Need Infrastructure? The easy way is still the best

As you may have heard, on Friday the debt of the United States was downgraded by Standard and Poors. Subsequently everyone continued to rush to buy said debt, and the 10 yield fell to an astonishing 2.20%, and taking into account inflation, many people seem keen to pay the government to take their money. This was an understandable response given the rating’s agencies track records. It also reveals a market that remains orthodox Keynesian [fn1] and with no desire for short term austerity. Radical heterodox theories about expansionary austerity may earn you  respect in the otherworld of North Atlantic politics and academia, but its a terrible way to anticipate events in reality. Better to accept that contractionary policy is contractionary and take to safe harbours.

This follows the experience of Japanese downgrades over the past decade. I have marked them because you wouldn’t notice otherwise [for laymen, a lower yield implies lower expected risk relative to alternatives].

Zero cash rates negate the need to take a spread

If markets don’t pay attention to the agencies when it comes to government debt, why talk about them? The do matter for two reasons.

A) Regulation in many places requires funds to take their ratings into account

B) The provide an announceables for media outlets and pundits to discuss, to spare them from the effort of examining the world. This has political ramifications.

These issues are important in Australia. They are the justification for underspending on state infrastructure, and for using expensive, elaborate and ineffective funding mechanisms such as Private Public Partnerships. They also are used to justify privatisations that lack the financial or microeconomic case that would ideally justify them. Borrowing might be the simplest way to fund infrastructure, but governments cherish the AAA rating and fear the agency’s wrath.

In NSW, the AAA rating was also the given justification for investigating Tax Increment Finance. In that interview (the now Treasurer) Mike Baird feared that losing the AAA rating would present difficulties as institutional investors, such as Japanese pension funds, could not invest in a lower rated product because of reason A). I felt however that the shortage of safe securities around the world would mean there was more than adequate money not bound by regulation that would be keen to get in. If that was true then, it’s more than true now. Many people dismissed the Japanese experience by pointing to a repressed financial sector and high domestic saving – plausible, but not applicable in the US case.

Compare the situations.

Japan’s debt to GDP ratio is well over 200% with a dysfunctional Diet, huge structural deficit and terrible demography.

America nears 100% with a huge structural deficit and a Congress willing to hold the nation to ransom.

NSW has a debt to GSP ratio of 23%, down from 27% in the 90s, a  (now)stable government  and a budget that is change away from balanced.

It has defaulted in the past, during the turbulent Premiership of Jack Lang, and the circumstances are enlightening. That scenario involved a depression and mass unemployment; two separate paramilitary organisations threatening to move against the state and paranoia about Communists; a Commonwealth prepared to invade and one that was pursuing aggressive austerity; a shackling to the gold standard (much like unfortunate European economies are shackled to the Euro) and Lang’s own rare inclination to remove the state’s wealth from the treasury. None of this is present at the current time, and even with all that creditors still got paid (by the Commonwealth).

Given that is what it takes, investors that enthusiastically pile into US and Japanese bonds would be more than take on NSW bonds even if the Naked Emperor, whose exposure is widely acknowledged, saw fit to downgrade them.

We have a form of natural experiment with the Queensland government which displeased agencies have given sub AAA ratings to. Last month they prepared to sell 10 year bonds with a 0.715%-0.735% premium over Commonwealth bonds. NSW bonds in the same month traded at roughly a 0.6% premium. A 0.1% difference.

0.1%! Is that the price we would pay for a credit downgrade? Is it the fear of that 0.1% that is preventing decent rail and road and ports and power stations? Is that what tore Labor apart over politically suicidal (and financially nonsensical) power privatisation? I hope not! That’s less than the regular noise in the NSW spread over Commonwealth bonds, as shown at right. It’s also vastly lower than the >2% spread you would cop by adopting 8% Tax Increment bonds as suggested by Property Council.

Data from RBA

Which leaves only reason B, fear of political consequences should the media feed on the meaningless announceable of a downgrade report. I hope the present government recognises that the distaste for the last government was so great that their political capital would not be impaired in the slightest, and the News Ltd press won’t go after them since partisanship outweighs ideology. A downgrade would almost certainly be blamed on the old lot, assuming a downgrade occurs.

There is thus three options.

a) Avoid any investment in infrastructure, which is not desirable.

b) Fund infrastructure via non borrowing measures. These include expensive means that threaten the long term budget, such as poorly conceived privatisations or Tax Increment Finance, or methods that compromise the resulting infrastructure like Private Public Partnerships. They could also revive the Sydney Betterment Levy, which would be great policy but terrible politics.

c) Take the simplest, cheapest and most responsible option and borrow, with a small threat of short term political problems.

The choice seems obvious to me.

 

[fn1] Or following Chapter 12 one that believes that everyone else believes that everyone else is Keynesian.

About Richard Tsukamasa Green

Richard Tsukamasa Green is an economist. Public employment means he can't post on policy much anymore. Also found at @RHTGreen on twitter.
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Fyodor
10 years ago

Very muddled piece, Richard. Coupla points:

US treasury yields were falling before the downgrade, and fell after. There’s no basis for asserting that this had anything to do with the change in S&P rating, and far more likely that it reflects the deteriorating economic outlook for the USA, which in turn feeds into expectations around US interest rates, particularly given Bernanke’s key message yesterday on interest rates was – again – “lower for longer”. That is, interest rate expectations trump a minor downgrade of opinion from one rating agency that has proven itself to be a lagging indicator on credit.

Your assertion that “It also reveals a market that remains orthodox Keynesian and with no desire for short term austerity.” is similarly unsubstantiated tosh, and a colossally silly thing to write. CDS spreads on PIIGS sovereign debt tell a radically different story. The bond market is quite clearly communicating to a variety of fiscally challenged countries that it will not support further profligacy. That is not “orthodox Keynesian”. Far from it.

Your contrast with Japan is totally inappropriate. As you well know – or should – Japan’s current account and capital position enables it to fund its gargantuan public debt domestically. The US government has no such domestic funding base, given the twin deficits – and is predominantly reliant upon foreign funding and Federal Reserve purchases to support its growing debt load. True, foreign central banks have been happy to supply the addict with more drug in the cause of managing the value of their currencies – and they really have no alternative – but this is far from a sustainable structure. In fact, it is inherently dangerous for both the US and the world economy. The reason why the US government can pursue this wheeze is obvious – the reserve currency status of the USD. Australian state and federal governments have no such advantage.

Further, Japan dug itself into its debt hole with ineffective fiscal expansion that included over-investment in infrastructure that it plainly did not need. That you should use Japan as an example for Australia to follow is simply perverse.

KB Keynes
KB Keynes
10 years ago

In actual fact fiscal policy was quite effective in Japan as shown here.
The economy increased in growth when fiscal policy expanded and unfortunately reduced when fiscal policy was reduced prematurely.

The major problems of structural budget deficits in Europe is not because of profligate spending but much reduced revenues as this IMF report shows.

This is probably the key paragraph.
“The persistence of deficits reflects permanent revenue losses, primarily from a steep decline in potential GDP during the crisis, but also due to the impact of lower asset prices and financial sector profits.”

The market is somewhat confused. Spain is a debt problem but Japan or the UK is not.
Keynesian economics is again showed correct in that Austerity polices have made the problems worse.

observa
observa
10 years ago

Here’s the other side of the argument sans observa ramblings-
http://joannenova.com.au/2011/08/the-money-you-earn-it-they-print-it-welcome-to-the-world-of-corruption/#more-16479
but I did notice she pinched my previous ‘loaves and fishes’ line.

Patrick
Patrick
10 years ago

Spain has pretty fundamental issues, Richard, you don’t get to 40% youth unemployment without pretty fundamental issues.

Overall I am convert, thanks largely to this site, to increased government debt funding of infrastructure. Just not friggin NBNs and high-speed rail :(

Fyodor
10 years ago

Homerkles,

Your first link doesn’t work. Unusually for you, this time it literally doesn’t work, as opposed to figuratively, which is more typical for you.

The major problems of structural budget deficits in Europe is not because of profligate spending but much reduced revenues as this IMF report shows.

It does not show that at all. Figure 1 of the report you cited shows that the cyclically adjusted primary balance is materially negative for “advanced economies”.

This would be a more typical instance of your link working in a literal sense but failing miserably to prove your case. In fact, it proves the opposite.

The market is somewhat confused. Spain is a debt problem but Japan or the UK is not.

Homer accuses the market of being confused.

*chuckle*

Keynesian economics is again showed correct in that Austerity polices have made the problems worse.

The only clear conclusion we can make about the efficacy of so-called “Keynesian economics” is in its obvious contribution to increased public indebtedness, for little economic benefit.

As for “austerity policies”, it’s hard to argue that large fiscal deficits are evidence of austerity. Keynes would be spinning in his grave at the extent to which the operation of the modern welfare state’s automatic stabilisers are claimed to represent “austerity”.

Pedro
Pedro
10 years ago

Yes, the only thing stopping the states from providing decent trains and port and roads and whatever else you want them to buy is a stupid fear of the bond market vigilanties. Or is it that they are serially incompetent money wasters?

KB Keynes
KB Keynes
10 years ago

Fyodor,

the first link is here.

of course it is materially negative but why dumpkopf! If you actually read it instead of merely looking at graphs you will learn something. Maybe not.

Ayone who believes Keynesianism lead to further indebtedness doesn’t understand Keynes at all.

Keynes argued austerity was very good policy in good times but would make economies worse of in bad times.

correct again.

I also note you couldn’t/wouldn’t show the market’s consistency re debt

JC
JC
10 years ago

Richard:

What is the purpose of wanting to borrow the money under state government balance sheets? If you think a state government has the expertise and the project stands on its own merits surely non-recourse funding is the best way to go (and the debt is aligned to the the project) thereby protecting the taxpayers.

I’d also attribute the case of the PIIS (I leave out Greece because it has genuinely fundamental problems) to the Euro which is sideways – but also that attempts at short run austerity are dynamically associated with a failure to close the output gap that is responsible for the deficit (since there remains structural balance), which is Keynesian.

Why would you leave Greece out and mark them as “special”? Take the case of Italy with E 1.8 trillion of debt. Would you mind explaining how you think they will roll over the portion of the debt (E 250 billion) coming due by the end of this year I believe.

I’m honestly asking this as it would be really insightful seeing I see no other choice than default or printing the Euro for them, which seems like a long shot seeing Germany in against such a move.

Pedro
Pedro
10 years ago

Shock! Homer provided a link! Congratulations old man. But I must say, it was remarkable how the US went from booming again to bust when that massive dose of austerity was announced.

Pedro
Pedro
10 years ago

Did my eyes deceive me or did someone just delete Bird’s comments? Not that I’m complaining mind.

KB Keynes
KB Keynes
10 years ago

Pedro,

I have been providing links since my young friend convinced me that it was the way to go.

Sorry your last sentence which appears to be flooded with irony escapes me.

Just for interest a link between austerity and anarchy in Europe between 1919-2009. Just another reason why this policy never works and indeed makes the problem worse as we see in Europe now.

Pedro
Pedro
10 years ago

Homer, I’ll read your paper after work, but I wonder whether the anarchy is a product of the same conditions that led to the need for austerity. Are the greeks rioting because of austerity, or is that a symptom of a general culture of government entitlement and misrepresentation that led to the economic crisis.

David Wilkie
David Wilkie
10 years ago

It was a good post. Its a pity you were too gutless to let it be.

David Wilkie
David Wilkie
10 years ago

God that was gutless. Here I am talking about the Eire Canal and how to do infrastructure right and you are too gutless to let it be.

JC
JC
10 years ago

Not to derail the thread.
Birdie, not for nothing, but are you self aware? Not only do you delete 99% of comments on your ‘blog’ people leave there, but you write over them in cap lock. Lets see a little less hypocrisy please.

David Wilkie
David Wilkie
10 years ago

What could possibly be your point you grubby carnival promoter? I delete posts because I tell the truth on my blog, and therefore get pilloried by greasy greasy rent-seekers like yourself. I never delete good posts. I almost never delete posts where a bit of effort has been put in. Go away you shonky candy-floss peddler. You haven’t yet retracted your support for the bank heist have you you moral criminal. No you have not.

Ken Parish
Admin
Ken Parish(@ken-parish)
10 years ago

You just can’t behave yourself for more than a couple of comments, can you Graeme? If only you could stay vaguely within the bounds of civil discussion we’d be perfectly happy for you to participate in the debate if only because your consistently bizarre take on reality is occasionally entertaining. But consistent abuse will always get you banned, which is what I’ve now done to your latest avatar.

rog
rog
10 years ago

While JC may have adopted the appearance of one with a justifiable grievance the reality is that Graemes’ real failing is that he lacks guile.

Sally
Sally
10 years ago

“JC” is the most abusive commenter in all Oz blogs, no contest. He’s got form.

And unlike Graeme Bird he is neither witty nor has a political approach to any issue even approaching the insightful or empathetic.

Fyodor
10 years ago

Okeydokes, Homerkles has a working link and – surprise! – it’s Posen’s Keynesian apologia. Here’s what Homer said originally about Posen’s argument:

In actual fact fiscal policy was quite effective in Japan as shown here.

The economy increased in growth when fiscal policy expanded and unfortunately reduced when fiscal policy was reduced prematurely.

Total bullshit. Japan’s government sector has been in material structural deficit through the last 20 years. There’s has been no austerity. Posen cherry-picks the Cabinet Office data, but I prefer the original source.

The following link shows that government spending never contracted materially during the 1990s. The “fiscal contraction” in 1997 that Posen makes so much of was the increase in consumption tax in 1997. As shown here that had only a slight effect in reducing Japan’s structural budget deficit, which has remained at a high level throughout the period.

The evidence from Japan is that sustained structural fiscal deficits and the consequent accumulation of massive government debt have failed to prevent prolonged economic stagnation.

of course it is materially negative but why dumpkopf!

“Dummkopf”, Scheißkopf.

Why “materially negative”? What do you think “cyclically adjusted” means, Homerkles? It means spending is structurally too high relative to revenue.

If you actually read it instead of merely looking at graphs you will learn something. Maybe not.

I did read it. The fact that I was able to contradict you with your own evidence confirms I read it far more closely than you did. Not surprising, really, as you’re not able to do more than google up links to sources that favour your bias and which you parrot uncritically. You’ve shown yourself time and again to be incapable of independent critical analysis of hard data.

Ayone who believes Keynesianism lead to further indebtedness doesn’t understand Keynes at all.

Yet another bullshit link that doesn’t mean what you think it means.

Quiggin doesn’t that make that point, and anyone who believes – as we can infer that you do – that persistent fiscal deficits don’t increase debt is living in fairyland. What’s Japan’s debt/GDP ratio, Homerkles, and what was it in 1990?

Keynes argued austerity was very good policy in good times but would make economies worse of in bad times.

correct again.

Correct where?

I also note you couldn’t/wouldn’t show the market’s consistency re debt

What are you talking about?

observa
observa
10 years ago

Speaking of Gummint infrastructure grand visions, remember how the beercoaster planner lambasted 14 shortlisted (from 200 odd) professional install companies for being too dear and not knowing how to do their sums? Pink Battiness here they come again-
http://technologyspectator.com.au/nbn-buzz/nbn-buzz-hackett-job
Got a few problems there boys and girls with inner city takeup as well as a Hackett job on the revenues? Just a few minor details to fill in after the usual big announcement. This L-Plater Govt just keeps on giving and all any Opposition has to do is stand there, keep breathing and wait.

KB Keynes
KB Keynes
10 years ago

Fyodor I can can only conclude one of two things.

Either you a a natural born liar or you are just a complete imbecile.

given you have a record of stating monetary policy is instantaneous and believe an increase in spending as a % of GDP which was caused half by nominal GDP falling not spending increasing in actual fact then it is easy to see it is the latter.

Posen clearly shows government expenditure increases and then so does the Japaan GDP and again too early government expenditure falls and wella Japans GDP falls.

wow.

The MAJOR reason for the deficits is what? Err lack of tax revenue not spending in Europe as the IMF publication clearly shows IF you look for it.

no Quiggin makes the point that Keynesian economics leads to stronger Surpluses in good times than under classical econmics indeed Classical economics merely exacerbvated the cycle.

Market consistency. gosh why is Spain for example a problem but Japan , the Us and the UK not?

wow your understanding is breath-taking as usual

Fyodor
10 years ago

Fyodor I can can only conclude one of two things.

You lack imagination…

Either you a a natural born liar or you are just a complete imbecile.

…and judgement. It’s really quite foolish for someone of your very limited abilities to accuse others of lying and stupidity.

given you have a record of stating monetary policy is instantaneous and believe an increase in spending as a % of GDP which was caused half by nominal GDP falling not spending increasing in actual fact then it is easy to see it is the latter.

I have a record of stating neither of those things. I couldn’t have stated the latter, as it’s barely intelligible gibberish, i.e. something more in your line.

Posen clearly shows government expenditure increases and then so does the Japaan GDP and again too early government expenditure falls and wella Japans GDP falls.

Where? He shows no such thing. I’ve just demonstrated to you, with Japan’s Cabinet Office data, that government expenditure/GDP never fell. Japan has persisted with large structural budget deficits. The stop-start nature of Japan’s meagre economic growth therefore cannot be blamed on fiscal tightness.

wow.

The MAJOR reason for the deficits is what? Err lack of tax revenue not spending in Europe as the IMF publication clearly shows IF you look for it.

I did look for it. Couldn’t find it. State exactly where the report says this. Perhaps you could provide a quotation, given you’re no good with charts or data. The chart I showed you earlier demonstrates very clearly that the advanced economies’ budget deficits are structural, not cyclical. They are simply spending too much relative to their sustainable revenue.

no Quiggin makes the point that Keynesian economics leads to stronger Surpluses in good times than under classical econmics indeed Classical economics merely exacerbvated the cycle.

He says no such thing. He makes no such comment on “classical economics” nor on its “exacerbation” of the “cycle”. His argument boils down to St Augustine’s prayer, “Please, Lord, make me good, but not yet.”

It’s politically naive and unhelpful for JQ to chide, retrospectively, the European governments for not running large surpluses in good times so that they would be in the position to afford the Keynesian largesse that he thinks is necessary now. Some of these governments are facing a serious risk of default because they’ve spent beyond their means for too long and his advice – and yours, I presume – is: borrow more. Nice one.

Market consistency. gosh why is Spain for example a problem but Japan , the Us and the UK not?

Government finances are a problem in each, but the credit market is assessing the probabilities of default differently, as their circumstances differ. Do you think the default risk should be the same? If so, why?

wow your understanding is breath-taking as usual

Thank you. Your misunderstanding I would describe as mouth-breathing.

JC
JC
10 years ago

Market consistency. gosh why is Spain for example a problem but Japan , the Us and the UK not?

Part of that has been explained to you before Homes, yet you refuse to listen.

Japan has a large capital account surplus and a captured audience with respect to the government’s bond selling program. Part of the reason is the regulations to do pension assets and the proportion of government bonds that need to make up these pension plans. The other is that Japanese feel the risk/reward in pushing their assets abroad causes them to incur all sorts of risks and exchange rate risk in hindsight is a material one, so they keep their money at home as the interest spread is not worth the risk, according to them. Perhaps rightly so, so far anyway. Overseas investors own an absolutely tiny proportion of Japanese bonds.

Not if but when, Japan has to go overseas to finance themselves they will see what sort of rates foreigners will demand to buy their bonds and it won’t be a pretty sight. That’s when the shit hits the fan.

Spain on the other hand had a current account deficit of around 10% from memory, which meant they had to attract foreigners into their bond market, as they don’t have enough domestic savings. People are simply not prepared to take any more credit risk, which is why they are forced to retrench.

The US doesn’t really have a major problem to fund their deficit or at least we haven’t seen any evidence of that since SnP downgrade. SnP explained that the downgrade was because of political deadlock. As for the UK…what’s your point about the UK exactly anyways?

Homer, if you think a debt to GDP of 230% that Japan has is fine, then come out and say it, rather than hiding behind the garage.

observa
observa
10 years ago

The main worry over debt per se(public or private) boils down to how it is measured and who it is owed to and can it be repaid. Measuring it in fiat money is problematic because as any Austrian knows, to be placed in charge of the printing press, is to become a committed Keynesian rather rapidly. Short of mannah from Heaven from the supreme central banker, as the true medium of exchange, unit of account or store of wealth, gold is traditionally the next best thing. Earn it, exchange assets for it or mine it and short of finding Lasseter’s Reefs everywhere, gold would quickly have a steady value in exchange unlike now when it has to compete with funny money swings and roundabouts. You could use silver but we consume that industrially and well you know how it is with Fort Knoxes full of oil, coal, iron ore and the like.

With funny money everywhere and declining faith in it, it’s obvious what’s happening to its exchange rate with gold right now. Why the crisis of confidence? That boils down to the understanding that real savings (ie forgone consumption) and its lending is largely (macro speaking) by the old to the young, to fund the former’s retirement and the household formation and takeover of businesses(the reins of power) by the young. It must be real lest the former suffer in retirement, or else the latter will have to earn less to pay for it. And that’s the problem now with demographics. Funny money fooled everyone but not anymore and there’s nowhere to hide from it except gold perhaps.

With no true anchor of value(ie real savings and investment), fiat money creation has done exactly what Austrians said it would. Create malinvestments and debts that obscured the true picture for so long but there’s a day or year/s of reckoning and here we all are. There’s no way China could have amassed US debt the way it has if US gold had left US hands in such quantities. No way the US economy could have approached 50% of GDP from financial intermediation, nor those Morgan Sachs bonuses if real gold were being exchanged. No way a Japanese Govt could have become as indebted to its old inhabitants with real gold. No way the wine drinkers of Europe could have borrowed that much gold from the beer drinkers or Chinese workers if it were real gold. Mind you if a country could borrow as much as the PIGS and then default then why wouldn’t it? That wouldn’t be an option for a country like Japan defaulting on its own citizens. Neither could you fight wars without real guns or butter tradeoffs if you were coughing up real gold to do it.

Shuffling debt deckchairs on the Titanic between public or private won’t change the overarching problem now. Massive malinvestments and the great unwinding until the real demographic problem is laid completely bare for all to see. That’s why Keynesian pump priming can only work if Govts have real communal savings (ie forgone consumption)to use in the bad times. The bust times which Austrians warrant will not occur because there can’t be any Keynesian induced booms. Any animal spirits for tulips or whatever will quickly burn themselves out with real gold changing hands, as well as real debt defaults causing real pain. Funny money has reached the end of the line with demographics now and it shows.

observa
observa
10 years ago

This is the best analysis I’ve heard-
http://www.financialsense.com/contributors/antal-fekete/real-bills-visited

That gives ‘Keensians’ the horrors on 2 counts. Firstly it forces Govt to live within its means or else raise unwelcome taxes and face the electoral consequences and secondly it removes their ability to raise taxes by inflationary stealth(theft of savings)due largely to progressive income taxation. Nevertheless they have to ask themselves honestly who benefits first and foremost from their funny money creationism and who is left with the crumbs off that table and also suffer most with the wages tail chasing their inflationary dog.

The question arises with a gold standard as to what would happen to the price of gold (ie its overall exchange value with other goods)if you held it as savings (ie real forgone consumption) as some might by sticking it under the mattress. At present every saver knows what happens to their fiat money. At best a $100 today will only buy you $97 worth in a years time but could a $100 savings in gold buy $103 or $105 worth of goods in a years time under a gold standard? Quite possibly in which case the overall interest rate would naturally reflect that.

No doubt a gold standard would see the international exchange rate of gold with real goods remain very steady unlike now, but there could be some appreciation for holders although counteracting that is the addition by miners. Now if seignorage with fiat money is unavailable there is the cost of storing and protecting gold for certain trusted ‘bankers’ which would no doubt be certain select national entities. China and not Zimbawe, etc but take your pick with various gold backed currencies. The world’s currencies would naturally shrink (Euro, Yuan and USD as a minimum perhaps). However like holding Perth Mint gold warrants the holder must pay an annual storage fee(ie 1% reduction in warrants) for the service and so would any national warranter. That could be offset by miners and other gold holders paying fees to input ‘new’ assayed gold into vaults, the problem with private holdings being unassayed and the problem of forgery. That’s why you’ll see ebayers mainly wanting sealed Perth Mint 1oz coins and the like. In any case competing Govt and private mints can keep this ‘seignorage’ to a minimum by international competition as well as their complementary savings banks paying regular fees for service, which will ultimately be paid by their users. All users will have a common interest in the auditors naturally so there’s no funny money creation going on where the buck stops.

Senexx
10 years ago

I’m confused whether Observa wants a gold standard or not, as the gold standard had a pegged rate of gold to the amount of dollars. Observa then argues the value of gold could appreciate on the free market. On one hand Observa is arguing for price controls and I’m not entirely sure what on the other.

Of course the typical gold standard means we will all have a need to defend foreign exchange reserves which means running out of money, becoming insolvent becomes a real economic problem rather than just a political one, which in turns means recessions will become more prevalent.

On other matters, Keynes was primarily talking on the gold standard, that we should have surpluses in the good times and deficits in the bad times. That ended around the world in the 70s, I do not understand why we still cling to that notion.

Spain is a member of the European Monetary Union which makes it a currency user with no fiscal power until a European Fiscal body is established. Spain can do nothing other than cut costs via austerity and cause European recession and depression with or without the help of the ECB and IMF.

The US, UK, Japan are currency issuing nations, they have the power to spend and tax. The members of the European Monetary Union do not have the capacity to spend and never will unless they default and return to a national currency or a European fiscal body is established. The European Monetary Union is in a way a de facto gold standard.

Patrick
Patrick
10 years ago

senexx, wasn’t the gold standard period marked by more recessions but less asset bubbles and thus less crashes?

JC
JC
10 years ago

Oh goodie, a gold standard discussion.

Of course the typical gold standard means we will all have a need to defend foreign exchange reserves which means running out of money, becoming insolvent becomes a real economic problem rather than just a political one, which in turns means recessions will become more prevalent.

Actually you don’t “defend” anything in a classic gold standard. The system basically self corrects by gold leaving or moving back into the system. I’m not advocating it by the way, but the classic gold standard worked very well. It was only when the system was corrupted, such as the Bretton Woods gold exchange standard that you need to defend the rate.

On other matters, Keynes was primarily talking on the gold standard, that we should have surpluses in the good times and deficits in the bad times. That ended around the world in the 70s, I do not understand why we still cling to that notion.

Keynesian economics could never operate in a classic gold standard as a domestic deficit or a surplus would be prevented/counted through gold movement. That’s why Bretton Woods was constructed as a make believe one. It gave government latitude. It’s also why it collapsed.

Spain is a member of the European Monetary Union which makes it a currency user with no fiscal power until a European Fiscal body is established.

That’s not correct. Spain has a a reasonable degree of fiscal latitude under the Maastricht Treaty. In fact the reason there are problems is exactly because fiscal policy is dealt with at the national level while monetary policy is at the EU level. That’s the reason they are in crisis.

The EU either has to fiscally integrate, which means Germans have to tolerate transfers to the South, or they will have to break up. There’s no in between any longer.

Spain can do nothing other than cut costs via austerity and cause European recession and depression with or without the help of the ECB and IMF.

Not really. That’s not true. The other alternative is that the ECB runs a looser monetary policy and allows inflation to move higher in places like Germany.

Do not underestimate the incompetence of the ECB showing itself in the past few years. They raised rates in July 08 (i think) just before the global economy crashed and the raised rates a few months ago totally misreading the direction of the EU economy. The ECB runs policy as though only Germany counts. They have been an appalling Central Bank and can be partially blamed for the GFC and the recent crisis.

The US, UK, Japan are currency issuing nations, they have the power to spend and tax. The members of the European Monetary Union do not have the capacity to spend and never will unless they default and return to a national currency or a European fiscal body is established.

OF course the Euro nations have the capacity to spend within the treaty constraints and little requirement for harmonization.

The European Monetary Union is in a way a de facto gold standard.

It isn’t at all. The ECB has the power to print as much money as it likes and set interest rates where it likes. It also has the ability to purchase bonds to help member countries.

A gold standard doesn’t allow for that, as all a CB does in a gold standard is show up at the gold window and exchange either gold or currency at a fixed price. They can’t create money other than the amount tied to the agreed gold ratio. The ECB on the other hand runs a fiat currency regime. The two are significantly different. The ECB is not running a loose monetary policy at the moment because it doesn’t choose to, as it has the German boot inside the door.

KB Keynes
KB Keynes
10 years ago

Golly I was wrong Fyodor is incredibly stupid or simply has aspergers rather badly.

A budget is made up of structural and cyclical components.

If you reduce the structural components in bad times it makes the cyclical deficit much much larger to wit Ireland. They take 4.5% out of GDP but our Fyodor says it is a spendthrift on the bais of a graph.

Japan is somewhat similar. I shouldn’t waste my time but in my generosity here is possibly the seminal chapter of Posen’s book on Japanese economic policy <a href= "http://www.petersoninstitute.org/publications/chapters_preview/35/2iie2628.pdf&quot;.here.

Fyodor if you can’t read where it is saying that European nations are facing a permanent reduction tin taxation revenue and so need to reduce spending to compensate for that then you didn’t read much of it at all. wow fact Fyodor claiming to read something he mightn’t have. Who would have thunked that.

Fyodor says

“no Quiggin makes the point that Keynesian economics leads to stronger Surpluses in good times than under classical econmics indeed Classical economics merely exacerbated the cycle.

He says no such thing. He makes no such comment on “classical economics” nor on its “exacerbation” of the “cycle”. His argument boils down to St Augustine’s prayer, “Please, Lord, make me good, but not yet.”

Quiggin says “Contrary to the beliefs of nearly all anti-Keynesians — and, regrettably, some Keynesians, too — Keynesianism demands more, not less, fiscal rectitude in normal times than does the orthodox theory of balanced budgets that underpins the EU.”

oh dear another article Fyodor allegedly read but didn’t or he is simply and shamefully lying through his teeth.

Well the credit markets were saying defaults of companies during 2007 would be worse that in the great Depression. that was a good call.

Still It would be nice if you could give us a few reasons why Spain is in a much worse position than the other three countires.

KB Keynes
KB Keynes
10 years ago

bugger that link should have been

Posen’s Chapter

Fyodor
10 years ago

Golly I was wrong Fyodor is incredibly stupid or simply has aspergers rather badly.

Yes, you were wrong, as you are most of the time. You are also a liar, as I have shown several times, just on this thread.

A budget is made up of structural and cyclical components.

If you reduce the structural components in bad times it makes the cyclical deficit much much larger to wit Ireland. They take 4.5% out of GDP but our Fyodor says it is a spendthrift on the bais of a graph.

I’m glad you’re able to distinguish between structural and cyclical components, or at least claim so. As I pointed out to you your own link showed that the “advanced economies” you pointed to were in structural deficit. Got that? STRUCTURAL DEFICIT.

Why are you introducing Ireland? What 4.5% of GDP are you talking about? Why are you diverting the argument?

Oh, yeah, that’s right: you’ve fucked up again and are now playing diversionary games.

Japan is somewhat similar. I shouldn’t waste my time but in my generosity here is possibly the seminal chapter of Posen’s book on Japanese economic policy <a href= "http://www.petersoninstitute.org/publications/chapters_preview/35/2iie2628.pdf&quot;.here.

Similar to what? The circumstances are different, and introducing a new link is yet another pointless diversion.

Fyodor if you can’t read where it is saying that European nations are facing a permanent reduction tin taxation revenue and so need to reduce spending to compensate for that then you didn’t read much of it at all.

It does not say that. FFFS, just quote the thing rather than spin your usual bullshit:

“The persistence of deficits reflects permanent revenue losses, primarily from a steep decline in potential GDP during the crisis, but also due to the impact of lower asset prices and financial sector profits. Underlying spending pressures, particularly for health and pension outlays for aging populations, military spending, and higher interest expenditures (due to higher debt levels and interest rates), also contribute to the outcome.”

It’s not just a cyclical decline in revenue. It’s not just a permanent decline in some sources of income; it’s also “underlying spending pressures” that cause these economies to have STRUCTURAL DEFICITS.

wow fact Fyodor claiming to read something he mightn’t have. Who would have thunked that.

Wow, Homerkles misquoting a source for the umpteenth time, whodathunkit?

Oh, yeah: anyone who knows Homer to be a sloppy liar.

Fyodor says

“no Quiggin makes the point that Keynesian economics leads to stronger Surpluses in good times than under classical econmics indeed Classical economics merely exacerbated the cycle.

He says no such thing. He makes no such comment on “classical economics” nor on its “exacerbation” of the “cycle”. His argument boils down to St Augustine’s prayer, “Please, Lord, make me good, but not yet.”

Quiggin says “Contrary to the beliefs of nearly all anti-Keynesians — and, regrettably, some Keynesians, too — Keynesianism demands more, not less, fiscal rectitude in normal times than does the orthodox theory of balanced budgets that underpins the EU.”

oh dear another article Fyodor allegedly read but didn’t or he is simply and shamefully lying through his teeth.

As I said, Quiggin makes no comment about classical economics and no comment about classical economics “exacerbating the cycle”. Yet again, the original source proves that I am right and that you are wrong and lying, shamelessly, about it.

Well the credit markets were saying defaults of companies during 2007 would be worse that in the great Depression. that was a good call.

What are you talking about now? Christ, you’re all over the shop.

Still It would be nice if you could give us a few reasons why Spain is in a much worse position than the other three countires.

Worse than Japan, the UK or USA? Here’s a few suggestions:

1) Spain is locked in a currency union which prevents its currency from adjusting to its weak trade and current account position.

2) Spain has a sclerotic labour market with structurally high unemployment, which makes it harder for the economy to employ surplus capacity and places extreme pressure on its welfare state.

3) Spain has a large current account deficit, financed by foreign borrowing, but, unlike the USA, does not have the luxury of printing the reserve currency or, unlike the UK, the ability to devalue its currency.

4) Spain had, proportionally, one of the largest property bubbles in the world that has yet to fully unwind, with dire implications for its banking sector.

Now, I answered your question, it’s your turn to answer mine: Do you think Spain’s default risk should be the same as Japan, the US and UK? If so, why?

KB Keynes
KB Keynes
10 years ago

no Fyodor you haven’t proved anything but I have already show you up as lying through your teeth.
first let us get to your aspergers line on deficits.

I am not disputing and have never disputed that some European structural deficits have risen .what I have said is that they have risen BECAUSE of declining ( IMF says it is permanent) tax revenues.

Everyone I bring up the MAJOR reason for the rise in structural deficits you say they have risen.

Even when you quote them as in this
“The persistence of deficits reflects permanent revenue losses, primarily from a steep decline in potential GDP during the crisis, but also due to the impact of lower asset prices and financial sector profits. Underlying spending pressures, particularly for health and pension outlays for aging populations, military spending, and higher interest expenditures (due to higher debt levels and interest rates), also contribute to the outcome.”

it just backs up what I said not you! what is the major reason? well bugger me it is taxes or lack of them. wow

If they rise because tax revenues have declined, temporary or permanent, it doesn’t have a great effect on the economy.

Ireland’s rose whilst they were taking 4.5% of GDP out of the economy.
Ours rose to over 5% last financial year. do you see the economy roaring away anywhere because of the rises? di you note at all what Martin Parkinson said about such rises at the ABE luncheon at all?

you claim POsen cherryp icked his data yet he went through two decades of data showing stimulus and GDP growth. if you wish to allege it is cherrypicking try and show it otherwise it wil lbe seen as the lie it is.

Boofhead Quiggin does that or don’t you understand what he is saying by the orthodox theory of the balanced budgets.

He actually elaborates on the differences.

sorry I thought you might actually understand credit markets. When the credit crunch i.e before the GFC occurred those said credit markets were forecasting default rates in the US worse than in the great Depression!

wow talks about Spain but declines to talk about the budget.
interesting. how does a default occur? I’m sure the budget is related somehow

Central Banks print money and the Fed for a start could not print money to exacerbate inflationary pressures unless it’s charter was changed.

JC
JC
10 years ago

Central Banks print money and the Fed for a start could not print money to exacerbate inflationary pressures unless it’s charter was changed.

Huh? QE1 , QE2 and possibly QE3.

What are you talking about Homer?

Homes, I know I’m not the best when it comes to gramcheck etc, but doncha think boofhead requires a comma after it?

KB Keynes
KB Keynes
10 years ago

inflation is what genius???

do you think the Fed would allow inflation of 3% for any period of time let alone 5-10% which is at the least usual in attempting to inflate your way out of debt problems.

JC
JC
10 years ago

inflation is what genius???

Your comments on this topic homer. It’s form of debasement.

do you think the Fed would allow inflation of 3% for any period of time let alone 5-10% which is at the least usual in attempting to inflate your way out of debt problems.

Umm yes they would, as we’ve seen with their most recent policy announcement of leaving rates alone until the middle of 2013 at the earliest. So even if there is inflation they will not touch rates or move policy.

So there goes your theory down the drain… as usual.

Fyodor
10 years ago

no Fyodor you haven’t proved anything but I have already show you up as lying through your teeth.

Nope. Not once. Perversely, it is you who have been proved to be lying, several times.

first let us get to your aspergers line on deficits.

Oh, let’s.

I am not disputing and have never disputed that some European structural deficits have risen .what I have said is that they have risen BECAUSE of declining ( IMF says it is permanent) tax revenues.

I’m glad to hear you’re not disputing that the deficits are structural, as they undermine your case against “austerity”.

Traditionally “Keynesian” policy uses fiscal policy to offset the fall in aggregate demand arising from cyclical decline. It does not support structural deficits. The fiscal deficits in many “advanced economies” are primarily structural in nature, not cyclical, and thus should not be supported by “Keynesians” such as yourself. That you continue to do so reflects poorly upon your vulgar conception of Keynes’ economic theory, your weak grasp of economics in general and nothing more than your willingness to dig yourself further into the ditch you’ve chosen.

Everyone I bring up the MAJOR reason for the rise in structural deficits you say they have risen.

Unintelligible gibberish.

Even when you quote them as in this

“The persistence of deficits reflects permanent revenue losses, primarily from a steep decline in potential GDP during the crisis, but also due to the impact of lower asset prices and financial sector profits. Underlying spending pressures, particularly for health and pension outlays for aging populations, military spending, and higher interest expenditures (due to higher debt levels and interest rates), also contribute to the outcome.”

it just backs up what I said not you! what is the major reason? well bugger me it is taxes or lack of them. wow

Not at all. Nowhere does it say “major”, and it states clearly that underlying spending pressure is also responsible. The underlying problem is that spending exceeds the sustainable – i.e. through-cycle – revenue base for the governments in question. That is, the problems are structural, not cyclical. The structural deficits of many countries now go well beyond supposedly “Keynesian” stimulus and are thus unsustainable on any basis, Keynesian or otherwise.

If they rise because tax revenues have declined, temporary or permanent, it doesn’t have a great effect on the economy.

Compared to what? You’re simply making shit up now.

Ireland’s rose whilst they were taking 4.5% of GDP out of the economy.

Again, why is Ireland relevant? Who is “they” and when did “they” take “4.5% of GDP out of the economy”. This is more diversionary drivel.

Ours rose to over 5% last financial year. do you see the economy roaring away anywhere because of the rises? di you note at all what Martin Parkinson said about such rises at the ABE luncheon at all?

What are you talking about?

you claim POsen cherryp icked his data yet he went through two decades of data showing stimulus and GDP growth. if you wish to allege it is cherrypicking try and show it otherwise it wil lbe seen as the lie it is.

Already have – in the link earlier, which I note you have not refuted.

Boofhead Quiggin does that or don’t you understand what he is saying by the orthodox theory of the balanced budgets.

I understand perfectly well what Boofhead Quiggin is saying about the “orthodox theory of balanced budgets”. The question is, do you?

He actually elaborates on the differences.

Which aren’t what you think.

sorry I thought you might actually understand credit markets. When the credit crunch i.e before the GFC occurred those said credit markets were forecasting default rates in the US worse than in the great Depression!

Still not getting your point. How is this relevant?

wow talks about Spain but declines to talk about the budget.

I didn’t “decline” anything. You didn’t ask me about the budget. You wrote,

“Still It would be nice if you could give us a few reasons why Spain is in a much worse position than the other three countires.”

And I did you the courtesy of responding, with a few reasons. I’ve asked you a related question, twice now, and note, to no great surprise, that you’ve squibbed in responding.

interesting. how does a default occur? I’m sure the budget is related somehow

I’m sure it is, too. Do you have a point to make?

Central Banks print money and the Fed for a start could not print money to exacerbate inflationary pressures unless it’s charter was changed.

Why not?

KB Keynes
KB Keynes
10 years ago

Under a forward looking Taylor rule you wouldn’t move rates until unemployment gets near 8%.

Are you seriously suggesting inflation is coming a roaring at 8% unemployment

KB Keynes
KB Keynes
10 years ago

the argument about Austerity is that it weakens the economy and leads to a worsening in defcit and debt levels as has happened.

you are the clown who thought the rise in structural deficits were somehow largely stimulatory by looking at graphs.
I said in the first place they were not BECAUSE of the weakening tax revenues. Otherwise Ireland would be roaring when it structural deficit rose from around 0.5% of GDP to around 7% as the GFC affected the economy.
Explaining why the countries have a structural deficit is not support.

gosh what does that FIRST line say again from the IMF? PRIMARILY. gosh what does that mean?

Yes I agree you have said gibberish. as every previous time I made mention of the reason structural deficits rose primarily you merely said the ratio had increased.
What an intellect/ talk about being hit with a warm lettuce.

doesn’t understand how the Irish structural defcit could balloon but the economy falls away. agh thinks all structural deficits are stimulatory. unbelievable.

Doesn’t understand Martin Parkinson’s remark either. shouldn’t be surprised.

Thinks two decades of data showing Japanese public sector stimulus and GDP growth id cherrypicking. wow. Still has provided no evidence for his lie either .

IF you understand what quiggin has said the sentence shows you lie again, if you don’t as probable it is merely another example of your aspergers.

Doesn’t understand about credit markets and doesn’t understand how budgets would be related to possible defaults.

The last question i already answered in the quote. hint inflation target
Amazing.

you really should write at Catallaxy. you would be perfect.

JC
JC
10 years ago

What’s Taylor have to with it now.

Let me remind you what you said…. again because you seem to quickly forget your own appalling assertions.

Central Banks print money and the Fed for a start could not print money to exacerbate inflationary pressures unless it’s charter was changed.

Do you admit this is not true?

Are you seriously suggesting inflation is coming a roaring at 8% unemployment

It’s not up to me to back anything up. It’s you who has to defend that statement.

Fyodor
10 years ago

the argument about Austerity is that it weakens the economy and leads to a worsening in defcit and debt levels as has happened.

That’s a nonsense argument, Homerkles. The budget deficit is not the product of “austerity”. The budget deficits and blow-out in debt levels preceded any implementation of “austerity” and so cannot be blamed upon it.

you are the clown who thought the rise in structural deficits were somehow largely stimulatory by looking at graphs.

Where did I say that? Quote me or admit you’re lying again.

I said in the first place they were not BECAUSE of the weakening tax revenues.

In “the first place” WHERE? Your first comment on this thread contained this statement from you:

The major problems of structural budget deficits in Europe is not because of profligate spending but much reduced revenues as this IMF report shows.

Not only are you contradicting your earlier statement, but you’re lying about it.

Otherwise Ireland would be roaring when it structural deficit rose from around 0.5% of GDP to around 7% as the GFC affected the economy.

Why?

Explaining why the countries have a structural deficit is not support.

Support for what?

gosh what does that FIRST line say again from the IMF? PRIMARILY. gosh what does that mean?

It states that the permanent revenue losses are primarily from a steep decline in potential GDP. What did you think it meant?

Yes I agree you have said gibberish. as every previous time I made mention of the reason structural deficits rose primarily you merely said the ratio had increased.
What an intellect/ talk about being hit with a warm lettuce.

WHEN did I say WHAT? Produce the statements or admit, again, that you are lying.

doesn’t understand how the Irish structural defcit could balloon but the economy falls away. agh thinks all structural deficits are stimulatory. unbelievable.

What you believe is of no consequence, particularly when it relates to your incoherent ramblings on strawman arguments.

Doesn’t understand Martin Parkinson’s remark either. shouldn’t be surprised.

What’s to understand? That you dropped his name in typically obtuse fashion is of no relevance to the argument. As I said, if you have a point to make, make it.

Thinks two decades of data showing Japanese public sector stimulus and GDP growth id cherrypicking. wow. Still has provided no evidence for his lie either .

I produced the evidence – the link to Japanese Cabinet Office data – earlier. As I noted, you refused to address it, and still do.

IF you understand what quiggin has said the sentence shows you lie again, if you don’t as probable it is merely another example of your aspergers.

Non-sequitur. One of many.

Doesn’t understand about credit markets and doesn’t understand how budgets would be related to possible defaults.

Nope, you’ve lost me again. Are you self-analysising now?

The last question i already answered in the quote. hint inflation target
Amazing.

Nope. You’re not getting anywhere. Be more specific.

you really should write at Catallaxy. you would be perfect.

You really should write in English. It wouldn’t be perfect, but it would be an improvement.