George And Wolf

[scepticus]

http://www.ft.com/cms/s/0/31d8576e-74c6-11df-aed7-00144feabdc0.html

Worth a read. It ends:

"Your government is preparing the ground for a large, sustained and pre-programmed reduction in the structural fiscal deficit. But if this tightening is not to generate an even more prolonged period of economic weakness, and so a bigger cyclical fiscal deficit, there must be strongly offsetting reductions in the surpluses of the household, corporate or foreign sectors. The first is surely undesirable: the UK wants higher household savings, not less. The second is indeed desirable, since corporations ran a financial surplus, of 8 per cent of gross domestic product, in 2009. But considerably higher corporate investment is unlikely if the economy itself now weakens. Last but not least, the crisis in the eurozone, the UK’s most important trading partner, not to mention its enthusiastic embrace of the fiscal hair shirt, makes escape via far higher net exports unlikely.

With luck, I will be proved too pessimistic. But what are you going to do if I am not? Are you going to stand by if the economy goes into a steep decline? Have you discussed this possibility with Mervyn King, the governor of the Bank of England? In such circumstances, the most effective instrument might be central bank financing of additional public spending. But your commitment to pre-programmed spending cuts would seem to rule this out. The alternative might be a temporary reduction in taxes, of the kind you condemned under the previous government. In any case, the UK should have a plan for growth of nominal demand at a rate of 6 per cent and preferably more, for some years. Who is to take responsibility for this – and how?

However carefully you carry out your public relations, the cuts you intend to impose will be viewed as punishment of the innocent for the sins not just of the guilty, but of the rescued and now bonus-receiving guilty. You can answer that cuts are necessary because the economy is durably smaller than hoped and so pain must now be borne by public spending, the part of the economy that has not yet adjusted to reality. But if, at the same time, you made the economy weaker, so throwing away the advantage of policy autonomy, your decisions would be unpardonable – and unpardoned.

I have no question that the structural deficit must be eliminated. But I will judge your emergency Budget by whether it also contains a credible plan B for demand. If it is believable that monetary policy will work, on its own, even in today’s circumstances, well and good. But I, for one, doubt it. So remember this: the imposition of futile misery is not an act of wise policy, but rather a sign of folly. "

[_w_]

In such circumstances, the most effective instrument might be central bank financing of additional public spending.

Ta da! The magic wand. "If you are going to slow down debt financed consumption then at least generate inflation so people can keep themselves busy speculating"

In any case, the UK should have a plan for growth of nominal demand at a rate of 6 per cent and preferably more, for some years. Who is to take responsibility for this – and how?

"We must spend spend spend no matter what. Who cares if we haven't got the money."

You can answer that cuts are necessary because the economy is durably smaller than hoped and so pain must now be borne by public spending, the part of the economy that has not yet adjusted to reality. But if, at the same time, you made the economy weaker, so throwing away the advantage of policy autonomy, your decisions would be unpardonable – and unpardoned.

"If you don't keep ruining us we will vote Brown back in and we will never forgive you"

I have no question that the structural deficit must be eliminated.

"But let's just do it tomorrow hey, not today"

But I will judge your emergency Budget by whether it also contains a credible plan B for demand.

"Spend spend spend!"

If it is believable that monetary policy will work, on its own, even in today's circumstances, well and good. But I, for one, doubt it. So remember this: the imposition of futile misery is not an act of wise policy, but rather a sign of folly."

"Let people spend and enjoy themselves, anything else would be cruel!"

I am astonished by those recent attacks on Western governments by a handful of Keynesian economists. They are often visceral, sometimes personal, usually no better than doom mongerers. Let us not forget that these are the guys that advised us straight into this crisis to begin with.

Now for the TFH bit:

I've noticed that Wolf and Krugman are two of those extremely virulent critics of western governments that promote austerity. Both use a language and a tone of voice that is way above their pay grade. Weren't they both at this year's Bildeberg?

[scepticus]

Now for the TFH bit:

I've noticed that Wolf and Krugman are two of those extremely virulent critics of western governments that promote austerity. Both use a language and a tone of voice that is way above their pay grade. Weren't they both at this year's Bildeberg?

sure they are very vocal. However they are drowned out easily by the various commentators demanding austerity. Debate doesn't hurt.

what is actually very interesting is if both krugman/wolf are at bildeburg, and so are their very many detractors/polar opposites, what does that tell you about the consensus among the atlantic elite which are supposed to be the bildeburg attendees?

[scepticus]

I am astonished by those recent attacks on Western governments by a handful of Keynesian economists. They are often visceral, sometimes personal, usually no better than doom mongerers. Let us not forget that these are the guys that advised us straight into this crisis to begin with.

wolfs piece is much more along the lines of how one expects to pay back ones national public and private debts with 15-25% unemployment, social unrest and plunging GDP and plungin demand in nations inporting british goods?

Wolf/krugman et al say it can't be done, and I agree. Osborne thinks different - I guess we shall see.

Sooner or later the debate will be about how the default is to be managed domestically and internationally, not if.

[_w_]

what is actually very interesting is if both krugman/wolf are at bildeburg, and so are their very many detractors/polar opposites, what does that tell you about the consensus among the atlantic elite which are supposed to be the bildeburg attendees?

I must admit that I don't really know who was at Bildeberg. I know Wolf was there and think Krugman was there and boy have I heard from then since then.

Do you know of any economist currently pushing for austerity that went to Bildeberg?

[_w_]

Wolf/krugman et al say it can't be done, and I agree.

And so do I, but without so much conviction.

But neither can we keep borrowing and spending money in the vain hope that things will get better. It only makes things worse and this is what got us here.

Only vicious inflation would make their proposal realistic and I think for the sake of honesty and credibility they might as well come out clean and say it. A proper analysis debate could then be contemplated.

[scepticus]

Only vicious inflation would make their proposal realistic and I think for the sake of honesty and credibility they might as well come out clean and say it. A proper analysis debate could then be contemplated.

the language of debate needs to change from deflation vs inflation, to default vs austerity.

There is a good case to be made I think that an inflationary exit is not going to work, and neither is an austerity exit.

That leaves the default exit, and the sooner people realise that the better. Whether that results in inflation or deflation is debate-able, and of secondary concern.

[scepticus]

Do you know of any economist currently pushing for austerity that went to Bildeberg?

I don't have a list of attendees - the ones you can google appear incomplete, but for sure there are plenty of anti-inflationists there.

In fact I can't see anyu confirmation that krugman is on it.

[_w_]

the language of debate needs to change from deflation vs inflation, to default vs austerity.

Inflation as in currency debasement is what Wolf is really asking for and even that is doubtful at best. So inflation/debasement vs. default vs. austerity would be the complete set of choice.

That leaves the default exit, and the sooner people realise that the better. Whether that results in inflation or deflation is debate-able, and of secondary concern.

The thing is, is default really possible? I would assume that defaults on the scale that would be required to make a difference would cascade into a complete and total default of all debts, possibly inevitably? Wouldn't this result in the destruction of the monetary system as surely as excessive debasement would?

[Injin]

the language of debate needs to change from deflation vs inflation, to default vs austerity.

Default will also lead to austerity.

There is a good case to be made I think that an inflationary exit is not going to work, and neither is an austerity exit.

The question is - work for who?

That leaves the default exit, and the sooner people realise that the better. Whether that results in inflation or deflation is debate-able, and of secondary concern.

There has never been a voluntary default when the option to print has been on the table.

Either you think the option isn't on the table or "it's different this time." Which is fair enough - i'd be interested in your reasoning though, if you would be so kind.

[_w_]

I don't have a list of attendees - the ones you can google appear incomplete, but for sure there are plenty of anti-inflationists there.

In fact I can't see any confirmation that krugman is on it.

It was just an itch, I'm surprised by the tone of their papers and hoped for a connection.

[Injin]

Inflation as in currency debasement is what Wolf is really asking for and even that is doubtful at best. So inflation/debasement vs. default vs. austerity would be the complete set of choice.

The thing is, is default really possible? I would assume that defaults on the scale that would be required to make a difference would cascade into a complete and total default of all debts, possibly inevitably? Wouldn't this result in the destruction of the monetary system as surely as excessive debasement would?

Even your local loan shark will tell you that everyone who owes has to be lent on to pay up or pretty soon no one will.

[_w_]

Default will also lead to austerity.

Oh yes absolutely, and most probably of a much worse kind than voluntary austerity.

[_w_]

Even your local loan shark will tell you that everyone who owes has to be lent on to pay up or pretty soon no one will.

Which only leaves austerity according to you?

[Injin]

Which only leaves austerity according to you?

No, it only leads to inflation.

The guy with the printing press owes the money.

[scepticus]

Inflation as in currency debasement is what Wolf is really asking for and even that is doubtful at best. So inflation/debasement vs. default vs. austerity would be the complete set of choice.

He is not so stupid as to argue for that since if everyone debases their currency it doesn't change anything.

The keynsian argument is that actions to restore demand have a long run positive effect on the currency, which in normal inflationary times (1945 to 2001), I would agree with.

The reality is that demand can only be restored by restoring the purchasing power of the bottom sectors of society, and that includes the chavs and chinese foxonn workers, and by a better balancing of purchasing power between east/west, north/south.

Inflation doesn't achieve that, but neither does austerity. Inflation and austerity are both tools of capitalism.

The thing is, is default really possible? I would assume that defaults on the scale that would be required to make a difference would cascade into a complete and total default of all debts, possibly inevitably? Wouldn't this result in the destruction of the monetary system as surely as excessive debasement would?

of course it is possible. debts that can't be repaid, won't be repaid.

I would say a default of somewhere around 25% over spread over 5 years should be sufficient.

Defaults won't destroy the monetary system as long as they are reasonably uniform and distributed in a balanced way accross the entire affected global economy. Of course is is perfectly reasonable to argue such an outcome couldn't possibly happen.

Edited June 11, 2010 by scepticus

[scepticus]

There has never been a voluntary default when the option to print has been on the table.

yes there has, argentina for example. Russia also defaulted in 1998.

In the asian financial crisis, many asian nations debts were restructured. South Korea was restructured in 1998 I think, and now 10 years later samsung is within spitting distance of taking the semiconductor top spot off intel.

default will happen when the majority of the population reject the printing press as an option.

[Injin]

He is not so stupid as to argue for that since if everyone debases their currency it doesn't change anything.

I find this an interesting meme, if only for it's utter insanity.

The keynsian argument is that actions to restore demand have a long run positive effect on the currency, which in normal inflationary times (1945 to 2001), I would agree with.

The reality is that demand can only be restored by restoring the purchasing power of the bottom sectors of society, and that includes the chavs and chinese foxonn workers, and by a better balancing of purchasing power between east/west, north/south.

Inflation doesn't achieve that, but neither does austerity. Inflation and austerity are both tools of capitalism.

Well of course not. Inflation is stealing from the middle class and poor by devaluation, austerity is stealing from the middle class and poor by direct stealing.

What has to stop is the theft of all kinds. The state has to shrink, in other words. Problem being : number of states that have voluntarily shrunk = zero.

of course it is possible. debts that can't be repaid, won't be repaid.

I would say a default of somewhere around 25% over 5 years should be sufficient.

Can't do it - 1 default and their is a rush for the exits. "You go broke slowly and then all at once."

Defaults won't destroy the monetary system as long as they are reasonably uniform and distributed in a balanced way accross the entire affected global economy. Of course is is perfectly reasonable to argue such an outcome couldn't possibly happen.

Impossible to achieve, almost certainly.

[Injin]

yes there has, argentina for example. Russia also defaulted in 1998.

Argentina was dollar pegged. It had no option to inflate as it can't print dollars (without getting woken up by a cruise missile through the bathroom window...)

Russia had a real world problem which meant they couldn't.

Even if you were to allow them as examples (and there is no reason why anyone would) it's still 2 out of thousands.

In the asian financial crisis, many asian nations debts were restructured. South Korea was restructured in 1998 I think, and now 10 years later samsung is within spitting distance of taking the semiconductor top spot off intel.

default will happen when the majority of the population reject the printing press as an option.

And that onyl ever happens after currency repudation - after it's been printed into worthlessness.

if there was any appetitie at all amongst the general public for dong the sensible thing we wouldn't be here in the first place.

[_w_]

He is not so stupid as to argue for that since if everyone debases their currency it doesn't change anything.

I would say a default of somewhere around 25% over spread over 5 years should be sufficient.

I think the kind of default you describe (uniform) would result in a complete rewrite of the law. And its effect would be the same as debasement (via printing, I didn't say devaluation) without the legal aggravation.

[_w_]

yes there has, argentina for example. Russia also defaulted in 1998.

In the asian financial crisis, many asian nations debts were restructured. South Korea was restructured in 1998 I think, and now 10 years later samsung is within spitting distance of taking the semiconductor top spot off intel.

default will happen when the majority of the population reject the printing press as an option.

Every single example you cite involved debts in foreign currency that couldn't be printed away.

[_w_]

default will happen when the majority of the population reject the printing press as an option.

This is the interesting thing. The majority of the population is begging for the printing press. It's the easy option.

[sharpe]

This is the interesting thing. The majority of the population is begging for the printing press. It's the easy option.

The printing press is actively being used as we debate.

In the EU recently they seem to have had this debate. With Germany presumably pushing for a Greek default and France pushing for ECB action to buy Greek bonds (printing). It looks like they agreed to print.

[Bloo Loo]

The printing press is actively being used as we debate.

In the EU recently they seem to have had this debate. With Germany presumably pushing for a Greek default and France pushing for ECB action to buy Greek bonds (printing). It looks like they agreed to print.

the printing is for the banks.

the Austerity is to pay for the printing.

[crouch]

the language of debate needs to change from deflation vs inflation, to default vs austerity.

There is a good case to be made I think that an inflationary exit is not going to work, and neither is an austerity exit.

That leaves the default exit, and the sooner people realise that the better. Whether that results in inflation or deflation is debate-able, and of secondary concern.

I also am inclined to believe this. If you look at Reinhardt & Rogoff's recent book: "This Time is Different" they chronicle that these crises are habitual all over the world and have been for centuries and that the main way they have been resolved is either by inflation or default - which includes rescheduling.

The inflation route is now much more difficult due to CB independence and the power of the bond market which leaves default; as unlikely as this might appear I think default is a definite possiblity, if not probablity.