Who Knew? Pre-Keynesian Economics Actually Works

Where the economies of the world are heading based on its Keynesian mantra of C+I+G is still anybody’s guess but a very hard fall is not out of the question. The US economy is the dead centre of such policies with easily one of the most economically incompetent administrations in American history – possibly the most incompetent ever – making decisions in tandem with a Democrat controlled Congress which has not introduced a budget in something like 765 days. They are too frightened, apparently, to let anyone else see what they have in mind.

Two bits have come up today that are worth bundling. The first is from Tim Congdon writing in the English magazine Standpoint. In an article on “Expansionary Contractions”, that is, on how cutting public spending actually leads to growth, he writes about how Keynesian economists continue to press for more spending:

Economics may not be a science, but — in their view and that of other Keynesians — the lessons of textbook theory are straightforward and uncontroversial: cuts in public expenditure and reductions in deficits have deflationary effects.

But what about the evidence? The historical record turns out to be fascinating. The last 20 years of UK statistics provide a decisive refutation of the [Keynesian] position. They contain two lengthy periods in which fiscal policy was consistently moving in one direction. According to data from the International Monetary Fund, between 1993 and 2000 the UK’s cyclically-adjusted budget position was transformed from a deficit of 6.1 per cent of GDP to a surplus of 1.5 per cent. Every year was “deflationary”, in Keynesian terms, in this seven-year period. Yet the economy enjoyed strong growth and falling unemployment.

By contrast, from 2001 to 2009, the cyclically-adjusted budget position slithered from a surplus of 0.6 per cent of GDP to a deficit of 8.5 per cent. With two minor exceptions, every year was “expansionary”, according to Keynesian terminology. And what happened to economic activity over these eight years? The answer is that, whereas in 2001 the UK was as near to full employment as it had been for a generation, by 2009 it was suffering from the after-effects of the worst recession since the 1930s. Again, the Keynesian view is contradicted.

And then, via Powerline once again, we find an article on the Canadian experience. With no economic theory to guide them, certainly no theory found in any standard economic text, the Canadian government spent the last sixteen years cutting spending and moving the budget towards balance with immense success. There are two morals that were drawn, the first being that deficits can be cut through cuts to spending rather than increased taxes. And then this:

The second moral is that the Canadian experience does not support the Keynesian view that one should not cut government spending during an economic slowdown. The Canadian experience, just like the U.S. experience during the 1920-21 recession and in the first two years after World War II ended, shows that cutting spending even during low-growth years is good for long-term economic results.

But why go to Canada or the UK? We have had the experience right here in the economy managed by Peter Costello. I used to say while we were in the midst of those budget surpluses and regular cuts to personal taxation that no one would understand why it had been so successful and therefore when they stopped no one would do it again. Once again we find that the only thing we learn from history is that no one ever learns from history.

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64 Responses to Who Knew? Pre-Keynesian Economics Actually Works

  1. tbh

    I’ve not seen any recent figures out of the UK, but how are they going after a couple of tough budgets (their words) in a row?

    I really hope that the US congress has the courage to start chopping into that deficit, otherwise they are well on the way to being the next Ireland or Greece.

  2. Skuter

    Good insights Steve. I believe Alesina & Ardagna (hope I have their names right) have provided empirical evidence of non-Keynesian effects of contractions in government spending. Also, I believe Mountford & Uhlig and Blanchard & Perrotti have presented evidence of non-Keynesian effects as well. What about the composition of spending, as opposed to just the level? Is there any good evidence to suggest different effects of cutting different types of spending? Expectations and fiscal credibility appear to be important too…

  3. sdfc

    Private debt was nowhere near as high in 1920 as it was in 1929 or 2007. The 20-21 depression wasn’t caused by financial crisis but by deliberate Fed policy.

    tbh

    US public sector debt is denominated in $US. Ireland and Greece both in effect borrow in a foreign currency.

    Skuter

    A&A don’t really say anything because they didn’t control for economic conditions. Let alone financial conditions.

  4. Rafe Champion

    tbh, I am afraid that you will find that the “tough” UK budgets are much the same as the “tough” US and Aust budgets:)

  5. tbh

    sdfc, that is true, but at some point the cost of servicing that debt becomes too onerous and the bond vigilanties come calling. I know they can try to inflate their way out of it, but that also hurts the economy. Inflation is the silent killer.

  6. sdfc

    I wouldn’t worry about the bond vigilanties tbh. They’ve got nowhere to go.

  7. JC.

    Private debt was nowhere near as high in 1920 as it was in 1929 or 2007. The 20-21 depression wasn’t caused by financial crisis but by deliberate Fed policy.

    Bullshit.

    Evidence please.

    US public sector debt is denominated in $US. Ireland and Greece both in effect borrow in a foreign currency.

    Bullshit. If it was a “foreign currency” as you suggest would need to be converted to the domestic currency. It doesn’t. It’s domestic currency over which their governments don’t exercise complete control.

    get this stuff right, SDFC. And if you don’t understand it then ask me or Dot to help you, but don’t go around misleading people because you’re too proud to ask for help.

  8. .

    Ireland and Greece both in effect borrow in a foreign currency

    WTF?

    This makes up for my greek bond graph howler (however it turns out I’m right about austerity working and there being no default).

    Come on moodys. Keep on downgrading them like you never downgraded US mortgage debt. Or like how you spruiked 10% unemployment without the stimulus and then 17% without the stimulus.

    Does anyone with their sanity actually pay credit rating agencies for anything anymore?

    Sorry. OT. The fact of the matter is that Greeks are borrowing Euros, which are trading to a premium against the USD, which has depreciated since their credit downgrades and new loan restructure.

    If sfdc can explain how this is a loan in USD, I’ll give him my power of attorney.

  9. tbh

    Dot, are you talking about austerity in Greece? Is that actually working?

  10. .

    Yeah its working. They’re actually getting their house in order after multi decadal malfeasance. They’re making budget cuts. Moodys thinks this makes them like Cuba.

  11. tbh

    If that’s the case, then I guess there is some hope for them. All I’ve heard recently is bad news where they are concerned. I read in The Economist today that Ireland may actually start growing again, which will also be a good thing.

  12. JC

    Steve

    Clinton was cutting the deficit for a good part of his term and it was a glorious period of economic expansion in the US at the time.

    That’s an example right at devils lair right there.

  13. Skuter

    sdfc, to Use Tory Shepherd’s phrase: I call bullshit on your comment. See here
    At least on my reading, an effort is made to control for economic conditions. There are clearly episodes when the Keynesian model breaks down. Why? Not sure, but that is why more research needs to be done into the composition of fiscal contractions, the political environment, etc. To apply Keynesian economics uncritically is clearly a stupid thing to do.

  14. .

    I wouldn’t worry about the bond vigilanties tbh. They’ve got nowhere to go.

    Oh yeah like they did at the end of ’09?

    Everything sfdc has said on this thread is bollocks.

  15. Jim Rose

    australia under the premiors plan and new zealand too cut government spending to the bone in the early 1930s. Unemployment rates were back from above 25% to in single figures by the mid-1930s.

  16. James Drury

    This article is quite remarkable.

    Firstly it says that Pre-Keynesian (or classical) economics works. Not according to the the IMF it aint. They show it to be a complete crock. Indeed it supports Keynes contention way back in 1936 that Austerity only works in good times. It also completely blows out of the water A&A’s ‘analysis’.

    Indeed Austerity makes budgets worse in bad times as Kash Mansouri shows.

    You do not seem to understand how Keynesianism works at all. If you read this you will find out how it does in fact work.

    You can then concede the British experience was anything but Keynesian.
    Present Structural deficits in Europe are large not because of spending but other reasons.

    You can read about that here.

    Peter Costello left us with larger and larger Structural deficits which you can read about at page 68. It is one of the reasons why inflation started to rise back then.

  17. chris

    This is an appalling piece of “analysis”.

    The Author has displayed tremendous ignorance to the sectoral balances that is our economy.

    In a nutshell;
    Private deficit + government surplus plus external accounts = 0.

    As the UK and Canadian governments pushed their economies to surplus, the private sector took up the slack via increased household debt (ala USA).

    This was fine 20 years ago when private debt was small.

    No so anymore.

    Private debt has a limit. When that limit is reached, the private sector needs to de-lever (or save). this can only happen if there is an external account surplus (Switzerland) or government deficits (Australia & USA today) as defined by the sectorial balances.

    This article ignores the evidence of today. UK is almost certain to head to a a double dip.

    USA GDP slowed in Q1 as government spending slowed.

    Austerity is making the deficit WORSE in Greece, Spain and Ireland.

    Australia avoided a recession not because we had budget surpluses, but because we went into deficit (as a % of GDP we were one of the largest deficit spenders in the world). We can afford to go into deficit not because of prior year surpluses, but because we are a sovereign nation who can supply its own currency at will for zero marginal cost (unlike Greece / Ireland / Spain etc).

    There is no such thing as the “confidence fairy”. This article is pure Bunk because it ignore private debt, and displays ignorance to the realities of the modern monetary system.

  18. .

    Austerity is making the deficit WORSE in Greece, Spain and Ireland.

    Bullshit. Show us some evidence.

    USA GDP slowed in Q1 as government spending slowed.

    Why don’t they just keep on spending more and more and tax the rich more? I’m sure nothing bad will happen to capital investment.

  19. .

    In a nutshell;
    Private deficit + government surplus plus external accounts = 0.

    I think you mean the private and public deficit equals the capital account surplus.

    The only thing that matters is productivity and debt serviceability. Private debt has gone down since the crisis. The savings rate has gone up. You are being hysterical.

    As the UK and Canadian governments pushed their economies to surplus, the private sector took up the slack via increased household debt (ala USA).

    This was fine 20 years ago when private debt was small.

    This is rubbish and bad mathematics.

    Australia avoided a recession not because we had budget surpluses, but because we went into deficit

    That means nothing even if your theory was correct and your maths wasn’t a dodgy sleight of hand. Even Keynes said so. How much of that spending was “G”, may I ask? It was poorly spent and lead to a fall in short term cap ex – which has never actually recovered.

    but because we are a sovereign nation who can supply its own currency at will for zero marginal cost (unlike Greece / Ireland / Spain etc).

    Zero marginal cost if you don’t count crowding out, arbitrary wealth transfers, capital mis-pricing etc as costs.

    Although this is another admission that your maths doesn’t work out and Government debt certainly matters more than private debt as it is financed through fiscal drag (i.e the stealth tax of inflation).

    You should get some schooling before you criticise Kates. Perhaps a grounding in a stable number system should be your first port of call.

  20. sdfc

    JC

    Bullshit. If it was a “foreign currency” as you suggest would need to be converted to the domestic currency. It doesn’t. It’s domestic currency over which their governments don’t exercise complete control.

    They are in effect borrowing in a foreign currency. They outsourced their monetary policy to the ECB.

    Any US government default could only be intentional. The US government’s debt is in its own currency. Ireland and Greece’s debt is denominated in a European currency. It’s why they’re finding funding such a problem.

  21. sdfc

    Yeah its working. They’re actually getting their house in order after multi decadal malfeasance. They’re making budget cuts. Moodys thinks this makes them like Cuba.

    You’re kidding. Greece is currently pan-handling for more money. The IMF is iffy about lending more money to Greece because there’s a good chance they’re missing they’re targets.

  22. sdfc

    Skuter

    sdfc, to Use Tory Shepherd’s phrase: I call bullshit on your comment. See here

    At least on my reading, an effort is made to control for economic conditions. There are clearly episodes when the Keynesian model breaks down. Why? Not sure, but that is why more research needs to be done into the composition of fiscal contractions, the political environment, etc. To apply Keynesian economics uncritically is clearly a stupid thing to do.

    They don’t control for economic conditions. They acknowledge the impact of economic conditions on fiscal policy and growth is left unexplored. Page 8 of the paper “Large Changes is Fiscal Policy…” Sorry can’t link to it.

    The piece below is cut from the article you linked to. They don’t say anything really.

    Below is an incomplete list of papers consistent with the possibility of expansionary fiscal adjustments. All of these analyses find two results:
    • Spending cuts are less recessionary than tax increases when deficits are reduced, and;
    • Sometimes, not always, some fiscal adjustments based upon spending cuts are not associated with economic downturns.

    That paper is bought up from time to time but as you can see their analysis says nothing about policy choices during a severe financial crisis accompanied by a sharp recession.

    I’m not really interested in a spending v tax cut debate about expansionary fiscal policy. I see them both as cash injections into the private sector.

  23. sdfc

    Dot

    Oh yeah like they did at the end of ’09?

    I’m not sure what you are talking about here Dot.

    When the US economy started growing again treasury yields went back to where they were before they plunged on deflation concerns.

  24. sdfc

    Actually deflation concerns is probably a bit simplistic.

  25. Jim Rose

    The great forgetting about the crowding out effects of fiscal policy and the welfare costs of taxes are part of larger cyclical nature of policy popularity.

    Thomas Humphrey wrote excellent 300 year long literature surveys of the rules versus discretion debate and the cost-push inflation fallacy in the 1998 and 1999 Richmond Fed Quarterly.

    Humphrey wrote the two reviews to see if economics was a progressive science in the sense that superior new ideas relentlessly supplant inferior old ones.

    He found that Keynesian ideas and their antecedents gained currency when unemployment was the main concern. Monetarist ideas tended to reign when price stability was the main problem

    The policy debate keeps recycling because
    1. people forget the lessons of the past and
    2. for better or worse, politicians and the public have tended to believe that central banks, the focus of his studies, have the power to boost output, employment, and growth permanently.

    Humphrey showed that stable policy rules where popular in good times to contain inflation, and when unemployment was rising, discretionary policies returned to vogue. Cost-push inflation was even more resilient against repeated refutation.

    Humphrey concluded that doctrinal historians knows that much of what passes for novelty and originality in monetary theory and policy is ancient teaching dressed up in modern guises.

  26. CHris

    So much ill-informed comment, so little time and space to respond.
    ———–
    Austerity is making the deficit WORSE in Greece, Spain and Ireland.

    Bullshit. Show us some evidence.
    ————–
    Errm, how about here
    “Things have turned out substantially worse than the Greek government expected. In the stability programme that was made by the Greek government a little more than a year ago the ministry expected a budget deficit of 8.7% of GDP in 2010. In the adjustment programme that followed the bailout package in May it was expected that the deficit in 2010 would be 8.1% and that government debt would peak at around 150% of GDP in 2013. This seems very unlikely and, to be fair, it seems more plausible that the debt will peak at around 160% of GDP according to our calculations. Consequently, a debt restructuring seems increasingly likely.”
    http://www.fxstreet.com/fundamental/analysis-reports/flash-comment/2011/04/26/

  27. CHris

    USA GDP slowed in Q1 as government spending slowed.

    Why don’t they just keep on spending more and more and tax the rich more? I’m sure nothing bad will happen to capital investment.
    ————-
    who said anything about taxing the rich? Taxes do not fund anything for a country with control over its own currency. They simply drain the private sector of savings. This is not requred in the USA. The private sector needs savings to de-lever.

  28. JC

    They are in effect borrowing in a foreign currency. They outsourced their monetary policy to the ECB.

    They are NOT borrowing in a foreign currency. It’s incorrect to even suggest that. Economics is a precise language and your description is loose with language and facts.

    Borrowing in a foreign currency would mean it would have to be converted to the domestic currency on which there is a potential exchange rate risk. In this case there isn’t.

    Any US government default could only be intentional. The US government’s debt is in its own currency.

    But missing the point. Bond yields would destroy the economy alone if they went full on retarded that way.

    Ireland and Greece’s debt is denominated in a European currency. It’s why they’re finding funding such a problem.

    You are again using imprecise language. Stop it please.

  29. CHris

    but because we are a sovereign nation who can supply its own currency at will for zero marginal cost (unlike Greece / Ireland / Spain etc).

    Zero marginal cost if you don’t count crowding out, arbitrary wealth transfers, capital mis-pricing etc as costs.

    —-
    lol – crowding out?

    Yes deficit spending in the US / Greece / Ireland etc is cause heaps and heaps of crowding out – for food stamps.

    http://www.reuters.com/article/2010/05/07/us-food-usa-stamps-idUSTRE6465E220100507

    Capacity utilisation is at near all time post depression lows, and unemployment (measured in U-6 terms) is almost 20% in the US. Please tell me how this is “crowding out”?

    You need to pick up a newpsaper and read what is going on in the world.

  30. CHris

    They are in effect borrowing in a foreign currency. They outsourced their monetary policy to the ECB.

    They are NOT borrowing in a foreign currency. It’s incorrect to even suggest that. Economics is a precise language and your description is loose with language and facts.

    ————
    It is very important to get the terminology right here.

    You are quite correct. They are not borrowing in a foreign currency.

    But Greece / Ireland / Spain are currency USERS. Conversely, Australia, US UK etc are currency ISSUERS.

    There is a big difference. A currency user can run out of money. This is the threat to some Euro based economies. The same for households, businesses and state / local governments.

    A currency ISSUER can never run out of money. The deficit scare mongerers ignore this fact.

    Since Independance (1776), the USA has recoded deficits for around 210 of its 230 years of existence. It has yet to go broke, and its bond yields are at near all time lows.

    The facts speak for themselves.

  31. JC

    Capacity utilisation is at near all time post depression lows, and unemployment (measured in U-6 terms) is almost 20% in the US. Please tell me how this is “crowding out”?

    Easy. Crowding out is a reference to the effect massive government borrowing has on the capital markets. The symptoms are felt in U6 etc.

    If you want to read more about I suggest you take a look at a Philly Fed paper on the subject warning about this evidenced with a reference to the same experience in the 70’s.

  32. JC

    A currency ISSUER can never run out of money. The deficit scare mongerers ignore this fact.

    No Germany never ran out of money in the 20’s either. I also don’t think Zimbabwe ran outta money.

    Let me ask you a question.

    You’re a bond holder and you see the central bank doing massive amounts of QE. What would you do?

    1. Would you hold your position

    2. Increase your holdings

    3. Reduce your holdings

    4. PIMCO(ize) your position by selling the market short

  33. CHris

    Private debt was nowhere near as high in 1920 as it was in 1929 or 2007. The 20-21 depression wasn’t caused by financial crisis but by deliberate Fed policy.

    Bullshit.

    Evidence please.
    ——————
    Again – here
    http://www.skeptically.org/sitebuildercontent/sitebuilderpictures/us-private-debt-to-gdp-20-09.jpg

    In the 1920’s the US move toward austerity and a balanced budget. This forced the private sector into deficit pushing up private debt / GDP to “breaking point”. AS private debt grew it created the facade of economic health. However, private debt has a limit. The Depression was a consequence of many things including;
    1. Private sector trying to de-lever from the 1920’s debt binge (see chart)
    2. Idiot policy from Hoover to try and balance the budget during economic weakness (just like 1921).

    What the President did not understand was the recovery in the 1920’s was driven by private debt growth. Once it reaches breaking point, Government deficits are a certainty – since the private sector demands savings. The sectorial balances ensure Government remains in deficit by collapsing tax receipts and therefore collapsing the economy.

    The President did not understand this because he had no roadmap to help.

    The tragedy is we have a road map today – but ignorance still prevails.

  34. CHris

    A currency ISSUER can never run out of money. The deficit scare mongerers ignore this fact.

    No Germany never ran out of money in the 20?s either. I also don’t think Zimbabwe ran outta money.

    ————

    Firstly, I would not follow PIMCO into anything. They have played this cycle as bad as any market partipant. There ignorance has cost their clients dearly.

    Now – lets address the same old tired “just like Germany / Zimbabwe” argument shall we….?

    First, you need to understand the difference between inflation and hyperinflation.

    Inflation is continued increasing price of goods and services. Consumers continue to demand currency to pay for those goods and services. If there is too much money RELATIVE TO OUTPUT, prices rise.

    Hyperinflation (Germany/Weimar and Zimbabwe) is the outright rejection of currency. You can also include The Confederate Army. Post 1900, you may also include Hungary, Austria, Poland and Russia post WW2. In every instance budget deficits were irrelevant. What was relevant was
    1. Foreign denominated debt
    2. Regime change
    3. Civil War

    If you want to read more on this see below.
    http://pragcap.com/hyperinflation-its-more-than-just-a-monetary-phenomenon

  35. CHris

    You’re a bond holder and you see the central bank doing massive amounts of QE. What would you do?

    1. Would you hold your position

    2. Increase your holdings

    3. Reduce your holdings

    4. PIMCO(ize) your position by selling the market short
    ————–
    If I didn’t want to do much work, I would simply do the opposite of PIMCO. I would be very rich by now.

    But in all seriousness, What do you think QE2 is? You do understand it does not change the money supply don’t you?

    If you are talking out the USA today, I would increase my holdings in Bonds. This is because;
    1. Capacity utilisation is near 70 year lows. Therefore Inflation is very unlikely.
    2. Idiots are now trying to contract Government while the private sector is still trying to delever. This will ensure double dip.
    3. The long bond mearly reflects the future intentions of the Fed’s short term rate target. Since the US will move into another recession as the Government contracts once would expect 10 year bonds yields to fall further – resulting in a capital gain to me!

    I will let Bill Gross cover his short from me next year when the ten year treasury yield is below 2%.

  36. CHris

    Capacity utilisation is at near all time post depression lows, and unemployment (measured in U-6 terms) is almost 20% in the US. Please tell me how this is “crowding out”?

    Easy. Crowding out is a reference to the effect massive government borrowing has on the capital markets. The symptoms are felt in U6 etc.

    If you want to read more about I suggest you take a look at a Philly Fed paper on the subject warning about this evidenced with a reference to the same experience in the 70?s.
    ————–

    It is impossible for Governments to “Crowd out” the capital markets.

    Government deficits create private sector savings. These savings have nowhere else to go but to buy bonds. The government bond market is always in balance.

    Japan has more gross government debt (as % of GDP) as any Country on the planet. Tell me how this is crowding out the yen bond market?

    If you want to know more….

    http://bilbo.economicoutlook.net/blog/?p=332

  37. CHris

    In a nutshell;
    Private deficit + government surplus plus external accounts = 0.

    I think you mean the private and public deficit equals the capital account surplus.

    The only thing that matters is productivity and debt serviceability. Private debt has gone down since the crisis. The savings rate has gone up. You are being hysterical.

    ————
    It seems to me the only hysterical commentators here are the one who think a Country like the USA can run out of money. This notion is beyond absurd.

    But you are quite right about productivity and debt servicability. A comment on each;
    1. The USA is well below national productivity given its very high unemployment rate. Therefore the most pressing need is for more jobs to improve national productivity. Somehow, the debate has tuned to inflation – which is pretty much non existent. The USA has lost focus caused by fear mongering by the Republicans.

    2. Debt serviceability. Yes but for who?

    For the US government this is never an issue. This is because the USA is the sole issuer of US dollars. The government is never constrained by liquidity, only by inflation. Given the state of the economy, Inflation will be of no concern for a very very long time.

    For households serviceability is key. Private debt is now at an all time record. Many households can not service their debt (record foreclosures etc). This is because households are currency USERS, not currency ISSUERS. US households are the same as Greece, Spain etc.

    Because household debt is too high, households need to save. They only way that can happen is if
    1. The US runs a capital account deficit
    2. The US Government runs as fiscal deficit.

    Since (1) is unlikely (global demand for US capital is always very high), the Government must continue to run deficits to allow households to service their debt.

    This is why private debt matters. This is why Public debt matter far less.

  38. .

    In the 1920?s the US move toward austerity and a balanced budget. This forced the private sector into deficit pushing up private debt / GDP to “breaking point”.

    This is such utter bullshit. You don’t even understand how the KA = CAD equation works. You just assume that KA can never change.

    What the President did not understand was the recovery in the 1920?s was driven by private debt growth. Once it reaches breaking point, Government deficits are a certainty – since the private sector demands savings. The sectorial balances ensure Government remains in deficit by collapsing tax receipts and therefore collapsing the economy.

    Um, so your solution when private debt reaches a breaking point is for the Government to become indebted up to our eyeballs?

    Forget the rhetoric, explain how this actually works

    Now – lets address the same old tired “just like Germany / Zimbabwe” argument shall we….?

    No. YOU haven’t addressed the relevant issues. Germany had been inflating their currency for years before WWI to pay for things AND THEN they were saddled with unserviceable debt payments.

    This is of course extremely pertinent to the USA. Now it may not happen but don’t let the fact that such a possibility happening was unimaginable a generation ago be a cognitive clog on your thinking.

    You do understand it does not change the money supply don’t you?

    Until it starts working. If they don’t guess the right amount of easing or let it go on for too long? Splat. The shit hits the fan. The credit multiplier kicks in and it is a very sorry state of affairs. Now, tell me why all of that money never amounts to anything?

    Capacity utilisation is near 70 year lows. Therefore Inflation is very unlikely.

    Rubbish. The bond market repudiated QE I. This was because the bonds were offering a negative real interest rate – because of inflation.

    Idiots are now trying to contract Government while the private sector is still trying to delever. This will ensure double dip.

    This is so sloppy. “Government” isn’t “G” Keynes described. This is also based on your stupid application of the capital accounts equation.

    It is impossible for Governments to “Crowd out” the capital markets.

    This is echastological nonsense. READ THE FRIGGIN’ FED PAPER.

    Japan has more gross government debt (as % of GDP) as any Country on the planet. Tell me how this is crowding out the yen bond market?

    Um idiot…hello…tell us all about their capital investment, GDP growth, wages growth etc.

    It seems to me the only hysterical commentators here are the one who think a Country like the USA can run out of money.

    Err pal … you are ignorant of how an equation you keep on bringing up actually works.

    The USA is well below national productivity

    ??? What the HELL does this mean?

    Somehow, the debate has tuned to inflation – which is pretty much non existent. The USA has lost focus caused by fear mongering by the Republicans.

    Err yes those evil republicans…whatever. Inflation increases productivity? My God you speak gibberish. Yes, let’s increase money supply for no reason at all and output per worker will increase…what a fatuous piece of ignoramousity.

    The government is never constrained by liquidity, only by inflation

    They’ve been trying to inflate their way out for two years now. They have gone nowhere and have possibly gone backwards in per capita GDP. The inflation will come back to bite them on the arse.

    Private debt is now at an all time record. Many households can not service their debt (record foreclosures etc).

    Then clear them out and start again. They are withholding capital from more efficient users. The banking system has already been broken.

    Since (1) is unlikely (global demand for US capital is always very high)

    This is so stupid. 1. is how it works the rest of the time the US isn’t engaging in a policy with no results and long term consequences. 1. still exists. which means that your “advice” is not only wrong it is dangerously wrong. You have predicated 2. on 1. not being possible. The US has had a current account deficit for three decades. Increasing fiscal deficits means that the US either pay higher taxes to fund itself through fiscal drag if there is increased money supply (which isn’t fiscally expansionary anyway) and inflation or it puts upward pressure on the currency (which always happens, and is evidence of crowding out). The higher currency reduces direct and financial investment in the US and reduces the ability of US households to service debt.

    This is why private debt matters. This is why Public debt matter far less.

    Illiterate, ignorant tripe.

  39. .

    sfdc has a whacky suggestion – that Greek austerity causes Greek debt, but Greek debt will cause growth and thus long term austerity.

    So it should all work out sfdc. Unless you reckon for example the Greek Government policy of funding committees for the filling of lakes which haven’t had water in them since the 1930s is somehow productivity enhancing.

  40. CHris

    In the 1920?s the US move toward austerity and a balanced budget. This forced the private sector into deficit pushing up private debt / GDP to “breaking point”.

    This is such utter bullshit. You don’t even understand how the KA = CAD equation works. You just assume that KA can never change.
    ——
    I did no such thing….the chart spoke for itself. You asked for evidence so I supplied it. You have not said anything to repudiate the fact private debt increased from the 1920’s which provided the illusion of growth. Austerity did not work in the 1920’s and does not work today. Here is the chart again.
    http://www.skeptically.org/sitebuildercontent/sitebuilderpictures/us-private-debt-to-gdp-20-09.jpg

    Now instead of writing “bullshit”, why don’t you debate the facts – or aren’t you able?

  41. CHris

    Um, so your solution when private debt reaches a breaking point is for the Government to become indebted up to our eyeballs?

    Forget the rhetoric, explain how this actually works

    Now – lets address the same old tired “just like Germany / Zimbabwe” argument shall we….?

    No. YOU haven’t addressed the relevant issues. Germany had been inflating their currency for years before WWI to pay for things AND THEN they were saddled with unserviceable debt payments.

    This is of course extremely pertinent to the USA. Now it may not happen but don’t let the fact that such a possibility happening was unimaginable a generation ago be a cognitive clog on your thinking.
    ————–
    You don’t know much about history do you?

    So twenty / thirty years of deficits killed Germany eh? The legitamacy of the Government after losing the war was never called into question?

    Now some facts which makes the “Germany argument” look outright silly:
    – Since 1776 The USA has been in debt for every year but 1. Where is the inflation? Oh yeh, its about 2%
    – there have been budget deficits for approximately 190 out of the past 230-odd years since US Independence, and accumulated debt virtually nonstop since 1837. Where is the inflation? Where are the Bond Vigilantes? With the Easter Bunny and Santa Clause?
    – Since 1776 there have been exactly seven periods of substantial budget surpluses and significant reduction of the debt. From 1817 to 1821 the national debt fell by 29 percent; from 1823 to 1836 it was eliminated (Jackson’s efforts); from 1852 to 1857 it fell by 59 percent, from 1867 to 1873 by 27 percent, from 1880 to 1893 by more than 50 percent, and from 1920 to 1930 by about a third.
    – The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.)
    – While we cannot rule out coincidences, seven surpluses followed by six and a half depressions (with some possibility for making it the perfect seven) should raise some eyebrows.

    The real answer is sectorial balances ensured federal surpluses tuned into private sector deficits. Private debt matters because the private sector is a currency user and therefore has limited means to meet serviceability. Government debt matters less so (assuming the Government is a currency issuer).

    Fore more read here…http://pragcap.com/surpluses-debt-and-depressions

  42. CHris

    You do understand it does not change the money supply don’t you?

    Until it starts working. If they don’t guess the right amount of easing or let it go on for too long? Splat. The shit hits the fan. The credit multiplier kicks in and it is a very sorry state of affairs. Now, tell me why all of that money never amounts to anything?
    ——
    Thats eay – but you have to understand the Modern Monetary System.

    QE is simply the process of the Central Bank buying Treasuries from the Public (mainly the banks). The banks sell their Treasuries for cash on deposit with the central bank.

    Bank balance sheets have altered in that they once held treasuries – and now they hold cash. One form of money has been swapped for another form. No new money has been created at all.

    Further this does nothing to encourage bank lending. That is because it take two to borrow. A bank, and a client. If the client does not want more debt (because the economy sucks, or because he can not currently service the debt already owed) then there will be no more lending. This is why private debt matters.

    These are the facts today.

    This is why QE has not worked

    This is why the money multiplier is not working (in fact its a myth)

    This is why 10 year T’s are now below 3% much to the distress of PIMCO

    This is why the inflation fear mongering in 2010 turned out to be bulldust.

    This is why M3 continues to fall

    This is why the US economy is slowing AT THE SAME TIME as government spending is slowing.

    The facts speak for themselves.

  43. CHris

    t seems to me the only hysterical commentators here are the one who think a Country like the USA can run out of money.

    Err pal … you are ignorant of how an equation you keep on bringing up actually works.
    —-
    I know exactly how the sectorial balances work. The lead article is silent on this matter – a point you seem to ignore. Perhaps you don’t understand. If you want I can take you through it.

    Now tell me how the USA can run out of USD? lol….

  44. CHris

    The USA is well below national productivity

    ??? What the HELL does this mean?
    ————-
    It means the US is operating well below its potential output. If you ever decide to read anything outside of right wing propaganda, you may notice the US has
    – Very high unemployment and
    – Very low capacity utilisation.

    I can not make it any simpler than that.

  45. CHris

    Japan has more gross government debt (as % of GDP) as any Country on the planet. Tell me how this is crowding out the yen bond market?

    Um idiot…hello…tell us all about their capital investment, GDP growth, wages growth etc.
    ——-
    I was answering a question about crowding out in the capital markets. Why are you avoiding the question. I’ll ask it again.

    “Japan has more gross government debt (as % of GDP) as any Country on the planet. Tell me how this is crowding out the yen bond market?”

    Is borrowing yen at 2% too high to encourage investment is it? You are delusional.

  46. CHris

    Somehow, the debate has tuned to inflation – which is pretty much non existent. The USA has lost focus caused by fear mongering by the Republicans.

    Err yes those evil republicans…whatever. Inflation increases productivity? My God you speak gibberish. Yes, let’s increase money supply for no reason at all and output per worker will increase…what a fatuous piece of ignoramousity.
    ————-

    1.

    Inflation increased productivity

    . I made no such statement. Why are you misquoting me. Is it because you are incapable of supporting your position with data or facts?
    2. Your comment about increasing the money supply shows you do not understand how the monetary system works. Read my earlier post on QE.

  47. CHris

    The government is never constrained by liquidity, only by inflation

    They’ve been trying to inflate their way out for two years now. They have gone nowhere and have possibly gone backwards in per capita GDP. The inflation will come back to bite them on the arse.
    —–
    Again you knowledge of history is poor. The USA has been running deficits for 190 out of 230 years. Where is the inflation?

  48. CHris

    Private debt is now at an all time record. Many households can not service their debt (record foreclosures etc).

    Then clear them out and start again. They are withholding capital from more efficient users. The banking system has already been broken.
    ——-

    The banking system has already been broken.

    Yes, because of too much private debt.

    You claim you understand the sectorial balances. Using the sectorial balances Please explain how moving the US to surplus will help.

    They are withholding capital from more efficient users

    They are not holding capital back from anyone. Banks do not require deposits to make a loan. Loans create deposits. You have again highlighted your ignorance.

  49. JC

    • Japan has more gross government debt (as % of GDP) as any Country on the planet. Tell me how this is crowding out the yen bond market?

    What are you talking about, ris. The bond market is crowding out everything else. They basically haven’t grown for 20 years.

    Is borrowing yen at 2% too high to encourage investment is it? You are delusional.

    Borrowing at about 3% real rates it is, Einstein. Their deflation rate has been around 1% per annum most years or basically flat. So a real nominal and real rate of around 3% is actually on the high side.

  50. JC

    It seems to me the only hysterical commentators here are the one who think a Country like the USA can run out of money.

    No they can’t run out of money, hypothetically because they can hyper-inflate of course.

    Is that what you’re suggesting “not running out of money” means or would lead to?

  51. CHris

    There seems to be great confusion about the sectorial balances and how they work. Below is a brief summary.

    GDP = C + I + G + (X – M)

    C = consumption

    I = investment

    G = government spending

    X = exports

    M = imports

    Or stated differently;

    GDP = C + S + T

    C = consumption

    S = savings

    T = taxes

    From this we get

    C + S + T = GDP = C+ I + G + (X – M)

    If rearranged we can see that these sectors must net to zero:

    (I – S) + (G – T) + (X – M) = 0

    (I – S) = private sector balance

    (G – T) = public sector balance

    (X – M) = foreign sector balance

    So, assuming the external sector is 0, public deficits = private savings.

    The US has been running an external deficit for decades. This means the US government needs to run a deficit to ensure households remain in balance.

    Since 1776, nearly every time the US has run a surplus it has been followed by a deep recession. This is because of the sectorial balances.

    The hysteria on this site is only matched by its ignorance. The USA today is suffering from a balance sheet recession. Private sector debt is at unprecedented levels. The only way out is either
    1. Trade surplus or
    2. Government deficit.

    These are the facts. The rest is simply politics.

  52. CHris

    Borrowing at about 3% real rates it is

    ———-
    So when real interest rates are 3% that is s sign of crowding out meaning low investment and recession…..umm..Care to explain how that fits into the last 100 years of Western Finance?

  53. CHris

    No they can’t run out of money, hypothetically because they can hyper-inflate of course.

    Is that what you’re suggesting “not running out of money” means or would lead to?

    No. You need to read my earlier post on Hyperinflation. Contrary to popular belief, inflation and hyperinflation are not related and are two very different conditions.

  54. CHris

    Further to my post above.

    Inflation is the continued increase in price of goods and services measured in Money. It required demand for money to pay for goods and services.

    Hyperinflation relates to the outright rejection of money. History has shown it is caused by foreign denominated debt, questionable legitimacy of a government (usually after a lost war).

    There is stack of research on this. I have posted some in an earlier comment.

  55. JC

    Ris, you should stop being a numbnut.

    You can rearrange this:

    GDP = C + I + G + (X – M)

    however you like:

    If G goes up then other variables in the equation must fall, do they not?

    What is likely to fall?

    C? not immediately

    (X-M) Not immedaitely either.

    How about I?

    If C is going to held up I must fall all else being equal.

    The US has been running an external deficit for decades. This means the US government needs to run a deficit to ensure households remain in balance.

    Are your retarded or still able to function in a sheltered workshop?

    You actually believe that government spending is the only driver the ensures household have savings.. or “in balance” as you call it? You’re kidding right?

    The USA today is suffering from a balance sheet recession.

    No it’s not, you ignorant twat.

    Private sector debt is at unprecedented levels. The only way out is either

    Corporate America has a positive cash position at around 1.4 trillion at this very moment.

    Corporate America (S&P 500) will earn 94 dollars this years which I think all time highs and US corporate American is NOT currently experiencing a balance sheet recession whatever that means.

    Ris, you’re out of the game. Please practice harder if you want to play the big leagues.

  56. JC

    No. You need to read my earlier post on Hyperinflation. Contrary to popular belief, inflation and hyperinflation are not related and are two very different conditions.

    You mean Hyperinflation is not a larger version of inflation? And here’s me just thinking hyperinflation was bigger numbers.

  57. JC

    So when real interest rates are 3% that is s sign of crowding out meaning low investment and recession…..umm..Care to explain how that fits into the last 100 years of Western Finance?

    No not necessarily, but when it’s combined with the Japanese circumstances of a “relatively” risk free rate of return of 3%, a current account surplus and sparsely attractive private investment scenarios domestically, 3% nominal and real is quite high, yea.

  58. JC

    Hyperinflation relates to the outright rejection of money.

    A great deal of rejection but not 100%.

    History has shown it is caused by foreign denominated debt, questionable legitimacy of a government (usually after a lost war).

    Oh yea. What is the external debt situation of Zimbabwe or 20’s Germany? Possibly close to zero, right? So your little theory goes out the window and at the rate you’re going to end up without any possessions.

    There may be or may not be large external debt involved, however that is like having a cold and cancer at the same time.

  59. .

    What I find amusing is that ‘CHris’ rearranges equations that don’t actually balance or have fixed parameters – which balance to zero.

    You have not said anything to repudiate the fact private debt increased from the 1920?s which provided the illusion of growth.

    The illusion of growth? Look, things got a bit out of hand and there was some delevering but you’re basically saying the growth America had pre 1929 was all phoney? Global trade fell 20% after the unprecedented ramping up of tariffs. This isn’t really an austerity measure. They also had a cheap credit boom which created malinvestments. You cannot blame austerity.

    So twenty / thirty years of deficits killed Germany eh? The legitamacy of the Government after losing the war was never called into question?

    Stresseman created a credible currency and servicing programme, and normalised foreign and economic relations in Europe – and attracted a tonne of US FDI.

    Note when the Nazis bullied their way into power, their vote was falling and Germany was actually beginning to recover.

    Now some facts which makes the “Germany argument” look outright silly:
    – Since 1776 The USA has been in debt for every year but 1.

    This proves nothing. Every time they have paid it off in a credible manner. Worthless State and wartime currencies were scrapped – they tried to inflate their way out. You don’t think this would have any impact on America? Now you want them to lose all credibility and never pay it back. Their currency would be destroyed.

    – The United States has also experienced six periods of depression. The depressions began in 1819, 1837, 1857, 1873, 1893, and 1929. (Do you see any pattern? Take a look at the dates listed above.)

    This is exceptionally specious reasoning. Obvious counter examples which can be backed up by theory are the Reagan debt leading to the 1990 recession and Clinton’s fiscal clean up and the boom during his time.

    The real answer is sectorial balances ensured federal surpluses tuned into private sector deficits

    You’re saying all we need to do to increase the savings rate is increase Government debt. In theory, you reckon the Government can inflate out of debt and so by ever increasing debt and money supply, private savings would go through the roof and capital investment would surge as savings create investment as does the now infinite Government debt.

    You are living in a fucking fantasy world. Napoleon had an incredible fiscal agenda, the bond markets refused to support him, his soldiers would not be apid in worthless scrip and he lost the materiel and logistics war well before Waterloo.

    Bank balance sheets have altered in that they once held treasuries – and now they hold cash

    Um yes we know what QE is.

    Further this does nothing to encourage bank lending

    Yes well…and when the economy recovers or a contraction is messed up? Bam. Inflation shoots up. Capital is mispriced and malinvestments are made.

    This is why QE has not worked

    There are several other critiques of QE.

    This is why the money multiplier is not working (in fact its a myth)

    You are a crank. The money multiplier works and it is very real.

    This is why the US economy is slowing AT THE SAME TIME as government spending is slowing.

    This ‘kind of’ gainsays your silly little theory about magic pudding economics.

    Now tell me how the USA can run out of USD? lol….

    The Continental Congress and various States DID in fact run out of money. Don’t be so wilfully ignorant.

    It means the US is operating well below its potential output. If you ever decide to read anything outside of right wing propaganda, you may notice the US has
    – Very high unemployment and
    – Very low capacity utilisation.

    I can not make it any simpler than that.

    The right wing propaganda in fact points out that despite all of the QE, stimulus etc, all that has been produced is: virtually no change in unemployment, marginal GDP growth, deflation during fiscal stimulus and inflation when it is no longer applied – and bonds earning negative real interest rates – acting in a manner which would seem to defy the inverse price yield relatonship if asked what effect does money supply have on price.

    1.
    Inflation increased productivity
    . I made no such statement. Why are you misquoting me. Is it because you are incapable of supporting your position with data or facts?
    2. Your comment about increasing the money supply shows you do not understand how the monetary system works. Read my earlier post on QE.

    No you twat these are the implications of what you’re saying. Inflation increases productivity. You are not even familiar with your own theory.

    It is amazingly brash of a clueless crackpot who thinks the money multiplier doesn’t exist to tell others “read up on how monetary policy works.

    Again you knowledge of history is poor. The USA has been running deficits for 190 out of 230 years. Where is the inflation?

    US inflation has been ever present and the capital outflows since Vietnam shows that debt drives inflation vis a vis monetary supply differentials.

    You claim you understand the sectorial balances. Using the sectorial balances Please explain how moving the US to surplus will help.

    This is just plain silly. I’ve already showed that it would to a capital outflow save for FDI (cheap real effective exchange rate) – but you want to “fix the balance sheets” – and Government debt and incredible macro policy actually deter FDI.

    They are not holding capital back from anyone. Banks do not require deposits to make a loan. Loans create deposits. You have again highlighted your ignorance.

    Then why is the US investment rate so pitiful, resulting in stagnant GDP and unemployment data?

    Banks do require some sort of capital. Loans are a source. Yes loans create new deposits IF the activity they fund is productive – otherwise it is consumption ultimately financed through drawing down of income or capital.

    You really are carrying on with nonsense now.

    So, assuming the external sector is 0, public deficits = private savings.

    No, this is bullshit. The external balance fluctuates either side of zero – you have simply assumed that it can never change from zero.

    The US has been running an external deficit for decades. This means the US government needs to run a deficit to ensure households remain in balance.

    No, only with your whacky assumptions which have never been observed.

    Private sector debt is at unprecedented levels. The only way out is either
    1. Trade surplus or
    2. Government deficit.

    The BOP consists of more than trade, you nimrod.

    No. You need to read my earlier post on Hyperinflation. Contrary to popular belief, inflation and hyperinflation are not related and are two very different conditions.

    This is nonsense. The US has already trashed several pre Federal currencies.

    So when real interest rates are 3% that is s sign of crowding out meaning low investment and recession

    How on earth does this mean crowding out cannot be explained in a loanable funds model?

    Hyperinflation relates to the outright rejection of money

    Yes and the Americans have already done this, but just not to the greenback.

    History has shown it is caused by foreign denominated debt, questionable legitimacy of a government (usually after a lost war).

    Sheer nonsense. Pre Federal USA did not have a foreign denominated currency. Neither did Weimar Germany. Neither did the preceding German Empire which had been secretly inflating for years. The US won their war and they were entirely legitimate, as I’ve shown Germany was – but you’ve never heard of Stresseman.

  60. .

    This is why the US economy is slowing AT THE SAME TIME as government spending is slowing.

    This ‘kind of’ gainsays your silly little theory about magic pudding economics.

    Whoa. Slow down there. I responded without explaining fully.

    Government debt is ever increasing (despite spending ‘slowing down”) and they are engaging in QE. Yet the GDP numbers aren’t increasing. Your solution is to accumulate debt at an even quicker rate and GDP numbers will magically appear?

    Seriously, what university did you do your B Ec at? They seem to have a very, very strange programme.

  61. sdfc

    JC the context in which Ireland and Greece are in effect borrowing in a foreign currency is in terms of their borrowings.

    Sorry if I’m going a bit deeper than you’d like into the advantage of borrowing in a sovereign currency. The euro is neither Greece nor Ireland’s sovereign currency. It’s a common currency.

    It’s about the central bank dummy. I thought that would have been obvious, afterall it was a discussion the chance of a US default compared to Greece and Ireland.

  62. sdfc

    Sorry about that the first sentence should read –

    JC the context in which Ireland and Greece are in effect borrowing in a foreign currency is in terms of their risk of default.

  63. .

    A bit of elaboration really helps, what you said makes sense – now we’ve got these bloody chartalists coming and ruining a good discussion with their pro poverty programme.

    It’s your fault. Close the back door next time seth.

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