Thursday, Aug 05, 2010
Fed fiddles while economy burns
Counterpunch: An Avoidable Depression
Bernanke said the printing press was the technology to fight delation. So he increased the money supply (no good - the money had circulatory probles and M3 is negative) and stuffed the banks with reserves (no good - at least for the real economy - since lending and consumer credit are shrinking). Now they're talking of more QE (to fan inflation expectations to get people to spend before their money loses its value). But consumer spending can't be constantly regenerated by lowering IRs or fanning inflation expectations. As people are laid off or have to take pay cuts no amount of monetary policy will work. Fiscal, not monetary, stimulus is needed.
Posted by icarus @ 05:47 PM (1253 views) Add Comment
21 Comments
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1. icarus said...
That 2.4% second-Q GDP growth was due largely to inventory growth. Final demand was pretty flat.
http://www.guardian.co.uk/commentisfree/cifamerica/2010/aug/02/us-economy-road-to-recovery
2. drewster said...
"Fiscal, not monetary, stimulus is needed."
That's not entirely true. The basic problem is that even with interest rates at 0%, nobody wants to borrow money (hence falling M3). Printing money and giving it to banks to lend (via QE) doesn't help, since nobody wants to borrow. One way out of this is for the government to borrow and spend more money (fiscal stimulus). However many people object to this in principle since the government won't spend the cash wisely or get good value for money. Billions will be wasted on pork-barrel projects.
There is an alternative. Simply print and give each citizen $10,000 (this can be done as a tax credit). This has the same monetary effect as government spending, but without less risk of money being wasted.
3. icarus said...
A tax credit is a fiscal stimulus.
4. drewster said...
I suppose you're right. I just associate the words "fiscal stimulus" with general government spending.
What I was getting at is the difference between Fiscal Stimulus and just Printing Money. With FS, the government borrows money today but there is always the fear of future tax rises to repay the debt. That fear can prevent people from spending. (Arguably, that's what we're seeing in the UK today.) With PM, the government creates money and there is no fear of future tax rises.
(thanks for posting this btw, it's interesting)
5. icarus said...
But tax credits also increase deficits, which result from less revenue as well as from more expenditure. The writer disagrees with your idea that deficits prevent people from spending because of fears of future tax rises. His claim is that "Ordinary working people do not care about the budget deficits; that's a myth propagated by the right wing think tanks. They care about jobs, wages, and providing for their families." If deficit spending does create jobs and salaries then people will spend for that reason.
Regarding government waste, that's a big question, with political dimensions. Are Trident and wars in Iraq and Afghanistan "wastes"? Or are wastes just the things the Mail goes on about? And if somebody earns £60k for a non-job in a quango that waste is offset by government clawbacks through that person's paying income tax, NI, VAT, Council Tax etc. - just a couple of the things you have to fold into a "waste" debate and calculation.
6. general congreve said...
@2 - If you gave everyone $10,000 each you can guarantee that the feckless (the majority) would use this windfall to pay down their massive debts (owed to the insolvent banks who would just hoard it upon payment) and the prudent would probably just save it for a rainy day (considering the current economic climate). The overall net gain to the economy probably wouldn't be all that much, as most wouldn't be spent on consumer goods. So you'll just have loaded another pile of debt onto the taxpayer that has very little positive effect in stimulating the economy.
Saying that, I'd love to see such a fantastic plan happen, it'll be another step closer to sovereign debt default. I'm really fed up with watching this slow-mo car crash, I want my gold profits now!
7. fallingbuzzard said...
I think that the Fed and the US administration will take the "do nothing" approach to creating confidence.
8. Crunchy said...
5. icarus said...Regarding government waste, that's a big question, with political dimensions. Are Trident and wars in Iraq and Afghanistan "wastes"?
Someone had to say it.
We are financing our own demise and the vast majority are blissfully unaware of the multitude of future ramifications.
Their children will be disgraced at their ignorance, that's if they are left with any thinking faculty at all after the chemical brain
bombardments.
One of the great flaws of people is to think all men are basically good. Most are.
9. drewster said...
general congreve,
So you'll just have loaded another pile of debt onto the taxpayer
No, the whole point is that it's not debt, it's pure printed money which never need be repaid.
If you gave everyone $10,000 each ... pay down their massive debts
That might be the case today - but five years ago if you'd given everyone $10,000 they would have used it as the down payment on a fly-to-let hovel in Bratislava.
it'll be another step closer to sovereign debt default
Perhaps, ultimately. But we're in somewhat uncharted territory at the moment. Also the government can stop printing whenever they like - which would hopefully quickly staunch any currency crisis.
icarus,
The writer disagrees ... that deficits prevent people from spending
"Ordinary working people do not care about the budget deficits; that's a myth propagated by the right wing think tanks. They care about jobs, wages..."
Fear of unemployment is real, and is present in the UK (and USA) today. A lot of people are employed either directly or indirectly by government; and many more depend wholly or partly on government workers. Britain has far more state-dependent workers than the USA. You're right in that nobody cared about rising deficits five years ago. People only care about deficits in so far as they mean less government spending, fewer state-sponsored jobs, etc. However right now we're seeing a big cutback in government spending.
But tax credits also increase deficits...
No, my point was that you could just print money and give it to people via the tax system. No need to increase the deficit, just print.
... deficits which result from less revenue as well as from more expenditure
In the short-term you can boost revenue by boosting expenditure. Borrow & spend today, create illusory growth, claim credit for the growth - that was Gordon Brown's tactic. It was never sustainable in the long term. Now that the peg-leg of endless borrowing has been kicked away, the growth has faltered too - and we've ended up with even more deficits.
Regarding government waste, that's a big question...
Yes. I said "many people object to this in principle" - it's not necessarily my view. Whether certain expenditures are wasteful is a political viewpoint. (Note that spending £60k on a non-job only to reclaim £20k in taxes is still a waste of £40k.) However it's easy to make the argument for reduced spending: Tell people that debt is morally wrong. Tell people that government debt is equally bad. Tell people that for government to spend money it doesn't have is feckless and irresponsible. Hey presto! - you've made a case for cutting spending.
I'm not a Daily Mail reader - not even a sympathiser. The rights or wrongs of deficit spending are largely political decisions, not economic. My original point was simply that there are two ways out of deflation: (1) print money and give it to the government to spend, or (2) print money and give it to the people to spend. (Option 3: just let deflation run its course.)
10. techieman said...
"I'm really fed up with watching this slow-mo car crash, I want my gold profits now!" - im actually a bit fed up with you always bringing up gold in every post. Yes you have some of the yellow stuff... yes you want it to go to the moon ... yes eventually you may be right, but your resolve may be severely tested in the coming months.... ok GC - we get it..
Can you post something with out mentioning the yellow shiny stuff??... thanks!
11. techieman said...
"are two ways out of deflation: (1) print money and give it to the government to spend, or (2) print money and give it to the people to spend."
1 = dangerous game.... that relies on the multiplier feeding through and ultimately people re-spending the injected money
2= dangerous game.... Agree with GCs first paragraph. Horses / water / drink.
There are only so many times you can do this without the markets smelling a rat. The markets know this and the government knows the market knows this. Not only that but throwing good money after bad doesnt exactly help in the political stakes if it dont do the trick.
Politically perhaps its better to not do it and then say that you were stopped from doing it and if you had have been able to do it, everything in the garden would have been l-u-v-e-r-l-y..... [oh is that going to be Labour's argument at thye next election .. hmmm i wonder!].
12. hpwatcher said...
"are two ways out of deflation: (1) print money and give it to the government to spend, or (2) print money and give it to the people to spend."
1 = dangerous game.... that relies on the multiplier feeding through and ultimately people re-spending the injected money
2= dangerous game.... Agree with GCs first paragraph. Horses / water / drink.
It's going to be a delicate balancing act, though I don't think it's one that will present too many problems as fiat money is so flexible, many hundreds of solutions will probably be tried until one eventually works. Although, the problem isn't really deflation as such, but the strength the dollar gets from being the reserve currency. So it may well be worth them, pushing this responsibility onto something else - like the yellow stuff - to ease pressure on the dollar. Just a thought.
13. another alan said...
Agree with the comments about General Congreve being a gold bore - every post! A bit like ant solely being Greg Pytel's pr department and not engaging elsewhere.
14. hpwatcher said...
Gold, gold gold ;-)
15. inbreda said...
"There is an alternative. Simply print and give each citizen $10,000 (this can be done as a tax credit). This has the same monetary effect as government spending, but without less risk of money being wasted."
or - another solution - is to raise interest rates (seeing as low interest rates aren't get people spending or boosting the economy in any way) - crash the housing market so we (and future generations!) can afford to buy, and get back to some level of normality.
As I see it nobody has a clue about whether printing money/QE/low IR/High IR/fisical stimulation (sic) will have the desired effect. In fact I can't see too much evidence of anyone even having a clear idea about what the desired effect might be. At the end of the day all I see is the government planning to destroy the currency, increase inflation, to shake off its debts and steal from the prudent.
16. icarus said...
What's the difference between a government "printing" money and giving it out to everybody and banks' creating money through loans and overdrafts and lending it out to everybody? Most money is created by banks.
17. inbreda said...
cruising the archives::
1. harold said...Quote of the day:
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose." -- John Maynard Keynes
Seems like the gentlemen at the Fed need to go back to school.
Monday, October 30, 2006 08:49AM
18. techieman said...
From the bloomberg article on the non farm numbers i have just posted:
"Americans are torn about whether the federal government should focus on curbing spending or creating jobs, the poll conducted July 9-12 showed. Seven of 10 Americans say reducing unemployment is the priority. At the same time, the public is skeptical of the President Barack Obama’s stimulus program and wary of more spending, with more than half saying the deficit is “dangerously out of control.”
Support for Obama has fallen as the jobless rate has been slow to retreat. His job approval over a three-day period ending July 31 was 44 percent, compared with 54 percent at this time last year, according to a Gallup poll."
Public opinion is turning.... and the question will become how much stimulus will be allowed and politically expedient.
19. drewster said...
techie,
Definitely agree. In fact I think public sentiment in the USA has already turned. The Tea Party movement, with its pro small-government message, is a sign of this.
20. icarus said...
techieman @17
From an article last October:
1.A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.
2.The effects of this depression have been lessened by economic stimulus and government support.
3.Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
4.In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
5.Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.
The article is at http://www.creditwritedowns.com/2009/10/the-recession-is-over-but-the-depression-has-just-begun.html
21. techieman said...
Icarus - cant disagree with the points made there. Have always been a duuble dipper (at best) myself.
I was reading about the cash for clunkers and its withdrawal and the consequent reduction in demand for automobiles. Not only that but the default rates on the HP associated with those purchases are about twice those which were not purchased that way.... "go figure"!!
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