The deficit this month is the largest since February. A lot of the money drained from the private sector in April is now being recycled back into the economy in the form of higher spending. This should be supportive. The market selloff is likely reaching a climax.
16 comments:
Thanks for the data, Mike
I wish I had a feel for whether these month to month changes are a normal seasonal thing, random noise, or whatever. But I guess that will come in time.
Thank you for the information.
I am interested in where you find the data and also what you think are the reasons for the increase in the deficit. I know that the last time you mentioned tax returns, but are there other reasons?
Mike, sorry for being off-topic but couldn't find any post on china in your recent posts.
Chinese govt is known for its efficient and targeted public spending. So why did it have to face inflation, high public debt and asset bubble after $586 billion stimulus package? Doesn't the Chinese experience negate the MMT belief that deficit spending in non-inflationary and doesn't cause asset bubbles?
http://www.latimes.com/business/la-fi-china-no-stimulus-20120531,0,2010993.story
"Beijing has already indicated it will act to stabilize growth, but it can't afford to repeat its 2009 strategy, which included $586 billion in public spending and the loosening of bank credit to businesses and consumers. That led to inflation, skyrocketing public debt and asset bubbles that still bedevil the Chinese economy today."
Roger,
I'll take a quick stab at your question…
Asset bubbles are not the same thing as inflation. Said another way, if lots of money is flowing into a particular asset… be it housing, gold, treasury secrurities, etc.. that isn't what people are referring to when they talk about inflation. Said one more way, inflation isn't simply the price of "something" going up.
I re-read the quote and have some other thoughts.. (my caps below)
"Beijing has already indicated it will act to stabilize growth, but it can't afford to repeat its 2009 strategy, which included $586 billion in public spending AND THE LOOSENING OF BANK CREDIT to businesses and consumers. That led to inflation, SKYROCKETING PUBLIC DEBT AND ASSET BUBBLES that still bedevil the Chinese economy today."
Loosening of bank credit probably led to the asset bubble(s). As interest rates get driven down, investors move their money elsewhere in search of a better rate of return. If lots of money flow toward a particular asset (e.g. gold), we'll see an asset bubble. But this is not inflation.
And the skyrocketing public is just what happens when deficit spending occurs. The public debt is a non-issue. For a sovereign curreny issuer like China, and the United States etc, the "public debt" isn't really DEBT. It's more like a savings account at a commercial bank.
OK, one more thing :)
It's difficult to know how inflation occurred (assuming it did.. I'm not familiar with the data). It could have easily been something like increased oil prices causing "cost-push" inflation. There are a lot of variables that need to be examined.
Maybe someone more familair with the China situation will comment tomorrow.
Automatic stabilizers, and with credit/consumption contracting again.
Probably not enough to offset deleveraging effect.
Thanks JK..
I understand that for any country with sovereign currency, public debt is a non-issue. I also understand how asset bubbles are created due to credit creation. But, I was under the impression that Chinese govt is aware of MMT and wasn't worried about increasing public debt. So the decision by the Chinese govt to suspend further deficit financing citing skyrocketing debt at a time its economy is slowing down is bit puzzling.
JK/Roger,
The "inflation" issue is not well understood imo even by people otherwise familiar with MMT.
As Warren says: "is a function of what govt agrees to pay for things and what price they allow banks to collateralize things" (perhaps to paraphrase)....
The "inflation" part of MMT is not well recognized imo...
Resp,
The government can't control the private sector leverage (collateralization).
Private sector does what it wants and the government just accommodates, more so because of the political system favours this.
have yet to see a single politician/regulator who tries to 'tame' inflation created by the private sector.
So in theory may be what you say but in practice the government does not control inflation in "the good times", and in the bad times will accommodate to plug the holes left by de-collateralization and deleverage in a very deterministic way. (Even ECB with all his hawkish talk and stance about hard money has done this and continues to do so, to avoid systemic collapse.)
The government can't effectively control inflation creation.
"So the decision by the Chinese govt to suspend further deficit financing citing skyrocketing debt at a time its economy is slowing down is bit puzzling."
It's does not look like puzzling to me, China is in an inflation trap, period. BTW this trap has been partially set-up through financialization of commodities in anglo-saxon nations, now commodity markets are in a process of definancialization as some sings have been pointing out.
But the trend of cost-push inflation is up if you eliminate the noise, noise is introduced by artificial market volatility + inflation-disinflation-deflation cycles of the world economy (which are triggered partially by these high commodity prices + peak credit).
Demand is inflationary, Chinese government policies increased demand and propelled credit bubbles.
The 'inflation' problem is two-pronged: bubbles and cost-push inflation.
For example take the copper bubble, firms bought copper and used it as collateral (copper-standard!) to create more credit(!), this drove prices of copper higher because of demand and at the same time created a credit bubble. This is an other demonstration governments, even authoritarian ones, can't really limit private sector rehypothecation/collaterization and creation of shadow-money (be them MBS or copper). It's extremely difficult thing to do for political/social reasons.
Then you have the 'inflation trap' due to commodity prices because global rising demand and supply/production capacity limits, like oil and other forms of carbon (be careful, for example coal prices have a premium in that world zone because explosive consumption in India and China and lack of sufficient supply). Sort of reality as a hard limit to growth, limited carbon consumption for more than 2500 mill. persons in two neighbour nation, inflation is going to trigger necessarily.
Check out the video (important part) here:
http://mikenormaneconomics.blogspot.com/2011/11/infaltion.html
You can see perhaps an intro to MMT Inflation there...
Resp,
I would love to get my hands on the source data as well. I'm curious about what it would look like to plot this data against the price of the Russel 2000 index or something similar.
Roger,
Chinese govt is known for its efficient and targeted public spending.
Almost spat out my coffee at that one, man. Look at the empty...everything over there.
China's in an odd situation because it has gobs of excess capacity and investment at a nary-precedented 50% of GDP, but a slow down in process. So the government can do their traditional "efficient" stimulus by creating more public spending, but that simply exacerbates an existing problem.
Appropriate policy mix? Not more damn empty apartment buildings, that's for sure. Don't loosen bank lending, cautious infrastructure investment, encourage consumption by floating currency and cutting taxes. But they're hamstrung by a hopelessly and inscrutably corrupt political system, so who knows WTF is going to happen.
Seriously man, "efficient and targeted public spending"? What have you been reading?
@Illhaveadouble "Seriously man, "efficient and targeted public spending"? What have you been reading?"
Let's see - in last decade, china has spent billions on roads, highways, bridges, tunnels, water projects, large dams, nuclear power plants, high speed railway systems, ports, airports, towns etc. Which other country comes close to the speed at which China has been growing since last three decades?
Sure there are some empty towns & malls, but do you deny that China's massive spending on infrastructure has kept its unemployment low?
Repeating what someone else mentioned above..
I find inflation to be a tricky issue. Even within the MMT community there doesn't seems to be a firm consensus or understanding.
For one thing, what inflation "is" varies. Demand-pull inflation and cost-push inflation are very different phenomena when we're considering cause-effect relationships. Consequently, when prices start going up, just saying we're experiencing inflation has very little informative meaning.
It's easy to blame it on deficit/stimulus spending becaue our collective neoliberal hardwiring assumes the causal relationship between the two. But really it's VERY unclear. The economy is a complex system with millions of moving parts parts.
With all the said, I think MMT provides an informative and useful logic for understanding the macro economy. It seems no other economic paradigm attempts to incoporate the way money and private debt(s) affect economic outcomes. MMT is attractive for a lot of the reasons, but the sectoral balances are a really useful way to incorporate/understand a lot of this stuff.
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