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Still, there are indirect ways to improve the business climate and increase capital investment. Tax breaks for investment, improved infrastructure, improved higher education, reduced bureaucracy and corruption, and so on. These are all things which lie under the control of the government.

And none of those were lacking in Spain. The crisis was the result of the blowup of private (corporate, not household!) debt which built up as a result of the pressure to reduce government debt as a fraction of GDP.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:13:10 AM EST
[ Parent ]
There is no reason why funds that had previously flown into government debt instead had to flow into private corporate debt. If the owners of those funds had been prudent they would not have lent that much, nor would those in the real estate business borrowed as much as they did if they had been prudent.

There is no simple mechanical explanation here, which says that funds flowing out of Spanish government debt has to create a credit bubble somewhere else in the Spanish economy. There were, and are, other asset classes available for investors.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Dec 14th, 2011 at 09:19:59 AM EST
[ Parent ]
There is no simple mechanical explanation here, which says that funds flowing out of Spanish government debt has to create a credit bubble somewhere else in the Spanish economy. There were, and are, other asset classes available for investors.
Yes, there is. Three-sector national accounting.

You can't have growth, public sector surplus, private sector surplus, and a structural trade deficit. Something has to give. Structural trade balances take years to change. Public sector surplus is mandated by the GSP. Growth is a political necessity. Therefore, you get private sector deficit. Therefore, foreign agents' surpluses get intermediated into private debt. And the structural imbalances don't get corrected.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:39:42 AM EST
[ Parent ]
The funds might have flowed from out of government debt other things than Spanish private debt. For example into the Spanish stock market, or into investments, or they might have flowed abroad.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 09:50:38 AM EST
[ Parent ]
When you make that argument Eurozone-wide you end up with the argument that core surplus should have flowed abroad. Which would have meant a weaker Euro (and you have seen how the Swiss Central Bank reacted to that) or foreign-credit tensions in peripheral EU countries (which has happened, massively, with Core - mostly Austrian - funds loaned to Central-Eastern Europe, and blown up twice since the crisis started) or monetary deflation in the Eurozone (again, Eurozone-wide recession).

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 09:58:03 AM EST
[ Parent ]
The world is big. Unless those core surplus accumulated in just a few markets, they would have been comfortably diluted. Sure, the euro might have weakened somewhat, but not at all radically against certain currencies like the Swiss franc. The strengthening of the franc is purely an effect of flight to safety/quality.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:15:56 AM EST
[ Parent ]
The world is big, and the Eurozone is not a negligible fraction of the world. So the world is not big enough to dilute capital flows on the order of the Eurozone trade imbalances.

But you're from Sweden, and Sweden is outside the Eurozone and small enough to have its surpluses diluted in the Eurozone, let alone the whole big world.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 10:23:34 AM EST
[ Parent ]
The world is big, and the Eurozone is not a negligible fraction of the world. So the world is not big enough to dilute capital flows on the order of the Eurozone trade imbalances.

I'm not sure about that. It seems to be able to swallow US CA deficits without much trouble, and the US economy is of the same magnitude as that of the EZ.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Dec 14th, 2011 at 10:28:03 AM EST
[ Parent ]
Hmmm... just because the US CA deficit issue with China hasn't blown up yet isn't a good guide to "without much trouble."

The trouble is out there - and it's incoming. It can be solved, but it's going to take a huge political negotiation to do so - and may be a rough ride even with that level of leadership. With Merkozy levels of leadership, the prognosis isn't good.

by Metatone (metatone [a|t] gmail (dot) com) on Wed Dec 14th, 2011 at 12:46:28 PM EST
[ Parent ]
The world is big.

The world also floats its currencies relative to the €-Mark. It would be triviality itself to retaliate against a mercantilist drive towards surpluses with RoW.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 11:02:49 AM EST
[ Parent ]
We keep running circles around the small open economy mindset problem.
The many failures of the eurozone's crisis response policy have a common cause: the eurozone is a large closed economy. Each of its 17 members is small and open. The political leaders who run the eurozone have a small open economy mindset - every one of them, without exception. The economists they employ mostly use small, open economy models.


tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 11:10:15 AM EST
[ Parent ]
You're inverting the causality. The funds are created when the private or public sectors assume debt. Because central banks do not generally rediscount common stock under a capitalist system.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 10:04:35 AM EST
[ Parent ]
And when the government unwinds it debt, there is no need at all for it to turn up as new debt in some other part of the economy, unless someone actually want to borrow massively. Which is my point exactly.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:17:05 AM EST
[ Parent ]
But they will want to borrow massively, because otherwise GDP drops.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 10:21:57 AM EST
[ Parent ]
In the event of a recession where lower interests don't help enough, they will. But that's perfectly alright. Especially if they have payed down government debt during the good times.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:25:46 AM EST
[ Parent ]
Unless Germany panics and forces Austerity on you as happened to Spain (which had paid down its public debt in the good times) in 2009.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 10:27:39 AM EST
[ Parent ]
Sucks to be in a monetary union with goldbugs.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:28:55 AM EST
[ Parent ]
And when the government unwinds it debt, there is no need at all for it to turn up as new debt in some other part of the economy, unless someone actually want to borrow massively.

You're inverting the causality again. The government can only unwind its debts when someone else wants to borrow massively. Or if the private sector were to somehow radically alter its propensity to store its savings in monetary instruments. But the latter scenario is only of academic interest, as it has not happened to any modern industrial society.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 10:42:05 AM EST
[ Parent ]
The government can only unwind its debts when someone else wants to borrow massively.

Why is this? If I'm the minister of finance and don't feel like rolling over my bonds as they come due, who's going to stop me? I don't need the permission of some other borrower.

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Wed Dec 14th, 2011 at 10:47:50 AM EST
[ Parent ]
Because unwinding (consolidated) government debts reduces the money stock of society. Which you only get to do when people decrease their (money) savings relative to the size of the economy, or, what comes to the same thing, when the velocity of money increases rapidly.

If you attempt to reduce your consolidated government debt faster than society reduces its need for government money, you get deflation, which increases the magnitude of the government's obligation relative to GDP, both directly through shrinking nominal GDP for the same real GDP and indirectly by wrecking real GDP.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 10:53:00 AM EST
[ Parent ]
Can't you do it when you you're at the top of the business cycle then, when the government usually runs a surplus and inflation is a worry anyway?

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 10:58:24 AM EST
[ Parent ]
That's when you want to run surpluses, if you ever do. But the ability to run deficits during the downturn has no relation to your ability or will to run surpluses during the upturn. Unless you constrain yourself with silly and arbitrary rules like a 60 % of GDP government debt ceiling.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 11:19:40 AM EST
[ Parent ]
But the ability to run deficits during the downturn has no relation to your ability or will to run surpluses during the upturn.
Not if you keep devaluing your currency through inflation or repeatedly default on government debt. But if you actually want to have a sustainably good economy, you need to repay debt (as a fraction of GDP) when things are going well, if you want to do deficit spending when the economy is bad. Otherwise you'll end up as Greece. You can't spend more than you earn indefinitely. Eventually something will have to give.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 11:33:13 AM EST
[ Parent ]
Otherwise you'll end up as Greece.

And if you do you end up as Spain or Ireland. No amount of deficit reduction, no matter when it happens can unfuck the Eurozone.

by generic on Wed Dec 14th, 2011 at 12:10:20 PM EST
[ Parent ]
Not if you keep devaluing your currency through inflation

shrug

I have no great issue with inflation in the mid to high single digits. Beats unemployment in the mid to high single digits.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 12:39:21 PM EST
[ Parent ]
Then you need to pay the bonds out of increased tax revenue or reduced expenditures, and we know how well that is turning out in Europe at the moment...

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 10:57:11 AM EST
[ Parent ]
Not running a budget surplus when the economy is booming is just wrong, if you're inclined in a Keynesian way. I think we even have legislation demanding the government run a 1 % budget surplus over the business cycle.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Wed Dec 14th, 2011 at 11:00:04 AM EST
[ Parent ]
That's not a problem, the problem is the current austerity drive.

Another problem is using the boom to pay down government debt rather than to invest in a reduction of the trade deficit. Because if your economy is booming under a trade deficit the economy is taking debt on as a whole, and if you don't take that debt on as a government the private sector is doing it while at the same time growing on imports. That is not a healthy situation as we have seen, and the market won't correct it by itself.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker

by Migeru (migeru at eurotrib dot com) on Wed Dec 14th, 2011 at 11:03:28 AM EST
[ Parent ]
Actually, if you're doing it right (that is, tying a piece of string around the balls of your banks), you'll still be running moderate deficits during a boom.

You only really want to run surpluses when you have a foreign surplus (particularly when you suspect that it is caused by hot money) or a private sector credit expansion in excess of trend.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Wed Dec 14th, 2011 at 11:15:46 AM EST
[ Parent ]
The necessary first step in "doing it right" is not putting bankers in charge of financial regulations and the money supply.

For the same reason anyone with sense doesn't put monkeys in charge of a banana plantation.

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

by ATinNM on Thu Dec 15th, 2011 at 02:58:24 PM EST
[ Parent ]
Starvid:
I think we even have legislation demanding the government run a 1 % budget surplus over the business cycle.

I recently learned that that legislation was a preparation to joining EMU and was commented by the magazine Affärsvärlden as an abandonment of Keynesian politics.

Budgettaket är en anpassning till EMU

Tidskriften Affärsvärlden konstaterade redan när budgetsystemet beslutades att det innebär "en av de största förändringarna någonsin i svensk ekonomisk politik", närmare bestämt "ett byte av ekonomisk-politiskt system" och att "den keynesianska budgetpolitiken överges".


Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se
by A swedish kind of death on Wed Dec 14th, 2011 at 04:35:02 PM EST
[ Parent ]
In one way I agree you're right, but I think the more important reason is the lessons of the early 90's crisis. As PM Göran Persson said, he never again would allow that the leader in Sweden would have to go to Wall Street, cap in hand, and beg for loans from smirking 20-somethings. A bit like how those who got burned during the 30's often never ever borrowed money again. With strict budget discpline, all would be well. And to tell the truth, it has all worked very well, helped by a 6% CA surplus and a floating exchange rate. The only problem is the real estate bubble. We'll see how bad that turns out. And even if it does turn out badly, due to our budget discipline and the state saving money in the good times, Sweden is one of the few states around that can spend freely in the bad times without getting into economic/political problems.

Still, your point is relevant, in that the Euro would never have worked unless there were strict budget discipline and large budget surpluses during the good times, as the interest rate weapon would work much less efficiently during the bad times, and fiscal stimulus becomes very problematic in a common currency area unless your government debt is initially very low. Maybe the cap should have been set not at 60% of GDP, but at 30%? Then we would have no EZ at the moment, as Germany would not have managed to reach 30% yet. Seems like a good outcome to me... No caps on deficits, hard caps on debt ratios which were to be waived in the event of local asymmetric shocks..

Peak oil is not an energy crisis. It is a liquid fuel crisis.

by Starvid on Thu Dec 15th, 2011 at 03:44:14 AM EST
[ Parent ]
Yes, I think that was a formative moment for Persson and thus for the soc-dems and the whole economic politics of Sweden.

But from what I now understand he could have told "you and what central bank?" and got them to stop smirking. If there was a law in place to stop direct borrowing form Riksbanken they could always used Nordea that the government had taken over and borrowed as much as they wanted. Thus turning the speculators to... raw meatballs?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Dec 15th, 2011 at 10:04:54 AM EST
[ Parent ]
We were not in a liquidity trap back then. Printing lots and lots of money instead of borrowing it abroad would have resulted in considerable inflation. This was not at all wanted as massive inflation during the 70's and 80's had resulted in price-wage spirals, falling competitiveness and stagnating real wages. And lo and behold, since the crisis passed we have had real wage increases of a magnitude not seen since the golden years of the 50's and 60's. I think it's important to remember that the 70's and 80's were very dark years for the Swedish economy, which culminated in the credit bubble and real estate crash of the early 90's. Since then we've been back on track.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Dec 15th, 2011 at 10:29:57 AM EST
[ Parent ]
Why the need to borrow from abroad? Sweden had a positive Current Account Balance from 1994 and onwards (I am uncertain which year the famous trip was, but the soc-dems returned to power in 1994 so it is a starting point).

When it comes to the 70ies and 80ies I think the standard explanation overlooks factors like oil dependence, RoW catching up (Sweden did not have its industrial base destroyed in wwII) and demographics - Sweden avoiding wwII meant  more people born in 10's and 20ies working in the 50ies and 60ies and retiring in the 70ies and 80ies. I also object to stagnation causing the property bubble of the late 80ies, I see that as caused by the deregulation of 1985:

Novemberrevolutionen (Sverige) - Wikipedia

Novemberrevolutionen är det informella namnet på Riksbankens beslut att avreglera den svenska kreditmarknaden den 21 november 1985.[1] Beslutet innebar bland annat att bankerna fick låna ut obegränsat med pengar utan att Sveriges riksbank lade hinder i vägen.

Nationalekonomen Lars Jonung har skrivit om novemberrevolutionen: "Detta är den s.k novemberrevolutionen som markerar den mest genomgripande omläggningen av Riksbankens penningpolitiska strategi under hela efterkrigstiden.".[2]

But we are getting into a very broad topic and of the imho interesting topic in relation to the ongoing euro crisis - did Persson need to borrow abroad and if so why?

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Thu Dec 15th, 2011 at 02:45:21 PM EST
[ Parent ]
Note of Caution:

Have to be very careful when making conclusions based on Economic History.  It's easy, with the best will in the world, to fall into "Correlation-as-Causation" fallacies.  

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

by ATinNM on Thu Dec 15th, 2011 at 03:07:13 PM EST
[ Parent ]
Well, that credit bubble was certainly caused by credit deregulation, but it was something of a crescendo of the mad 25 years after 1968. It's important to note that with the exception of the oil crises, all the Swedish economic problems of 1968-1993 were homegrown.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Thu Dec 15th, 2011 at 04:07:30 PM EST
[ Parent ]

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