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The crash has begun!; It’s official - the crash has begun!
Topic Started: 4 Mar 2011, 02:16 PM (11,094 Views)
Veritas
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peter fraser
18 Sep 2014, 02:35 PM
I don't disagree with Krugman on his point that a government printing money and spending it into the economy could cause inflation, but we were discussing whether or not Ireland recapitalising or nationalising it's banks with money they borrow from their own central bank, and that money will end up as reserves and it isn't spent into the economy.

A government has to be careful how it spends money. If they spend into the wrong area of the economy they will cause chaos, but that in itself doesn't mean that they can't run a deficit

Tell me how many times has the USA had a surplus in it's entire history?

Very few government have a surplus. In fact the only US presidents to reduce the deficits in recent times are Obama and Clinton, yet the GOP claim to be more fiscally responsible.

Maybe they are, and maybe a small deficit every year is the more responsible option.
Well actually, this conversation started out with B_B arguing that MMT is right where mainstream macro is hopelessly wrong.

And you are wrong about Ireland. It was not about recapitalising its banks. That came later.

This is what happened:

1. Ireland guarantees the debts of its banks which swamp the sovereign.
2. Ireland, at the same time, suffers massive fiscal crisis as the gap between revenues and expenditure grows in response to the collapse of the real economy.
3. Bond markets figure that Ireland's debt/gdp ratio is unsustainable and the yield on Irish bonds rises to the point where,
4. Ireland is forced to seek a bailout from EU/IMF or be frozen out of the bond markets and default on its debt.

All that has been demonstrated using this example is that national debt and deficits matter, and that bond markets can lose confidence in sovereigns.

If this were not the case, Governments would not strive to run budget surpluses and minimise national debts.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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peter fraser
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Veritas
18 Sep 2014, 02:49 PM
Well actually, this conversation started out with B_B arguing that MMT is right where mainstream macro is hopelessly wrong.

And you are wrong about Ireland. It was not about recapitalising its banks. That came later.

This is what happened:

1. Ireland guarantees the debts of its banks which swamp the sovereign.
2. Ireland, at the same time, suffers massive fiscal crisis as the gap between revenues and expenditure grows in response to the collapse of the real economy.
3. Bond markets figure that Ireland's debt/gdp ratio is unsustainable and the yield on Irish bonds rises to the point where,
4. Ireland is forced to seek a bailout from EU/IMF or be frozen out of the bond markets and default on its debt.

All that has been demonstrated using this example is that national debt and deficits matter, and that bond markets can lose confidence in sovereigns.

If this were not the case, Governments would not strive to run budget surpluses and minimise national debts.
Yep but if the had there own currency they would not have had an issue they couldn't overcome, even though the Irish people would lose purchasing power because their currency would have lost a lot of buying power.

1. The act of guaranteeing the banks would not have caused an major issue

2. Fiscal gap - well I would have to know why that happened and whether the floating currency would have plugged most of that.

3. This point would be far less relevant.

4. Ireland would not have needed a bailout and they would not have been forced to pay outrageous interest rates, and they would have met their debts in their own currency, which they can print.

I'm sure that none of the above are what a responsible government wants, but it's what they occasionally have to do when the SHTF.

Any expressed market opinion is my own and is not to be taken as financial advice
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Veritas
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peter fraser
18 Sep 2014, 02:57 PM
Yep but if the had there own currency they would not have had an issue they couldn't overcome, even though the Irish people would lose purchasing power because their currency would have lost a lot of buying power.

1. The act of guaranteeing the banks would not have caused an major issue

2. Fiscal gap - well I would have to know why that happened and whether the floating currency would have plugged most of that.

3. This point would be far less relevant.

4. Ireland would not have needed a bailout and they would not have been forced to pay outrageous interest rates, and they would have met their debts in their own currency, which they can print.

I'm sure that none of the above are what a responsible government wants, but it's what they occasionally have to do when the SHTF.
Quote:
 
1. The act of guaranteeing the banks would not have caused an major issue


So a small state with about 2 million taxpayers appropriates the debts of a banking sector to the tune of tens of billions of euros and it wouldn't have been a problem if it was in its own currency?

What fresh madness is this? The sovereign either has the ability to honour those debts or it doesn't. Whether it be in euros, pounds drachma whatever. The Sovereign was swamped with a debt burden it couldn't repay.

The only reason why those debts are not such a problem now is that Draighi has basically said that the Germans will pay in the event Ireland cant.

Quote:
 
Fiscal gap - well I would have to know why that happened and whether the floating currency would have plugged most of that.


No, it wouldn't. You see what happened was Ireland was taxing a property bubble and spending based on those revenues. Then the bubble burst and the revenues went with it.

How would a floating currency fix that? Currency devaluation might have aided growth but it was still a mighty gap to bridge.

Quote:
 
Ireland would not have needed a bailout and they would not have been forced to pay outrageous interest rates, and they would have met their debts in their own currency, which they can print.



The interest rates were a reflection of the likelihood of default. The markets (rightly) did not believe that Ireland could pay its debts hence the massive increase in the yields and the need for the bailout.

Are you suggesting that all Ireland needed to do was leave the euro, issue bonds and buy them off themselves? Problem solved? :wak:
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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Bardon
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Dr Watson
18 Sep 2014, 11:36 AM
Never lose sight of the super-cycle. We all know about the mini-cycle, but where is Australia currently positioned in regards to the super-cycle? How high can debt-to-GDP go? How high do we want it to go?
Yes I am with you on the supercycle one.

There are always many cycles always at play and interacting.

For me the obvious ones are, the

Land price cycle -14 years up 4 years down next top around 2025

Kondratiev Commodity cycle - next peak in the 2020's this is of particular importance to commodity producing countries

The Grand Cycle (David Fischer) - measured since 1200 says that this could be the last run up of the current inflationary wave followed by a very long period of price equilibrium.

So for me this current super cycle will top out in 2025'ish. After which returns on capital will drop off significantly for a very long time, something like the Victorian equilibrium phase where some asset prices were cheaper in 1890 than they were in 1820.
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peter fraser
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Veritas
18 Sep 2014, 03:15 PM
So a small state with about 2 million taxpayers appropriates the debts of a banking sector to the tune of tens of billions of euros and it wouldn't have been a problem if it was in its own currency?
Correct.

Quote:
 
What fresh madness is this? The sovereign either has the ability to honour those debts or it doesn't. Whether it be in euros, pounds drachma whatever. The Sovereign was swamped with a debt burden it couldn't repay.

It could repay them if it controlled it's own currency. How could it possibly run out?

Quote:
 
The only reason why those debts are not such a problem now is that Draighi has basically said that the Germans will pay in the event Ireland cant.

Yes Draghi is turning the EUzone into a proper financial union.


Quote:
 
No, it wouldn't. You see what happened was Ireland was taxing a property bubble and spending based on those revenues. Then the bubble burst and the revenues went with it.

How would a floating currency fix that? Currency devaluation might have aided growth but it was still a mighty gap to bridge.

Before the housing boom Ireland was the Celtic Tiger - it was successful before it became a housing estate.



Quote:
 
The interest rates were a reflection of the likelihood of default. The markets (rightly) did not believe that Ireland could pay its debts hence the massive increase in the yields and the need for the bailout.

And if they had their own currency the investors wouldn't be afraid of a loss and wouldn't have needed high rates to tempt them to invest. The rates were high because of fear of loss. Take away the opportunity for loss and you remove the fear.

Remove the fear and the interest rates reduce.

Quote:
 
Are you suggesting that all Ireland needed to do was leave the euro, issue bonds and buy them off themselves? Problem solved? :wak:

Yes but the Irish government decided to remain - I guess they felt that the EUzone would sort out their structural problems and being a member of it had long term benefits.

Have you forgotten that Ireland has been deeply divided about the Euro?

Did you read Krugman who you quote - http://www.thejournal.ie/paul-krugman-says-irish-voters-should-vote-no-468368-May2012/?&r_dir_d=1
Any expressed market opinion is my own and is not to be taken as financial advice
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Count du Monet
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Jimbo
18 Sep 2014, 10:35 AM
This where the Keynesian economic multiplier falls down. The USA and Britain spent huge amounts in the post war years building infrastructure which produced great economic benefit.





A factor in the post war years is a key input, ....energy of new transportable kind proliferated.

In 1945 world oil production was around 5 mbpd. Consider against that just tiny little Australia's daily consumption of oil has surpassed 1 mbpd.

By 1950 it was 10 mbpd, 1960 20 mbpd, 1970 40 mbpd, then crunch came, a decade later in 1980 the oil had increased to 60 mbpd. Instead of doubling like it did in the immediate post war decades, it had only increased 50%. This was enough to almost junk a capital market used to higher rates of growth. It took another 20 years to 2000 for world oil production to hit 80 mbpd. Today it might be around 90 mbpd. The definitions get difficult at this point because what we term "conventional oil" is actually around 72 mbpd. Since about the 1980's non-conventional oil has become important.

In a world addicted to growth, that growth is getting harder to come by. Another example is the growth steam horse power in Germany. In 1870 it was 7 million per year. In 1914 it was 79 million per year. In percentage terms the growth in the 19th century out did anything we know today.

There is no doubt that with the refinement of technology, energy growth from non-conventional forms will continue. But the rapid growth the Western world took for granted is now finished. A time will come when growth ceases and then reverses.

Without this growth of oil post war Keynesian economics would have never been as successful as it was. The key element we are counting on is the ability to create a surplus. Without a surplus, b-b's spend your way to wealth no longer works.

It's fine and good except for one factor, all this growth is dependent on the careless use of world resources. This carelessness will come back to bite future humanity when their living standards decline back to those of the middle ages.

MMT only works when there is a surplus the government can harness. And the surplus can only be those things that are in surplus. Printing presses cannot harness oil that does not exist.
The next trick of our glorious banks will be to charge us a fee for using net bank!!!
You are no longer customer, you are property!!!

Don't be SAUCY with me Bernaisse
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miw
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Jimbo
18 Sep 2014, 10:35 AM
This where the Keynesian economic multiplier falls down. The USA and Britain spent huge amounts in the post war years building infrastructure which produced great economic benefit.

Now deficits are largely being spent on social welfare and other non productive programs. There is some short term economic benefit in that welfare payments will be spent in Walmart and Tesco but that is about it.

Ultimately, it is not the deficit that is the problem. It is the accumulation of deficits as debt and the cost of servicing that debt that is the killer.



As I read once somewhere:

You can divide the deficit into three portions:

a) Not actually a deficit: That part of the deficit that is less than nominal GDP growth. If your deficit is less than this, your accumulated deficit (i.e. debt) will shrink as a percentage of GDP.

b) Investment. This is deficit spending on needed assets that will have an economic return in the future. e.g. infrastructure spending. This is true Keynsian deficit spending. You do need to spend it sometime, and the right time to spend it is when a stimulus is needed. To my mind where the Japanese *really* screwed up is that, even though they could not find anymore worthwhile infrastructure projects, they went ahead anyway and built bridges to nowhere to keep the construction industry afloat. They would have been better off throwing out helicopter money.

c) Tax by stealth. Deficit spending beyond that which is less than nominal GDP growth and which does not get an economic return will show up in interest rates and is, in effect, a tax.

Dr Watson
18 Sep 2014, 02:16 PM
Veritas raises an interesting question here. If there is absolutely no need for countries to run balanced budgets, then why do they keep attempting to do so?
See above.
Edited by miw, 18 Sep 2014, 07:22 PM.
The truth will set you free. But first, it will piss you off.
--Gloria Steinem
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