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Koo Concerned Keynesian Class Contracting
The fear of 'turning-Greek', which is now apparently worse than 'turning-Japanese', is the anchoring bias that seems to be driving more and more countries to dramatically adjust their fiscal affairs. However, Nomura's Richard Koo (whose blood pressure was already elevated last week at the ignorance of many nations to his balance sheet recession diagnosis and treatment protocol) points out in a note this week that Greece's problems stem from fiscal profligacy, a lack of domestic savings, and dishonest reporting by the government (it does kind of ring a bell). His point being that the rest of the eurozone - not to mention Japan, US, and the UK - are suffering balance sheet recessions (unlike Greece), which occur when the collapse of an asset price bubble drives sharp increases in private savings. His problem is that traditional economists are not taught of a situation in which private sector deleveraging (which we discussed last week also) leaves fiscal stimulus as the only way to stabilize an economy and in the currrent environment of deficits being watched and denigrated by any and all politician, market participant, and talking head, Koo's borrow-and-spend 'all deficits are good deficits' medicine is hard to swallow. Koo believes that the post-Lehman world was saved by fiscal stimulus, that Greece is different, and that the anti-Koo austerity actions have 'thrown a large wrench into the works of many world economies' and while the UK is coming around to the notion that austerity is not working, he worries on recent actions in the US and Japan at a time of excess private saving. It seems to us that his argument boils down to - given the system's fragility - an Austrian solution to the broken Keynesian problem is unworkable (without depression), and he hopes that the growing doubts (recessions popping up left, right, and center) about an overriding focus on fiscal consolidation will bring people back to Keynesian (Kooian) fold. He concludes with a worrying reflection on his countrymen in the MoF that seem to have learnt none of his lessons as they look to raise the consumption tax and Japan's rising sun sets.
Austerity Is Not The Correct Medicine
Greek Tragedy should not set fiscal agenda for rest of world
Richard Koo, Nomura
Can Greek "spell" be broken?
News of a reopening of debt negotiations between the Greek government and private banks—which were supposed to have been settled last October— rocked financial circles last week. I expect the two sides will eventually come to an agreement. Nevertheless, I find it disturbing that a problem that started with the Greek debt crisis, which is insignificant in the larger scheme of things, has now grown to deliver a severe shock to the global economy.
It has prompted countries throughout the eurozone—not to mention Japan, the US, and the UK—to dramatically alter their approach to fiscal affairs lest they become another Greece.
Greece's problems, however, stem from fiscal profligacy, a lack of domestic savings, and dishonest reporting by the government.
The rest of these countries are suffering from balance sheet recessions, which occur when the collapse of an asset price bubble drives a sharp increase in private savings. A world of difference exists between the two.
Countries embrace austerity in misguided bid to avoid Greece's fate
Traditional economists are not taught of a situation in which private sector deleveraging leaves fiscal stimulus as the only way to stabilize the economy. Policymakers, believing all fiscal problems are the same, seem transfixed by the fact that their own fiscal deficits are as large as Greece's and have therefore embraced fiscal consolidation as the core of their macroeconomic policies.
By trying to administer the same treatment as Greece even though their fiscal deficits have entirely different causes, they have—not surprisingly— thrown a large wrench into the works of their economies.
Fiscal stimulus contributed greatly to post-Lehman recovery...
Fiscal deficits rose around the world because the Lehman crisis sent the global economy into free fall, causing industrial output to drop to 1997 levels in the US and the eurozone and to the level of 1983—fully a quarter of a century earlier—in Japan.
Faced with this unprecedented decline in economic activity, many of the world's leading economies administered a heavy dose of fiscal stimulus in 2009. Their spending revived the global economy and restored output to 2005 levels in the eurozone and the US and to 2004 levels in Japan (since the 11 March earthquake Japanese output has fallen back to the level of 2002).
In addition to fiscal stimulus such as public works investment and Japan's "eco-point" program of government subsidies for the purchase of energy- efficient appliances, automatic stabilizers—including the lower tax take and increased benefits for the unemployed that typically accompany a recession— contributed greatly to the ensuing recovery.
And summarising the body of his article:
- While monetary policy has lost its effectiveness
- Focus on austerity has triggered sharp slowdowns in eurozone
- UK slowly realizing that austerity isn’t working
- Japan and US have also fallen under Greece’s spell…
- But US economy likely to be quite stable
- Austerity at time of excess private savings will slow the economy
- Hashimoto government’s austerity attempt failed in 1997
- As did Koizumi administration’s efforts in 2001
- DPJ and MOF officials unaware of past failures
- Proper indicator for fiscal consolidation is private loan demand, not GDP growth
- Shifting funding for social security from bonds to taxes would cut disposable income
- Private loan demand a precondition for fiscal consolidation
- Debate should first ask whether tax hike is appropriate for Japan
- With both DPJ and LDP behind tax hike, voters have no choice
- Both politicians and public starting to question notion of tax hike as foregone conclusion
- Doubts about overriding focus on fiscal consolidation are growing…
Still, those calling for fiscal stimulus and not fiscal consolidation remain in the minority.
When future historians write about this era, will they say that governments implemented mistaken policies that crushed their economies out of a fear of following in Greece’s footsteps, when in fact their circumstances were entirely different from those of Greece? The answer depends on whether we can free ourselves from the power of the Greek spell.
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alotta alliteration in that headline...
"A pledge pin!" on your uniform!
"Faced with this unprecedented decline in economic activity, many of the world's leading economies administered a heavy dose of fiscal stimulus in 2009. Their spending revived the global economy and restored output to 2005 levels in the eurozone and the US and to 2004 levels in Japan (since the 11 March earthquake Japanese output has fallen back to the level of 2002).
In addition to fiscal stimulus such as public works investment and Japan's "eco-point" program of government subsidies for the purchase of energy- efficient appliances, automatic stabilizers—including the lower tax take and increased benefits for the unemployed that typically accompany a recession— contributed greatly to the ensuing recovery."
This was the wrong approach and we have made the Depression worse.
"Who are you, to pooh-pooh Koo?"
I am the eggman... I am the eggman...
This was the wrong approach and we have made the Depression worse. The correct approach would have been to let prices deflate, liquidate bad investments and mal-investments like housing stocks.
Spending money on existing capital markets that are already inefficiently used only makes the problem worse. Instead of letting the excess capital stock be liquidated and reallocated for more efficient utilization, central planners have artificially stimulated this inefficient capital and created capitalist who are bidding up the cost of resources they do not need nor does society need.
By borrowing money to prolong the misuse of capital and labor central planners have created the additional problem of overleveraged government debt that will mean sacrificing core services when interest rates increase. In essence central planners have created the means of their own destruction by piling on trillions of debt when interest rate are artificially low.
The proper course of action would have been to shrink the federal government and not interfere in the liquidation, and reallocation, of capital, letting interest rate go to 3% above the inflation rate to attract real savings, as opposed to a central bank printing.
The above approach shold be economics 101 in every college text book. All the other Y=C+I+G+NX crap is bull shit.
your idea has no insight into two words: opportunity cost. in your approach what is the opp cost?
anyhoo........
Greece doesnt deal, PSI doesnt deal, so who gonna deal??? (banks via LTRO 2.0???? IMF... ????)
The opportunity cost for the politicians?
They would look like the fools and the central banks would be exposed. Instead they hid behind the printing presses and bull shit growth numbers.
The .01% were NOT going to take losses. Your solution, although obvious, was unworkable.
Barry Soetero-Obama was certainly a bad investment that should be liquidated this year.
Romney, Gingrich, Rubio, Paul, whoever. Just get the current TOTUS out of there.
+1.
If one took a keynesian approach and insisted on intervention,
then I say it should have been the injection of capital in brand
new state-run banks or credit unions. This would create fresh
real credit (no bad loans on those books), and flight to quality
would have taken out all the unicorn priced pixie dust toxic debt.
nothing wrong with making the callous private sector compete with
public utilities a bit. instead now we have the opposite, with sound
small local banks being hosed by bernanke's backstopped bailout
buddies.
he and krugman are perfectly correct.
look, fukushima is still hot. it creates unlimited cleanup jobs, plus additional medical sector jobs for those who have to take care of the clean up crew who get cancer, plus the general population at large who's cancer rates are increasing.
it's super bullish for the Japanese economy. So much so I liquidated every last physical coin i had and invested in the japan ETF.
Hopefully we get to go to war with Iran, we can bomb them (jobs for bomb makers), invade them (jobs for veteran affairs), nuke them (clean up crew jobs), install a new dictator (more jobs for diplomats), then sell them more new US made weapons (jobs for plane makers).
It's ALL bullish
BUY BUY BUY.
<sarc off>
Whatever happens in/with Greece will be setting the precedent for all those soverign defaults that follow, that is the only reason it is a big deal. In the meantime the capital mis-allocation continues, Got physical?
It is easy just to call this a "Greek" problem. Due to their history, Greece is ahead of the pack in terms of problem spending and lack of real markets. It is universal in developed nations. It is not a "Greek" spell, it is a bankster spell.
Maybe people would be more comfortable "turning-Greek" if they too had a catchy tune...
http://www.youtube.com/watch?v=gEmJ-VWPDM4
This is the Greek tune </sarcasm>
http://www.youtube.com/watch?v=UJOjTNuuEVw
Why not for Japan, US, UK, to work with Austrian School?
They can copy what USSR did, collapse the Union, and invite the IMF to rule over them with Shock Therapy. It worked wonders like BBC said. They cannot pretend to be rich if they weren't forever
Oh for God's sake, Russia could get away with that BECAUSE THEY ARE THE #1 OIL PUMPER IN THE WORLD.
It can't work anywhere else.
'an Austrian solution to the broken Keynesian problem is unworkable (without depression), and he hopes that the growing doubts (recessions popping up left, right, and center) about an overriding focus on fiscal consolidation will bring people back to Keynesian (Kooian) fold.'
Yes. Keynesian ideas are as dead as the man himself. Koo is halfway to Koo-Koo. Econo-shamans aside, all this will take a backseat to actual trade wars and some real geopolitical tension.
Yes sir.
But Keynesians have a heads-I-win-tails-you-lose response whether their stimulus approach works or not. If austerity is tried and conditions don't improve, well you should have listened to them and printed money. If printing money is tried and the economy stagnates, well the amount of stimulus just wasn't enough because of those damn critics from the Austrian school.
[quote]
...an Austrian solution to the broken Keynesian problem is unworkable (without depression),
[/quote]
a Keynesian solution to the broken Keynesian problem is ALSO unworkable (because it will lead to massive inflation!)
This lunatic actually believes that there is a problem of "excess private savings" in the US?
In other words, if the private savings rate is anything higher than ZERO, then "economic growth" grinds to a halt.
While this appears to be quite true, it suggests that what passes for our economy is addicted to ever increasing amounts of debt to maintain the illusion of "growth".
More debt is the only answer these guys keep coming up with.
Really puts the statist mentallity in stark relief doesn't it?
If you hold your "excess savings" in US Dollars the Keynsians will take appropriate action to defend the interests of society against your greedy hoarding ass and feel damned morally proud of themselves for doing it too.
Cui bono?
Koo-Aid
I propose this coffin for the Euro http://www.telegraph.co.uk/news/picturegalleries/howaboutthat/9010691/Boxed-Fabulous-Coffins-from-UK-and-Ghana.html?image=4
Without the massive use of debt (unreality) to assuage the bleeding of a deteriorating American economy, large numbers of the people would be in the streets begging for food and shelter and jobs... and revolution. That, Mr. Obama, is the true state of the union. Look at these facts.
· 15%, or 46 million Americans are on food stamps.
· Among males 25 to 34, 19% live with their parents.
· The unemployment rate for males between 25 and 34 years old with high-school diplomas stands at 14.4 per cent.
· The estimated number of Americans living in poverty are at the highest known rate reaching 49.1 million, or 16 percent.
· The wealth gap is now more than double what it was in 2005 and nearly five times the 10-to-1 disparity a quarter-century ago, after adjusting for inflation.
· The median net worth for the younger-age households is $3,662, down by 68 percent from a quarter-century ago.
· In all, 37 percent of younger-age households have a net worth of zero or less, nearly double the share in 1984.
· Older Americans are staying in jobs longer, while young adults now face the highest unemployment since World War II.
· Households headed by someone under age 35 had their median net worth reduced by 27 percent in 2009 as a result of unsecured liabilities, mostly a combination of credit card debt and student loans.
· The seasonally-adjusted SGS Alternate Unemployment Rate that reflects current unemployment reporting methodology adjusted for SGS-estimated long-term discouraged workers, who were defined out of official existence in 1994, added to the BLS estimate of U-6 unemployment which includes short-term discouraged workers, stands at 23% of the America’s working force.
Read more: http://www.dailymail.co.uk/news/article-2058605/Number-men-aged-25-34-living-parents-hits-highest-level-1960.html#ixzz1kU8LM6Szhttp://www.shadowstats.com/alternate_data/unemployment-charts
Add to this the millions who have lost their investments, savings and home equity due to unprecedented Fed monetary manipulations that led to America’s three largest speculative bubbles - the 1992-2000 dot.com bubble, the 1991-2006 consumer bubble and the 2002-2006 real estate bubble – coupled with the takeover and removal of America’s manufacturing base and blue collar and management jobs by hostile globalist forces, and it’s obvious that the state of America’s economic engine is derailment.
"The median net worth for the younger-age households is $3,662, down by 68 percent from a quarter-century ago."
We also have to factor in that the dollar has lost 85% buying power since 1970 to date.
Guess the Fabians are truly proud of their efforts, then!
While generally critical of them, I commonly find Koo’s pro-Keynesian arguments considerably more cogent than Krugman’s.
I agree.
But both conveniently overlook the convincing evidence that fiscal stimulus only has a temporary effect (at best) if it isn't used for productive purposes.
Building highways and bridges are certainly productive, but projects come and go when the stiumulus disappears. But it provides a lasting value for those transporting bodies and good across the land.
Much of what fiscal stimulus we've see in the US, however, has been truly wasteful. From the early days of direct billion $ injections into the major TBTF's to absorbing mounting losses at the zombified Freddie and Fannie, fiscal authorities are just pouring hundreds of billions down a funnel with no productive intent whatsoever. Of course, this stuff needs to be financed and will add to our own sovereign debt problems...
One could make the case as well about all the fiscal decisions made to bloat the defense budget to even more proposterous levels, or provide extended unemployment benefits without providing the carrot and stick approach by investing in job training-- when there's an apparent gap between skills high in demand and a lack of skilled labor supply. But that would just piss half the population off, as they are hot-button political issues.
Perhaps what's even more concerning, in my view, is that Congress is passing the buck to entities like the Fed-- and allowing them to pour unlimited amounts of capital into a financial system that operates on the premise that profits are realized and kept in the coffers-- and losses are socialized among the poor huddled masses.
The fiscal stimulus (while still close to the $ trillion range) provided to the general public has paled in comparison to the comination of $1.5 trillion or so the Fed has (so far) printed to it's own balance sheet, plus the windfalls banks have enjoyped playing the Treasury-ZIRP spread. ZIRP, in particular, has robbed savers blind at the expense of the financial system. And whether its Congress providing direct capital injections into banks-- or whether its the Fed buying worthless loans off of bank balance sheets in exchange for Treasury notes, it's all the same unproductive stuff.
So... yeah... What Koo relays in theory is technically correct. But the bulk of any additional fiscal stimulus needs to be put to good prductive use. Japan spent more than a decade of funneling wasteful fiscal spending into it's own zombie banking system-- and you know how that has turned out. Japan is no better off than they were 15 years ago, but is now more a debt slave than ever.
Do you trust your goverment to fiscally do the right thing?
Thus my point...the US gvt finances are a lot more like Greece. Not a savings country.
Thus our rates will be going much higher.
Tomorrow? Next quarter? Next year?
Eventually.
The hell with Richard Koo. I want to know about
a much more important Koo.
Does anyone know whatever happened to Koo Stark?
The hottie who caused an uproar in the royal family
by 'dating' Prince Andrew in the early 80's.
She was really an ooo-laa-la kind of babe.
Please - from here on out - more articles about Koo Stark.
Koodos
http://www.dailymail.co.uk/femail/article-1355803/Prince-Andrews-ex-girl...
I see. Koo is advocating, along with Krugman, that we all skip merrily down the road to global hyperinflation rather than a deflationary depression.
Bullshit. Austrian economics is like pathology. The disease exists whether you think so or not. The cure may be uncomfortable, but the disease is worse. The only person who thinks that the cure is "too uncomfortable" to warrant application of the medicine is someone who is neck deep in the lies.
Upton Sinclair said “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
So, what is wrong with a depression if it fixes the problem?
Let all of the banks self-destruct by taking away their power to create money from thin air, stop bailing them out and then restructure in a way that makes sure that banks never again have the power to rule the world.
Depression (recession, contraction, whatever) is the cure. The Austrians will tell you the "depression" is the healthy thing, the credit expansion that caused it was the unhealthy thing.
Correct. If you follow this thought process through, you will find that you don't really need banks at all. Crazy concept, but true: we don't need banks.
oops double post, sorry
Is that the same Upton Sinclair who wrote last night's SOTU address?
Because Barry clearly had that crap dredged out of the archives of the American Left of the 1930's.
One thing that seems apparent is that central planning with crony capitalism is not an effective way to run a world because it only works well for a small minority of the people.
It is understandable that those in charge like it and somewhat less understandable that they feel no responsibility for the difficulties that they continue to foist onto the majority. The do not seem to be considering any solution that takes the best interests of the majority to heart, even though we have gone through many eras where benevolent and "service to others" oriented people had power.
Regardless of their hollow claims to service, the current decision makers appear self-centered and apparently don't give a damn about anyone else. In fact their thought of reducing the numbers of everyone else, seems appealing to them (as appauling as it may be).
Next time, I will request another planet.
Look, there's a simple solution to all of this: Move to China! There are reportedly a lot of empty apartment buildings there!
But don't get too comfortable. You'll robably have to move to Vietnam when the corporate bigwigs think China's workforce is getting too expensive. And then to Lesotho...