Thursday, Mar 04, 2010
Oh dear - the truth is out
Investor's Chronicle: Sterling and a hung parliament
This will upset the fruitloops. You can't get a Rizla between Labour and Conservative spending plans. Britain's debt aint so bad and hyperinflation is not round the corner.
Posted by chrisch @ 09:39 AM (908 views) Add Comment
9 Comments
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1. icarus said...
It's worth noting also that the domestic private sector cannot increase net saving (deleverage), as it is trying to do, unless the government or foreigners increase their deficits (the latter through a UK trade surplus). If households and companies try to net save the economy and incomes weaken and the attempted saving is thwarted. Private excess saving (saving more out of incomes than is tangibly invested) cannot take place without a budget deficit or a trade surplus. Look also at the Clinton budget surpluses in the late 90s. Increased tax liabilities led to greater private indebtedness and this reduced demand, incomes and liquidity and was a large part of the cause of the 2001-2 recession. This squeeze on incomes helped to fuel the increased borrowing via Frankenderivatives and the following crisis.
2. flashman said...
Icarus: what you say makes intuitive sense but it is not actually true. We can see the proof right now….we have been deleveraging and we are in a recovery
I’ll selectively quote from an article where the much-respected Tim Bond was asked to discuss a similar conundrum. In a nut shell you would have been wrong in 7 out of ten of the last recessions.
This from the article:
But is it possible to envisage a scenario where the economy can recover at a solid and sustainable rate, while simultaneously paying off debt.
His answer: 'Such worries make intuitive sense and are consequently a powerful source of concern, the historical record does not offer much in the way of empirical support for such fears. De-leveraging is a phenomenon typically seen in the early stages of economic recovery.'
Bond goes on to point out that in seven out of the last nine recoveries, debt as a portion of GDP shrunk
But how much debt can we pay off and still recover? Bond has calculated that in the first year of a recovery, household debt to income ratio falls by 0.28%, while the average fall in corporate debt to profit is 1.1%.
Bond's argument is that borrowing is not an important driver of economic recoveries.
So Bond is bullish in the belief that we don't need to borrow to grow and we can pay off debt and still grow.
He concludes: 'surely, a key message of the credit crunch is that increases in debt often do not produce the increases in income needed to service that debt? Quite how the myth of the indispensability of debt has managed to survive such a thorough empirical assault defies reason.'
3. icarus said...
flashman - Firstly I doubt if it's a recovery. Any uptick is driven by asset-price support and government stimulus. And when you say 'we have been deleveraging' do you mean the private sector? But my point is that the counterpoint to this is the growing government deficit.
'Increases in debt do not produce the increases in income needed to service that debt.' I agree completely with that one. That's the crux of the problem. Investment flows into assets already in place instead of into production of goods and services.
4. flashman said...
icarus: We could argue 'til the cows come home, as to whether or not we are in a recovery. At the moment you are on a sticky wicket because the figures say we are in a recovery and the latest service sector figures here and in the US suggest that the recovery is gathering pace. However, I will remember this discussion and honourably come back to you, if at some stage in the future, it turns out that we spiralled back into a lasting recession.
The private sector (including consumers) is indeed deleveraing and yet we are in a recovery. Without wishing to be facetious, it turns out that this happens during 70% of recoveries from ression.
btw: I scratched my head yesterday but still couldn’t understand your Tsar reference. It occurred to me that you might have taken my comment “ excluding icarus and mountain goat” as a slight? It was actually the opposite.
5. icarus said...
Flashman - Harry Flashman had lots of adventures in the 19th century and met many famous historical figures If he met the Tsar he would also have had an eye for the Tsarina if she was pretty. Hadn't seen a post of yours for a while, so I guessed you'd been adventuring. I'm sure you know the books.
Agreed on the danger of going around and around about whether the recovery is underway - but you DID cite it as a 'proof'.
The private sector is deleveraging but my original point is that it can't do this without increased government deficit or a trade surplus. It's just a formal accounting thing; net buyers = net sellers of legal claims.
A good account of the role that government deficits can play is at
http://www.levy.org/pubs/hili_99a.pdf
or just page 2 if you want a quick read. An idea worth playing with was summarised in my last two sentences @1. Try to get rid of govt deficits and you may end up with demand coming from private overborrowing.
_
6. flashman said...
icarus: Aaahh, got it. Yes, I have read every one of George MacDonald Frazer’s books, twice over. I think I could now challenge any history professor on Victorian military history. GMF was actually a historian before he lit up the world with his crazy idea to plagiarise Tom Brown
Yes I did actually fall in love with the Tsarina but I threw her off the sledge to lighten the load, when fleeing across the Tundra. It war her or the champagne, don't you know.
Anyway now that you have made that reference, I will agree with everything you say from now on. Recovery? What rot and I’ll damn anyone’s eyes that says otherwise.
7. braindeed said...
flashman @4 said...
'The private sector (including consumers) is indeed deleveraing and yet we are in a recovery. Without wishing to be facetious, it turns out that this happens during 70% of recoveries from ression'.
Accepting that statement prima facie, could you tell us which of the recessions defied the stats - and if possible, why you think they did?
8. flashman said...
The mid 50s and 2002 were the two exceptions, out of the last 9. I'm not sure about the 50's but in 2002 no one was worried enough to pay off their debt. The recession was widely considered to be a dotcom: 9/11 blip that was not structural. Housing actually started booming in this period. I am only guessing about the mid 50's recession but I imagine that people were quite optimistic in that period. Architecture, car design and pop art (mainly in the US) certainly infer that it was an optimistic period. Again I have to stress that I am only guessing about the mid 50s episode. People certainly took the recent recession seriously, which is why they deleveraged (the banks also cut off credit, which forced people to deleveraged whether they wanted to or not).
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