Tag: economics

The state pensions are going to run out a lot faster than reported:

America’s red ink runs much deeper than you think. Aside from the nearly $18 trillion national debt, many state governments are looking at future budgets that are trillions of dollars in the red. And they’ve hidden the numbers by dramatically under-reporting that debt, according to a new report by the think tank State Budget Solutions.

The group looked at what are known as “unfunded liabilities” — or debt states will owe down the road. It found a number of states are fudging their numbers — big-time — using tricks like assuming their stock investments will soar.

The book-cooking could mean bad news for public pensions and other programs that rely on these budgets. The report finds that, nationwide, states have unfunded liabilities of nearly $5 trillion, or $15,000 per American.

It’s impossible to say when governments are going to stop making interest payments or finally writing off debts. But the date will almost certainly be sooner than those who work off the official statistics estimate.

Of course, the Neo-Keynesians will probably use this as an explanation for why their stimulus plans keep falling. See, they totally would have worked if only they had known the actual size of the problem, but because they didn’t have accurate information, the stimulus was too small to be effective.

Abenomics has, as predicted, conclusively failed:

Japan’s economy unexpectedly fell into recession in the third quarter, a painful slump that called into question efforts by Prime Minister Shinzo Abe to pull the country out of nearly two decades of deflation.

The second consecutive quarterly decline in gross domestic product could upend Japan’s political landscape. Mr. Abe is considering dissolving Parliament and calling fresh elections, people close to him say, and Monday’s economic report is seen as critical to his decision, which is widely expected to come this week.

Rising sales taxes have been blamed for triggering the downturn by deterring consumer spending, and with Japan having now slipped into a technical recession, the chances that Mr. Abe will seek a new mandate from voters to alter the government’s tax program appear to have increased significantly.

The preliminary economic report, issued by the Cabinet Office, showed that gross domestic product fell at an annualized pace of 1.6 percent in the quarter through September. That added to the previous quarter’s much larger decline, which the government now puts at 7.3 percent, a slightly worse figure than in its last estimate of 7.1 percent.

The surprise recession underscores the difficulties faced by Mr. Abe, who won power two years ago on a pledge to reinvigorate the economy and end his country’s long streak of wage and consumer-price declines. His agenda, dubbed Abenomics, has focused largely on stimulus measures, in particular an expanded program of government bond purchases by the central bank.

When the Obama stimulus plan failed, Neo-Keynesians like Paul Krugman claimed it was because the stimulus wasn’t big enough even though it was BIGGER than Neo-Keynesians like Paul Krugman had claimed was necessary to jump-start the economy.

Then Japanese Prime Minister Abe launched the Abenomics program, which consisted of  “monetary policy, fiscal policy, and economic growth strategies to encourage private investment. Specific policies include inflation targeting at a 2% annual rate, correction of the excessive yen appreciation, setting negative interest rates, radical quantitative easing, expansion of public investment, buying operations of construction bonds by Bank of Japan (BOJ), and revision of the Bank of Japan Act.”

The total fiscal stimulus was ¥20.2 trillion, and yet even in combination with all the aggressively easy monetary policy pursued by the Bank of Japan, it hasn’t been able to grow the economy at all. The plain and simple economic fact is this: you cannot print or borrow your way out of an economic depression that is a consequence of excessive debt. No matter how many Nobel-prize winners assure you that you can.

Check one. When banks are charging their depositors to hold their money, this is strongly indicative of deflation:

Just three months ago, Mario Draghi (President of the European Central Bank) embarked on his own Quixotic folly by taking certain interest rates into NEGATIVE territory. Draghi convinced himself that he was saving Europe from disaster. And like Don Quixote, everyone else has had to pay the price for his delusions.

On November 1st, the first European bank has passed along these negative interest rates to its retail customers. So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.

We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances.And large investors are paying European governments negative interest on certain bonds.

Check two: When debtor nations are finding it harder and harder to pay interest on their outstanding loans despite historically low interest rates, this is also indicative of deflation.  Ambrose Evans-Pritchard describes the battle between the ECB and the Bundesbank over continuing the European version of quantitative easing:

The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data from the IMF show that Germany’s net foreign credit position (NIIP) has risen from 34pc to 48pc of GDP since 2009, Holland’s from 17pc to 46pc. The net debtors are sinking into deeper trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc. Claims that Spain is safely out of the woods ignore this festering problem. 

We have been seeing some inflationary artifacts during the last five years of credit disinflation, but that is the result of the massive credit money pumping. According to mainstream economic theory, there should have been 10x or more inflation, but instead, all those efforts to monetarily refuel the global economy have uselessly run off, like gasoline poured over a stone. There has been some asset inflation, as can be seen in the stock market, but when the crash comes – and it will come – that will put a conclusive end to the inflation/deflation debate.

Actually, from most of the models I’ve seen, mainstream economists completely ignore public debt as well. After all, since credit owed is (mostly) endogenous, what does it matter how much Peter owes Paul? That’s the main reason so few of them saw 2008 coming. The article is focused on Australia, but it is globally applicable.

There is a reason why mainstream economists ignore private debt while focusing intently upon public debt. Neoclassical economic models assume markets operate in a static state of equilibrium, but these models are based on a slew of preposterous assumptions which are never met in the real world. The banking and financial system is modelled by assuming that money, debt and banks do not exist! The element of time is also removed, making it difficult for economists to understand the inter-temporal allocations of debt.

This is like an astronomer or astrophysicist building a model of our solar system absent the sun, moon and gravity – an inadequate framework that will inevitably produce glaring mistakes. By using a circular form of logic, private domestic and external debts are assumed to be the outcome of rationally-derived contracts, so the level of debt is deemed to be efficient by definition. In contrast, public debts are considered to be managed by ‘irrational’ government planners, who cannot make optimising decisions; a clear fallacy based on stereotypes of the competency of financial actors within the economy.

In the post-1970s era, neoliberal economic policy has dominated mainstream perspectives. A major goal of government has led to an unyielding mantra that public debts must be reduced by running surpluses where possible. The obsession with public debt and deficits has blindsided policymakers to the rapid accumulation of private debts. For instance, the severe mid-1970s recession was caused largely by the collapse of the dual commercial and residential real estate bubbles, inflated by sharply accelerating private debts, but the economics profession failed to take notice.

Unfortunately, this made no difference, with the 1981 Campbell Report advocating further deregulation of the banking and financial sector. By the time of the 1997 Wallis Report, neoclassical economists had the benefit of hindsight when examining the mid-1970s dual commercial and housing bubbles, the 1981 Sydney housing bubble, the 1987 stock market bubble and crash, the late 1980s dual commercial and housing bubbles, and the lead-up to the largest stock market bubble in Australian economic history, the Dot-Com era.

With Australia’s economic history littered with asset bubbles, irrational exuberance, recessions and depressions, what were the recommendations of the Wallis Report? More financial deregulation! Mainstream economists in Australia (and elsewhere) are wilfully blind to countervailing evidence which demonstrates the harms caused by financial deregulation.

The reason that financial deregulation is advocated becomes obvious: booming private debts enhance the power, profit and authority of the horde of private monopolists, usurers, speculators, rent seekers, free riders, financial robber barons, control frauds, inheritors and indolent rich.