Usa 'grows' It's Way Out Of Debt

[mfp123]

I'm sure you aware that the deficit was caused by the global financial crisis, and the resulting collapse in tax revenues. In fact, in 2008 before the crisis hit, our deficit and debt levels were much lower than when the Tories handed over power in 1997.

The question, then, is how to react to a once-in-a-lifetime economic shock. Government spending was never the problem - it was private debt (sub-prime mortgages) and highly leveraged financial institutions which caused and deepened the crisis.

collapsing tax revenues occurred because the economy was shrinking. you either adjust your spending to match the size of your economy or you see your spending run away.

your spending needs to shrink to get to its equilibrium, which will form a base to start growing again.

now if debts were low there is scope to borrow, but the fact is debts are high so the scope to borrow disappeared. pre crisis debts were 40% of gdp, post crisis its approaching 80% so that increase in spending and borrowing in relation to the size of the economy did increase to make up the shortfall.

weve already used it all up.

there comes a point when the debt is getting too high, your options become limited.

Edited May 18, 2013 by mfp123

[easy2012]

I don't think Japan can be used as a reference for us or anyone else.

Out of all western nations they have a shrinking population. Whatever else, a debt based monetary system and a shrinking population do not work together. They simply cannot, since a shrinking population is anthema to the continual economic growth paradigm that debt based money needs.

I agree there are large differences - but it is good enough to proof the part of MMT that says a government cannot default on domestic currency debt.

And if it does, there is enough lesson to be learn from there.

(Japan is not even a Western nation..)

[Dr_Mibbles]

collapsing tax revenues occurred because the economy was shrinking. you either adjust your spending to match the size of your economy or you see your spending run away.

your spending needs to shrink to get to its equilibrium, which will form a base to start growing again.

You would only do this if you thought the economy was permanently damaged and would never recover.

Otherwise, if you take the view that the private sector is going through a period of temporary weakness, government can and should step in and pick up the slack, while businesses and individuals pay down their debts. This prevents serious damage to the economy.

If everyone cuts spending at the same time, you enter a recessionary death-spiral of the kind Greece is experiencing, with literally nothing positive to show for it. Government spending is private businesses income - either through direct contracts, or salaries being spent in the private sector. If you cut that lifeline while businesses are trying to de-leverage, you have an economic disaster on your hand.

[Dr_Mibbles]

So if the amount of debt in an economy isn't important, then how can the financial crisis have been caused by the amount of private debt as you stated earlier?

It wasn't caused by the amount of private sector debt per se, it was caused by the amount and quality of that debt, and, importantly, the way the debt was distributed in the financial system. Debt is a necessary part of successful capitalism, moving money from places where it isn't productive, to where it can be invested.

For an accurate overview of how the financial crisis happened, watch the film 'Inside Job'. It's one of those rare documentaries that is not only entertaining, but entirely accurate as anyone who has worked in banking will attest.

[mfp123]

You would only do this if you thought the economy was permanently damaged and would never recover.

Otherwise, if you take the view that the private sector is going through a period of temporary weakness, government can and should step in and pick up the slack, while businesses and individuals pay down their debts. This prevents serious damage to the economy.

If everyone cuts spending at the same time, you enter a recessionary death-spiral of the kind Greece is experiencing, with literally nothing positive to show for it. Government spending is private businesses income - either through direct contracts, or salaries being spent in the private sector. If you cut that lifeline while businesses are trying to de-leverage, you have an economic disaster on your hand.

we already did that. debt rose from 40% to 80% to closer to 90% now. the deficit was running at around 11% per year.

our deficit is the government stepping in and spending more that what the economy can afford and its still 7%

how long can you keep that going for. 3 years, 5 years, 7 years? we are in year 5 since the crisis. and weve added 40-50% in debt so far.

Edited May 18, 2013 by mfp123

[Lone_Twin]

You would only do this if you thought the economy was permanently damaged and would never recover.

Otherwise, if you take the view that the private sector is going through a period of temporary weakness, government can and should step in and pick up the slack, while businesses and individuals pay down their debts. This prevents serious damage to the economy.

If everyone cuts spending at the same time, you enter a recessionary death-spiral of the kind Greece is experiencing, with literally nothing positive to show for it. Government spending is private businesses income - either through direct contracts, or salaries being spent in the private sector. If you cut that lifeline while businesses are trying to de-leverage, you have an economic disaster on your hand.

Its not the "job" of government (tax payer) or of profitable enterprises to maintain the status quo of the economy. the "global crisis" was the natural consequence of an over extension of credit which manifested in many areas of malinvestment (not least in property). credit contraction is the cure for such malinvestment, forcing good companies to be more efficient and removing the over indebted and long term unprofitable from the economic landscape. to allow this to happen is not to say that the whole economy is sunk but to recognise that businesses (and governmentspending) which can only be sustained in an environment of loose credit are not possible to maintain all the time.

[gf3]

Its not the "job" of government (tax payer) or of profitable enterprises to maintain the status quo of the economy. the "global crisis" was the natural consequence of an over extension of credit which manifested in many areas of malinvestment (not least in property). credit contraction is the cure for such malinvestment, forcing good companies to be more efficient and removing the over indebted and long term unprofitable from the economic landscape. to allow this to happen is not to say that the whole economy is sunk but to recognise that businesses (and governmentspending) which can only be sustained in an environment of loose credit are not possible to maintain all the time.

I see it differently.

Too much of the countries money has ended up in the hands of the few. They hoard money and stop it being released back into the general economy where people with debt can earn it and service their debts.

Zombie companies is exactly what we need. Companies that spend everything they make. Apple is sat on billions of $ that they don't know what to do with.

QE+defict spending is releasing money into the economy that the rich aren't spending.

I don't think we have inflation in this country if you priced everything in a basket of currency's. It's the 30% fall in the pound that make everything expensive for the average Brit.

[Lone_Twin]

I see it differently.

Too much of the countries money has ended up in the hands of the few. They hoard money and stop it being released back into the general economy where people with debt can earn it and service their debts.

Zombie companies is exactly what we need. Companies that spend everything they make. Apple is sat on billions of $ that they don't know what to do with.

QE+defict spending is releasing money into the economy that the rich aren't spending.

I don't think we have inflation in this country if you priced everything in a basket of currency's. It's the 30% fall in the pound that make everything expensive for the average Brit.

As neither "austerity" nor extremely loose credit have had a distributive effect I'm not sure this is relevant to this argument.

[easy2012]

As neither "austerity" nor extremely loose credit have had a distributive effect I'm not sure this is relevant to this argument.

It does, both fake austerity and QE continue to distribute nominal wealth upwards...

[Mr Jib Fingers]

It wasn't caused by the amount of private sector debt per se, it was caused by the amount and quality of that debt, and, importantly, the way the debt was distributed in the financial system. Debt is a necessary part of successful capitalism, moving money from places where it isn't productive, to where it can be invested.

For an accurate overview of how the financial crisis happened, watch the film 'Inside Job'. It's one of those rare documentaries that is not only entertaining, but entirely accurate as anyone who has worked in banking will attest.

Ok well are you agreed that without considering the way debt is distributed in the financial system GDP is a meaningless measure?

[Jack's Creation]

You would only do this if you thought the economy was permanently damaged and would never recover.

Otherwise, if you take the view that the private sector is going through a period of temporary weakness, government can and should step in and pick up the slack, while businesses and individuals pay down their debts. This prevents serious damage to the economy.

If everyone cuts spending at the same time, you enter a recessionary death-spiral of the kind Greece is experiencing, with literally nothing positive to show for it. Government spending is private businesses income - either through direct contracts, or salaries being spent in the private sector. If you cut that lifeline while businesses are trying to de-leverage, you have an economic disaster on your hand.

Where do you think that Government spending comes from? Given that the public sector, by it's very nature, produces not one penny of net tax revenue.

[Bloo Loo]

I see it differently.

Too much of the countries money has ended up in the hands of the few. They hoard money and stop it being released back into the general economy where people with debt can earn it and service their debts.

Zombie companies is exactly what we need. Companies that spend everything they make. Apple is sat on billions of $ that they don't know what to do with.

QE+defict spending is releasing money into the economy that the rich aren't spending.

I don't think we have inflation in this country if you priced everything in a basket of currency's. It's the 30% fall in the pound that make everything expensive for the average Brit.

where is all this money being hoarded.

Answer this and you will see why the point you make is mute.

[Bloo Loo]

Where do you think that Government spending comes from? Given that the public sector, by it's very nature, produces not one penny of net tax revenue.

oh it does.....its a circle jerk that needs constant top up, but it does contribute....suitable for can kicking.

[Bloo Loo]

When the system is operating at 100% of capacity yes. Then any growth in government must come from a shrinkage of the private sector. But we are not in that scenario.

Currently we have a large degree of economic slack. There's a couple million unemployed and a few more million underemployed or in disguised unemployment.

These could be put to work without any negative impact on the private sector.

what work would you put the excess labour to?

The private sector seems to be at a loss....indeed, much of their labour requirement is currently in China and other cheap labour states.

any system can work at 100% and yet have spare capacity...usually for redundancy or failsafe reasons.

again, you focus on a figure of arithmatic as the end goal....

[gf3]

where is all this money being hoarded.

Answer this and you will see why the point you make is mute.

In the banks.

Ahh I see what you are saying now. the people with debt could borrow the money and pay off their debts.

[Venger]

Deflation = bubble in money as money is worth more without the holder having to lift a finger and disadvantage those who are without these tokens.

Inflation = theft from holders of the token.

So a -1 to 1% target would sound fair to me although I hate think how road to a transformed world would look like (might be tempted to watch this from outside rather than from inside).

Quite a few points taken on board and accepted there.

Except for the one above. -1 to 1%. Unless I'm misunderstanding the effects of -1%. We've already had the theft, grand heist, from holders of the tokens, or those trying to amass them.

Perhaps if we'd not had runaway house price inflation since year 2000. 200% on the upside for the benefit of those who took on debt and who already owned houses. Now -1%-0%-+1% target should satisfy us holding the core fewer tokens of savings money against huge debts and over-valued assets?

I want more purchasing power back for the savings I've been making since that time. It's sure been devalued by more than 1% against house prices. Not just for me, but for many younger people coming into the system. No Help-To-Buy to support that hyperinflation in house prices. Deflation -50%.

[easy2012]

Quite a few points taken on board and accepted there.

Except for the one above. -1 to 1%. Unless I'm misunderstanding the effects of -1%. We've already had the theft, grand heist, from holders of the tokens, or those trying to amass them.

Perhaps if we'd not had runaway house price inflation since year 2000. 200% on the upside for the benefit of those who took on debt and who already owned houses. Now -1%-0%-+1% target should satisfy us holding the core fewer tokens of savings money against huge debts and over-valued assets?

I want more purchasing power back for the savings I've been making since that time. It's sure been devalued by more than 1% against house prices. Not just for me, but for many younger people coming into the system. No Help-To-Buy to support that hyperinflation in house prices. Deflation -50%.

Whst is done is done. As for hp, that is be solved via building/planning. An economy is more than houses...

[Bloo Loo]

In the banks.

Ahh I see what you are saying now. the people with debt could borrow the money and pay off their debts.

LOL

almost there....the purpose of banks is to put lenders with borrowers.

Borrowers should be able to pass a return to the bank via productive use of the money they have borrowed. Build a housing estate, an aircraft, plant some seeds....the end result is wealth created for other people to buy....the loan is repaid m the borrower earns a living and some of the surplus production is taxed.

The bank takes its repayment and its interest and is able to pay back the lenders....these could be pension funds, ordinary savers or businesses with cash.

No debts can be paid off if there is no wealth created.

Banks have tended to lend recently into ponzi schemes, and the shadow banking system, itself pretending to be able to make a margin on the self same ponzi lending.

sadly, all this paper leverage hasnt produced one extra potato with which to pay all the claims...the system has been corrupted.

[Liquid Goldfish]

you have just illustrated one of the main planks of the "alternative" media in the US.

NO MSM report anything other than what the Government is churning out.

The financial channels see nothing but good and bring in VI talking heads to out shout any dissenting views.

Denninger seems to be saying that accounting chicanery has allowed the statistics body to reduce the deficit from $1 trillion last year to $600bn this year.

Is the US media so poor that noone reports this?

Even the Daily Mail was all over George Osborne because of his various fiddles. It seems a bit unbelievable that if there really was a $400bn sleight of hand going on that papers like the NY Times and the Washington Post wouldn't be reporting it - don't they have a pretty good reputation?

[alexw]

what work would you put the excess labour to?

The private sector seems to be at a loss....indeed, much of their labour requirement is currently in China and other cheap labour states.

any system can work at 100% and yet have spare capacity...usually for redundancy or failsafe reasons.

again, you focus on a figure of arithmatic as the end goal....

A council house building program where the government self-grants planning permission. Another additional prospect would be a tidal barrage across the severn estuary.

None of that can leak abroad.

And its not just arithmetic both possibilities add substantially to the UK in terms of real wealth, to the extent that the new monies brought into existence match the new wealth created, so the debt created is self-fianced by the new wealth. Don't confuse these with things such as A4e or PFI that just add debt without expanding the economy.

[Venger]

Pure nonsense. One persons debt is another persons asset/savings. Debt removes no money from the economy.

If you loan a business £1m of your money at 5% interest, then you have an asset paying you interest, while the business can invest and expand. Debt is not a bad thing per se. Removing peoples asset from the economy because someone else is putting the asset to use would be pure insanity.

So if the amount of debt in an economy isn't important, then how can the financial crisis have been caused by the amount of private debt as you stated earlier?

Headshot.

Mibbles the company can default on what it owes you. I'm pleased to see some companies I know being defaulted on. Some of them are solid productive businesses with good long term prospects, but the owners have bought 2nd homes and portfolios of BTLs and had every luxury for the past 20-30 years, with exotic holidays and their main homes kitted out with all the expensive furnishings.

Debt? They've been setting the price of these houses with the amount of money lenders would lend them. Are you just learning that? Less debt available leads to lower prices. People with tokens and no debt, want better value. Ideally from older people who've not suffered anything like younger people have today, (smart professionals who have a lot to offer a company going fowards, with no debt, sharing and renting flats so BTL landlord can enjoy even more of the pie). Austerity helps cut out all this dead wood and parasites and gives opportunity to younger people, at lower prices.

Edited May 18, 2013 by Venger

[gf3]

LOL

almost there....the purpose of banks is to put lenders with borrowers.

Borrowers should be able to pass a return to the bank via productive use of the money they have borrowed. Build a housing estate, an aircraft, plant some seeds....the end result is wealth created for other people to buy....the loan is repaid m the borrower earns a living and some of the surplus production is taxed.

This is where I disagree with you. If we were the only people on a desert island and you were £10 in credit and I was £10 in debt. If you refuse to spend your money no matter what I offered in exchange I will go bankrupt.

If someone else turned up on the island and went £10 in debt for something I offered him. I could now pay my debt but a debt would still exist.

There is a mechanics to money that is totally independent to what it is spent on.

[Bloo Loo]

This is where I disagree with you. If we were the only people on a desert island and you were £10 in credit and I was £10 in debt. If you refuse to spend your money no matter what I offered in exchange I will go bankrupt.

If someone else turned up on the island and went £10 in debt for something I offered him. I could now pay my debt but a debt would still exist.

There is a mechanics to money that is totally independent to what it is spent on.

Money is a means of exchange.

your two people on the island dont even need it. the two people would have to agree what their roles would be in the survival of the small group..

no money required.

Money is only required when the exchanges are complex.

[Dr_Mibbles]

Headshot.

Mibbles the company can default on what it owes you.

In the context of this particular discussion, that doesn't matter. The money is still in the economy. My debt is someone elses asset, and if I default I still have the money. Debt neither removes nor creates money.

That's not to say that debt doesn't matter. It certainly does, and I've not said otherwise - however, it depends on the type of debt, the status of the debtor, and the terms of the creditor. Private debt caused the financial crisis, but not debt in general, it was a specific kind of debt (sub-prime mortgages) and the way that debt was absorbed into the financial system. It was reckless.

It is equally reckless for a government to engage in fiscal austerity during a period of temporary private sector weakness. That causes permanent economic damage and makes it much more difficult for the private sector to de-leverage.

[Dr_Mibbles]

we already did that. debt rose from 40% to 80% to closer to 90% now. the deficit was running at around 11% per year.

our deficit is the government stepping in and spending more that what the economy can afford and its still 7%

how long can you keep that going for. 3 years, 5 years, 7 years? we are in year 5 since the crisis. and weve added 40-50% in debt so far.

We did it to start with, yes. And it worked. The economy was growing at an annualised rate of 2.5% when the Coalition took power and the deficit fell as a result, by about 25%.

But then the Coaltion immediately started reducing real-term government spending (i.e. fiscal austerity), and made a set of predictions about how this would be expansionary and reduce the deficit further. Well, three years later, the facts and figures are in, and they were spectacularly wrong, as anyone who understands basic macroeconomics predicted. Our deficit has remained high because austerity killed growth, and expected tax revenues have collapsed as a result.

I'm not anti-austerity forever, I'm anti-austerity during a depression. This is just basic economic common sense - .if the private sector is weak and paying off past debts, it needs breathing space to do that. Fiscal austerity during a depression kicks away the crutch, and causes a death-spiral.

No country in the world has had any success with fiscal austerity during a recession, so it shouldn't be surprising that we haven't either.