patrick.net

Why doesn't he mention the impact of deflation on all of the debt that exists, both public and private, not to mention so called unfunded liabilities ? I guess one might say that the federal debt isn't a problem since it can be paid with essentially printed money, but how about state and local ?

How about all of the private bonds , and morgages and corporate debt that has to be paid back in dollars that are worth more ? All that money that was borrowed presumably mostly for all kinds of investments in the past, now had to be paid back in dollars that are worth more ? This is on top of the interest !

Jeepers. I wonder what kind of impact that would have ?

Yeah, not even the slightest mention of existing debt.

Presumably, a real deflation that continues after mortgage rates are as low as they can go, would cause more and more people to be underwater too.

I'm not impressed.

marcus says

Yeah, not even the slightest mention of existing debt.

That's what bankruptcy is for. There is a point where every entity (person, corporation, government) should clear bad debt rather than wilt under perpetual indebtness.

marcus says

Presumably, a real deflation that continues after mortgage rates are as low as they can go, would cause more and more people to be underwater too.

That is only because people keep getting into debt buying naturally depreciating assets but expecting the opposite, i.e. rising prices and factoring that expectation into their decisions to take on maximum debt. Once you break the consumption and speculation addiction and only purchase what yo can afford and plan ahead accordingly, then stable prices are your best friend. Of course deflation would be temporary until a price equilibrium is reached.

I think he is right in fact the natural disposition of the economy is deflationary.

The people who like inflation are the banks. The top of the economy greatly benefits from the inflation as witnessed by the fast growth of high end retail.

On the other end the states with long term debt will be forced to default. Sorta poetic justice, kinda brings a tear to my eye.

If we don't have inflation after all the QEs and yet have banks with record high reserves it doesn't seem likely that inflation is going to happen?

You read that the big dogs have record amounts of cash as another indicator.

Another factor that does get talked about much is simply demographics the world population is shrinking with Japan leading the way

This is good at explaing this more.

http://www.youtube.com/embed/v_yPwilCy1Q&feature=em-subs_digest

marcus says

But back to your point. I find it similar to Dan's argument. You talk about how you think economics should work or could work, rather than how history suggests it does.

It's best to stick with simple math which doesn't lie and it is on my side in this case. Historic example are problematic, I mean, we have people discussion still today whose policies were responsible for the very same boom or bust and people cannot find common ground. Btw. I have provided examples time and time again where countries in slightly deflationary - to slightly inflationary (max 1%) did well in those years and a crisis was nowhere to be seen. I have also linked to a table of countries who have adopted a maximum debt to gdp ratio or have had very low debt to gdp and on average they do better than their counterparts.

Nobody is going to argue that debt is not a problem. In fact, I would argue , as I did above, that because of the debt we have, deflation would be devastating.

This is typical Austrian position. They of course want to supplant Keynes with their bullshit religion, which absolves capitalism of all crimes. Any competing dogma is automatically to be derided.

The debt is a problem as long as it is not cleared. The religious aspect is on the modern keynesian side, this is just simple math. If you cannot sustain paying your debt at reasonable interest rates it's bad debt and should be cleared - and the rates are already as low as ever! It's a chicken and egg thing, but the problem is creating too much debt in the first place, you cannot fix this with more QE and more debt. As said on another thread, this is not left-vs-right, it's math and vs voodoo economics, never mind that man behind the curtain ;)

Deflation as a long-term policy goal is BS. Everyone thinks things will get cheaper down the road, so they defer spending insofar as possible now. Everyone hoards gold, and everyone ends up poorer. I have issues with the negative side effects of inflationary policy, however it does encourage spending and investment on a continuing basis.

mell says

If you cannot sustain paying your debt at reasonable interest rates it's bad debt and should be cleared

This is just another kind of moral hazard. The borrowers are bailed out, why ? Because they borrowed too much ? That seems like an awfully good deal, for those who borrowed the money.

mell says

It's a chicken and egg thing, but the problem is creating too much debt in the first place, you cannot fix this with more QE and more debt. As said on another thread, this is not left-vs-right, it's math and vs voodoo economics, never mind that man behind the curtain ;)

I understand your point. IT gets to the troubled situation we are in, which is yet to be resolved. And yes, it's not left versus right. But if the truth were told, you don't really have a solution. You want to whine about what isn't a solution as if you have a solution. But you don't.

Vicente says

Deflation as a long-term policy goal is BS.

It's not a goal, it's a natural occurrence keeping prices around an equilibrium - neither should inflation be a policy goal.

marcus says

This is just another kind of moral hazard. The borrowers are bailed out, why ? Because they borrowed too much ? That seems like an awfully good deal, for those who borrowed the money.

No, this is not a free pass, the borrowers suffer consequences as well. Bankruptcy law is pretty good at splitting the duties. Consequences are bad credit for the borrowers and a rise in interest rates when lending is perceived as more risky for a while. The system works. What doesn't work is printing money for 25 years and saying it's never a good time to tighten.

marcus says

But if the truth were told, you don't really have a solution. You want to whine about what isn't a solution as if you have a solution. But you don't.

There is no solution as in "pain-free", but clearing the debt via bankruptcy causes short term pain for both sides while new entities can emerge who played it safer, on the long term both the lender and the borrower are starting with a clean slate. This keeps the playing field leveled. Crony capitalism and taxpayer bailouts skew it in favor of the wealthy and connected. But if your point is that this is not a solution either because it is not pain free, then I agree with you on the second part, because all actions have consequences. Making risky lending and borrowing free of consequences is the danger that has been screwing up the system since this juggernaut of a ponzi scheme was invented.

Vicente says

This is typical Austrian position. They of course want to supplant Keynes with their bullshit religion, which absolves capitalism of all crimes. Any competing dogma is automatically to be derided.

What does this even mean? My objection to those who seem to consider themselves in the "Keynes" camp (whether or not their beliefs have anything to do with anything Keynes ever wrote) are for artificially supporting big business at all costs, and this is mainly what has led to the extreme disparity of wealth in the U.S. I am not against government regulation, but current policies are the OPPOSITE of regulation. The government allows huge corporations to do whatever they like, then steps in and give them loans, or buys their financial "products" that they couldn't unload any other way, and that money goes straight to the top and gets hoarded by the 1%.

How that makes me an "Austrian" who "absolves capitalism of all crimes" is not at all clear to me. Perhaps you'd care to explain that?

It seems to me that anyone who raises common sense objections to how the U.S. government is influencing the economy is simply dismissed out of hand as "not understanding Keynes". It's rather like talking to an extremely religious person; If I raise the logical question "How would an all-loving god allow people to suffer?", I am simply dismissed as "not understanding God".

Vicente says

Deflation as a long-term policy goal is BS. Everyone thinks things will get cheaper down the road, so they defer spending insofar as possible now. Everyone hoards gold, and everyone ends up poorer.

Which is exactly why the undoing of quantitative easing should be a sudden, one time correction. People defer spending if they expect further price drops, which they would not if the price drops were sudden. It's pulling off the band-aide slowly that causes the problem.

This is exactly why propping up the housing prices during the burst caused the Second Great Depression. Had housing prices been allowed to return to pre-bubble levels quickly, people would have continued to buy houses and then buy other things like furniture and restaurant services rather than going into "honker down" mode. I know that I would have spent a hell of a lot more of my income had prices not been propped up by quantitative easing and a host of other tricks.

I'm not sure it does. I only know that those who support such policies, like yourself, seem to self-identify as being in the "Keynes" camp. Why don't YOU explain Keynes? I doubt you understand it yourself, based on what you write here. You seem to be in complete denial that the Fed even has a policy of buying up debt from big business.

I'd like to have my personal printing press, after all Paul Krugman says moar monies are good for the economy and I am promising to stimulate the heck out of it by spending it not just on hookers and blow, but also by flipping a shack or two! It's a win-win for everybody! Deal?

Homeboy says

My objection to those who seem to consider themselves in the "Keynes" camp (whether or not their beliefs have anything to do with anything Keynes ever wrote) are for artificially supporting big business at all costs

This is a ridiculous assertion, to a position I do not hold.

Part of me prefers the Iceland solution. Let the banks and creditors take a hit.

Most people who deride "Keynesianism" know absolutely zip about it, it's just a convenient whipping boy like "Communist". Of course the same can be said of many self-described "Keynesians" they conveniently forget about the "storing nuts for the winter" part of his dogma that required regulation and taxes. Nobody wants to take away the punchbowl when the party is a blast do they? Austrian and others unfortunately view boom-bust as their friend and innocuously call it the "business cycle" completely ignoring the fact that FIRE economy people benefit most from these cycles.

Much though I disagree with certain aspects of "Keynesianism" in it's various forms, application of these ideas did lead to a remarkable period of stability from the 1930's to nearly the millenium. Unfortunately the same people who FUCKED up the S&L's, decided to go one better and unleash megabanks on the world. In my ideal world, Glass-Steagall 2.0 would break up all these monsters.

Vicente says

I actually prefer the Iceland solution. Let the banks and creditors take a hit.

Then you are not a Keynesian.

Reality says

Then you are not a Keynesian.

I never said I was. However Iceland DID devalue it's currency, which according to many would lead to hyperinflation. They also instituted stronger capital controls. They seem recovering better than many countries that chose to the "hard medicine" austerity route.

http://www.nytimes.com/2012/07/08/world/europe/icelands-economy-is-mending-amid-europes-malaise.html?ref=business&pagewanted=all

Vicente says

Reality says

Then you are not a Keynesian.

I never said I was. However Iceland DID devalue it's currency, which according to many would lead to hyperinflation. They also instituted stronger capital controls. They seem recovering better than many countries that chose to the "hard medicine" austerity route.

Iceland did implement austerity and they did well canceling a lot of foreign debt and going through orderly recievership(s). The currency devaluation was not intended by the policymakers, it was a result of mistrust due to the default. This is often the case and countries undergoing defaults could not stop it even if they wanted to. However there was nothing Keynesian or QE about their method of handling the crisis.

Vicente says

Homeboy says

My objection to those who seem to consider themselves in the "Keynes" camp (whether or not their beliefs have anything to do with anything Keynes ever wrote) are for artificially supporting big business at all costs

This is a ridiculous assertion, to a position I do not hold.

Part of me prefers the Iceland solution. Let the banks and creditors take a hit.

Perhaps you do not hold that position. But is it really "ridiculous" to say that many do? Did we let the banks and creditors take a hit? No, we did not. In fact, the utmost priority was placed on keeping investors whole.

Vicente says

Most people who deride "Keynesianism" know absolutely zip about it, it's just a convenient whipping boy like "Communist". Of course the same can be said of many self-described "Keynesians"

I'm not actually deriding Keynesiansim; I'm deriding the perversion of Keynesiansim that currently guides US economic policy. My understanding is that Keynes favored government investment in public works; I'm not sure how he would feel about government investment in mortgage-backed securities. I think the Soviet Union failed because of a perversion of communism. Was it "real" communism? Perhaps not, but that doesn't change the fact that it was held out as such, and was not successful.

Homeboy says

I'm not actually deriding Keynesiansim; I'm deriding the perversion of Keynesiansim that currently guides US economic policy

then why not attack the source of the problem which is bank de regulations and lax lending standards ?
I have yet to see any republican standing up for the middleclass and demanding tigher regulation and credit lending standards for banks.
I know why they don't do it..because they are just puppets of big money.
The rich only give us two options -
1) No fed/QE and have deflation. This will increase their purchasing power while they sit on their asses and enjoy their rent seeking behaviour. no wonder they want to abolish fed and go back to gold. the good old days of masters and slaves.
or
2) do QE and create lots of debt BUT with lax lending standards/deregulation so that they can use that money to fleece the middle class by creating bubbles.lax lending standards ( no collateral or accountability) also allows them to make plenty of money without risking any of their own money. tighter lending standards requires them to have some skin the game which they don't want .

what they don't want is

- QE/debt creating with High lending standards. This would mean , they can't do either 1 and 2 above. They have to actually compete, take risk, do their due diligence to find right investments and do hard work ..who wants that ..right ?

no wonder Keynesian ism with very high lending standards gave us decades of good growth until the rich folks started looking for easy way out by raping the system and using their paid thugs ( politicians) to relax the standards.

The democrats are not saints either . who the fu*K asked them to back home mortgages with govt money ?
i think we had a perfect storm during our previous bubble.
republicans pushing for deregulation and democrats pushing for backing housing with govt money. so we have Keynesiansim ( cheap money) with no accountability from banks and the govt ready to hold the bag if something goes wrong.
when shit hits the fans...who gets the blame ? ofcourse Keynesiansim :-)

everybody needs a scapegoat and the fed was a good one.

The fact is that Keynesiansim comes with a big caveat.
: KEYNESIANISM DOES NOT WORK WITH LAX LENDING STANDARDS AND WITHOUT THE CREDITORS AND DEBTORS SKIN IN THE GAME.

this is the bare minimum that needs to be enforced for Keynesiansim and we are not even capable of doing that. i guess we deserve to go back to the stone age.

Capitolism can be gamed and is not perfect.

But Keynesianism is starting to look like Kleptocrasy.

Vicente says

This has nothing to do with economic theories, and everything to do with the grip of FIRE on politics. It is no accident that Citizens United made corporations people. It is no accident that a string of Goldman Sachs alums occupied key positions for a long time now.

What's your point? You act like you're saying something I don't already know. You also don't seem to want to acknowledge that there are a lot of Americans who support this Wall Street coup, and in fact argue that it was all necessary to "save" the economy. Many support it somewhat begrudgingly as what they call a "necessary evil", but support it they do, and a perversion of Keynesianism is the justification.

Think about it for a second. Did any Goldman Sachs alums get into power and say, "Hi, I'm evil and I'm going to corrupt the economy just so I can profit from it."? No, none of them has said that. What have they said? They say, "We HAVE to do this. If we don't, there will be another Great Depression."

Entitlemented says

Capitolism can be gamed and is not perfect.

But Keynesianism is starting to look like Kleptocrasy.

+1