Jump to content
House Price Crash Forum
Sign in to follow this  
zugzwang

Krugman's Leaky Bathtub: Why Ngdp Targeting Won't Work

Recommended Posts

David Stockman demolishes the New Keynesian masterplan for global recovery.

http://davidstockmanscontracorner.com/krugmans-bathtub-economics/

During the seven years ending on the eve of the financial crisis in Q3 2008, total credit market debt soared from $28 trillion to $53 trillion—-or at a sizzling 9.2% annual rate.

By contrast, nominal GDP during the same period expanded at just 4.8% annually or at half the rate of credit growth. Accordingly, just during this short 7-year interval, the nation’s aggregate leverage ratio expanded from 2.7X GDP to 3.5X. In short, the booming “demand” of the Greenspan/Bernanke housing bubble was being borrowed from the future, not financed out of current production.

The unsustainability of nominal GDP growth financed by an ever increasing ratchet of the leverage ratio is evident from simple arithmetic. Just assume that the massive credit expansion of 2001-2008 was a good thing and that the trend needed to be preserved another 7-years, according to the Keynesian injunction on the conservation of demand. Moreover, even though credit expansion was rapidly loosing its efficacy during the last bubble as more debt bought less new GDP each year, assume that nominal GDP also managed to grow at 4.8% a year— compared to the actual rate of only 2.4% annually that has been recorded since 2008.

Under those assumptions, a “cut and paste” of the 2001-2008 trend would result by 2015 in $100 trillion of credit market debt on $20.6 trillion of GDP. The national leverage ratio would then also ratchet to a mind-numbing 4.8X GDP.

Needless to say, the credit-fueled trend of 2001-2008 could not be sustained without eventual economic and financial collapse.

Stated differently, the rate of demand growth from the Greenspan/Bernanke bubble finance policies could not be conserved, and should not have been implemented in the first place.

Ironically, the housing bubble that Professor Krugman wants to preserve was actually his idea in the first place. During 2002 he famously instructed the Fed to replace the dotcom bubble with a housing bubble. Now he proposes that the “hole” left by the housing collapse should have been filled by an aggressive expansion of public investment, which is to say, a public works bubble.

Here is the part that Professor Krugman didn’t mention. We already had a public works bubble last time around!

Public construction spending grew at a 10% annual rate in the period up to the 2008 crash. The decline he laments since then is modest, and still reflects a 2% real growth rate since the 1990s. Filling the “hole” with a continuation of the pre-2008 public works bubble, therefore, would result in the same kind of malinvestments and waste that was generated by the housing bubble he recommended last time around.

Share this post


Link to post
Share on other sites

From what I recall Bush/Neocons and their bankers were in power this whole period, starting wars and transferring wealth to their friends.

Share this post


Link to post
Share on other sites

I guessing Keynes himself wouldn't be impressed with the likes of Krugman.

So for growth we deficit spend into the bubble and then to clear up the mess we deficit spend even more?

Wasn't Keynes for saving in the bubble and then deficit spending in the bust? I don't think perpetual deficit spending is very Keynesian.

Edited by interestrateripoff

Share this post


Link to post
Share on other sites

I guessing Keynes himself wouldn't be impressed with the likes of Krugman.

So for growth with deficit spend into the bubble and then to clear up the mess we deficit spend even more?

Wasn't Keynes for saving in the bubble and then deficit spending in the bust? I don't think perpetual deficit spending is very Keynesian.

+1

Keynes-fix the roof while the sun is shining.

FED,BOE,Central Banks- Talk about the roof but do not try to fix it, while it rains. Repeat and rinse that to infinity

Share this post


Link to post
Share on other sites

+1

Keynes-fix the roof while the sun is shining.

FED,BOE,Central Banks- Talk about the roof but do not try to fix it, while it rains. Repeat and rinse that to infinity

Rinsing is easier with a leaky roof.

Share this post


Link to post
Share on other sites

Create an account or sign in to comment

You need to be a member in order to leave a comment

Create an account

Sign up for a new account in our community. It's easy!

Register a new account

Sign in

Already have an account? Sign in here.

Sign In Now
Sign in to follow this  

  • Recently Browsing   0 members

    No registered users viewing this page.

  • The Prime Minister stated that there were three Brexit options available to the UK:   215 members have voted

    1. 1. Which of the Prime Minister's options would you choose?


      • Leave with the negotiated deal
      • Remain
      • Leave with no deal

    Please sign in or register to vote in this poll. View topic


×

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.