The scourge of government debt

There has been much debate about the need to revive Keynesianism, government stimulation of the economy versus austerity. In many respects the debate is irrelevant. It is not dealing with the world as it currently is. A lesson is emerging from the current crisis, and for that matter the financial crises of the last  two decades, ever since the Latin American debt crisis of the 1980s. Sovereign debt creates risks that private debt does not. With the exception of America and Japan, governments cannot really afford debt, even though government debt is only about a quarter of global conventional debt and a fraction of the out of control unconventional debt created by the private sector. In this world of market states, private debt is not subject to reasonable limits, while the buck very definitely stops at the desk of public debt. Partly because private debt can be bailed out by governments, but there is no-one to bail out public debt and partly because of the climate of anti-government sentiment. A dangerous set of parallel universes, in other words, reckless libertarianism on one side and excessive blame on the other.

Witness the current demonisation of the Greek and Italian governments, and the leadership of the European Union. It is a familiar moralistic refrain that is at best a partial picture of what is wrong with the global financial system, at worst downright deceptive. Post hoc, sovereign debt crises can always be readily blamed on governments because they are the obvious culprits. That is, they allowed the debt to occur. The problem is that while the criticism is true, it is only part of the story. The post hoc analyses miss the elephant in the living room: that such crises were made possible by the globalisation of the capital markets. Instead, it so much easier to blame those foreign governments. We saw this in the financial crisis when Asian “crony capitalism” was blamed as if the developed world doesn’t have crony capitalism!!!). The Russians are corrupt, the Mexicans are so Mexican, the South East Asians haven’t grasped what capitalism really is, you can’t trust those Argentineans etc.

The developing world learned their lesson and have been stockpiling foreign exchange, which actually has contributed to the savings imbalance of recent times. It is why FDI has been flowing from the developing world to the developed world, and not the other way around. After the developing world protected itself from capital markets, the emphasis shifted — to Europe. Now we have more foreign governments to blame. Even though Italy was acting reasonably responsibly, as was Spain, the neo-liberal moralists are queuing up to point the finger.

John Quiggin, writing in the Australian Financial Review, points out how partial this picture is:

With the arguable exception of Berlusconi, none of the leaders swept into oblivion in recent weeks bore any real responsibility for the crisis that engulfed them. Papandreou was only elected in late 2009 when the sovereign debt crisis, driven in part by the irresponsibility of his predecessors, was well under way. Spanish PM Jose Zapatero had been prime minister since 2004 but, until the emergence of the global financial crisis, Spain appeared a model of fiscal probity, running a string of budget surpluses.

Berlusconi was too focused on fending off a string of inquiries into his various political and personal improprieties to do much of anything in terms of policy. Nevertheless, the ratio of Italian public debt to GDP was falling over much of the decade leading up to the crisis.

The debt crises facing Spain and Italy are not the product of government profligacy, and even in Greece, fiscal mismanagement is only part of the story. The fiscal crisis is a continuation of the global financial crisis, which in turn arose from the desperate chase for high-risk profits by European and Wall Street banks, the costs of which have ultimately been borne by the public.

If we accept that the problem is excessive debt, then it is worth asking who produces the debt. According to McKinsey , in 2010 the total value of all debt was $158 trillion. Only a quarter of that is public debt. Over the previous year government debt soared as they sought to bail out the financial system — it was up 12 per cent and accounted for 80 per cent of net new borrowing — but it is still much smaller than private debt. And then there is all the confected private debt (meta-money) that is associated with derivatives and scams like high frequency trading, which is mostly unmeasurable but is certainly part of the financial system. Factor that in, and government debt is seen as a comparatively small part of the global debt debauch.

Yet the brutal reality, which has been confronted by many developing countries, is that government debt simply has to be eliminated, because the risk of being exposed to the financial Leviathan is too great and certainly outweighs any short term benefits. Australia’s removal of public debt under the Howard government is looking like a very wise strategy; compare it with the profligacy of Britain, for instance. This is the world of the market state. In a sense, governments must learn to hide from the financial markets, and have needed to do that ever since Soros wreaked havoc with the Bank of England. Put another way, if risk analytics are applied to government debt, it is clear that questions have to be asked about whether it is worth it.

The exceptions are large, though. The US, which has the greenback, can run levels of government debt with impunity because there will not be any shortage of demand for T-Bills. It has a free pass because it has the world’s reserve currency (that is why it can run Argentinean levels of debt yet never get punished the way Argentina has been). The other exception is also big: Japan. Because Japan owes all the debt to itself, it also gets an odd type of free pass. It is not exposed to the global capital markets, just to itself.

A report on a talk by Yanis Varoufakis, author of The Global Minotaur,  gives some nice history of how we got here. The Minotaur is a marvelous metaphor for what governments have allowed to occur in the global financial system. Now they, and all of us, are being skewered by its horns:

“In the immediate post-war era, Varoufakis claims, “the Americans begin to take seriously the redemptive mission to save capitalism from itself.”

But in doing so, against its apocalyptic competition with the Soviet Union, America spread itself too thin. Or too thick. By the time it was funding LBJ’s Great Society reform programme, alongside the dire weight of the Vietnam war effort, America stopped being a surplus nation. It went into deficit.

What followed was a worldwide project to balance everyone else’s books in line with the Americans own – what Paul Volcker, American economist and head of the Federal Reserve from 1979-1987, called the “controlled disintegration of the world economy”. Varoufakis compared this to George Osborne’s present fascination with tightening everyone else’s belts.  We’re all in it together, but some of us are more all in it together than others.

Thus the Minotaur was both invented, and ultimately, consigned to the Underworld. Around it, “handmaidens” supported the monster – Wall Street (and all that brings to mind), the “toxic politics” of neo-liberalism, and toxic economics, taught in universities across the globe since the advent of Reaganomics and Thatcherism in the West. Varoufakis argued that teaching this bent of economics in our universities is in fact damaging to our understanding of the system. A change is needed, actual as well as intellectual, before we can address our present situation properly.

Towards the end of his speech, Varoufakis claimed: “The Left and Right miss the significance of this current juncture. It is not terminal for capitalism, but it has ended the conglomeration of illusions in how we viewed the world. It ended the illusion we had that we had something called free market capitalism.”

Comments

  1. There has been a lot of posts and comments on the issue of austerity on the John Quiggin Blog (http://johnquiggin.com/).

    People are quite polarized on the issue and their political biases come to the fore.

    Most seem to ignore something that I think is the fundamental truth at the heart of it all – the end of growth as a consequence of the constraining effects of resource production peaking (eg oil).

    I tried to capture the issue and the effect on the worlds populations in a short story:

    http://thepeakoilpoet.blogspot.com/2011/11/land-of-skinny-people.html

    pop

  2. And underlying all the realism that many now see; most if they choose to look, is the uneasy hope that ‘maybe we can get away with it, just one last time…then we’ll fix the system !’

  3. Humans have a weak spot when it comes to debt – they inflate the value of the things they borrow money to purchase and deflate the effort it will take to repay what is due.

    While Polonius states an extreme position – neither a borrower or lender be – he is certainly in the ball park.

    In recent times the great brains of finance claimed that we have the technology to use debt wisely but it appears there was plenty of hubris amidst those claims.

    The RBA claims measures and percentages are not the answer to ‘our problem with debt’ but it is hard to comprehend why to err on the side of caution would not be prudent.

    Use interest rates and perhaps other regulation – tax- to keep the outstanding level of debt, public and private, within modest percentages of GDP.

    Say 30%.

    Certainly there is more chance of generating sources of savings internally if interest rates are maintained at a reasonable level.

    • Why should there be any government debt at all? Over the cycle of various events, recessions, natural disasters, wars etc, the net government debt position should be exactly zero. Over the cycles, a government should raise tax to pay for what they spend, not to borrow and burden the future budgets with interest payments to bondholders.

      There is one source from which the government can draw a moderate monetary benefit without any liability: to increase the base money supply by a fixed amount, say 2.5%pa. Every year the RBA “prints” 2.5% more money by simply adding that number to both sides of its balance sheet, and then immediately credit it to the Treasury. The RBA should be tasked to keep broad money growth to within GDP growth + 2.5% over the cycle, like they currently do with inflation.

      This way, there could never be another financial crisis again.

      • Government debt must exist to provide a safe asset in the economy. What would have happening in late 2008 if the world had not had US government debt to fly to in the face of impending doom? The fact the nominal rates on US debt were negative for a few days back then underscore the important of this safe asset. Ideally the government would run a deficit over the cycle that is just large enough to keep the debt/GDP ratio at whatever level is needed for the to be enough of this safe asset.

      • Tedblack44MEMBER

        “Safe assets” are BS. This is lazy money that does nothing to create a job for anyone except the rent seekers who sell it. Gov’t debt was first issued to fund wars. If the war was won you got the spoils. If the war was lost you were defaulted upon and may have lost everything. Safe Assets are really the original Ponzy Scheme where ever increasing growth and exploitation of resources funds the current encumbents into retirement. The Ponzy scheme just got too big and needs to be deflated slowly – (if we can) If not then buy the basic assets neccessary for survival.

    • +1. agree entirely, the system can be used as is, but also central banks should lean on asset bubbles as part of mandate. they should also limit leverage as you say to around 25-30%. if leverage at these levels are maintained, systems can withstand six sigma (1 in 100 year events).

      • It may be that there is no need to lean against asset bubbles if a prudent approach is taken to limit the rate of growth and extent of debt across the economy.

        Decisions to borrow money should not be distorted by rates manipulated downwards to ‘stimulate’ growth. Attitudes to debt and savings are hard to change (check the 1930’s generation) and fooling around with attitudes by yanking on interest rates is unwise.

        In principle there is no problem with a government issuing bonds to borrow money from the public for major projects but the level of such debts and the reasons for incuuring should be scrutinised. An absolute limit on the amount such debt would encourage pollies to keep the borrowings low to allow room for times of need.

        As for the libertarian perspective – it has a lot going for it – provided you remember that libertarians distrust market distorters and riggers of both flavours – big govt socialist and big govt corporatists. Purists might want no regs but i think regs directed to keeping competition and freedom of choice alive are appropriate.

        Unfortunately, many people – lefties and conservatives- seek regulations as a method of social control and engineering.

        That’s what libertarians dislike.

  4. “After the developing world protected itself from capital markets, the emphasis shifted — to Europe. Now we have more foreign governments to blame. Even though Italy was acting reasonably responsibly, as was Spain, the neo-liberal moralists are queuing up to point the finger.”

    We focus on the EU, and the US, but a look at our own backyard shows that it’s not the great example we constantly hear from the government. A stall in China will impact us dramatically, and you can see it slowing down (no risk here?). Also, we have a pretty impressive position in the world for our private/government debt/GDP don’t you think /sarc?

    We are not educated on economics in school generally, and I would suggest that most politicians have very little idea about debt. I wonder how many know the debt life cycle with it’s creation on a banks balance sheet as one example. How many have any idea of risk in economics, and the questions go on.

  5. I have never seen such a dishonest mendacious claim in my life, as the following:

    “because private debt can be bailed out by governments, but there is no-one to bail out public debt and partly because of the climate of anti-government sentiment. A dangerous set of parallel universes, in other words, reckless libertarianism on one side and excessive blame on the other.”

    Libertarianism = government bailouts ???

    Please !! We libertarians have been screaming for the banks to fail for years.

    Bailouts are socialism. It is a form of crony capitalism, and has nothing to do with free market economics, where the government does not pick winners and losers.

    • Like it or not, letting the banks fail was not an option if a depression was to be avoided. The actual problem was bailing out the banks and then not regulating them enough to reduce the likelihood of them needing to be bailed out again. Substantially higher capital requirements, for example, would have been a good first step.

      • +1 agree here. regulation is needed, separate the trading parts of banking from the utility services provided to community, peg salaries to downside risk also. banking needs to broken up so TBTF never occurs again.

      • yes raptor exactly like glass steagal. i cant believe they havent reversed that legislation yet! the bankers really do rule.

      • Why did they let Lehman fail?

        I think globally there is about USD 25 Trillion in M1, USD 55 Trillion in M2, and USD 74 Trillion in M3, so even with Basil III how good are the capital requirements in covering the banks?

      • because fuld was a turkey and again imperfect knowledge led the to believe it was not a systemic risk. someone also mentioned to me that of all the majors they were the only ones that refused to bailout LTCM in the 90s, so it was payback.

      • According to whom ?

        Let the banks fail and we would already have a real recovery.

        We are just postponing the necessary correction.

        Every speculative boom that is fueled by central banks expanding credit will need to end.

    • Please !! We libertarians have been screaming for the banks to fail for years.
      .
      But all those rules on banking were undone under the banner of libertarianism. “Self-regulation” was the mantra under Alan Greenspan. Greenspan himself was a member of the inner circle of that Saint of Libertarianism – Ayn Rand.
      .
      Even Helicopter Ben derives his ideas from another school of right-wing economics ( Chicago school) – Milton Friedman seems to be his idol and the original “helicopter drop” statement was Milton Friedman.

      • base your judgement on what they do not what they claim to support or intend to do… its not unusual for economists and the like to change their tune once in Washington/Wall Street

        naming the two biggest price fixers in the past 2 decades is hardly a testament to libertarianism

  6. After decades of argument between Monetarists and Keynesians, I think Prof. John Cochrane has really put his finger on something HERE:

    http://faculty.chicagobooth.edu/john.cochrane/research/papers/Cochrane_Inflation_and_Debt_National_Affairs.pdf

    This explains why the interaction between money supply and government DEBT often leads to “stagflation”, contrary to what received wisdom expects. The news is all bad for the Keynesians in particular. The rehabilitation of Keynesianism is like adding nails to the coffin lid of crony capitalism – which “Sell On News” quite rightly criticises. A “reckless libertarian” like Ayn Rand actually said “crony capitalists” should be hung, so be careful what ideologies you blame. “Crony capitalism” is a tango – it takes two. True libertarianism would leave the “capitalist” with no Tango partner on the political side.

    Hyperinflation is a result not just of too high a money supply, it is a result of too much money supply AND sovereign debt becoming so obviously unmanageable that government borrowing can no longer absorb the excess money. If he is right, the US Federal Reserve simply won’t be ABLE to sell off the Treasury Bonds it now has on its balance sheet, once all their “QE” starts to actually have an effect.

    Furthermore, even nations like Greece will not be able to use monetary policy to help their problems even if they go off the Euro, because their debt is already too high. Monetary easing will feed straight into inflation.

    • “If he is right, the US Federal Reserve simply won’t be ABLE to sell off the Treasury Bonds it now has on its balance sheet,”

      If that is what he says he is wrong. As long as the US dollar exists the bonds will have a value and can thus be sold. It appears that the FED is sitting on a profit on the bonds it holds – eg the 10 and 30 year stuff is now being bought at a higher price (lower yield) than the FED paid. If inflation arises then yes the price the FED can get will be lower (higher yield) but they will certainly still have a value. With 30 year treasury yields now below 3% they have massive scope to improve the attractiveness of their bonds. If the FED ultimately makes a loss on the sales of those bonds, that loss just gets passed to the treasury accounts – just like FED profits. They can then just issue more bonds to cover the accounting loss.

      • You obviously didn’t read the article.

        His point is that at some point a government simply must have so much debt that no-one is going to keep buying their bonds. At that point, QE money no longer can be mopped up with government bonds. That is the point with which he convincingly connects hyperinflation – it is always accompanied by government debt already maxxed out.

      • There’s just one slight problem with the Fed and its bloated balance sheet. It has capital of $50b but a BS of around $3 Trllion. With a 2% fall in value of its treasury holdings its capital will be wiped out and it will be bankrupt.

      • CBs, including the FED and the RBA, don’t work like that. The capital amount is fixed (just occasionally altered by policy). Excess capital is handed over to the Treasury and capital loss is made up by the Treasury.
        The RBA lost far more than it’s capital last year as a result of its foreign reserves losing value in AU$ terms, but the loss was made up by the Treasury and the RBA capital remained the same.

      • Silly me, and I thought the CB’s were independent from governments!

        How is Treasury printing money to make up the difference? I always thought the “printing presses” were in the CB’s basements?

        And, isn’t the FED owned by some private shareholders?

    • If Cochrane is right, and his argument is quite logical, our government should aim for budget surplus in order for our banks to have any hope for reasonably priced foreign financing. More precisely, the government effectively back stops the over leveraged banks so for its guarantees to be of any value it has to be able to sell its bonds for a reasonable price.

    • A “reckless libertarian” like Ayn Rand actually said “crony capitalists” should be hung
      .
      Yes, Alan Greenspan, who was both a Ayn Rand crony as well as a crony of Wall St banksters, should be hung.

  7. Government puting taxpayers on the hook and transfer private debts in to public hands was a choice. No government was compelled to do it.

    It was the wrong choice. Many new so and said as much beforehand. It was a gamble based on the deeply ignorant assumption that the GFC was just a “glitch” in the matrix.

    It re/misdirected market forces and risk.

    I totally agree that preposterous economic theories played a significant role in getting us to where we are now.

    However, I would caution throwing the baby out with the bathwater. “Free market capitalism” does not, and never has, meant absolutely free unfettered, unregulated markets. Free market capitalism includes (minimal and wisely targetted) regulation.

    But what is guaranteed to deal a serious or even fatal blow to capitalism is to try and manipulate market forces (or to set up regulations that manipulate market forces and risks). That is what is happening now, as governments (fuelled by nonsense economic theories) think they can just change the ending with a few tweaks like it is some kind of fairy tale, not the real world.

    • wrong there was no choice. it was global depression or bailout the banks. where they failed as mentioned is on the regulation and compensation side. europe now finds itself in the same situation. when the german people are calling for merkels head, that is when you know, merkel has made the painful yet realistic choice. if she does not choose to stand behind the ECB, we may get the depression anyway, and the german people will still call for her head. its the leverage and the regulation that need to be corrected. additionally economics taught in schools is a farce.

    • “capitalism” ….

      ‘Capitalism’ was a word and a phenomenon neither used by, nor known to, Adam Smith. Capitalism was a wholly late 19th-century experience. The Oxford English Dictionary (Vol II, p 863) locates its first usage in English in 1854 by William Makepeace Thackeray in his novel, The Newcomes.

      Karl Marx published, in German, Das Kapital, in 1867 and subsequent translations introduced the word ‘capitalism’ to his readers some years later (Moscow’s ‘Marxist’ editors during the Soviet era ‘interpolated’ the new word of capitalism into his works as if Marx himself had written it)….

      Of the word ‘capitalist’, this was first used in English in 1792, by Arthur Young (Travels in France) and it was used by Turgot (in French) in his ‘Reflections on the Formation and the Distribution of Riches’ LXIII-IV, 1770….

      http://www.krusekronicle.com/2009/01/origins-of-the-word-capitalism-.html

  8. rubbish. peak oil (or as i like to call it plateau oil/end of cheap conventional hydrocarbons) has nothing to do with it. have you not heard of shale oil, tar sands, csg, etc. when the first stage of the financial crisis hit, oil fell to just over 30/barrel (this revealed just how much speculative activity was in commodity markets). most good oil projects work on the assumption of 30-40/barrel (this is the new floor = 3-4x more expensive than at end of 90s) the world will never run out of hydrocarbons just cheap ones, and therefore only inflation is created, and also declining energy use per capita. this is a good thing for efficiency and the environment. why do peak oil nuts always manage to tie everything back to peak oil. it has nothing to do with it. this is about unsustainable debt levels. one thing is for sure, we will see oil back at less than 50/barrel before we see it at 2-300 barrel like many peak oil cranks think will happen (which it never will). stop plugging your own propaganda and engage in the thread at hand.

    • i assume you were commenting to me?

      Funny how many assumptions you make. And it’s interesting how aggressive you are as if being aggressive makes you right. But that’s one of the things i notice about people when it comes to some of these issues – very emotionally connected to opinion – like people who used to argue vehemently about Holdens vs Fords or programmers who used to argue C vs Pascal etc. Android vs iPones etc. The Beatles vs The Stones.

      I’d be interested to know if you are in the energy industry? (I actually assume not seeing as you do not appear to know anything except the sound bite level stuff that even the most shallow of Peak Oil readers might know.)

      As for propaganda. It’s very pot-kettle-black of you to make such a violent assertion in the light of some of your other comments. I wonder if you are another of those disempowered righteous types that seem to permeate the net looking for a virtual fight they could never back up with the real thing? I bet you hoard gold and filter your water too and probably would not immunise your kids.

      My tack, for your edification, is, to keep it simple for you, that underneath all of these constructions we call “economics” there are real things called “markets” and that these are markets in the true sense not just the feeble share trading or other speculation of those who otherwise do not engage with the markets in any real sense (ie are not a producer, seller, buyer (other than to be a basic consumer)).

      These markets are markets of real things. Everything else is about building house-of-cards claim upon claim above them.

      Once the reality sinks in that these claims are worthless and the scramble begins for the real underlying assets the fun will begin as they say.

      I look back at history and for most of it we struggled. Only recently have we been able to live like kings on the back of the energy resources we have found. I do not know (and neither do you) just how things will play out as these resources become more expensive (in real terms – no matter what the trading price).

      I look around and see the storm of rising voices all over the world and wonder just what is behind it all.

      I have read pretty much every opinion on pretty much every aspect of what we have all been living through over the time of my life.

      You think you know for sure 100% what is going on.

      You should be treasurer or prime minister then – or president of the US or the world etc.

      Then you can save us all eh?

      pop

      ps i do come from an energy industry background and one of my sons is a geophysicist in the oil industry. I am sure that it is very unlikely you have read anything like as much on the subject of oil as i have but i’m prepared to accept the very little you have read is the only portion worth reading seeing as you were clever enough to figure out which bits to read eh 🙂

      p

      • where to start? i work and invest in energy and commodity markets all day long, sometimes 7 days a week. peak oil is a myth perpetuated by those who do not understand very basic economics. i am well aware we are only discovering ~7 billion barrels/yr and consuming ~28 billion, but trillions of barrels in shale became economic in the last 5 years. its that simple. i dont discount that humans will probably both consume and pollute key resources on its way to wiping itself out, but hydrocarbons i can assure you is not one of the resources we will run out of. we are talking about unsustainable debt, not conventional hydrocarbon depletion. focus on the thread not your own agenda.

      • ~28 Billion eh?

        http://www.indexmundi.com/energy.aspx

        i’ll leave the ~7 billion figure because there’s no real consensus – it all depends on what you measure

        as for shale – there are a lot of conflicting results – profitability of shale oil has been covered in depth in a number of studies

        as for on topic

        there are a number of studies that have linked economic state to oil and related prices

        oil and gas imports constitute a large proportion of many countries expenditure

        debt flows as a consequence

        Peak Oil does not posit running out as you might know if you had read anything on the subject – you are asserting that Peak Oil is about running out which is in effect a lie because that’s not what anyone in the peak oil camp asserts

        if you were such an expert you’d know that

        try Oil 101 – it’s a good starter book for beginners

        (ps trading in energy futures etc does not make you an expert – eg you could trade purely on technicals and never know anything about oil at all)

        p

      • geo by training, thesis on depletion modelling and gas as marginal transition fuel of choice. work for major gentailer in strategic role. thanks for patronising response.

      • and yes. 26.6 billion using your link. the rest is defined as other liquids by US-DoE and growing in share by day as global conventionals probably peaked 05-07

      • finally like most peak oilers you are underestimating the unconventionals and particularly the shale revolution. on gas oil ratio it will be very difficult to sustain 100 oil when converting gas equivalents its more like 30 bucks. but keep telling everyone the sky is falling. a broken clock is right twice a day

  9. I am honestly gobsmacked by the number of pundits who really think that there would have been no mal-investments, no instability, no speculative activity if only we had more regulations.

    Which regulations would have stopped banks making sub-prime loans ?

    Which regulations would have stopped the Greeks, Italians and Spanish living beyond their means and paying their public servants too much to work 35 hour weeks and retire at 55 ?

    Which regulations would have stopped the dot-com boom and bust which caused Greenspan to respond with low interest rates that were actually negative in real terms ?

    Which regulations would have stopped the Japanese government accumulating a debt of 200% of GDP ?

    The free market is always the right regulation. You can only fool it for so long. The free market has always sniffed out fraud and corruption before any government regulator.

    The free market uncovered every ponzi scheme, from Enron to Bernie Madoff, to subprime and sovereign debt crises.

    At every crisis, government officials, regulators and central banks have denied the existence of the problem. The SEC was given 10 years of warnings about Bernie Madoff and never investigated him.

    Regulations ? Who is regulating the central banks ? Why won’t the Federal Reserve allow Bloomberg to know where the $2trillion in asset purchases have occurred ? Who is regulating the ECB and EU and the IMF, a bunch of unelected bodies who are trying to dictate fiscal policy to the democracies of Europe ??

    • i think you could regulate a lot of what you mention actually, but regulators and market participants both have imperfect knowledge, and this is just one of the many fundamental flaws in neoliberal economics. soros has done a lot of work on this and is becoming increasingly vocal following the most recent events. the key really is the leverage. as mentioned previously in this thread 30% max leverage would prevent many of the asset bubbles created by the unfortunate “greenspan put”. in many of the examples you list you virtually articulate how the regulation could apply.

    • The regulations that would have stopped the subprime mortgage bubble from appearing were the ones that compelled banks to extend loans to borrowers on the basis of their ethnicity, rather than their capacity to repay the loan. Without those regulations, no subprime crisis.

      • “The regulations that would have stopped the subprime mortgage bubble from appearing were the ones that compelled banks to extend loans to borrowers on the basis of their ethnicity, rather than their capacity to repay the loan.”

        Utter nonsense! You are referring to the CRA and yet the main culprits in the lending fiasco (e.g. Countrywide) weren’t subject to the CRA (as they weren’t banks). Nor were the Irish and Spanish banks and yet those countries had bubbles as well. Oh, and don’t forget that the foreclosure rates in areas covered by the CRA were actually a bit lower than in areas that weren’t.

      • This is a fiction, Lucius. The subprime bubble was never “required”. It was the outcome of sustained fraud and deception, carried out to satisfy the greed of lenders and their agents, enabled by ideological zealots and propelled by financial bungling, incompetence, dishonesty and self-delusion.

        Or, as Greenspan said in the understatement of his wholly blighted career, “I got the model wrong.”

        The subprime credit explosion and its aftermath are a vivid example of the stupidity of laissez-faire finance.

      • Excuse me but how come unregulated hedge funds didn’t need bailing out, but the heavily regulated banking sector was the one that needed bailing out ?

        You would never have had a subprime credit explosion without the central bank lowering rates in 2002, and certainly not without the SEC approved credit rating cartel slapping AAA on every piece of junk.

        The government guarantees of Fannie and Freddie, nor the CRA, did much to improve the situation either.

        Whats worst is the bailouts.. what were they supposed to do ? Why do we need to bailout failed banks ? What is so bad about deflation!?

      • What is bad about deflation is the real value of your debts increase, taking an even greater portion of income to service, which causes further contraction in demand, causing further declines in income, and so on. A nasty feedback loop where you dig yourself even deeper into the hole.

        Sure, goldbugs and savers win in this scenario, but it’s a pyrrhic victory as you are living in an impoverished society, and are quite likely unemployed yourself.

        As to bailing out the banks, the Swedes showed the sensible way to do this in the early 90s. Rather than reward their profligacy buy handing them a blank cheque, they put any failed bank into a government receivership, restructuring them, then eventually re-privatising them. The function the banks play in our society really is too important to just shut up shop completely if they fail, so some form of bailout is required if we don’t want a total economic collapse.

      • The sub-prime driven banking write-offs totaled about USD1.6 trillion, give or take, so it was hardly cost-free to banking.

        The mega losses were in the unregulated securitised/ synthetic debt and derivative markets. The core commercial and retail lending businesses did not generate the crisis and the vast majority of US banks did not need to be rescued.

        The losses were concentrated in firms that for the most part no longer exist, and the stand-alone securities industry is basically now extinct.

        Not that the risks are gone. Large parts of the financial markets – especially the CDS, forex and other derivative markets – are not regulated. Liabilities in this industry are scarcely even reported let alone controlled. They remain the channels through which Euro-centric financial crisis will be crystallized, amplified and transmitted.

        The European financial system faces collapse because its core assets – sovereign loans – were treated as being as good as cash on bank balance sheets. That this was possible was because of regulatory capture (the regulators went along with this folly) and because the banks believed they could use the unregulated CDS market to “wish away” credit risk.

        The banks now, wholly predictably, cannot make good on their sovereign loans, and this means the whole system is insolvent. This goes beyond a mere failure of regulation. It goes to the issue of system design itself.

        It also illustrates that risk does not go away, it simply passes from one party to another. Trading in synthetic credit is not regulated and is hyper-levered. Because of the gearing, the concentration of risk, the lack of transparency, the inter-connections between the (very few) counter-parties, this market is like a bonfire waiting to be ignited. It is just insane.

      • If you think the Greenspan put was laissez-faire, I suggest you look up what laissez-faire means and what a put option is.

      • When the laissez-faire system threatened to gyrate out of control and collapse, Greenspan rescued the players.

        The speculation by LTCM in sovereign debt, for example, was never subject to any regulation. Yet the failure of this one hedge fund was thought to pose a systemic risk to US markets and, while the firm itself closed, Greenspan eased policy, allowing other securities firms to make windfall gains.

        The simple fact is that speculation in derivatives is highly risky but was not and is not regulated.

        This is an ongoing source of moral hazard. This means that when a systemically important speculator, such as LTCM, places losing bets and fails, authorities will be faced with a dilemma. While their instinct is to allow the market to bear the losses, this could mean that innocent bystanders (say, home-buyers in Alabama or Adelaide) will also be harmed.

        So to prevent harm to the uninformed and uninvolved, regulators take actions which also help the losers in financial markets.

        But these events do not argue for less regulation. They argue for more, smarter, better and tougher regulation. There are lots of things that should be done, which all sound sensible, but have been opposed to varying degrees because they are said to be intrusive regulation that interfere with the “free market”:

        – trades should have to be settled through a clearing exchange;
        – speculators should have to maintain minimum capital reserves;
        – speculators should have to post relatively high collateral to support their trades
        – trading instruments should be standardised
        – traders should be required continuously to disclose their long and short positions in relation to trading instruments (because of the asymmetric access to information in the markets)
        – commercial banks should not be allowed to operate trading firms (because they implicitly place depositors’, shareholders’, bond-holders’, and public assets at risk)
        – traders should not be allowed to trade their private accounts and client accounts at the same time in the same instruments (because this generates conflicts of interest of which clients cannot always be aware)
        – speculation in sovereign debt should be prohibited
        – no one player should be able to hold more than, say, 0.25% of the risk in any traded instrument (so that markets retain depth and resilience)

        To support this world view, consider the action in the gold market at the end of last month, as gold futures wound down to expiry. The market fell notably over several sessions. Two major players in the gold market – Goldman Sachs and HSBC – are now being investigated for possibly manipulating the gold market lower in order to reduce payouts on gold futures contracts that they had sold to their clients.

        This sort of thing should not even be possible in the gold market, and yet there is nothing to stop these two giants of the financial system (between them they have more USD5 trillion in assets) from acting as both principal and agent in the same market to the detriment of their many millions of retail clients, some of whom could well include readers of this blog.

        There are many such examples – too many to recite – and they all get down to the same thing. The financial markets are giant speculative playgrounds, dominated by a very small number of actors. The failure of any one of these players could affect not only every other player, but all those who depend on the financial system, even though they have nothing to do with speculative trading.

        The laissez-faire players argue that free-wheeling is better for everyone – for the players and non-players alike. But this is clearly not true, and, in any case, misses the point, which is that the non-players are exposed to risks of which they have no knowledge and about which they are given no choice.

        Since the non-players can never be given adequate information about the risks to which they are indirectly or directly exposed, it follows they should be protected from them. This requires a system of regulation. This is just innately fair to the innocent, and yet it has been resisted on spurious ideological for decades.

      • briefly:

        “They argue for more, smarter, better and tougher regulation. ”

        Do you really think the government is going to be able to deliver smarter, better anything?

        You provide a list of regulations – if the markets had really been free and insolvent banks allowed to fail, I think many practices like these would have been developed organically and adopted by the remaining organisations anyway.

        The difference in your thinking and mine is that I believe each person should be free to choose how to live their life and conduct their business. Corollary to this is that they bear the consequences for their actions.

        You, it appears, would have government dictate to us how to conduct our affairs and in the event something goes wrong, socialise and share those losses.

        The problem is we have a mix – success is privitised and only losses are socialised.

      • dumb_non_economist

        Lucius,

        If regs restricted LVRs wouldn’t that have helped to keep housing prices to a reasonable level and not have forced those low on the economic totem poll to leverage themselves to ridiculous levels?

      • How would a LVR restriction keep prices at a lower level?

        No one forces anyone to ‘leverage themselves to ridiculous levels’. No one stood behind NINJA homeowners with a gun and coerced them to take out that 3rd mortgage.

        You can’t regulate against stupidity.

        And if you wanted to regulate LVRs, why do you think bureaucrats would know any better what to set the LVR level at than the banks?

        If the banks lend too much, they fail. That is how the market corrects misallocation. What incentive does the government have to set the appropriate LVR level? Lol.

  10. We have had a global fiat currency regime for the past 40 years. History tells us that they inevitably return to their intrinsic value of zero and fail.

    The whole concept of money is now intertwined with debt. Debt = money. This is unsustainable.

    We have seen ongoing global crises emanating from the problem of too much debt. This will only increase over time because more debt does not solve the problem. There is no real money to cover this debt which had been increasing exponentially for decades.

    This results in the idea that there will inevitably be a hyperinflationary depression as the paper currency markets fail to support the debt load. There is no safe haven currency except for physical gold which has no counterparty risk.

    We could see massive financial revolts over the next few years. There is no solution except for currency devaluation and collapse.

    • gold, gold, gold….this is essentially the set up in Europe, where countries cannot print their own currencies and instead are compelled to accumulate an external instrument of value. The result is endemic balance of payments crisis, resulting in fiscal instability, banking failures and permanent depression.

      Yup, the gold standard = destitution for all. It is a terrible delusion, but still a popular one.

      • briefly,

        You are pretty much wrong on every point.

        A true gold system is a floating one where the gold flows to those countries who provide the most value.

        “gold standard = destitution for all”

        This is the case for a fixed price system, but not so in the situation of a floating system, which is already very likely to happen by the way of market forces.

        Essentially it is just a sustainable system. The one we have at the moment never was sustainable and was always going to end up like this.

        If you actually want to learn about this topic, instead of keeping your very rigid views, have a look at http://www.fofoa.blogspot.com/ (freegold system). There is a massive amount of information, so it will take quite a while to get through it.

        The problem with Europe, as everyone knows, is that they have a tied monetary system with individual fiscal systems. This is obviously nothing to do with a gold based currency system.

      • There is more than one problem in Europe. The fact their reserve bank is not supported by a unified fiscal system is one problem. But the basic cause of their problems relate to the system wide use of a ‘foreign’ currency. This necessarily means the component economies will NEARLY ALWAYS be in external income imbalance. The weaker economies will therefore necessarily accumulate deficits, either in the private or the public sector or both over time. Ultimately, the deficits become self-reinforcing and generate collapse.

        A gold system works in precisely the same way as the Euro. Any economy that bases its currency on an arbitrary external measure, like gold, will be stable only as long as it generates an external income surplus. But since not all economies can be in surplus with each other at the same time, the system will automatically generate recurring crisis. It is just a matter of mathematical inevitability.

        It does not matter whether the gold price is fixed or floats. In fact, if the gold price were to be allowed to increase, deflationary pressures would be amplified: people would hoard gold and flee real assets (which is what they are doing now). If on the other hand, the gold price was forced down, it would eventually be worth next to nothing, and the standard would cease to exist.

        The gold stuff is just delusional nonsense.

      • “The gold stuff is just delusional nonsense.”

        This comment is nonsense. The gold ‘stuff’ is just reflecting the way the world is already headed and is not a theoretical concept. You don’t get to choose; the CBs in conjunction with market forces will choose.

        I pretty much disagree with every single thing you have said and it is clear that you have a very rigid view.

        I don’t think this is a theoretical debate. You fail to understand that gold is likely to be used as a unit of account that will result in renewed confidence in the monetary system.

        “But since not all economies can be in surplus with each other at the same time, the system will automatically generate recurring crisis.”

        No. Economies rebalance and adjust as they should.

        “It does not matter whether the gold price is fixed or floats.”

        This is completely wrong. Floating systems allow for natural economic adjustments.

        “A gold system works in precisely the same way as the Euro.”

        You mean it works as currency? Yes it does. This is the way in which the Euro was designed to allow for the free float of gold. It is also why the Euro is remaining strong in the midst of a credit crisis. Strong currencies are not bad for exporting unless there is no value add. Having a weak currency only allows for otherwise uncompetitive exports.

        “In fact, if the gold price were to be allowed to increase, deflationary pressures would be amplified: people would hoard gold and flee real assets”

        You really need to click on that link I provided. Since it would only be used as a floating unit of account, people would trade gold for other valuable real assets as they always have.

      • A gold standard doesn’t do anything except ensure that countries (and especially governments) cannot run sustained deficits forever, without exporting their own goods and services and repaying their debt.

        Nixon didn’t like this setup. You can’t go to war in Vietnam and spend on the 1960s welfare programs and New Deal nonsense, unless governments are free to print money.

      • Reversion to the gold standard will result in permanent instability and recurrent crisis, as it always used to in the good old days.

        Ya gotta understand…whether the standard is gold bars or panda bears, if the standard is “external” to an economy, the use of such a reference to set the exchange value of a currency will inexorably produce balance of payments crisis in some economies. Trying to reverse these imbalances results in depression.

        This has been seen hundreds of times. We are seeing a form of this replicated in Europe today.

      • Please provide some examples of this ‘permanent instability and recurrent crisis’.

        Please note that the gold exchange standard is not the gold standard.

        If you really think about money and currencies, you’ll quickly realise how absurd and misinformed your arguments really are.

        Gold is money because it has intrinsic worth and because it is not anyone else’s liability. It satisfies all the requirements of money and it is money not because someone requires it to be, but because individuals and peoples, over the last 4000+ years, have chosen and accepted it as such. The near exponential increase in the price of gold is, I think, showing incontrovertibly that people are again choosing it as such.

        The world economy has already accepted gold as money. Get with the times.

  11. “Yet the brutal reality, which has been confronted by many developing countries, is that government debt simply has to be eliminated,”

    Why are we labouring under the assumption that this is even possible for most? The brutal reality we are witnessing first-hand is that attempts to eliminate the debt (a)fail, and (b)have a tendency to create widespread hardship and social unrest as the attempt to eliminate the debt crushes economic activity, which may even increase the size of the debt relative to the economy which has been shrunk by the attempt to eliminate it. Howard didn’t really eliminate our public debt – we, the private sector largely did that for him by willingly driving ourselves deeper into private debt than any other time in history while Howard flogged off public assets. That period in history is over now. Of course, our government doesn’t even really need to issue debt to spend but that’s another story.

    • Austerity is not a very helpful description of what is required.

      There is nothing austere about ensuring that an economy is operating on a sustainable basis so that:

      * taxes raised are sufficient to pay for the services that a population desires govt to supply

      * people work efficiently and productively doing things that people spending their own money would be willing to buy if not forced to by a government monopoly – where the monopolist is a govt firm or a private firm.

      * markets for goods and services are not festooned with regulations that increase costs, reduce production and serve little more than producer interests or the good intentions of social engineers in regulator clothing.

      Lots of people interested in social justice and notions of equity and fairness – lets say good lefties as a contrast to the lefty authoritarians – keep defending the indefensible because they react to words like austerity as some how having something to do with being chained to wall street.

      As for the world ending or a return to the 1930’s had the banks not been bailed out that is not the case and is the sort of scare story that the baks were using to save their bacon.

      Deposits should have been protected, shareholders and other risk investors removed, then the banks nationalised. Existing Management should have been given the boot.

      Once the regs and new management were in place the banks could have been refloated and sold to new investors.

      It is important to remember most of the hardships of the 1930’s were due to the absence of any social security. Few are suggesting that.

      Had the above happened 2008 the debts would have been wiped out, the depositors protected, the fats cats cleaned out, the banks established, those out of work would have been fed and kept busy until the economy started to recover from the purge and adjustment from a massive unsustainable ponzi scheme.

      Cold turkey is tough but there is no alternative.

      • I doubt that many people’s idea of sustainability includes onging, entrenched mass-unemployment and spluttering or volitile economic growth. The idea of “expansionary fiscal austerity” is failing dismally and even the ECB themselves have admitted recently that it des not work. The harder governments try to be “sustainable” in their finances, the worse things are becoming overall and the further they are getting from their goal. What I’m saying is that it seems very obvious to me that when government subtracts it’s spending from an already floundering economy, the private spending that is supposed to replace it is simply failing to show up and the situation continues to worsen. 10 units of demand minus 4 units of demand are not equalling a renewed 20 units of demand simply because the 4 units subtracted was that of government. Subtracting from demand overall equals lower demand overall, equals mass-hardship and countires and their finances simply sinking further into the shit. We are watching this happen as we speak.

      • I completely agree that if one is unwilling to pull the plug on the debt preservation regime then they should open the spigots and just give money away to keep the Beast alive.

        As you say and as Europe is demonstrating you cannot do one without the other.

        My point is simply that we should pull the plug on the debt prservation scheme as we are going to have to do it eventually unless the Martian’s take a fancy to trillions in earthing IOU’s.

        The idea that we will shrink them with hyperinflation sounds disuturbing.

        I feel that good lefties have more in common with the libertarians than they may appreciate.

        Pulling the plug will require battening down the hatches and making sure there are plenty of measures in place so the average person can at least feed their families if they lose their job during the adjustment. There may even be a few public works projects that are worth doing with the excess labour – say building enough houses so the prices are less extortionate or having people learn how to start up their own business or learn a new skill they can sell or barter. Plenty people can do while a low debt economy is emerging.

      • Pfh007,

        “The idea that we will shrink them with hyperinflation sounds disuturbing.”

        It is what it is. In fiat currency regimes with debt crises it is the inevitable outcome due to the alternatives being considered too painful. History tells us that this is the most likely outcome.

      • Isn’t the problem for The West with your arguement,Pfh007, demographic? It’s all very well to ‘feed families’ to get them through, but that’s assuming that they are of working age and can participate in the real economy when all is better. With an aging populace, and one dependent upon the magic wealth held in a capital gains appreciating asset ( shares or property), do we not then have to accept that we will have to feed those individuals ad infinitum, as they are irrelevant to any future revitalised workplace?

      • Left-tee, I think you are failing to appreciate the fact that the previous government demand the current government is trying to reign in is NOT REAL DEMAND because it was underpinned by unsustainable debt.

        Demand was never really 10 units originally, it was probably more like 2 units of real demand and 8 units of fake demand from the government borrowing from the future.

        Now that the government is trying to get back to a level which it never should have exceeded, yes quality of life for almost everyone involved will fall. But that’s because the government jobs they were working didn’t really ever add anything or create anything that anyone wanted.

        Sure you can feel bad for them. Some bureaucrats may have spent years and years developing their administrative skills to now find that Siri does all that stuff for free. Does that mean we should kill Siri and destroy our iphones?

      • “….As for the world ending or a return to the 1930′s had the banks not been bailed out that is not the case and is the sort of scare story…”

        This is a false statement. The seizure in credit in 2008 was enough to precipitate a 40% contraction in international trade in the space of 2 months. The international payments system – and the entire global foreign exchange market – did cease to operate temporarily one afternoon in September. Had that been prolonged, there would have been widespread, ricochet-like defaults and a depression would certainly have ensued.

      • as opposed to the current situation where debts have merely been increased and the depression has been kicked down the road a few years.

        Statements are always made that we avoided a depression by bailing out banks, yet it certainly appears that we swapped one form of depression (a very nasty but quicker one) for something more insidious.

        The current situation will not be resolved until bad debts are cleaned out of the system through default. The only thing that has changed is we are now looking at sovereign default instead of bank failure.

        Fact is, much of the world economy has been based on unsustainable ponzi and this needs to be rectified before we can draw a line and move on. Things cannot continue as they have, we either take our medicine now or later (and it becomes more bitter the longer we leave it).

    • Lef-tee,

      “Why are we labouring under the assumption that this is even possible for most?”

      Well, its not about whether it is possible or not.

      The current system is unsustainable and one way or another it will happen. Austerity is not likely to work, however it doesn’t mean it won’t happen through currency devaluation (which is occurring as we speak) and/or default. However, given the total debts outstanding and the parties involved, widespread default is a low probability at this stage.

      That which cannot be repaid, will not be repaid.

      • Demographics dont make a difference.

        Certainly, more older dudes around but the idea that people cant work into their 70s and 80s and beyond is of recent invention.

        I had relos driving meals on wheels to people in their 70s when they were in their 80s . One great great granny stopping working in her shop in 1916 a few weeks before her death – she was in her 90s.

        Keep busy keep young

        Pensions for the few who can do absolutely nothing to earn any cash and have no family left will not ruin The rest.

        Hyperinflation – disturbing in the sense that some actually seem to think it is an option with merit.

  12. Its so funny that the Keynesians are so terrified of austerity, when we really haven’t even begun to see real austerity.

    When governments make marginal cuts against their planned increases in spending, Keynesian fools over-react and scream “bloody austerity”.

    The UK and US haven’t actually started running budget surpluses yet. When they do, that will be austerity.

    They are only trying to reduce the rate of increase of the rate of increase of the spending and debt.

    • It is not so funny when even mild austerity results in even more budget deficits, weakening economy, more unemployment, rioting and protests on the streets…
      ..
      … And Austerians, Rats, Mises and Randians are bewildered by the fact that reality does not reflect what they have read in some fictional novel and text books – this is not how it is supposed to work out and then they blame Keynesian economics for the results delivered by austerity.

      • dumb_non_economist

        Mav,

        Riots and protests shouldn’t be the decider as to whether or not the austerity is too severe or not. The French and Mediterranean people have been big rioters and protesters for bloody decades; it’s a cultural thing. I’m not referring to the ‘Arab Spring’ either, that is completely different.

        No one likes it when their sucking on the teat and someone comes along and throws cold water on them and says ‘no more, you have to earn your keep.’ To me there is a big difference to cutting unnecessary spending and stopping BS handouts like the baby bonus. Every gov handout should be means tested and necessary. We have become very lazy and I’m as guilty as the next!

      • The whole crisis would not have happened without regulations against urban development that allow property price bubbles to form. The only parts of the world that really DO have something approaching “lassez-faire” including in the use of land, happen to be the only parts of the world with no local property bubble crisis.

        So much for “lassez faire doesn’t work”.

      • So did the urban growth boundaries cause the Global Financial Crisis aka The Great Recession? ROFL
        .
        IMHO, just like Flawse has his “CAD is the root of all evil” fixation, you have a “UGB is the root cause” fixation.

      • I frankly find it incredible that a regulatory mechanism that interferes with something as SIGNIFICANT in the economy as the cost of urban land, can be scoffed at by the greatest number of “experts” as of no consequence. If there is ONE correlation that is “iron”, it is a correlation between inflation in “planning gain” and the severity of a following crisis.

        Check it out. Japan, Korea, the Asian crisis, California, Ireland, Spain.

        I am predicting, Australia, China and India. Are you? Do you say that the absurd levels of “planning gain” being racked up in those 3 countries is utterly without significance to future economic cyclical volatility? If so, fine, the numbers of “experts” are on your side, not mine. But this is possibly the worst case of the blind leading the blind, in the history of humanity. The entire global economy might melt down and armageddon result, without one single history book making the observation I just did.

        Someone somewhere needs recognition and a Nobel prize in Economics, before it is too late – if it already isn’t.

      • As I said above, austerity hasn’t even been tried.

        Name one government that is cutting spending by 10% or more ?

        They all talk about small cuts to baseline budget increases.

        Besides, if indebted governments don’t decide to follow austerity, it will be forced on them by market forces.

        And by the way, how is that stimulus working out for you ? The idea that governments can grow an economy with artificial stimulus which will help pay back debt is laughable. It has a proven record of failure.

        Some people remain blind to the obvious. Keynesianism is a cult where whenever the dose fails, the witch doctor complains that the dose must not have been strong enough and we need to repeat the experiment but with an even bigger stimulus.

      • +1

        Exactly right. The US MSM is reporting the failure of the ‘Supercommittee’s’ ability to cut 1.2 trillion over 10 (TEN) yearse as something significant.

        Against total government liabilities of $60T, WTF is $1.2 trillion over TEN years?

      • Mav, you really havent an idea what you are talking about here.

        If you want to talk about what Mises would prescribe, it is:

        – default
        – austerity to get budgets back in balance
        – a program of reducing govt size and taxation to improve economic efficiency

        It is expected that this will cause severe depression in the short-term. What you dont get is that the Austrian economists believe that such a contraction is now necessary, whereas most believe that it can somehow be avoided.

        I think this is where a lot of people fail at understanding exactly what von Mises talks about; stuck in a paradigm where you can a achieve stable long term growth rate (which is actually exponential growth, but most dont realise this either), whereas Austrians understand that there will be malinvestment over time that needs to be cleaned out through recession. dont interfere and it is short and sharp, ie the US in 1920-22. Interfere and it is long and drawn out, ie great depression, what we are seeing now.

    • Unfortunately, a lot of people who rightly are concerned at the potential for suffering during economic adjustment think that this concern makes them Keynesians.

      Keynesian = caring

      Caring certainly involves helping people during economic adjustment but the filling by govt of the pot holes in demand (keynesian) as an economy adjusts and people stop buying the products of ponzi period industries is a different kettle of fish.

      At some point the employees of ponzi period industries (finance, real estate, home reno etc) have to learn new skills and find new jobs.

      Propping those industries up and preventing adjustment by cutting interest rates and encouraging continued speculation is not helpful.

      The economies of the west are distorted by debt. The adjustment will not be easy but the sooner it starts the sooner it gets done.

      • Monetary stimulus or ZIRP or QE are NOT Keynesian ideas. There are inventions of Helicopter Ben and Alan Greenspan (Both Republican appointees).
        .
        Keynes focussed almost exclusively on fiscal stimulus/expansion. But the right wingnuts need scapegoat to blame for the effects of their laissez-faire banking de-regulation ideas and the subsequent ZIRP/QE measures required to save capitalism from itself – So they blame Keynsians for it.

      • Leaving helicopter ben to oneside as we seem to agree that using interest rates to re-animate the zombie ponzi is a dud idea.

        That leaves fiscal.

        No problem here with a deficit incurred easing the pain of adjustment. Unemployment benefits, legitimate and productive public works etc.

        But that is different to concluding ‘ austerity’ is bad.

        A lot of what is supposed to be getting the chop under austerity is little more than graft, incompetence and a lifestyle funded by debt.

        Paying unemployment benefits to the umemployed is not the target of austerity. Getting dudes to pay tax and turn up to govt jobs for a full day until they are at least 65 is what we are talking about.

        There is no way of avoiding an economic contraction while weaning off ponzinomics.

        Dragging it out trying to dodge the inevitable will be the cause of real austerity.

      • Boy, this thread has been swamped with replies since I went out this morning.

        “At some point the employees of ponzi period industries (finance, real estate, home reno etc) have to learn new skills and find new jobs.”

        Agree Pfh007 (add in retail, wholesale and transport to that list – all told, you have a rather large chunk of the labour market that I think will be demanding significantly less workers as time goes by). Problem is, if we insist on treating sovereign government finances (the Euro-countries cannot realistically be called sovereign in the full sense of the word) as though they were household finances – trying to eliminate the debt and run permanent surpluses at the same time as the private sector is trying to do the same thing……….why would the economy have any desire to re-employ all those the labour market has rejected due to the wind-down in demand as a result of the de-leveraging of both public and private sector at the same time? Unless there is life on Mars that wants to buy vast sums of our output, how can the public sector, the private sector and the external sector of all governments all be in surplus at the same time? Is this not an accounting impossibility? And why would the sustained attempt to bring it about not be a recipe for ongoing recessionary or depressionary conditions?

      • Correct – All in surplus at the same time is impossible.

        But collecting lawful taxes and reducing wasteful govt expenditure is possible and sensible at any time including the present.

        Paying people who are unemployed due to economic adjustment is reasonable.

        Having them work or do something for that money is reasonable as the focus is adjustment.

        Govt borrowing money for useful major works is reasonable at any time but dont bite off too much at any one time as dependency can develop.

        Govts that just keep on borrowing money are unreasonable even if there are fools willing to lend it to them. Particularly when you have reason to suspect those fools are squeezing their own citizens for the funds.

        No one forced the US Treasury to issue bonds for the Chinese and others to buy. Just because the US can raise money cheaply due to its reserve currency status doesnt mean they have to.

        However, countries that have borrowed the savings of others should try to repay them and that may mean running a surplus so they can buy back bonds they previously issued.

        If they can’t pay when they agreed to pay they should default.

        Just like the banks who lent them the savings of workers from other countries.

        That might cause them to take the decision to borrow more seriously next time – and lenders the decision to lend.

        Fiat currency nations do not have a free ride in this regard – they just have less painful more well concealed trip into poverty if they borrow too much.

        It is very hard to stop people using borrowed money to speculate but at least the cost of the money they are gambling with should not be subsidised.

        Which brings me back full circle.

        The current problems are a disaster but not much more than the result of too many people not heeding the spirit of, if perhaps not literally, Polonius’s warning.

        Cheap money is like cheap wine – a recipe for a shocking hangover.

        Yet even now, after all we know, people are still reaching for the hair of the dog.

      • “Correct – All in surplus at the same time is impossible”

        Yet the impossible is being doggedly pursued anyway, with results that are both disasterous and that continue to get further away from the goal. You cannot strangle an economy to balance or surplus, especially when everyone else is trying to do likewise, it must grow first or the debt simply becomes larger as the economy shrinks relative to it.

        For this reason, I feel that our own treasurer’s push for surplus is irresponsable and driven purely by political reasoning. With our private sector attempting to bring it’s debt down to much more sensible levels (a good thing) the credit accelerator that drove the economy to easily produce government budget surpluses over the credit boom years isn’t working like anything like it was, demonstrated by a broadly soft economy and weak employment growth, despite the biggest mining boom in history. I think the treasurer’s goal will probably fail and we will be the worse off for the attempt.

        I actually agree with you on a fair few things, but I think that getting government debt levels right down may prove rather more difficult than you think.

      • So we just ignore the problems of our indebtedness and keep on growing foreign debt forever…no austerity for us …no siree!!! We’re special. The rest of the world will just keep on working hard and saving so we can continue our luxurious lifestyle.

  13. This is a crap article, government debt for Japan cant be compared with government debt for the euro nations due to the fact that Japan is sovereign in their own currency. The key point with debt is the issue of debt being used to fund non productive assets, the fact that it is government or private debt is not an issue. The other fact is that no private institution should be too big to fail. The place of government is to actually have a safty net of small banks being able to step in and fulfil the banking needs of a country without the whole system seizing up.

  14. I know I have said this before, but this discussion about misses a key point about capital markets. Money IS rules; the rule making about money (i.e. regulation) is not external to the thing being ruled. What has happened in the last two decades is that the traders have been able to make up their own rules: financial “de-regulation” in reality led to frenzied new rule making, not less rules. Until that circularity is understood, tails will continue to be chased, at ever faster speeds.

    • You are right, SON, which brings me to another observation, which is that the distinction between ‘gold’ and ‘fiat’ currency is falsely drawn. At the level of the legal definition of ‘legal tender’, whether it is gold, dried tea leaves or notes issued by the Treasury, all currency is ‘fiat’.

      On the question of government debt per se, obviously debt is not in itself a bad thing. It depends on whether debt is incurred to finance consumption (usually a bad idea) or the creation of an asset (possibly a good idea). If public investment expands the productive potential of the economy, and the increase in income is greater than the cost of finance, then it can be logical to borrow.

      Considering the benefits of public investment accrue to both households and business, the issue should be finding investment projects that maximize economic welfare for the community as a whole.

      Beyond this, there are issues of risk and opportunity cost that have to be considered.

      There is no doubt that too much debt can increase risks for an economy, while not enough can also mean that economically valuable assets will not be created or replaced. This has to be treated in the context of the size and growth rate of an economy and cannot be settled on the basis of ideological reflexes.