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Keynesian End Game

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http://www.zerohedge.com/article/japan-land-rising-debt

Japan seems a good example of what Keynesian policies might be expected to deliver. The above article suggests an end game here.

The US seems keen to follow this route, delaying and worsening the inevitable. Europe and the UK are taking the pain now. Will be interesting to see how things play out in Japan from now on.

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Japan is proof that a country cannot borrow itself to prosperity.

+ 1

Simple really.

Edit to add important news:

Historically, more than 90 percent of Japan’s government-issued debt has been consumed internally by its citizens, directly or through its pension system. But the savings rate in Japan, which was in the mid-teens in the 1990s, today is approaching zero and will likely go negative in the not-so-distant future.

This is the end of cheap and easy borrowing for the Japanese government.

Moral of the story: Market logic is stronger than cultures. Market logic changes cultures (i.e. - interest rates can't stay so low, and savers not being eventually dissuaded, and borrowers tempted.)

.

Edited by Tired of Waiting

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The US seems keen to follow this route, delaying and worsening the inevitable. Europe and the UK are taking the pain now. Will be interesting to see how things play out in Japan from now on.

"The severity of the debt problem in Japan has been masked by the fact that government spending on interest payments has not changed over the past two decades, as the average interest rate paid on the country’s debt declined to 1.4 percent in 2009 from more than 6 percent in the 1990s. This is about to change."

About to change? About? The article is saying that Japan has followed fiscal expansion for nearly 20 years without any increase in its interest rates. 20 years! Yet the Austerians are saying we can't delay fiscal tightening for a mere 12 months (as Alastair Darling proposed) because it would result in higher interest rates?

One side points to Japan.

One side points to Ireland.

All I know is its definitely not 'simple really'.

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Interesting related article in Indy today

http://www.independent.co.uk/opinion/commentators/hamish-mcrae/hamish-mcrae-what-if-revenues-fail-to-recover-2031076.html

Hamish McRae: What if revenues fail to recover?

Could the UK become the new Japan? The two bits of news that spark that question are the public finance figures for June, released yesterday, and the creation by the Chancellor of this new Office for Tax Simplification. The June numbers are disturbing, for they show that the apparent recovery in tax revenues seems to be petering out, while the latter matters because a radical simplification of the tax system may be the only way the Government can generate enough tax to dig its way out of the fiscal catastrophe it inherited.

The parallel with Japan first, for if you add all the debts of the UK – government debt, company debt, personal debt and so on – we join Japan at the head of the league table of shame. The composition of the debt in the two countries varies, with public debt being bigger in Japan and personal debt being smaller, but in both countries total debt is more than four times GDP.

But now look at something else. I was aware, as most of us are, that Japan had experienced two decades of stagnation, with wealth rising very little or not at all, but I had not fully appreciated the damage that slow growth had done to tax revenues. A couple of weeks ago the Japanese finance minister reported that revenues for the last fiscal year, the one that ended in March, were Yen 38.7 trillion. That was actually a little higher than had been feared, but was still the lowest since 1986. Yes, 1986. Back in 1990, at the end of the boom years, they were Yen 60 trillion and since then there has been more or less steady decline. It is true that this is the central government tax take and there are other local taxes, but the broad picture is of a public sector that has to manage with less money coming in each year.

We are not used to that. Revenue has plunged over the past three years but the explicit assumption in all the budget forecasts is that it will recover. Yes, everyone accepts that we have to cut public spending and the only area of debate is about the speed at which that should be done. But the numbers only add up if you also assume that revenues will recover. What if they don't – or at least not to the extent expected?

We are only one quarter of the way into this fiscal year but the fiscal numbers don't look great. The Government had to borrow £42.4bn in the three months to end June, whereas last year it had to borrow "only" £41.4bn. This period does relate to policies under the former regime and the emergency Budget was not until 22 June. Nevertheless it has been a period of some growth, which is more than can be said of these three months last year. My worry is not that the Government is failing to control spending, for it is too early to expect much to be happening on that front. Rather it is that revenues are weakening and may weaken further.

For the first two months of the financial year revenues were decently up on 2009 but in June, though VAT was up, income tax revenues were flat. We will have to wait for some months to be sure but what may have been happening has been that people have been bringing forward purchases ahead of the emergency Budget to escape a possible rise in VAT. They may also have been taking capital gains to get the benefit of the 18 per cent rate, in the correct anticipation that this would be increased. That would explain the strong numbers there.

As for the weak income tax figures, people may now be starting to cut their income in response to the rise in the top rate of tax to 50 per cent.

To many people that must sound a bit odd – people just cutting their income – because that is not what most of us would choose or even be able easily to do. But you have to remember that a quarter of income tax revenue comes from the top 1 per cent of earners and many of this top group do have flexibility as to whether to take income or not. If they own their own businesses, for example, they can leave the money in the business. A few are moving offshore, which is hard for UK citizens but easy for non-nationals. (I see that JP Morgan is relocating its head of international business to New York because of the high personal taxes in the UK.) We don't know what the leakage will be but it is perfectly possible that three or four years down the line, income tax revenues may actually be lower than they were last year.

So there will be huge pressure on improving the tax system so that we get the revenues in but don't encourage people to move out, or simply not come here in the first place. That is where the Office for Tax Simplification comes in.

I find here a bit of scepticism coming on. I can't quite see why you need an office to make things simpler. Why not just stop complicating them in the first place? We no longer have a Chancellor with a compulsion to fidget. Remember all those little announcements that Gordon Brown used to scatter like a condiment over his Budget speeches? There is a huge case for radical simplification, not least because even the revenue can't cope with the present system but that should be mainstream, not something bolted on the side. Still, since we have it, its mission should surely be not just to simplify the system but to tune it so that we increase our chances of avoiding the plight of Japan.

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"Japan is proof that a country cannot borrow itself to prosperity."

this kind of trite nonsense always irritates me.

what japan proves is that a nation with a static or falling, and quickly ageing population cannot borrow its way to prosperity.

of course, Britain, the US and the rest of the west have been borrowing their way to increased prosperity for what - 300 years now?

So historically speaking, borrowing was the route to prosperity. Not saying it is now, but these silly little throwaway homilies stripped of all context are normally indicative of unthinking dogma.

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So historically speaking, borrowing was the route to prosperity. Not saying it is now, but these silly little throwaway homilies stripped of all context are normally indicative of unthinking dogma.

Welcome to the subculture of internet doomsdayery. You will learn very little here my padawan slave.

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Britain, the US and the rest of the west have been borrowing their way to increased prosperity for what - 300 years now?

Really? You think so?

Any data fro that - from a respected source?

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Really? You think so?

Any data fro that - from a respected source?

well, money is debt and there's a lot more money about now than there was 300 years ago!

you know the british empire was founded on borrowing? Nial Fergusson said so.

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well, money is debt and there's a lot more money about now than there was 300 years ago!

you know the british empire was founded on borrowing? Nial Fergusson said so.

So, if as you wrote:

"Britain, the US and the rest of the west have been borrowing their way to increased prosperity for what - 300 years now?",

Just a question: From whom did the west borrowed all this wealth?

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of course, Britain, the US and the rest of the west have been borrowing their way to increased prosperity for what - 300 years now?

So historically speaking, borrowing was the route to prosperity.

You are arguing the wealth of the West is based on borrowing?

Is borrowing not just a way of smoothing income and outgo over the long term? There is probably some profit made also from the inflation tax. Or is there some other way of generating wealth by borrowing?

Prosperity of the west is quite well correlated to the poverty and exploitation of the east and south

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Revenue has plunged over the past three years but the explicit assumption in all the budget forecasts is that it will recover. Yes, everyone accepts that we have to cut public spending and the only area of debate is about the speed at which that should be done. But the numbers only add up if you also assume that revenues will recover. What if they don't – or at least not to the extent expected?

I keep trying to make this point. I just cannot see how revenues can recover back to 07/08 peaks, because the growth in revenues between 01 and 07 were largely down to the credit boom and I do not see how we can get back to those levels without sparking CB II.

I keep saying ... in a climate where combined personal debt equates to a year's worth of GDP, where is future internal consumer demand going to come from? Who is going to be paying this tax revenue? Where are the conditions for economic growth?

Edited by dissident junk

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Really? You think so?

Any data fro that - from a respected source?

Didn't know that either, thought the borrowing was only possible on the back of the industrial revolution (you know Iron ships and puffer trains etc)and stealing one third of the world at gun point. Don't know why they bothered when they could have just bought Victorian houses as we do.

Edited by council dweller

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You are arguing the wealth of the West is based on borrowing?

Is borrowing not just a way of smoothing income and outgo over the long term? There is probably some profit made also from the inflation tax. Or is there some other way of generating wealth by borrowing?

Prosperity of the west is quite well correlated to the poverty and exploitation of the east and south

I find it interesting that in Muslim countries, you are not allowed to charge a rate of interest on debt. As a result, little borrowing is done there, why would anyone lend for that sort of return?

And Muslim countries are never top of the wealth league, unless they have oil under their land. Muslim countries are incapable of generating wealth. Are these two facts linked?

I suggest that they are. You see, what borrowing can do is this. I have a business idea, but I dont have access to the resources to make it happen. Someone else has no idea, but lots of resources. What borrowing does is allow these people to interact. I borrow the money, acquire the resources, create something newer and better, like a railway line, pay back my debts, with interest, and the whole of society benefits.

The use of borrowing and debt was necessary to create that new wealth, tangible wealth, that still enriches us all today.

Cant happen in a muslim country though, unless they find a way to pay interest that is Shia compliant. Which means lying about it.

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Didn't that either, thought the borrowing was only possible on the back of the industrial revolution (you know Iron ships and puffer trains etc)and stealing one third of the world at gun point. Don't know why they bothered when they could have just bought Victorian house as we do.

Exactly!

Real wealth is produced, manufactured, planted (preferably using tractors), etc.!

For goodness sake people, you are confusing wealth with money. They are NOT the same thing!

What enriched the west in the past 2 or 3 centuries was the huge increase in productive capacity - a consequence of the industrial revolution, a consequence (and then reinforcing cause) of advancements in knowledge, science and technology, etc.

We produced wealth. We created wealth.

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I find it interesting that in Muslim countries, you are not allowed to charge a rate of interest on debt. As a result, little borrowing is done there, why would anyone lend for that sort of return?

And Muslim countries are never top of the wealth league, unless they have oil under their land. Muslim countries are incapable of generating wealth. Are these two facts linked?

I suggest that they are. You see, what borrowing can do is this. I have a business idea, but I dont have access to the resources to make it happen. Someone else has no idea, but lots of resources. What borrowing does is allow these people to interact. I borrow the money, acquire the resources, create something newer and better, like a railway line, pay back my debts, with interest, and the whole of society benefits.

The use of borrowing and debt was necessary to create that new wealth, tangible wealth, that still enriches us all today.

Cant happen in a muslim country though, unless they find a way to pay interest that is Shia compliant. Which means lying about it.

We are talking about countries rather than businesses. Countries are not engaging in new business opportunities. Debt was borrowed to fund wars, and services to the population.

The real wealth of say the UK was acquired by looting other parts of the world.

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the main reason the British defeated the french in the wars leading up to and then following the french revolution, coming to an end in 1815, was the deep bond markets that the British could tap for funding.

And before that:

"Before the late 17th century, it was customary for the state to fund its war debts by levying new taxes. But by 1694 the Nine Years' War had left the English Government's finances in tatters. We were forced to borrow £1.2 million at a rate of 8% from the newly formed Bank of England and national deficit financing was born.

National debt in the modern sense emerged in the the early 18th century, as banking and financial markets enabled the creation of debt through the issue of bills and bonds. Subsequently, the national debt rose from £12m in 1700 to £850m by the end of the Napoleonic Wars in 1815."

The largest empire the world has ever seen was built from bond issuance (and press-gangs).

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"The severity of the debt problem in Japan has been masked by the fact that government spending on interest payments has not changed over the past two decades, as the average interest rate paid on the country’s debt declined to 1.4 percent in 2009 from more than 6 percent in the 1990s. This is about to change."

About to change? About? The article is saying that Japan has followed fiscal expansion for nearly 20 years without any increase in its interest rates. 20 years! Yet the Austerians are saying we can't delay fiscal tightening for a mere 12 months (as Alastair Darling proposed) because it would result in higher interest rates?

One side points to Japan.

One side points to Ireland.

All I know is its definitely not 'simple really'.

Problem is the Bond Vigilantes can easily confuse us for Greece.

Also their problems have occurred while everyone else has been relatively fiscally sound.

If every sod is chasing for funds rates will go up.[ just demand/supply]

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the main reason the British defeated the french in the wars leading up to and then following the french revolution, coming to an end in 1815, was the deep bond markets that the British could tap for funding.

And before that:

"Before the late 17th century, it was customary for the state to fund its war debts by levying new taxes. But by 1694 the Nine Years' War had left the English Government's finances in tatters. We were forced to borrow £1.2 million at a rate of 8% from the newly formed Bank of England and national deficit financing was born.

National debt in the modern sense emerged in the the early 18th century, as banking and financial markets enabled the creation of debt through the issue of bills and bonds. Subsequently, the national debt rose from £12m in 1700 to £850m by the end of the Napoleonic Wars in 1815."

The largest empire the world has ever seen was built from bond issuance (and press-gangs).

So we borrowed money and looted our neighbour - is that the crux of keynesianism?

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Problem is the Bond Vigilantes can easily confuse us for Greece.

Also their problems have occurred while everyone else has been relatively fiscally sound.

If every sod is chasing for funds rates will go up.[ just demand/supply]

But if everyone is trying to save money, rates will go down.

You can see what is happening with rates of interest in the market. They appear to be at all time lows for anything that isnt bankrupt.

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the main reason the British defeated the french in the wars leading up to and then following the french revolution, coming to an end in 1815, was the deep bond markets that the British could tap for funding.

Why the bond markets were "deep"? Because the private sector - the real economy - was wealthy.

And the government did what with the money? Bought real goods - in your example, weapons and supplies - from the real economy.

What gives currencies strength is real, material wealth - goods.

Without this material wealth behind it, a currency loses strength, devalues. In extreme cases it goes Weimar in the 30s, or Zimbabwe now.

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  • 261 Brexit, House prices and Summer 2020

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      • down 5% +
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