's not providing extra stimulus
but the extreme austerity on those Countries (not States) that can't fight back is, sorry, false
Greece could go a different way. Spain is trying everything at the moment. Italy cut their pensions and other "contingent liabilities" to the bone, best in class in the first world. And so on
And as usual europeans have a plan (cue laughter, yes, nevertheless) the European Fiscal Compact
Of course the UK is not going to partecipate (and so it's not known very well), nevertheless this is Austerity For Everyone
there is no one answer to any issue... except let the market/s crash and reload
pumping easy money into consumers pockets is as delusional as pumping them into the bums of bankings pockets
we're suffering from 30 years of pumping money into an economy inflating everything that moves and soaking it with debt
we need a free market in money as much as a free market in everything else
there's only one way to free the markets, pitchfork Monopolist Parasite Central, Govt
Much as I love the idea of free currencies, and distrust argument by analogy, here goes:
The economy is now like someone who has been on methadone for 30 years. If you make him go complete cold turkey (austerity) there is a real chance he'll die (Greece).
So what do we do? Yes, ideally, 'we wouldn't start from here', but here is where we are. Much as I am in complete agreement with the Austrians' assessment of how we got here, I don't agree with their prescriptions (at least, not the ones I've read) for getting us out. The amount of deflation resulting from such actions is just too economically dislocating.
At the same time, the neo-Keynesian idea that the government can carry on borrowing vast amounts and reflating bank balance sheets (or building bridges to nowhere) to get the economy going again is ridiculous. That debt has to be either paid off or defaulted upon (and, yes, I know, inflation is a form of default) and, anyway, such spending is just sucking capital away from the productive and giving it to known incompetents to waste. Also, one of the problems we have is the preponderance of the financial sector, which has come about by too much debt, as credit became disconnected from actual capital because of artificially low interest rates and fractional reserve banking. Borrowing more does nothing to address this issue and indeed exacerbates it.
So we need to shrink the financial sector relative to the rest of the economy. But outright deflation is likely to lead to societal breakdown.
It seems to me Steve Keen's idea - that everyone gets a handout of (say) $100,000, and it has to pay down debt, is probably the best way to start steering our way out of this mess. At that point, either sound money (ie, a gold standard, and no deposit guarantees, thus enforcing market discipline on the credit multiplier) or, preferably, free banking should be instituted to stop it all getting out of hand again. Yes, there'll be a one-off burst of inflation; but that, and the fact that debt repayment will shrink banks balance sheets viz-a-viz the rest of the economy, would break us out of the debt paralysis we find ourselves in. And, unlike (say) bailing out underwater mortgages, it doesn't reward the profligate at the expense of the prudent.
BigJim - the reason you're critically wrong is because nobody is God able to make one policy decision and hand it down to the market (what's left of it) to suit hundreds of different enterprises and millions of consumers.
This God-like idealogy/idiotology is also the critical systemic error in Govt who does think it's God. Maybe you think Govt or yourself can hand down one great policy decision of which car we should all buy?
We prefer as a society to choose our cars, from hundreds on the market. Why get some arsehole that thinks they're God, like Govt, to narrow our choices down to one?
It's a nonsense isn't it.
There is one answer, it's called the free market. That distributes power (empowers) everyone in the market to get clued up and make the best decisions, thousands of decisions evey day, over one stupid deicison made maybe every 4 dreary unchanging years that fits nobody.
The Free Market runs much faster and circles around Govt or any public-private bankrupt sham because of it. There's no better, faster more beneficial mechanism for making decisions in history and here's the kicker, it's FREE
Mate, you're preaching to the converted.
The issue is... how do we get there, from HERE, where we are now?
Unless we have complete collapse - and the free market re-assembles itself from scratch - whatever decision 'we' take to tackle this is going to have to be 'handed down' from government, because that's where we are now. We have complete government (or central banker, or oligarchical, take your pick, in this context it's all the same) control of the money stock. HOW do we get to a free market in money from where we are now?
We could have wholesale default on the odious debt, and let the banks collapse, at which point 'we're' faced with bailing out deposits... or letting depositors hang. Or 'we' could nationalise them, and wipe out their bondholders and shareholders. Or...
The point is, you appear to have your eyes firmly fixed on the promised land (fair enough), but don't want to consider HOW we get there. Unless we have complete collapse, it's going to be a matter of policymaking, and the only way we get 'them' to do what we want is if we can hammer out what's best and then get enough people to agree and start putting some pressure on our politicians to implement change.
So what's the best way for dealing with the mess we find ourselves in, NOW? I know where we want to go - we're in agreement there - but how do we get there, with the minimum number of ordinary people being economically destroyed in the process?
Totally agree with you the only fix is collapse and reset to out founding principals
So, you typed exactly by mistake I assume? Lol, so funny.
You expect savers will do well if their banks are allowed to fail then? Nope, they lose the lot.
The ECB has no 'stimulus' mandate, do you realise that? Read some of Draghi's speeched, and other ECB governors,
Quite rightly they don't give a fuck about the economy in Greece or Spain, just the stability of the currency.
There is NO FREE LUNCH Reggie, it'll end in tears over in the States, but you fail to see that.
And typical EZ bias too.
Reggie,
Thank you for engaging your detractors on this issue. Until recently I worked at a Major digital network of Financial News sites, and it was the rare columnist who would actually engage with those who comment on his article.
From reading the article, I didn't catch the solution. (I posted another comment with my understanding...) It sounds to me, like you are saying that the problem is that banks have capital, but there is no appetite for debt, and others who have capital save (to their own detriment) because there exists insufficient market demand to entice them to invest or expand.
The solution that this analysis calls for, is to stimulate the consumer rather than banks or companies. Deleveraging the consumer would create long-term demand (whereas government stimulus creates short-term demand) which will entice companies to invest and expand to try to capture that demand.
Am I understanding your point?
(Edit: Austrian econmics says the same thing, I think...but it counts on a collapse to deleverage consumers through an unwinding of malinvestment...I'm not an economist and I am at the very edge of my understanding...)
Charles
I didn't include a specific solution, but I did outline a specific problem. This video approaches a solution, of course any who implement it must be wary of now blowing another uncontrollable bubble - something that may be nigh impossible...
SMB are getting crushed by lack of capital. I've seen it hundreds of times. A business cannot get a bank loan/LOC just to make payroll. A business could get some decent orders but does not have the capital to produce the damn product. Bigger businesses are leveraging the pay cycle, grabbing 30,40,50,60 or more days in credit terms in a competitive environment. That takes money for suppliers, money the do not have, or cannot finance. Factoring/receivables companies are charging 2-4% a MONTH. That is the real state of lending right now.
Low interest rates/mortgage rates are a MIRAGE for most people. Yes they are legit, but try qualifying for them, good luck.
Capital is NOT being invested and allocated properly, especially foricbly taken taxes by the government. Govt is doing a terrible job, in fact, couldn't be worse for small/med biz, hence the economy. Government is supposed to be a referee, not 3/4 of the players on the field now. It's truly criminal.
Reggie, Nowhere in your article did I see any mention of bad debt being written off. This whole historical episode cannot have taken place without a huge amount of malinvestment and mispriced credit - in the past, this kind of stupidity was rewarded with failure. Instead, we see bad debt decisions consolidated and driven up the food chain, until a huge percentage of the problem has become the responsibility of taxpayers / soverign, with virtually no failures of the TBTF banks.
I know from reading your work in the past that you've made points like those above, but this article seems quite disconnected from that past work. If the current episode of deleveraging was instead resolved with issuers of bad debt going bankrupt, the entire mess would have been admittedly more disruptive, but would also have arguably cleared from the system by now.
Instead, we have the status quo of TBTF banks enjoying the implicit transfer of wealth toward them that their exclusive access to ZIRP $ implies, and a diminishment of available capital accumulating and available for new ventures.
By essentially stating that sometimes keynsian stimulus spending is appropriate, is to effectively ignore the point that we would not be in the kind of mess that might justify it if banks hadn't been able to pocket the profits and socialize the losses. We are all deleveraging from excess debt that was mispriced by faulty macro monetary policy, and the price is not being paid by the banks whose prudent responsibility it was to not allow that to happen in the first place.
Stated simply, this has been a massive transfer of wealth and power, and the additional stimulus by debt is akin to being falling down drunk, and paying dearly for another bottle with the intention of drinking yourself straight. The only one who benefits is the barkeep.
The dismissals you are hearing are those of people all to familiar with the self serving arguments of those who made the mistakes, and who would be most damaged by a deflation. There have been deflations in the past, along with quick debt write offs, and a quicker return to prosperity for the average joe. I am also sick to death of justifications that take it as read that the TBTF banks must be protected at all costs, for the sake of 'systemic stablitiy'. The status quo has failed us, and to continue to prop it up is to allow it to accumulate yet more power. I find this frightening to the extreme, and long term means only one thing - Revolution.
Sorry for the typos - hey, I never complain about yours ;)
A (mostly) RM fan.
Obama is an employee of TPTB. He will do exactly as he is told. They are not "making mistakes", or "stupid". They know exactly what they are doing and are cashing in big in the process. They are also firmly in control, and any ideas that propose to "fix" what they are doing are pure fantasy.
How is it that a vampire is killed, again? Through new policies?
Oh dear.
Reggie is a closet (now self-outed) Keynsian/Marxist.
In praise of Koo, in praise of printing, I'll be damned.
Maybe because you're American, and don't like the fact the Eurozone is getting its house in order, with a stable currency, whereas the Yanks are headed at full tilt for a currency collapse?
All your paper trade recommendations will do you no good when the dya of reckong comes Reggie!
Ignorant, populist, bombastic and dictatorial
Without needing re-election, he can go full Khardasin on us and never miss a beat. As long as the "free" money flows, he will be thee most popular preezy breezy of this century. I foresee scratch golf in his future, the czars run the day to day and the dying canaries hidden under the welfare check tsunami.
Detroit! America's Model Community.
Is it "free money", or is it pseudo money. Money that the Fed lends the TBTF's, that can not be lent, out or spent. The only purpose it servers is to make the banks books "look" good (very short term loans, that need to be rolled over very frequently). Like the new "mark to fantasies" book keeping. I am keeping a eye on the FDIC, not wanting to have too much money in our account next year. Now; The buying up of the bad loans (MBS) is nothing but a gift to the banks.
He will make a speech every once and a while to demonize some group so the masses have some red meat to focus their anger on