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Sudden Debt

by t-------------- Tue Oct 7th, 2008 at 06:40:32 PM EST

Some of the resident EuroTribers might know Sudden Debt, a blog on the state of US (and world) economy. Although the quantity of posts (and in part the quality) has decreased in the last weeks, this was the probably one of the first places where the current situation was forecast and with unbelievable accuracy. If you spend some time reading past posts you will notice how the author, "Hellasious" (Hell as IOUs) really was able to see what was coming. Heck, just the name of the blog shows some prescience.

One of the things that always seemed strange on Hell's analysis was the forecast of deflation. Today he has put up a post where he insists on the issue and seems to be at odds with what he calls a Keynesian approach.

Some food for thought from someone that was always "right on the money" (silly pun intended).


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The inflation/deflation debacle needs an interpretation from quantum mechanics...

I have an issue with this Hellasious' statement:

The silliness of policymakers the world over is that they keep acting to artificially prop up asset prices, via replacing private with public debt. That's a remedy straight out of 1930's Keynesian economics, but it won't work because it can't work.

The first sentence is true - the governments are indeed uber-activist in propping asset prices. But how Keynesian is that?! The key direction of Keynesian government activism is completely different. I would even ask, did Keynes substantially care about asset prices at all in the 30s?  

by das monde on Wed Oct 8th, 2008 at 01:39:12 AM EST
I am no authority, but from the little I understand it seems to me that Keynesianism is about the use of public credit/money to fund the creation of new assets, public and private - and the economic stimulus to which this leads.

As opposed to the creation of credit to purchase or repurchase of pre-existing assets which is what causes or maintains asset prices Bubbles.

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

by ChrisCook (cojockathotmaildotcom) on Wed Oct 8th, 2008 at 04:41:05 AM EST
[ Parent ]
If you can associate Keynesianism with the problem rather that the solution you've won half the battle...

This guy doesn't even know anything about the way the Depression was managed.

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Oct 8th, 2008 at 04:50:46 AM EST
[ Parent ]
I think he knows actually, and I agree that we are in a somewhat deeper clusterfuck than during the 30's.

Any attempt at consolidating distressed private debt into public debt today, will only accelerate the "market" realization of a looming public budget problem (that has been lingering for decades): most public debt even in the developed countries cannot be repaid, save with newly printed money.

And even keynesianism is dead: we have been living in a constant keynesian boost context since the end of WWII, in the US it took the form of a "permanent war economy", geared towards the USSR.

Essentially all OECD countries now have public spending in the 30-45% of GDP. You cannot increase this sufficiently to get any stimulus, you could only change the recipients to less silly ones (e.g. less to the military in the US). Before the Great Depression, this rate was much lower, below the 15% mark in the US I think.

In order to have the option to stimulate the economy Keynes-style, the developed world should have greatly lowered public spending and balanced the budgets decades ago. Which would have meant lower benefits and lower standards of living in Europe. This is the same endgame: whether living beyond one's means was achieved by private debt, or by underfunded public transfers (which accumulate public debt), it's now about to end.

There is no way to avoid a long, secular decline in standards of living everywhere on the planet.

Pierre

by Pierre on Wed Oct 8th, 2008 at 06:08:15 AM EST
[ Parent ]
the developed world should have greatly lowered public spending and balanced the budgets decades ago.

High public spending is positively correlated to high GDP. As far as I know there is no such connection between high public spending and public debt. Ie the United States.

Also, you are saying that public spending between 30 and 45 percent can't be increased sufficiently to stimulate the economy.

Since some of the countries that have been binging on cheap credit the last few years are among the ones with the lowest public expenditures in the OECD, it seems that they at least have some room for boosting the state sector. Providing they are willing to raise taxes on the wealthy that is.

by Trond Ove on Wed Oct 8th, 2008 at 09:20:57 AM EST
[ Parent ]
we have been living in a constant keynesian boost context since the end of WWII

I agree that the US government was under constant stimulation, especially the last 8 (or 28) years. But is there anything Keynesian in the "supply side" tax cut stimulation, particularly?

by das monde on Wed Oct 8th, 2008 at 10:47:32 AM EST
[ Parent ]
There's nothing keynesian about buying bad assets off banks. If the goal is to kick-start lending, setting up a national investment bank would be more likely to work.

(Why the fuck did we have to privatize the national savings banks?)

A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith

by Migeru (migeru at eurotrib dot com) on Wed Oct 8th, 2008 at 10:51:19 AM EST
[ Parent ]
No, keynesian stimuli mean higher taxes, spending, state. The stimuli works by forcing (hopefully wise) spending, when economic actors do not want to spend any longer. Tax cuts are not stimuli in this context: the money is saved/deleveraged. This is exactly what "pushing on a string" means.

Pierre
by Pierre on Wed Oct 8th, 2008 at 11:27:02 AM EST
[ Parent ]
I don't see the stimuli as the alpha and omega of the Keynesian approach. As Migeru suggested above, we should associate Keynesianism with the problem rather that the solution. The point is not to push the stimuli no matter what is happening. The point is to solve macro-economic problems: if economy is down, it needs to be stimulated (by the state if "economic actors" are unwilling, increased government spending that incidentally requires higher taxes, what else?). If the economy is up, it can be cooled down by... hmmm... higher taxes. The Friedmanian approach is the opposite: if the economy is up, it "needs" to be accelerated further with tax cuts; if it is down, the market ought to revive itself without government intervention. At the end, relevance of taxes is acknowledged by both ideologies - but effectiveness of marginal tax rates probably depends on the cycle phase, and here Keynesians seem to estimate better. After all, the US got into this mess after accelerating bubbles with aggressive tax cuts. Tax cuts just flooded money to chase a series of assets; it didn't trickle down much to regular folks at the boom, and they get no help at the bust. Kenesianism seems to focus on people rather than on investment statistics better.

P.S. My previous comment is mistyped. It should start with
I agree that the US economy was under constant stimulation...

by das monde on Wed Oct 8th, 2008 at 09:35:57 PM EST
[ Parent ]
Pierre:

There is no way to avoid a long, secular decline in standards of living everywhere on the planet.

Only if one defines "High Standard of Living" with "continuous consumption of useless stuff you don't need and never use."  

In my village in New Mexico there's a group of us who are getting fairly serious about community-based (with 10 kilometers) consumption: food, fuel, power, water, consumer goods, & etc.  Keeping our dollars in the area would improve the standard of living of the village as a whole.  

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

by ATinNM on Fri Oct 10th, 2008 at 03:45:42 PM EST
[ Parent ]
I really know very little about economical issues to issue a mature opinion. But there is one thing I know of: I've been following Sudden Debt for many months now and Hellasious ability to predict the future (short and medium term) and provide insightful analysis is unrivaled. Don't dismiss his opinions so fast.

This diary was actually an attempt to bridge my 2 favorite sources of information about the State Of The Planet(TM).

by t-------------- on Wed Oct 8th, 2008 at 07:03:41 AM EST
[ Parent ]
He has an interesting perspective: I for one would not dismiss it...

"The future is already here -- it's just not very evenly distributed" William Gibson
by ChrisCook (cojockathotmaildotcom) on Wed Oct 8th, 2008 at 12:15:18 PM EST
[ Parent ]


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