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has a pretty explicit article: A Greek crisis is coming to America:


Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not "save" us half so much as monetary policy - zero interest rates plus quantitative easing - did. First, the impact of government spending (the hallowed "multiplier") has been much less than the proponents of stimulus hoped. Second, there is a good deal of "leakage" from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

I don't like his snide comment about "Keynesian free lunches" and I think he is wrong here in that the monetary easing worked ONLY because governments were able and willing to take on that debt burden and step in to replace incapacitated private sector actors. Without public borrowing (and spending), there would have been no borrowing at all and a much more savage crunch.

But he's right that it was still a new pile of (public) debt to try to limit the impact of too much (private) debt in the first place.

And he makes this point about the US:


Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.

But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500bn, that implies up to $300bn of extra interest payments - and you get up there pretty quickly with the average maturity of the debt now below 50 months.

Unless checked before, the financial markets will turn on the US and the Obama administration quickly, and they will of course want blood, ie severe cuts in Social Security and Medicare.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 08:34:46 AM EST
Everyone has a book to sell, which is my problem with the coverage. Keynes got us into this mess so he can't get us out?
by Colman (colman at eurotrib.com) on Thu Feb 11th, 2010 at 08:43:49 AM EST
[ Parent ]
It solved a first order problem by creating a second order one. People (markets) are behaving as if only the second order problem mattered, and are trying to "solve" it in a way that will re-start the first order problem...

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Feb 11th, 2010 at 09:41:00 AM EST
[ Parent ]
There is, as Henry Liu points out, a general and fundamental misconception as to the nature of fiat money. Almost all schools of economics appear to think that it is a debt instrument, when in fact it is a credit instrument more akin to a redeemable share.

Deficit is not remotely a problem if governments actually understand that it is their duty - either individually, or collectively in the case of the EU - to ensure that the credit necessary for a vibrant economy is created - eg by QE or by refinancing existing debt through unitising it - as what is essentially a form of quasi national equity.

There is no reason at all - other than the self interest of the banking industry - why the function of credit creation must necessarily be privatised.

Governments, either directly or through central banks, can and should create public credit ie 'print money'. More to the point, they should not just print it and let it prop up financial asset prices, but they should ensure that it is invested directly - in a process managed by service providers formerly known as banks - into the productive assets which are desperately needed globally. Investing in peoples' health and education is one of the investments necessary.

Private banks are, and will continue for decades to be, systemically short of capital. It's time to transition from private credit intermediation to private management of public credit creation.

The alternative is a Japanese style zombie economy, or worse.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Feb 11th, 2010 at 10:08:13 AM EST
[ Parent ]
Ferguson is first and foremost a historian. He may have studied economics in order to write its history but he has no formal training in the discipline and so, while he can report on the opinions of others with a certain modicum of understanding, his ability to provide any profound analysis of what is obviously a highly complex situation should be considered extremely marginal.

keep to the Fen Causeway
by Helen (lareinagal at yahoo dot co dot uk) on Thu Feb 11th, 2010 at 03:21:35 PM EST
[ Parent ]
He's a propagandist and an ideologue.

I was going to make your same argument but then I realised I would be making "formal training in economics" sound like a net positive when I believe it isn't...

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

by Migeru (migeru at eurotrib dot com) on Thu Feb 11th, 2010 at 03:26:54 PM EST
[ Parent ]
I realised I would be making "formal training in economics" sound like a net positive when I believe it isn't...

rotflmao

keep to the Fen Causeway

by Helen (lareinagal at yahoo dot co dot uk) on Thu Feb 11th, 2010 at 03:53:14 PM EST
[ Parent ]
I don't like his snide comment about "Keynesian free lunches"

I don't know if he is discussing the Samuelson NCE compatible Keynesian" approach or Keynes. I find virtually incomprehensible condemnation of Keynes so many places, especially financial blogs, that it is pathetic and I suspect they think Samuelson invented Keynes. And Keynes' critics never seem to distinguish between the uses to which borrowing is put. Perhaps they don't see any difference in new debt to prop up bad debt held by banks and new debt used to fund a self-liquidating investment, such as a wind farm. Indeed, the investment folks may prefer using the money to prop up banks, as they expect it would have a higher yield.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Feb 11th, 2010 at 03:26:18 PM EST
[ Parent ]

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