Tag: economics

And yet, somehow I doubt he’ll admit that his neo-Keynesian advocacy of more government spending, more money printing, and more debt is incorrect when Abenomics, as applied Keynesian stimulus in Japan is known, fails.  We already know that when it fails, it will be for the same reason that Obama’s $787 billion stimulus package failed: it was too small.

These days we are, in economic terms, all
Japanese — which is why the ongoing economic experiment in the country
that started it all is so important, not just for Japan, but for the
world. In a sense, the really remarkable thing about “Abenomics” — the sharp
turn toward monetary and fiscal stimulus adopted by the government of
Prime Minster Shinzo Abe — is that nobody else in the advanced world is
trying anything similar. In fact, the Western world seems overtaken by
economic defeatism….

It would be easy for Japanese officials to make the same excuses for
inaction that we hear all around the North Atlantic: they are hamstrung
by a rapidly aging population; the economy is weighed down by structural
problems (and Japan’s structural problems, especially its
discrimination against women, are legendary); debt is too high (far
higher, as a share of the economy, than that of Greece). And in the
past, Japanese officials have, indeed, been very fond of making such
excuses.

The truth, however — a truth that the Abe government apparently gets —
is that all of these problems are made worse by economic stagnation. A
short-term boost to growth won’t cure all of Japan’s ills, but, if it
can be achieved, it can be the first step toward a much brighter future.

So, how is Abenomics working? The safe answer is that it’s too soon to tell. But the early signs are good — and, no, Thursday’s sudden drop in Japanese stocks doesn’t change that story.

What is the difference between Keynesianism and Neo-Keynesianism?  The true Keynesian believes that there is a time for government spending to contract.  The Neo-Keynesian says: in times of growth, spending must be maintained in order to preserve economic growth.  And in times of contraction, spending must be increased in order to kickstart it.

I have been following the mini-scandal of sorts in economics ever since the revelation that debt stars Carmen Reinhart and Kenneth Roghoff committed a basic Excel error in their famous paper that served as the basis for their very good 2009 book, This Time It’s Different.  I refrained from jumping into it right away because I think it is usually best to hear what both sides have to say before attempting to reach any kind of judgment on the matter.

Also, from my neo-Austrian perspective, the basic idea that economic statistics can provide legitimate and meaningful guidelines for policy actions is a dubious one at best. The recent artificial boost to GDP by means of counting R&D expenditures twice, (to put it very, very crudely), is only one of many examples of the futility of attempting to derive economic principles from analyzing government-produced statistics.

Even so, I tended to suspect that the Neo-Keynesians were exaggerating the significance of the error, since the idea that beyond a certain amount, the addition of more debt will tend to reduce one’s ability to spend is not exactly logically controversial.  The fact that Krugman and others immediately attempted to turn the matter into a policy debate was also suspicious, since the Reinhart and Roghoff paper was hardly the only one published on the subject. And, as it happens, Reinhart and Roghoff’s response indicates that their admitted mistake was considerably less significant than the Keynesians and the inflationistas would like to pretend it is.

LAST week, we were sent a sharply worded paper by three researchers from the University of Massachusetts, Amherst, at the same time it was sent to journalists. It asserted serious errors in our article “Growth in a Time of Debt,” published in May 2010 in the Papers and Proceedings of the American Economic Review. In an Op-Ed essay for The New York Times, we have tried to defend our research and refute the distorted policy positions that have been attributed to us. In this appendix, we address the technical issues raised by our critics.

These critics, Thomas Herndon, Michael Ash and Robert Pollin, identified a spreadsheet calculation error, but also accused us of two “serious errors”: “selective exclusion of available data” and “unconventional weighting of summary statistics.”

We acknowledged the calculation error in an online statement posted the night we received the article, but we adamantly deny the other accusations.

They neglected to report that we included both median and average estimates for growth, at various levels of debt in relation to economic output, going back to 1800. Our paper gave significant weight to the median estimates, precisely because they reduce the problem posed by data outliers, a constant source of concern when doing archival research that reaches far back into economic history spanning several periods of war and economic crises.

When you look at our median estimates, they are actually quite similar to those of the University of Massachusetts researchers. (See the attached table.)

Moreover, our critics omitted mention of our paper “Public Debt Overhangs: Advanced-Economy Episodes Since 1800,” with Vincent R. Reinhart, published last summer, in The Journal of Economic Perspectives. That paper, which is more thorough than the 2010 paper under attack, gives an average estimate for growth when a country’s debt-to-G.D.P. ratio exceeds 90 percent of 2.3 percent — compared to our critics’ figure of 2.2 percent. (Also see the comparisons posted by the blogger known as F. F. Wiley, including his chart, a copy of which accompanies this essay.)

Despite the very small actual differences between our critics’ results and ours, some commenters have trumpeted the new paper as a fundamental reassessment of the literature on debt and growth. Our critics have done little to argue otherwise; Mr. Pollin and Mr. Ash made the same claim in an April 17 essay in The Financial Times, where they also ignore our strong exception to the claim by Mr. Herndon, Mr. Ash and Mr. Pollin that we use a “nonconventional weighting procedure.” It is the accusation that our weighting procedure is nonconventional that is itself nonconventional. A leading expert in time series econometrics, James D. Hamilton of the University of California, San Diego, wrote (without consulting us) that “to suggest that there is some deep flaw in the method used by RR or obvious advantage to the alternative favored by HAP is in my opinion quite unjustified.” (He was using the initials for the last names of the economists involved in this matter.)

Above all, our work hardly amounts to the whole literature on the relationship between debt and growth, which has grown rapidly even since our 2010 paper was published. A number of careful empirical studies have found broadly similar results to ours. But this is not the definitive word, as a smaller number of just as scholarly papers have not found a robust relationship between debt and growth. (Our paper in The Journal of Economic Perspectives included a review of that literature.)

Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: “Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year.”

It’s important to understand how deep we are into uncharted waters here, as only 8 percent of the postwar observations in advanced economies exceeded 90 percent of GDP and levels over 120 percent are almost unheard of.  But regardless, as Reinhart and Roghoff point out, there are only four options: slow growth and austerity for a
very long time, elevated inflation, financial repression and debt
restructuring.  And the only one that offers any possibility of success without massive social disruption and violence is the last one.

More importantly, as we’ll be discussing in the next round of the Inflation/Deflation debate, policy makers may not have anywhere nearly as much choice in the matter as they believe they have.

As Zerohedge notes, US Government Debt/GDP presently stands at 104.8 percent, up from 103 percent three months ago.

Fortunately, as all we good Keynesians know, there is no problem with large quantities of government debt because when interest on the debt is paid out of taxation, there is no direct loss of disposable income.  It’s literally textbook economics!

“The interest on an internal debt is paid by Americans to Americans;
there is no direct loss of goods and services. When interest on the debt
is paid out of taxation, there is no direct loss of disposable income;
Paul receives what Peter loses, and sometimes – but only sometimes –
Paul and Peter are one and the same person…. In the future, some of
our grandchildren will be giving up goods and services to other
grandchildren. That is the nub of the matter. The only way we can impose
a direct burden on the future nation as a whole is by incurring an
external debt or by passing along less capital equipment to posterity.”
– Paul Samuelson, Economics, 1948

So, the USA is in good shape despite Debt/GDP passing 100 percent earlier this year. Or is it?

Foreign demand for
U.S. Treasury securities rose to a record level in February, indicating
that international investors remain confident in U.S. debt despite
budget wrangling in Washington. The Treasury
Department said Monday that foreign holdings of U.S. Treasury securities
increased 0.3 percent in February from January to a record $5.66
trillion. It was the 14th straight monthly increase.

As she is one-half of the Reinhart-Roghoff team that has done some excellent work concerning why what Alan Greenspan once called the New Economy was not, in fact, anything new or different, I’m always interested in what Carmen Reinhart has to say.  I don’t necessarily agree with her on policy prescriptions, but her diagnostic take is usually insightful. She was interviewed by Der Spiegel last week:

SPIEGEL: Ms. Reinhart, central banks around the world are
flooding the markets with cheap money in order to spur economies and
support governments. Are these institutions losing their independence?
Reinhart: No central bank will admit it is keeping rates low to
help governments out of their debt crises. But in fact they are bending
over backwards to help governments to finance their deficits. This is
nothing new in history. After World War II, there was a long phase in
which central banks were subservient to governments. It has only been
since the 1970s that they have become politically more independent. The
pendulum seems to be swinging back as a result of the financial crisis.
SPIEGEL: Is that true of the European Central Bank as well?
Reinhart: Less than for other central banks, but yes. And the crisis isn’t over yet — not in the United States and not in Europe.
SPIEGEL: But the danger of such a central bank policy is already well known: It can lead to high inflation.
Reinhart: True. But it is certainly more difficult for a central
banker to raise interest rates with a debt to gross domestic product
ratio of over 100 percent than it is when this ratio stands at 39
percent. Therefore, I believe the shift towards less independence of
monetary policy is not just a temporary change.
SPIEGEL: As a historian who knows the potential long-term
consequences very well, doesn’t such short-sighted decision-making
frighten you?
Reinhart: I am not opposing this change, I am just stating it.
You have to deal with the debt overhang one way or the other because the
high debt levels are an impediment to growth, they paralyze the
financial system and the credit process. One way to cope with this is to
write off part of the debt.
SPIEGEL: You mean some kind of haircut?
Reinhart: Yes. But we are in an environment where politicians are very reluctant to do write-offs. So what happens is that money is transferred from savers to borrowers via negative interest rates.
SPIEGEL: In other words: When the inflation rate is higher than
the interest rates paid on the markets, the debts shrink as if by magic.
The downside, though, is that this applies to the savings of normal
people.
Reinhart: The technical term for this is financial repression.
After World War II, all countries that had a big debt overhang relied on
financial repression to avoid an explicit default. After the war,
governments imposed interest rate ceilings for government bonds.
Nowadays they have more sophisticated means.

The dangerous phase of the crisis that we have now entered is that even mainstream economists who understand the debt-related nature of the problem – and recall that back in 2008-2009, the only people who recognized that it was based on debt were outsiders like Steve Keen and me – are still supporting, however unenthusiastically, the attempt of the central banks to inflate their way out of the problem, even though some of them know it isn’t going to work.

Why? Because they are desperate.  They know that the alternative is either default and a short but savage depression that will absolutely ruin most of the world’s wealthy and powerful or the collapse of the global financial system and quite likely a fair amount of the various political structures as well. So, they are hoping against hope that the central banks will be successful in inflating their way out, but if one looks at the debt statistics, it is perfectly clear that the strategy is failing because debt/GDP is still growing.

“In the EU-27 the government debt-to-GDP ratio increased from 80.0 % at
the end of 2010 to 82.5 % at the end of 2011, and in the euro area from
85.4 % to 87.3 %…. In the EU-27, total government revenue in 2011 amounted to 44.7 % of GDP
(up from 44.1 % of GDP in 2010), and expenditure to 49.1 % of GDP (down
from 50.6 % in 2010).”

That’s the savage austerity of which the European Keynesians are complaining. Tax revenues are up 0.6 percent and government spending is down 1.5 percent, but the debt/GDP went up 2.5 percent anyhow.  This is why default, and the concomitant deflation, is inevitable, no matter how much the financial powers-that-be are desperately fighting it off.

The situation is even worse in the USA and Japan, where the government debt/GDP ratios have risen to 103 percent and 230 percent.  And while we don’t know when the financial engine, increasingly clogged with debt, is going to seize up, we can be certain that sooner or later it will.  It is very unlikely that either Europe or the USA are going to be given more than 20 years to muddle along and continue piling on the debt in the manner that Japan has.

Does something very nasty this way come?

Over the last 90 days without any announcement, stocks of gold held at Comex warehouses plunged by the largest figure ever on record during a single quarter since eligible record keeping began in 2001 (roughly the beginning of the bull market)….

JP Morgan Chase’s reported gold stockpile dropped by over 1.2 million oz.’s, or rather, a staggering $1.8 billion dollars worth of physical gold was removed from it’s vaults during the last 120 days.  Scotia Mocatta’s gold stockpile removals were nominal in size when compared to JPM’s, but registered in at over 650k oz’s of gold, or over $1 billion dollars worth of physical gold was removed from its vaults over the last 90 days.

I don’t know precisely what this signifies, but it would appear to indicate a certain lack of confidence in the system among the wealthy global elite.