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Lost Decade, Here We Come - Paul Krugman Blog - NYTimes.com
It's basically incredible that this is happening with unemployment in the euro area still rising, and only slight labor market progress in the US.

But don't we need to worry about government debt? Yes -- but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts. A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.
...
Yet the conventional wisdom now is that these countries must nonetheless cut -- not because the markets are currently demanding it, not because it will make any noticeable difference to their long-run fiscal prospects, but because we think that the markets might demand it (even though they shouldn't) sometime in the future.

Utter folly posing as wisdom. Incredible.



"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Sun Jun 6th, 2010 at 11:27:53 AM EST
It would be incredible if we hadn't seen it before, circa 1930.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sun Jun 6th, 2010 at 11:35:24 AM EST
[ Parent ]
This is what we've been dealing with since 2007 in California. The entire political establishment, backed by the media, has argued that budget cuts are simply necessary. Nobody in the state capitol or the mainstream media has asked what the impact of those cuts on the unemployment problem is, and so every year since 2007 we've seen one Hooverite budget after another.

Only lately have Democratic leaders started to argue that budget cuts worsen unemployment. But we've seen them pledge to resist cuts in the past and get wedged into supporting them when Arnold Schwarzenegger and the media argued that not making cuts risked California's credit rating or cash flow.

And the world will live as one

by Montereyan (robert at calitics dot com) on Sun Jun 6th, 2010 at 11:43:15 AM EST
[ Parent ]
California is ridiculous. I was there when Gray Davis was recalled and I remember Schwarzenegger campaigning on the issue of Gray Davis' budget troubles and specifically Davis' intention to reintroduce vehicle registration fees. One of Schwarzenegger's first acts in office was to call a state budget emergency, and seven years ago here we are...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sun Jun 6th, 2010 at 11:49:31 AM EST
[ Parent ]
I mean seven years later, not ago...

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sun Jun 6th, 2010 at 12:21:48 PM EST
[ Parent ]
With Jerry Brown on his way to be Governor, that's an understandable mistake....
by gk (gk (gk quattro due due sette @gmail.com)) on Sun Jun 6th, 2010 at 12:29:07 PM EST
[ Parent ]
Moonbeam won't be able to do much until the Super Majority Rule for raising taxes is revoked.

Despite some factors being out of the state government's control, ultimately California is badly managed.  The combination of interests vested in the Post World War II status quo frustrates and defeats those interests who wish to adequately respond to the situation.

That can be changed but it will require political will, requiring the supine electorate, those who want change, to get off their lazy asses and vote.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Sun Jun 6th, 2010 at 12:47:04 PM EST
[ Parent ]
Indeed. I wrote about that recently at Calitics - California's institutional sclerosis. The lack of majority rule was implemented in 1978 due to a desire to maintain the mid-20th century status quo. It remains in place because it helps maintain the late 20th century status quo. As you rightly say, those vested interests succeed in blocking any changes.

It's proved rather difficult to rally the public to fight against this - and I've been trying to do it for 2 years. That experience has led me to conclude we need an animating vision to pull such a movement together.

Of course, we also need money. Lots of it. And it's just not there, at least not right now. Perhaps a clear agenda and vision can produce that too.

And the world will live as one

by Montereyan (robert at calitics dot com) on Sun Jun 6th, 2010 at 02:26:39 PM EST
[ Parent ]
Two years?  I tried for fifteen.  

And got nowhere.

A combination of the agricultural, banking, real estate, and automotive industries have been in control of California since ... well ... forever.  Allied with the GOP they have stymied taxation of the income producers: agriculture, banking, real estate, & etc. by foisting the ever increasing tax burden on individuals.  They then 'flipped' the debate by forbidding any increase in taxation on anybody which starved necessary infrastructure and other Public Works.  

Almost simultaneously the damn fools passed Term Limits which shifted political power from elected officials to political insiders, of various sorts, which has resulted in political power being concentrated in people that do not, are not, and cannot be held publicly accountable.

Thus real political power in California is essential private.  Thus elections are essentially meaningless.


She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Mon Jun 7th, 2010 at 12:42:48 PM EST
[ Parent ]
I salute your perseverance. I often tell people that working in CA politics is like standing right outside the control chamber at Chernobyl, pounding on the glass screaming "you fools, you're doing it all wrong, you're going to kill us all" and realizing they can't or won't hear you.

Your assessment of the political landscape in CA is quite accurate. And as you note, they've rigged the system so that it is virtually impossible to change it. They've effectively destroyed democracy in California.

And the world will live as one

by Montereyan (robert at calitics dot com) on Tue Jun 8th, 2010 at 01:09:13 AM EST
[ Parent ]
I may be stupid.  But I'm stubborn.  :-)

California politics makes me think of 10,000,000 people standing around throwing hammers in air and then observing, "Gosh.  It's raining hammers."

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Tue Jun 8th, 2010 at 09:12:04 PM EST
[ Parent ]
And I salute your perseverance!
by sgr2 on Wed Jun 9th, 2010 at 05:45:35 AM EST
[ Parent ]
Ironically enough, Arnold relented in 2009 and agreed to increase the VLF. It was barely noticed by the public.

This state's politics are ridiculous, primarily because of a belief that we can have low taxes and high quality services. Prop 13's passage in 1978 was an attempt to protect the privilege of white suburbanites by imposing austerity on everyone else. It was intended to break liberal government.

What we're witnessing now is the delayed outcome of that vote. In the meantime, successive asset bubbles were used to provide the illusion of balanced budgets and prosperity, with the collusion of Democratic legislators and Republican governors. That policy is no longer tenable, but until now, the desire to have a political coalition of the Democratic legislature and the Republican executive has remained, usually meaning Democrats have acquiesced to austerity.

And the world will live as one

by Montereyan (robert at calitics dot com) on Sun Jun 6th, 2010 at 02:23:26 PM EST
[ Parent ]
I was told that in 2008 the CA League of Women Voters sponsored an initiative to completely change the apportionment process. The idea being to make it less partisan and reduce the number of safe seats. The commission responsible for it is in the process of forming now, and the new districts are supposed to be in effect 2012. Shouldn't this be very positive development?
by sgr2 on Mon Jun 7th, 2010 at 04:40:54 PM EST
[ Parent ]
I opposed Prop 11 - it's rearranging deck chairs at best, at worst an attempt to push the Democratic Party to the right and reduce the number of Democrats CA sends to the House of Representatives.

Partisanship is not CA's problem. A lack of democracy is.

And the world will live as one

by Montereyan (robert at calitics dot com) on Tue Jun 8th, 2010 at 01:07:05 AM EST
[ Parent ]
Thanks for elaborating, Montereyan.  Just took it at face value because the person who mentioned it to me (political activist/long-time Dem in the Oakland area), seemed to think it was a good idea. Can't see why he'd be in favor of things moving to the right and less Dems in the House, though. I'll definitely have to inquire further on this.
by sgr2 on Tue Jun 8th, 2010 at 03:34:28 PM EST
[ Parent ]
The essence of the Republican program:
massive government benefits with no taxes, but not to people of the wrong color.
by rootless2 on Mon Jun 7th, 2010 at 08:43:19 PM EST
[ Parent ]
Melanchthon:
fiscal contraction now reduces tax receipts

Principally because the tax base is earned income, rather than the unearned rental income from privilege.


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

by ChrisCook (cojockathotmaildotcom) on Sun Jun 6th, 2010 at 11:46:42 AM EST
[ Parent ]
a little tidbit to remember is that Japan's 'lost decade' was lost to the financial markets and not so much to the Japanese population (even if inequality and poverty did go up).

So maybe the "lost decade" of Japan is something we should look forward to rather than fear. But I'm pretty sure that's not what they have in mind.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Jun 6th, 2010 at 12:25:49 PM EST
[ Parent ]
Krugman:
But don't we need to worry about government debt?

That question shouldn't be dismissed offhandedly.
In a monetary system with a central bank that acts as a lender of last resort bank lending is not limited by government created base money. So does issuing bonds to fund a government deficit lead to a change in effective demand relative to running unfunded deficits? I don't see how. So what is the point of selling bonds? And if there is none, why should past deficits play a role in determining the size of current deficits?

by generic on Sun Jun 6th, 2010 at 12:29:18 PM EST
[ Parent ]
Printing bonds has the advantage over printing Greenbacks that bonds have lower liquidity, which means that they take part in fewer transactions and therefore cause less inflation than fully liquid forms of money.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 6th, 2010 at 12:33:19 PM EST
[ Parent ]
But you don't have to sell the bond. It is entirely sufficient if you visit your friendly bank and use it as security for a loan.
by generic on Sun Jun 6th, 2010 at 12:49:35 PM EST
[ Parent ]
Which is why when the stock market crashes what is lost is not wealth but loan collateral.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sun Jun 6th, 2010 at 02:20:03 PM EST
[ Parent ]
You could, but how does that differ in practise from selling the bond in the first place? Apart from increasing the gearing of your financial system, that is.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jun 6th, 2010 at 04:52:41 PM EST
[ Parent ]
If the only option were to sell the bond for existing money instead of monetizing it the overall amount of money in the system would stay unchanged. That would supposedly limit inflation.
by generic on Sun Jun 6th, 2010 at 06:19:32 PM EST
[ Parent ]
Liquidity is essentially the capability to transact, and it is true that a single class of one undated credit instrument will be more liquid than a myriad fragmented classes of dated debt instruments with different dates and rates.

But liquidity is not per se a reason to transact.

The reason why people may get shot of Greenbacks in favour of bonds or other asset classes - or just 'stuff', thereby causing inflation - is that Greenbacks carry:

(a) no right to income; and

(b) no right to anything with a use value.

What has happened at the moment is essentially that T-Bills at the Zero Bound are functionally equivalent to greenbacks.

So the huge amounts of QE dollars (Fed greenback clones) are going to investors who are using them to purchase of any financial asset other than T-Bills and thereby create parallel bubbles all over the place (eg WTI and S&P correlation).

Where they are not going is to people who will use them to buy stuff - investors have all the stuff they need, thank you.

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

by ChrisCook (cojockathotmaildotcom) on Sun Jun 6th, 2010 at 01:10:34 PM EST
[ Parent ]
But the Fed pays interest on excessive bank reserves. So even QE dollars may carry a right to income.
by generic on Sun Jun 6th, 2010 at 01:16:49 PM EST
[ Parent ]
I think it's fair to say that the dollars don't, but the clearing banks' relationships with the Fed do - at least for the time being.

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Sun Jun 6th, 2010 at 01:23:14 PM EST
[ Parent ]
How does a government run an unfunded deficit when government creation of base money is actually done by the independent central bank?

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sun Jun 6th, 2010 at 12:34:54 PM EST
[ Parent ]
Revoke the bank's independence?
by generic on Sun Jun 6th, 2010 at 12:55:23 PM EST
[ Parent ]
Willem Buiter had some very interesting things to say about central bank independence before he went to work for Citi as chief economist...

What's left of central bank independence? (May 5, 2009)

The modern independent central bank was born in New Zealand in 1989. It had a short life.  The onset of the financial crisis of the north Atlantic region in August 2007 signalled the beginning of the end.  Today, only the ECB still has a significant degree of operational independence left, and it will have to give that up if it is to be effective in the current phase of the crisis. In other words, the ECB is the last central bank to understand that, if it is to play a significant financial stability role, it cannot retain the degree of operational independence it was granted in the Treaty over monetary policy in the pursuit of price stability.

Inflation targeting was invented around the same time and central bank independence, and also in New Zealand, with the Reserve Bank of New Zealand Act of March 1989 and the first Policy Targets Agreement (PTA) in March 1990.  The Reserve Bank of New Zealand Act 1989 specifies that the primary function of the Reserve Bank shall be to deliver "stability in the general level of prices."

...

A case can be made for the Deutsche Bundesbank, established in 1957 as the sole successor to the two-tier central bank system which comprised the Bank deutscher Länder and the Land Central Banks of the Federal Republic of Germany, as the first modern independent central bank, but the de-facto independence of the Bundesbank was a product of Germany's unique historical circumstances - notably the hyperinflation of the Weimar Republic's hyperinflation during 1923 and the limited legitimacy of the other state institutions following the Nazi era and World War II.  I therefore consider the Bundesbank to have been a pre-modern independent central bank.

...

Unconventional monetary policies require close central bank - Treasury cooperation

Every time a central bank makes a loan at the discount window or engages in a reverse repo secured against private collateral, it takes credit risk (default risk).  In the Euro Area, the ECB even takes credit risk when in accepts the Treasury debt of some of the Euro Area member states as collateral in its lending operations.  There is no guarantee that cross-border fiscal solidarity in the Euro Area will ensure that sovereign debt issued by fiscally incontinent member states will be made good by Germany and other member states with deep pockets.

...

Inevitably, when the central bank takes on significant credit risk in its monetary policy management, liquidity management and credit enhancement policies, close cooperation between the central bank and the fiscal authorities is essential.  Cooperation and coordination do not necessarily mean loss of independence. The ECB, unfortunately, often talks as if cooperation and coordination, including binding agreements, between the ECB and the fiscal authorities of the Euro Area would in and of itself constitute an infringement on its independence.  So all it is up for is regular cheap talk with the Ecofin or with the Eurogroup finance ministers.

As the crisis lengthens and deepens, the absence of close cooperation between the fiscal authorities in the Euro Area and the ECB will make both the ECB and the fiscal authorities progressively less effective.  This is in addition to the problems the ECB encounters as a result of the absence of even a minimal `fiscal Europe', in the design and implementation of unconventional monetary policy involving outright purchases of private securities or unsecured lending to banks or other private counterparties.

...

This threatening irrelevance of the ECB is caused by two factors, largely beyond its control.  The first is the absence of a `fiscal Europe'.  This means that the ECB is more restricted in the amount of private credit risk it can take onto its balance sheet than central banks that are clearly backed by a fiscal authority (national central banks outside the Euro Area, backed by their national treasuries).  Credit easing policies therefore pose greater risks to the ECB price stability mandate than similar policies do in the UK and the US.

The second cause of the increasing irrelevance and ineffectiveness of the ECB in these later stages of the financial crisis is the excessive independence granted the ECB in the Treaty.  Governments will be extremely reluctant to transfer supervisory or regulatory powers to a central bank that is under no constraint to pay any attention whatsoever to the elected and accountable politicians, both in the executive and legislative branches of government.

So I conjecture that central banks are facing a choice: remain relevant to crisis prevention and resolution, but lose much of your independence, or remain independent and become irrelevant.

Also Central banking as partisan politics (June 27, 2009)
As long as the financial stability role of central banks remained in the background, the notion of central bank independence appeared to have something to recommend it.

Setting the official policy rate is, by the standards of other political interventions in the economy, a relatively `technocratic', non-political or at any rate non-partisan and non-party political act.  Like any interest rate change, it hurts those who are long the official policy rate (or other rates linked tightly to it) and it helps those short the official policy rate.  But as the official policy rate is an overnight rate in most countries, the distributional effect of this change in the inter-temporal relative price of money is likely to be minor.

...

Once central banks get involved in lender-of-last resort operations, recapitalisor-of-last-resort operations and other rescue operations of banks and other financial institutions deemed to big, too complex, to international, too interconnected or too politically well-connected to fail, centrals banks and central bankers become normal political actors, indeed partisan political actors.  They should not be surprised to be treated as such.



By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan
by Migeru (migeru at eurotrib dot com) on Sun Jun 6th, 2010 at 02:57:32 PM EST
[ Parent ]
pretty prescient stuff...

Wind power
by Jerome a Paris (etg@eurotrib.com) on Sun Jun 6th, 2010 at 04:28:14 PM EST
[ Parent ]
I nominate Buiter to succeed Trichet as ECB chief.

I think he understands banking and central banking better than most economists, bankers or central bankers.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sun Jun 6th, 2010 at 04:29:28 PM EST
[ Parent ]

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