Responding to a student question after a recent Kansas State debate with Brad DeLong I posed a conceptual puzzle. I asked students to ponder why textbooks treat Treasury sales of government bonds as a “stimulus” to demand (nominal GDP) in the same sense as Federal Reserve purchases of such bonds. “Those are very different polices,” I noted; “Why should they have the same effect?”
The remark was intended to encourage students to probe more deeply into what such metaphors as “stimulating” or “jump starting” really mean, not to accept as dogma that fiscal and monetary policy are equally effective or that economists are certain just how they work.
DeLong’s misinterpretation of my question led him to lecture me that, “if you really do think that monetary expansion undoes fiscal expansion because monetary expansion buys bonds and fiscal expansion sells bonds, you need to educate yourself.” Citing that wholly imaginary rewriting of my question, Paul Krugman wrote, “My heart goes out to Brad DeLong, who debated Alan Reynolds and discovered that his opponent really doesn’t understand at all how either fiscal or monetary policy work.”
Did I really say that “monetary expansion undoes fiscal expansion”? Of course not. If that had been my question, I would have answered myself by saying that piling more debt on the backs of taxpayers is unlikely to stimulate private spending (much less encourage more or better labor and capital) unless the added debt is “monetized” by the Fed and regulators allow banks to lend more to private borrowers. DeLong made much the same point by saying, “Expansionary monetary policy makes it a sure thing that expansionary fiscal policy is effective by removing the channels for interest-rate and tax crowding out.”
The Fed’s current bond-buying spree is bound to have some effect, if only to facilitate cheap corporate buybacks of shares and speculative day trading of such stocks on margin. But selling more government bonds per se (if the Fed won’t buy more) would be just as much an added burden for taxpayers as it would be a benefit to whoever receives the resulting government transfers, contracts or subsidies.
This make-believe squabble about monetary expansion undoing fiscal expansion exists only in DeLong’s imagination, like my non-prediction of mammoth inflation or Krugman’s non-facts about Ireland’s fiscal frugality.
I do have a few minor issues, however, with DeLong’s remark that, “It’s not possible to get confused if you have the IS-LM diagram in front of you.” To lean too heavily on John Hicks’ 1937 ad hoc diagram, which reduced the whole economy to two curves manipulated separately, is not an answer but rather part of my question. As theory goes, I much prefer Hicks’ 1975 book, The Crisis in Keynesian Economics (57) including his assessment (57) that “one of the worst things about Keynes’s doctrine … is the impression he gives that Liquidity Preference is wholly, and always, bad… .The trouble lies deep in his version of short-run macroeconomics, in which one form of investment appears as good as another.”
The question I posed to the Kansas students was more clearly explained in my 2009 Cato Journal essay, “The Misuse of Economic History.” I wrote that “it is a non sequitur to claim a ‘liquidity trap’ demonstrates that aggressive fiscal policy will ‘raise aggregate spending.’ Fiscal stimulus means selling more government securities; monetary stimulus mainly means central banks buying such securities with new money. Those are distinctly different policies, and their effectiveness raises distinctly different questions. Do big budget deficits stimulate demand? In postwar U.S. data there is no discernible connection, over short periods or long, between cyclically adjusted budget deficits and the growth of final sales to domestic purchasers. It is easier to find connections between aggregate spending and exogenous monetary policy changes.”
These are questions of fact, not theory. I was using historical data to show that monetary policy appeared relatively potent at times when Krugman claims it was not, while fiscal policy in the demand-side sense (budget deficits rather than tax rates) had no clear links to nominal or real GDP even during the Great Depression or post-1991 Japan.
Although Keynesian theory postulates a solid link between cyclically-adjusted budget deficits and changes in aggregate demand (nominal GDP), I find no such correlation in any data at home or abroad. Counterfactual simulations from Keynesian black box models are not evidence.
The burden of proof is entirely on those who assert that some measure of fiscal stimulus is linked with some measure of aggregate demand. Where did that happen and when? I am almost begging for some shred of evidence. In End This Depression Now! (234) Krugman could only uncover a study of military spending which suggests, he says, that “every year in which there was big [military] spending increase was also a year of strong growth.” Even if that causality was not ambiguous (i.e., we could afford a fatter defense budget when the economy and revenues were strong) any effect of military contracts on (defense industry) output says nothing about deficits per se, nor about the bulk of federal spending which is on payrolls, subsidies and transfers.
DeLong believes “anything that boosts the government’s deficit over the next two years passes the benefit-cost test–anything at all.” Just as there is no obvious reason to expect identical economic effects from marketing or monetizing federal debt, however, there is likewise no reason to expect all types of government spending (purchases, payrolls, interest expense and transfers) to have the same effect. The evidence that different sorts of taxing and spending have quite different effects (to get back to my initial microeconomic question) is entirely on the side of Casey Mulligan, who found increased transfer payments positively harmful to employment and output.
Unless government debt was literally a free lunch, how could it possibly be true that “anything that boosts the government’s deficit over the next two years passes the benefit-cost test”? Suppose interest rates doubled or tripled, as consequence of faster growth of nominal GDP, that would greatly increases the government’s deficit through larger interest payments. Would the “benefit” of that larger deficit really exceed the added interest cost to taxpayers? Would it qualify as a stimulus?
In the Brookings Papers on Economic Activity Brad DeLong and Larry Summers remind us of the changing fashions defining the mainstream economic consensus: “The late 1960s and 1970s,” they write, “provided powerful demonstrations that monetary policy had major effects on economic performance. The 1970s provided convincing evidence … that in the medium and long runs demand-management policy [whether fiscal or monetary] could affect levels of nominal but not real income. The late 1970s and the 1980s brought increased emphasis on the supply-side aspects of tax and expenditure policies. These three factors had led most economists by the 1990s to reject discretionary fiscal policy directed at aggregate demand as a tool of stabilization policy. Indeed, a central element of the economic strategy of the Clinton administration was the idea that deficit-reduction policy was likely to accelerate economic growth.”
For the DeLong and Summers to switch from advocating deficit-reduction in the Clinton-Bush years to advocating deficit-expansion in 2012 demonstrates impressive intellectual agility. Yet actual results of larger spending and debt have been far less impressive than the results of U.S. and Canadian spending reduction from 1992 to 2000.
For me to continue to “reject discretionary fiscal policy as a tool of stabilization policy,” just as “most economists” (including DeLong and Summers) did a decade ago, is now being redefined as ignorant heresy by DeLong and Krugman, who both wrote of being terrified by modest budget deficits in 2003-2004. The new reality, as opposed to old theory, is that national, historical and international evidence that increased government spending, borrowing and taxing is commonly unproductive or counterproductive has only grown stronger in recent years. Compare, for example, Ireland and Iceland.
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European Union reaches highest unemployment rate since crisis started – Spain hits 25 percent unemployment rate for first time. The missing EU crisis headlines.
Posted by mybudget360 in bailout, banks, economy, Employment, European Union
During the height of the US Great Depression, the unemployment rate stood at 25 percent. This was a devastating experience for our economy and shifted policies and geopolitics for decades to come. So when you have the European Union, the world’s largest trading bloc with two countries experiencing unemployment rates of 25 percent people should be paying more attention. The unemployment rate in Spain for the first time hit the 25 percent mark last month. The figures are more troubling when you dig deeper into the data. Greece is also facing tough economic times. At the core of the crisis is the subject matter of too much debt. Spain is pulling back from a busted housing bubble and Greece is dealing with massive debt-to-GDP ratios. We trade heavily with the EU so what happens in Europe is bound to have an impact in the US. Is the crisis in Europe solved?
Unemployment rate of Spain and Greece
The unemployment rate of both Spain and Greece has breached the 25 percent barrier:
“(Daily Mail) The unemployment rate in Spain is above 25 per cent for the first time – with more than half of young people out of work, new figures have revealed.
Between July and September, 85,000 more people joined the ranks of the unemployed raising the total to 5.78 million, the National Statistics Institute said today.
The figures brought the country’s unemployment rate up by around 0.4 per cent to 25.02 per cent.”
The unemployment figure of 25 percent is troubling enough but the fact that 50 percent of young Spaniards are out of work is disturbing. In the US, we have half of young college graduates under the age of 25 either not working or working in positions that do not require a college degree. There seems to be global epidemic of young people out of work. For those that care about the future of their economies it is important to set out a clear path of prosperity for those coming up through their respective economic systems.
Even more important in the chart above is the overall EU unemployment rate that is now well over 10 percent. This is even higher than at the peak of the crisis in 2008 and 2009. While the US has seen this figure slowly inch lower the EU is going in the opposite direction. The massive amount of debt being pumped into the system is amazing. While our stock market might be up in 2012 this is not the case in many other countries:
The Spanish stock market is down over 30 percent. The European Central Bank is following in the same path as the Fed and now has a balance sheet of over €3.1 trillion:
The action of the ECB has seemed to create a lull in the media about the EU crisis yet the unemployment situation continues to get worse. The stock markets in these respective markets are certainly not going up. It is hard when central banks begin bailing out the financial industry while forcing austerity on the workers in each country. Instead of dealing with the inflated debt brought on during the bubble, these financial institutions want to inflate their way out of the mess by lowering the standard of living of those in each country.
We are seeing this in the US as the standard of living is crushed all the while we have nearly 47 million Americans on food stamps while the stock market is up over 100 percent from the 2009 lows. The system is now setup for extreme dichotomies where connected institutions can receive subsidies and bailouts while the public is forced into a lower standard of living. The crisis in in Europe is not something that is passed. This is ongoing. It appears that this crisis has been missing in the headlines for the last few months but the debt is certainly still there and the citizens in each country I’m sure are still feeling it. Ask the 25 percent unemployed in these nations and see if the global debt crisis is now over.
Statistics: Posted by yoda — Wed Oct 31, 2012 12:52 pm
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The Missing Collapse in the Art Market – 20 July 2012
Cash, trash and treasure have switched purpose as the credit bubble turns to bust…
The ODDEST THING thing about today’s Great Depression? asks Adrian Ash at BullionVault. The lack of a collapse in the art market.
Previously a bellwether for the global economy, turnover in fine art sank by three-fifths in the early ’90s. It tanked again in the early Noughts, taking the revenues (and equity valuations) of the big auction houses down with it.
Yes, the stock price of Sotheby’s – one-half the global auctions duopoly with unlisted Christie’s – sank as today’s depression began with the credit crunch 5 years ago this summer. But see what zero rates, quantitative easing and the unflustered money of plutocrats worldwide then did to BID?
Buying at the low of March 2009, you could have made 8 times your money in barely two years. And even now, with Sotheby’s stock trailing spring 2011′s peak by 43% on the Nasdaq, treasure-hunting by the super rich is still setting fresh records worldwide.
Christie’s this week reported art sales up 13% in Jan-Jun from the first half of last year, hitting a record $3.2bn. "Massive storage units are increasingly in demand by the booming art market," says one Swiss newspaper, "offering a duty and tax-free place to store art and make sales easier." And a new book pumping "hard asset" investments in SWAG – adding silver, wine and gold to art to make a PR-friendly handle – is now on the summer reading list of SocGen’s much followed strategist Dylan Grice. Which means it will soon sit unread on the beach with lots of me-too City and Wall Street types, too.
Now, whereas the bull run in art, wine and other high-end baubles was all just more conspicuous consumption in the credit bubble up to 2007, it has since become an investment necessity. "Treasure comes in many forms including fine art, rare property and, of course, gold," writes QB Asset Management’s Paul Brodsky in his latest letter to clients. "Treasure does not need to have any functional utility. The all-important common characteristics of treasure are scarcity and ongoing demand."
But why buy treasure – be it gold, pastel daubs by Edvard Munch, "signed first edition Edith Wharton books, original Chippendale chests, Honus Wagner baseball cards, and Wyatt Earp pistols," as Brodsky suggests, or silver, wine, art, gold, stamps, prime London property, beachfront in Monaco, or Spongebob coins from bankrupt broker PFG as most anyone else with a publishing advance will tell you today…?
"It is simply, quite simply really, a sanctuary for purchasing power during a period of currency dilution," says Brodsky. "The more currency in existence, the more currency chases scarce items."
Hence the blockage for today’s great depression in art and treasure. Because unlike in past recessions, cash is still all-too abundant. Too much money is the problem, not too little. Provided you’ve already got it. And with America’s top 1% now holding one-third of the wealth, for instance, some folk have got it in spades.
Hence safe-haven bonds paying nothing. Or less than nothing in the case of German Bunds. The yield offered in the open market by everything up to and including Berlin’s 3-year debt now shows a minus sign at the start. You have to pay Mrs Merkel to lend her money. Because there’s so much money sloshing about, the return paid to safe-haven loans has gone into reverse. Retained savings have to sit somewhere, and while the vast bulk is squeezing into US, German, UK and now even French bonds, a smaller but growing chunk wants to hedge the risks inherent in all debt investments (default and/or inflation) by buying tangible, high-value stuff.
Hence the continued boom in London property prices, even as the rest of the UK endures a near-bear market of 20% falls. Hence the adverts for stamps, fine wine and all manner of other collectible trash now following you around the internet. Hence last week’s new all-time record high for the weight of gold held for ETF investors worldwide, and Thursday’s 18-month record for silver ETF holdings.
Here at BullionVault, private savers refusing to leave their entire wealth at the mercy of banking, corporate or government debtors are also adding to their physical gold and silver property. Regardless of price, owning precious metals outright remains the stand-out choice, we believe, for your savings. Because they trade in deep, liquid, instantly priced markets worldwide. And because unlike corked wine, forged stamps or remaindered books sent to pulp, gold and silver have always retained a deal price, persistently throughout history. They never deliver an absolute loss. Which we fear is what cash savers and bond investors are certain to enjoy – retirement savers as much as the global über-wealthy – before this depression can really get started.
Inflation is clearly a risk, as Brodsky and the rest point out. But mass default by the world’s debtors looks just as ugly and clear a risk to us today.
Statistics: Posted by yoda — Sat Jul 21, 2012 12:14 am
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China is Missing Its Own Targets
THURSDAY, MAY 24, 2012
What’s worse than creating hundreds of billions of dollars worth of absolutely unproductive debts over the course of a few years? Setting a target for how many hundreds of billions worth of unproductive debts you can create in one year, and then missing it, when the rest of the world is already saturated with debt and is relying on you to make up the funny-money difference. That is the situation in which China finds itself right now, in a nutshell. Well, actually, it’s even worse for them, and, by implication, the rest of the credit-starved, low-growth world.
Because, the Chinese population is already knee-deep in inflationary pressures, yet the Chinese authorities need to implement inflationary policies if they want to keep their epic infrastructure/housing credit ponzi afloat. Right now, they are jaw-boning about starting a series of "key infrastructure projects" in order to, once again, artificially boost demand for credit and sustain their inherently unsustainable rates of economic growth. I think they may have a harder time of it this go round, though.
A population already squeezed to death by high costs of living, horrible conditions of working and no return on savings, only to see the same destructive policies implemented over and over again, will not be a happy population for much longer. And all of the artificial domestic demand for unproductive credit in the world will not make up for the plummeting demand in the one sector that gives China all of its credibility as an economic powerhouse – exports. Here’s Jun Luo with the report for Bloomberg:
China Banks May Miss Loan Target for 2012, Officials Say
China’s biggest banks may fall short of loan targets for the first time in at least seven years as an economic slowdown crimps demand for credit, three bank officials with knowledge of the matter said.
A decline in lending in April and May means it’s likely the banks’ total new loans for 2012 will be about 7 trillion yuan ($1.1 trillion), less than the government goal of 8 trillion yuan to 8.5 trillion yuan, said one of the officials, declining to be identified because the person isn’t authorized to speak publicly. Banks are relying on small- and mid-sized companies for loan growth after demand from the biggest state-owned borrowers dropped, the people said.
The drying up of loan demand attests to the severity of China’s slowdown and may add pressure on Premier Wen Jiabao to cut interest rates and expand stimulus measures. The economy may grow in 2012 at its slowest pace in 13 years, a Bloomberg News survey showed last week, as Europe’s debt crisis curbs exports, manufacturing shrinks and demand for new homes wanes.
Press officials at the People’s Bank of China and the three largest lenders — Industrial & Commercial Bank of China Ltd., China Construction Bank Corp. (939) and Bank of China Ltd. (3988) — declined to comment. Press officials at Agricultural Bank of China Ltd. (601288) weren’t immediately available.
New bank loans last month dropped 33 percent from March to 681.8 billion yuan, missing the 780 billion yuan median forecast of economists surveyed by Bloomberg News. A third of April’s new credit was also so-called discounted bills, or short-term loans often used by banks to pad the total figure.
This month may be worse. The four biggest banks — which account for about 40 percent of lending — had advanced only 34 billion yuan as of May 20, Liu Yuhui, a director at the government-backed Chinese Academy of Social Sciences, said in an interview this week, without saying where he got the data. The lenders may rush to boost credit in the last few days, mainly through short-term notes, he said.
China hasn’t officially announced the quotas set for each bank or the total loan target for 2012.
Still, as recently as last month, policy makers were indicating the target was 7.5 trillion yuan to 8 trillion yuan. Lenders in China’s eastern province of Zhejiang, for instance, will aim to increase new loans to about 670 billion yuan, accounting for 8.4 to 8.9 percent of the nation’s total increase, the government-backed Securities Times newspaper reported on April 26, citing Liu Renwu, head of the PBOC’s Hangzhou branch.
Failing to meet the annual loan target would mark a turning point for Chinese banks, which have reached or exceeded the central bank’s goal every year that such quotas have been in place since at least 2006.
The lending slowdown reflects the faltering economy. China’s gross domestic product expansion, which dropped to 8.1 percent in the first quarter, may further slip to 7.9 percent in the three months ending in June, according to a Bloomberg News survey last week. That would be the sixth quarterly deceleration.
April’s weak trade and industrial-output data prompted the central bank on May 12 to announce the third cut in the amount that banks must set aside as reserves since November.
The Chinese government this week signaled a bigger focus on bolstering growth, saying in a statement it will intensify "fine-tuning" of policies "for stable and relatively fast economic growth."
The nation will start a series of "key infrastructure projects that are vital to the overall economy and can facilitate growth," and speed up construction of existing railway, environmental protection and rural projects, the government said on May 23, summarizing a meeting of the State Council, or Cabinet.
Still, Morgan Stanley this week joined banks including Goldman Sachs Group Inc. in lowering its estimate for China’s economic growth for the year. The annual GDP forecast was cut to 8.5 percent, from an earlier 9 percent goal, to "reflect the worse-than-expected slowdown" in the first four months, chief economist Helen Qiao said in a note to clients on May 21.
The waning demand for loans is also reflected in the three- month Shanghai interbank offered rate, or the rate at which Chinese banks say they can borrow from one another. The so- called Shibor has fallen every day since March 27, sliding 65 basis points to 4.30 percent, according to data compiled by Bloomberg.
The outlook for China’s economy may be even worse if Greece exits the euro and local policy makers don’t increase the stimulus, China Investment Capital Corp., the nation’s biggest investment bank, forecast this week. Economic expansion may drop to 6.4 percent in 2012 in that case, Beijing-based Peng Wensheng, CICC’s chief economist, said in a May 23 report.
Statistics: Posted by yoda — Thu May 24, 2012 12:32 pm
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