Central banks versus the people

As you are surely aware by now, the US Federal Reserve has announced a new round of quantitative easing which like the ECB’s outright monetary transactions (OMT) is a new program of large scale asset purchases by a central bank. I thought I’d spend a bit of time today talking about these programs because once again I have noticed some large misconceptions in the media about what these operations are, and more importantly, what the likely outcome of them is.

As I have stated before, one of the major issues I have with the reporting of these types of programs is that they are referred to as “money printing” which, although at some level is technically correct, provides a fairly deceptive view of what is actually happening and in many cases simply adds to the confusion as to what is actually going on.

The reason these operations are referred to as money printing is because when a central bank makes purchases of financial assets it does so by adding amounts to the reserve accounts of banks that either 1) own the asset or 2 ) are the registered bank of the holder of that asset.  In the case of 2 ) the bank will also create a deposit for the account holder. The difference here is quite important so I’ll come back to this point later.

It should be noted, however, that the creation of new reserves is not unique to QE, in fact all reserve banks create, and destroy, reserves on a daily basis in order to maintain the interbank market rate. See here for more in this topic. The purchase and sale of securities adds or drains reserves available in the banking system which controls the short term interest rates banks charge each other to borrow funds. This is the basic process in which central banks set interest rates.

Unorthodox monetary policy tends to be larger and sustained purchases of a particular types of financial asset in order to a) supply interbank liquidity to ensure monetary policy transmission, b) reduce systemic risk and/or c) reduce longer term interest rates. The ECB’s OMT probably covers the first two, QE3 the third.

In the case of QE3, Ben Bernanke has stated that the Fed will purchase US$40bn/month of mortgage backed securities. By doing so the amount of securities held by the private sector will reduce which bids up the price and in turn lowers the yield. As MBS are used as a benchmark for mortgage rates this purchases is expected to bring down the long term interest rate paid by US citizens on their home loans.

In the case of OMT, Mario Draghi’s plan is for the ECB to purchase sovereign debt of certain Eurozone nations again to bring down the yield. The difference being that OMT is more about financial stability and monetary policy transmission. But in both cases the basic idea is that the reserve bank will purchase securities in the market and by doing so will drive down interest rates. For QE3 the target securities are MBS , for the ECB’s OMT it is periphery government bonds.

Now for the catches.

There are obviously side effects of these programs, these aren’t my major focus today so I’ll skip over them but it should be noted that these operations lower the respective currency relative to other currencies and tend to lift equity and commodity prices in the short term as the additional liquidity finds a new home. The overall outcome of these side effects is inflationary pressures in food and energy that potentially decrease consumption and therefore reduce overall economic activity.

What you may have also noticed about these programs is that it is possible that there is no overall direct effect on the public. Unless a household or business themselves happen to be a holder of a particular type of financial asset then the public doesn’t actually receive any of this money. As I stated above, in the case where a bank is the owner of an asset all that occurs is an asset swap which creates excess reserves in the banking system. That is, in either case the major outcome of these policies is simply a change in composition of the asset side of commercial bank’s balance sheets.

For households and businesses the real outcome is potentially interest rates are lower than they otherwise would be, as Ben Bernanke stated:

Our mortgage-backed securities purchases ought to drive down mortgage rates and put downward pressure on mortgage rates and create more demand for homes and more refinancing.

So basically these operations are all about trying to get households and non-financial corporations to borrow more money through commercial banks and spend their savings in the economy. That is, these programs are aimed at increasing the velocity of money which includes both an increase in private sector debt and a lowering of deposit based savings.  None of this is about giving money away as suggested by the term “money printing”.

Notice the term “ought to” in Mr Bernanke’s statement. It’s important because whether or not this actually occurs is dependent on two things. Firstly, the decision of the banks as to whether they will pass on lower rates to consumers and expand their loan books, and secondly, how exactly the private sector will act in the face of lower rates in terms of new loans and savings.

These two points play a major part in what we are seeing in Europe and why ECB’s balance sheet expansion is failing there. In places like Spain the retrenchment of the private sector after an an asset shock is being made worse be the attempted de-leveraging of the government sector, as I said:

So with the external sector in this state and the private sector unable and/or unwilling to take on additional debt as it attempt to mend its balance sheet after an ‘asset shock’, the only sector left to provide for the short fall in national income is the government sector. If it fails to do so then the economy will continue to shrink until a new balance is found between the sectors at some lower national income, and therefore GDP.

The inability and/or lack of desire for new credit is by the private sector is the tell-tale signs of a balance sheet recession which has the following attributes

  • A balance sheet recession emerges after the bursting of a nationwide asset price bubble that leaves a large number of private-sector balance sheets with more liabilities than assets.
  • In order to repair their balance sheets, private sector moves away from profit maximization to debt minimization.
  • With the private sector de-leveraging, even at zero interest rates, newly generated savings and debt repayments enter the banking system but cannot leave the system due to the lack of borrowers.
  • The sum of savings and debt repayments end up becoming the leakage to the income stream.
  • The deflationary gap created by the above leakage will continue to push the economy toward a contractionary equilibrium until the private sector is too impoverished to save any money.
  • In this type of recession, the economy will not enter self-sustaining growth until private sector balance sheets are repaired.

So QE and OMT are monetary programs that, in part, aim at increasing the leverage of the private sector, but they have only attempted to address the supply side of the equation. Fiscal policy in the EZ is continuing to lower the private sector wealth and by doing so is reducing the demand for credit which in turn is further weakening the economy. This dynamic appears to be more that offsetting the expansionary monetary program which is why you have seen the ECB’s response continue to become larger and larger over time. The Eurozone is therefore likely to continue to see poor economic outcomes even under the open-ended OMT because the insistence on the fiscal compact as a pre-cursor to renewed intervention is likely to be completely counter-productive.

I think the jury is still out on whether the US is seeing expansion in the real economic activity, but there is no doubt it is performing better than the Eurozone. Whether that continues has a lot to do with what happens in regard to the “fiscal cliff”, which is their own version of the fiscal compact.




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  1. As a debt-free grain of sand on the population beach I can attest that I have no intention of borrowing – for anything, and have reduced spending ( I have to! My passive income has shrivelled up). Why? My age. And those who have/had passive income are getting less likely to either re-borrow or spend whatever savings they have left, the longer this goes on. If there was a younger cohort of debt free citizens to take up the baton and run with it, QE etc might work. But where are they? Mired in debt of all sorts and facing an uncertain employment future. The answer to this mess lies in a re-boot of the system – at much lower, historically sane, asset prices.

    • Re – boot the system is exactly what this QE 3 is about, the system of wealth liquidity through property liquidity.

      If the boomers cannot access their equity in their homes they are woefully short of retirement savings and in a country which treats illness as a wealth transfer from patient to Doctor then where is the money going to come from to care for the ageing population?

      The great bet the FED has made here is that there is a younger home buyer in the wings ready to buy new, but more importantly existing homes to free up the much needed wealth in the housing market.

      Most of the young educated Americans are, sadly, long education debt to the tune of almost $1 trillion.

  2. QE is delusional. New borrowing if happens at all will not help. The problem is heterogeneity – borrowers have more debt than they can repay, savers exposed to losses. That is not understood by current macro economics which treats the economy as a single homogenous agent.

  3. The aim of QE3 is not to “increase the quantity of private sector debt in the economy”. The aim is to stimulate demand in the economy.

      • Oh, I know! People go out and get a 10% pay rise from the ‘new money’? A person buys one widget per week. They get a 10% pay rise. The company increase prices by 10% to cover that wage rise. The employee has to pay 10% more to buy their widget. They therefore have no more disposable income than before, and have to borrow if they wish to buy two widgets? Still involves….more debt if demand is to be increased.

      • Substitution effect. Lowering the real interest rate (which ultimately is the QE transmission mechanism) reduces the incentive to forego current spending for future spending. This has nothing to do with debt. Spending will increase where-ever the propensity to spend is highest – it should be pretty obvious that this isn’t with America’s tapped out debtors.

        If Apple decides to put to work 20b of cash which absent QE3 would have laid idle on their balance sheet, debt will be unaffected.

          • The substitution effect relies on the fact that there is ‘money left over’ that can be applied to increased consumption. Lower interest rates might give consumers more money to spend, but on what if, via price increases, that extra money buys just the same amount of goods and services? That’s my point above. Lower interest rates either get applied to debt reduction or staples consumption, not discressionary spending that could increase aggregate demand. That’s why I see QE as futile. It will increase prices and wages and leave us in the same position, with a different set of $ numbers in front of wherever we choose to buy. “But the debt will be worth less’ is the usual answer. No it won’t! It might be, to the current holder, but the next buyer will have to borrow more to buy whatever it is he they desire, to pay the increased price.

          • Or perhaps, more appropriately, ..in Chinese. Isn’t that the problem? All the jobs have gone from Western economies and the employment is now elsewhere. Do you think the new owners of production are going to give it back to ‘us’if demand is stimulated? I don’t. Think what it would do to their social stability, for instance.

          • It really doesn’t matter…you increase the volume of money in an economy running a current account deficit you just create your foreign debt faster.

            Consumption responds to lower interest rates much faster than production. So much of any increased consumption will end up in the current account.

            Why does everyone just keep ignoring the CA? Do we actually believe that US paper is sufficient for the provision of real goods and services by others?
            In essence you are all on teh old horse “Debt doesn’t matter” and Foreign Debt matters even less.

          • DE…Corporations may have cash, the householder MIGHT have gone into savings mode, teh fact is the US is not saving. The US runs a chronic CAD.

            The accumulation in cash in the private sector is not covering the deficit in the Govt sector…Would the corporations and individuals still have cash if the Govt collected enough revenue to cover its expenses, or alternately, cut back all its programnes? Or Did both which is what is necessary!!!

            Western society needs REAL savings and REAL investment in PRODUCTIVE assets such as factories. You’ll not get it as long as you have ZIRP. You only get further mis-allocation.

            We arrived at this stupidity through policies of negative RAT rates. What the hell convinces anyone that further and worse RAT rates are the answer?

            Quoting Op8
            This is all just &*#^%$! BS

          • @ flawse – i like that point that corporate cash building up is in essence a debt the government hasn’t recovered.

            The ‘democratisation’ of share ownership, has been a master-stroke for the corporate aristocrats who can lobby governments as though there is some social interest in making companies wealthier!

            Even more hilarious is that pension fund interests are usually subordinate to a range of preference structures which means they’d probably get sweet fa in a fold.

        • The substitution effect, such as it is, will not matter if demand is not there. Janet is right IMO.

          Unless consumers are confident to spend ie borrow, it won’t matter how cheap money is to do it with.

          What effects our willingness to borrow? Job security, perception of future asset prices, state of current family balance sheets, our age, our level of savings (rainy day) etc..

          Final demand has fallen substantially worldwide, witness the engine room of manufacturing, China. Productive capacity is way over invested. Govts, since 2009, have stepped in ala Keynesian dogma to fill the demand breach- and?

          Still falling final demand.

          QE3 is a can kick.Not down the road but closer to the cliff edge.

          • Do you really believe that demography, job security, etc., are so vastly different from those in 2000?

            If people had truly learned any lessons from the 1987 crash, and kept their collective memories for a decade, then the tech bubble would not have happened. Likewise, if people had learned anything from the tech wreck in 2000 and kept their collective memories for several years, then the GFC would not have happened.

            So, I am confident that people will start borrowing soon enough. Because history said so! And, no, I do not buy that “this time it is different”.

    • The aim of QE 3 is precisely to encourage people to borrow money and spend it and thereby increase demand.

      The problem is that people are starting to wise up to the fact that all that propaganda about the power of leverage and debt had a particular source – the banks who make their profits from creating debt.

      A bit like Coke telling us big glasses of sugar is a natural part of life.

      • +1.

        I have also read recently, the following claim, by Dr David Evans of the “Science and Public Policy Institute”:

        “……..The profits made in the financial sector (in the USA) increased from 10% of all profits before 1971 to 45% in 2006. The finance industry only employs about five percent of workers, and produces no tangible goods and few essential services, yet it captured a huge share of profit during the financial bubble. That is rent seeking on a monumental scale……”

        I understand that there was once an opinion among classical economists, that “finance is handmaiden to industry”.

        • Thanks Phil…our finance, other service, and govt sectors are out of whack with the productive sector.
          ZIRP and QE just makes that situation worse.

    • I don’t know how you can say that when the Fed is buying $40billion in private sector debt with new money.

      Yes, the aim is to stimulate demand.. but this demand is fuelled by private sector debt via the “wealth effect”. This is confirmed by none other than The Bernanke himself:

      “There are a number of different channels – mortgage rates, I mentioned corporate bond rates, but also prices of various assets, like for example the prices of homes. To the extent that home prices begin to rise, consumers will feel wealthier, they’ll feel more disposed to spend.

      Read more: http://www.smh.com.au/business/bernanke-puts-the-pedal-to-the-metal-with-qe3-20120914-25vu4.html#ixzz26m4ZPNBs

      What happens with the Ponzi “wealth effect” money taps are closed?

      • Its a Ponzi game of pass the parcel. The person who gets to peel the last layer off and open the package gets left with nothing.

        QE 3 is buying debt with more debt.

  4. Nice work!

    Lots of fancy footwork by CBs to to find a painless solution to the fundamental problem of a local and international banking system that created far too much debt in pursuit of profit.

    Having created the debt and taken their ‘slice’ in bonuses and fees the Merchants of Debts ( bankers, financiers, lawyers etc) have washed their hands and left governments and Central Banks to solve the problem.

    It is proving more doubtful every day that there is a ‘painless’ deleverage through growth solution ( or inflation as some nutters suggest). A jubilee or just a big bust might be the only way to clear the more diabolic debts created by the private banks ( including the Fed).

    But one thing is clear – the debt generating money creating banking system must be locked down and the quantity of debt that is allowed to be created – public and private – by banks and governments must be subject to clear and modest limits.

    Appropriate ( higher) interest are part of the solution but actual limits on credit growth and total outstanding debt as a proprtion of ( name your metric) are also required.

    That is of course once we have seen some actual reduction of the debt mountain via deleveraging or more likely default.

  5. …in ether case the major outcome of these policies is simply a change in composition of the asset side of commercial bank’s balance sheets.

    An oh so apropos typo.

    This is all just &*#^%$! BS. It p*$$e$ me right off.

    Setting aside all the BS jargon of economic theory, what is really happening is that the central banksters are creating digital “money” from the ether in an(other) attempt to make predatory, parasitic commercial / “investment” banksters whole again. That’s it. Nothing more. End of story.

    &*(^#! me, how stupid is society!??!

    It’s just RULES, FFS. If our ancestors were so stupid as to allow rules permitting unelected central banksters to type “money” into existence from the ether and give it to their commercial bankster mates when their blood-sucking antics go waaaaay too far, why the _________ don’t we just CHANGE THE BL**DY RULES!?!


  6. hyper-inflation is the only way the CBs have to get out of this mess, so debt’s an effectively be disappeared relative to the “value” of underlying assets which will increase. Then we have a reset with a new currency. The question is whether this will be a global phenomena now the financial world is so interlinked, or the fallout happens in the markets with more significant debt and demography issues. Methinks the former, since the price of oil and energy generally is a key driver in economic output. Does this mean a return to the gold standard? No way, because the banksters who created this mess have bought the pollies, lock stock and two smoking barrels. We will live in interesting times while this gets “resolved”. My pick is a great unwind and the debt serfs losing everything to the cashed up. The end result a much smaller middle class and a society well and truly fragmented.

    • Hyperinflation will not solve the problem. This is not a balance Sheet problem or even a debt problem. We have a basic disconnect between what we are demanding and what we are consuming. We have a basic disconnect between the factors of production and the amount of ‘service’ that is required to get those factors into production. Lastly we have a basic disconnect, in the western world, between the resources that the world can provide long-term and what we are demanding.
      Hyperinflation will only make all those disconnects worse.

      • “…..we have a basic disconnect, in the western world, between the resources that the world can provide long-term and what we are demanding……”

        Correction: “…..we have a basic disconnect, in the western world, between the resources that the Green theocracy now running the establishment will allow access to, and what we are demanding…..”

        Nowhere is this a more glaring cause of our problems, than in the supply of land for urban growth, which is the most irrational of all the things alleged to be needing “constraint” given the actual proportion of total available land thus consumed by it. Our whole economy is being destroyed by a quota racket being run in 0.8% of the “supply” of land, the other 99.2% having been deemed sacred by the Green theocracy.

        • I suspect you are giving the green theocracy too much credit, from what I have seen they couldn’t manage a solid bowel action.
          You dont have the urban growth issues in well run countries like the germans or Swiss and funny enough the central banks actually own part of the private banking system whereas the ownership of the FED is by the private banking system. I suspect this is the major difference.

        • The two go together PB – can’t get rid of the frustration associated with environmental and ecological vandalism without ridding the world of the useless capital that goes to non-economic projects that only exist because there are buckets of fee money available for misallocation that some finance guy and white-shoe can take a bite of on the way…

          Went riding down the Victorian coastline on the weekend – what a stunning undeveloped area of natural beauty. Do you seriously think we would not end up with the Gold Coast if we just threw open the land use restrictions. That is just fair land!

  7. See Richard Koo’s book-The Holy Grail of Macroconomics-for some compelling evidence that QE had no impact on the Japanese recession because traumatised corporates refused to borrow more-even with rates at ZIRP. We will soon know whether US households are like japanese corporates.
    In fairness to Bernanke and Draghi they have been very clear that all they can hope to do is provide some space and time for fiscal and other political initiatives.The danger as many have pointed out is that actions like these provide cover for politicians to do nothing.

    • Just US household, Terry? Try New Zealand households; Australia households, Greek households. Having all seen their household ‘wealth’ go up in a puff of stock market a real estate smoke several times in their lifetimes, what’s the chances of ANY of us getting on the borrow to spend tomorrows capital gains bandwagon again. Slim, I’d suggest.

      • You know, I always find that I gave too much credit to the intelligence of people. If people had truly learned any lessons from 1987 crash, and kept their collective memories for a decade, then the tech bubble would not have happened. Likewise, if people had learned anything from the tech wreck in 2000 and kept their collective memories for several years, then the GFC would not have happened.

        So, I am quite confident that people will start borrowing soon enough. Because historical evidence is quite clear!

    • QE didn’t work in Japan because 1. It wasn’t open-ended and 2. The CB refused to increase it’s stingy inflation target.

      • The CB refused to increase it’s stingy inflation target.

        Sweeper do you have any other solution than to confiscate the property of the prudent and give it to the profligate so they can spend it and can create even more damned debt?

        • Flawse, In an ideal world low and stable inflation (say 1 -2%) at all times would be great.

          But unfortunately on certain occasions, slightly higher inflation is a necessary and a least bad option.

          Take Japan, would an inflation target of 5% and a weaker Yen during the 90’s really have been worse than what they ended up getting. ie. a permanent slump and sovereign debt exploding to 200% (guaranteeing a default at some point).

          • Confiscating hard earned savings is never a better option. You just assume that a higher inflation rate would have solved all Japan’s problems…why?
            Japan’s problems are structural and social. I can’t see how having high inflation would come into it.
            I’m guessing (underline guessing) that a Japanese response to high inflation would be to send even more money offshore or perhaps into Gold. So yes I think you’d get a weaker yen but to what end?

            As to a weaker Yen they were always doing their best to keep the yen value down to protect their exports.

            Why do we think Japan has been some kind of hell hole? Their real personal wealth (not just personal debt)has increased through the decades, they have had much lower unemployment than we have had.

            Re default….Do you think if the US was not the Reserve currency it would not have defaulted long ago?
            Do you think if Aus didn’t have so many natural resource assets and the willingness to flog them off to fund consumption we would not have defaulted long ago?

            All this inflation baloney has been tried before. I lived through it. NO GOOD of any kind comes of it at all. It creates social devastation. That is a FACT.

          • Look, I know that higher inflation creates winners and losers (some deserving some undeserving) and instinctively I don’t really like it. But once you start introducing ethics to economics things become messy.

            In terms of confiscation of savings; take another example. Imagine a hardworking person who has never run up excessive debt and has accumulated precautionary savings. Then a financial crisis causes a depression, this person loses their job and is forced to spend their savings.

            In a sense haven’t their savings been confiscated? Aren’t they being punished for others peoples excess?

          • What better place to embed ethics than in Economics ? Actually, I would say it is inevitable. Read Wealth of Nations and then tell me that Adam Smith is not framing economics within a moral context.

          • Sorry Sweeper…inflation is not a ‘solution’ it is a problem that just makes ‘solutions’ even further away.

      • QE didn’t work in Japan because 1. It wasn’t open-ended

        That is a circular argument.

        No QE can be open-ended because the household balance sheet can never be open-ended. CBs can keep pushing the string, but households have to borrow continuously for QE to be open-ended.

        • Good point Mav The Govt could spend spend spend to infinite deficit and the CB just do the matching QE buying Govt Bonds…No?

          Of course, in this case, in the past, given the poor structure of the economy, zero interest rates, and a ready source of cheap consumer goods, the increased spending has ended up in the external account. The debt always shows up somewhere unless you’ve got production. So you get an external account crisis unless your paper is accepted to infinity for all time.

          Of course if the cheap source of imported goods dries up you get inflation.
          One way or the other you have done nothing to redress the economic imbablances

          • The debt always shows up somewhere unless you’ve got production. So you get an external account crisis unless your paper is accepted to infinity for all time.

            yep, as Zimbabwe/Mugabe found out..

          • I reckon the best way for Japan to get out of its chronic deflation and at the same time to repair its balance sheet is to gradually increase its GST. Granted, it is politically difficult, but the GST in Japan is still very low compared with her peers. Then the ‘expectation’ that prices will rise in steps on prescribed dates will encourage households to begin spending.

    • The problem is the Fed buys dodgy RMBS and the banks, rather than write off the loan, keep the property on their books due to the changes in the mark-to-market rule – ie: mark-to-whatever you like. Bank off loads a bunch of shit (probably at an inflated price), asset value still intact, new money then pumped into the stocks, commodities whatever and the mortgage holder is left high and dry. The Fed would have been better off taking applications from punters and directly paying out their mortgages.

  8. Sweeper-please read Koo.The data are laid out there, as well as Koo’s coal face experience with Japanese corporates.

  9. I have a friend called Henry, whose intuitions I admire. He instinctively seems to fill in the gaps in a narrative he is being presented with. He asked me recently how central banks thought they would keep the lid on inflation once the banks started “leveraging” again. I replied that the central banks HOPED to sell all the government bonds and other securities they had been buying in the meantime. Henry, without missing a beat, asked “who to……?”

    Henry’s intuition is spot on. Read “Inflation and Debt” by John Cochrane:


    Hyperinflation has always set in after monetary inflation AND “saturation” of government debt to the point where no-one was prepared to buy it.

    • This has a lot to do with the Keynesian’s obsession with demand as the be-all and end-all of economics. They seem to forget that an economy is not isolated from the rest of the world, and if demand is stimulated it can just as easily be met from imports as from domestic production.

      If domestic production has been out-competed by foreigners, no amount of cash in the pockets of companies will entice them to invest in domestic production. It will be invested overseas.

      • Like a true extreme right winger, you really love bringing a red herring “lets blame the Keynesian’s” into a debate on monetary policy, don’t you.

        • The article PhilBest linked to also blames the Keynesian mindset. Not everything that Keynesians believe is wrong, but they are certainly wrong about this one.

          BTW, I don’t know where you get the idea that I am an “extreme right winger”. On the Political Compass I fall in the lower left quadrant, like most MB readers. I just don’t like BS. I have voted for all the major parties as well as independents in the past.

        • Mav….look at what Alex’s point is! The whole concentration of this stupidity is to rekindle a demand that is out of touch with all reality. Now we all know Keynes advocated restraint at other times. Nevertheless the Keynesians of the modern day have NEVER called for restraint on Govt spending…just more spending.

          What the hell has Right Wing got to do with it? In any case what’s the stupid labeling instead of good argument?

          • I am just tired of the oft repeated and lazy assertions that attribute everything our pollies do to Keynes/Keynesian economics. Expect better from a fellow MB commentator.

          • I am just tired of the oft repeated and lazy assertions that attribute everything our pollies [and central bankers] do to Keynes/Keynesian economics.

            A reasonable thing to object to, Mav. But in this case, the idea that what is needed is to stimulate demand, and that to do that the central bank needs to spread cash to the four winds, does come from people with a largely Keynesian mindset. I happen to disagree with this course of action, and I gave the arguments for my disagreement.

            Hope that is OK with you. If you have counterarguments, I’d love to hear them.

          • Hope that is OK with you. If you have counterarguments, I’d love to hear them.

            Not ok. Talk about “Keynesian mindset” if you can directly attribute it to ideas that John Maynard Keynes has written about. Attributing it to some random people who are of “Keynesian mindset” is a straw man/cop out.

            Re political compass, I’ll never vote for Julia Gillard. Does that make me an Abbott supporter?

          • I am just going along with commonly accepted terminology in calling people who believe the current need is to stimulate demand as “Keynesians”. I am pretty sure we could find something Keynes wrote that supports that idea, especially because he wrote so many things that contradict other writings of his. Nevertheless, let us leave aside the issue of terminology, if Keynes is a particular hero of yours and you don’t like seeing his name attached to ideas you don’t think he initiated. Let us call such people “demand pushers”. My point is still that I disagree with what they are doing. Do you agree with me or not? Why or why not?

            Re the Political Compass, it has nothing to do with Julia Gillard, Tony Abbott or any politician. It is a framework for analysing where people stand on issues of state control vs individual freedom and state economic involvement vs economic laissez faire policies. See http://www.politicalcompass.org/. As I said, I am in the bottom left quadrant, like most MB contributors and readers.

          • ‘Mav….look at what Alex’s point is! The whole concentration of this stupidity is to rekindle a demand that is out of touch with all reality. Now we all know Keynes advocated restraint at other times. Nevertheless the Keynesians of the modern day have NEVER called for restraint on Govt spending…just more spending.

            What the hell has Right Wing got to do with it? In any case what’s the stupid labeling instead of good argument?’

            This gets close to the nub. But you have left the other side of the possible equation.

            Is the point of all this to rekindle demand?


            Is the point of all this to avoid looking through a political/moral (let alone economic) prism at what has transpired in the (largely) english speaking world for about a generation?

          • Really?? I have lost count of the number of times 3d1k, GSM and other et al have called me and other commie socialists.

            The extreme right wing nuts can dish it out (not talking about u, flawse), but can’t take it.

          • Mav, can’t actually recalling referring to you as a ‘commie socialist’. That would at least indicate you had principles. 🙂

          • Thanks 3d1k, the lower is your estimation of me, the better!!

            Because the last thing I need is a certificate of authenticity from a confirmed professional astroturfer.

          • Sigh, my name in vain again Mav?

            I think however, I have to agree with you in that Keynes’ principles have been perverted and then hijacked by the borrow , tax and spend versions of Gov’t worldwide, not just Australia.

            On the vote thing- why not put your obvious intelligence to good use and less of the ticker? You don’t have to love your vote choice- just reconcile that the choice you make is likely to produce the outcome closest to what you think is right.

          • GSM is right, Mav.

            Vote 1 Katter’s Australia Party, preference the Greens.

            Anything else is just more of the same.

  10. 2 articles from my favourite (sorry MB) source of economic info.


    interesting theory that every asset that is and isnt nailed down has been put up as collateral on some debt somewhere.. rehypothecation being the solution to that problem… works fine as long as you believe there is a tangible asset with your name on it.

    2nd one


    a view of whats happening to the middle class of US.

    As I sat on the train this morning reading those articles and watching a 70 year old man fumble with an iPad. I thought to myself.. we are so F**Ked its not true.

    How will society look back on this period of financial rape that has doomed generations to debt fuelled servitude..

    I should probably taken my meds this morning.. apologies for the nature of my post feeling a bit helpless watching this unfold

      • Whoops, I think it should be

        “You’re not the only one.”

        I guess that’s what happens when a song lyric pops up.

    • Hang in there chief. I have exactly the same sensation.

      I cant change a damn thing, and can only watch as a society is rogered. and what I see is the future generations being held to ransom.

  11. The federal reserve is buying worthless junk that are listed as assests on the banks balance sheets such as CDOs and MBS. It will restore the balance sheets of the banks and in the process making the equity holders and the bond holders of the banks whole. This is the moral hazard that is being referred to as the tax payer is on the hook for that money. Thus the 99% is unknowingly bailing out the 1% courtesy of the federal reserve. It socializes all the losses while the gains are privatised. This will incentivise banks to take even bigger risks next time. The whole racket is sickening.