An economics, investment, trading and policy blog with a focus on Modern Monetary Theory (MMT). We seek the truth, avoid the mainstream and are virulently anti-neoliberalism.
Fair point by Dan Matt but going into the comments DG said he only had 700 words so couldn't cover everything. Private debt to GDP ratio obviously extremely important.
"Private debt to GDP ratio obviously extremely important."
But probably not as important as DG and the crew like to believe. There's this little thing called 'forbearance' that screws up their disaster models.
We saw a lot of forbearance after the 2008 crash that kept the banks afloat. You'd see that even more if the liability side was funded mostly by the central bank.
It's the change in debt ratios that's the kicker since that tends to overstimulate the economy and lead to over investment.
Sorry guys. I was talking about private debt to GDP. Should have been more clear. What I meant is that there is much more to look at than just what is happening to housing prices. For example, in the US households have deleveraged dramatically. So it would be very misleading at this point to suggest we are getting close to a 2008 scenario on that basis.
Of course, there are many other economic indicators that are very worrisome, as Tom notes. Many of the headwinds, though, are blowing from to the broader global economy - not just economies like the US and UK - and so people should be taking a broader look than David Graeber is looking at here. Right now, I would be more worried about an emerging market storm blowing in over Europe and into the US and the UK than a US and UK housing storm blowing out to the rest of the world.
I was impressed that Graeber went into Godley's sectoral balances.
Like Australia and Canada, the UK's housing market seems to have been aided in part by wealthy foreigners who view it as a safe place to park their money? That may change if China continues to slide into recession, or if the Sauds tighten their belts.
As for timing the next crash, we can only point out that the fundamentals are unsound. The rest is up to "animal spirits" and politics.
@Dan Kervick, true that US households have deleveraged, but the business sector has taken on debt. Next crash in US will involve business debt. Junk bonds, overcapacity, etc..
We're already in a global recession, as evidenced by falling commodity prices and as Andy pointed out, weakness in shipping.
US is looking at an additional 80B in discretionary this year (current budget deal) plus we can depend on the usual non-discretionary demographic increases in the xfer programs... if we get the interest rate increase on top of that it will be pretty solid this year...
inequality will increase and the needy will stacked out at the curb as usual...
A $200B yoy increase here would be very good in light of continued oil price in toilet... if we can get the 80 discretionary and 100 from xfer demographics and addl 20 in interest we would get the 200 and be off to the races a bit... S&Ps to 2500+ ... USD probably starts to roll over as consumers will have ability to pay a bit higher price for imports,
I'm with Matt. If the budget deal/debt ceiling is passed, then we're good to go. Not gangbusters, but no crash. Then with the eventual rate hike, that will be further fiscal expansion.
Right now, I would be more worried about an emerging market storm blowing in over Europe and into the US and the UK than a US and UK housing storm blowing out to the rest of the world.
Probably right. The EMs are getting hit and some adopting austerity under right wing pressure, Brazil for instance. This will hit developed nations exports and unless fiscal balances the decrease, it will negatively affect growth, investment and employment everywhere, starting at the periphery and migrating toward the core.
"Capital flight," often s euphemism for money laundering, is driving up RE prices in desirable areas, in particular London, Manhattan, and coastal California. Lots of cash buyers in these areas.
I've always understood rate hikes to only be slightly inflationary if at all. Why would a rate rate hike be anything other than a subsidy for the banks?
The world will muddle along with below par growth for as long as deficit hawks are in the ascendancy and the public continues to believe the deficit bullshit.
Japan is the role model, a little burst of spending, media deficit frenzy, then foot on the brake. Rinse, wash, repeat for 25 years.
Laugh my ass off if a country goes rogue on deficit spending and whoops it up. Even funnier if it was Canada.
If we calculated GDP as we did four years ago the U.S. would be in or teetering on the edge of technical recession. Things look ok because the BEA effectively adds a couple percentage points to make the White House appear competent.
"Yep I know all that, Minsky's ponzi finance stage."
The challenge is managing the income distribution to get past that.
But that requires ongoing state intervention - probably on a discretionary basis. And that's a no-no to those who are fundamentally against a strong state.
Nice to see Graeber introducing sectoral balances to the plebs. However he gets very near saying that when government pays off $X of debt, private debts must rise by $X. That’s nonsense. When govt runs a surplus of $X, PSNFA will fall by $X. As to whether private sector debts rise, that depends amongst other things on who the extra tax to bring about the surplus is taken from. If it’s taken from the less well off, then debts would rise a bit, I’d guess. But if it was all taken from those with plenty of money, private debts wouldn’t rise by much.
"But if it was all taken from those with plenty of money, private debts wouldn’t rise by much."
That ignores second order effects.
If you take tax off people with plenty of money, they use their power and influence to screw down those who don't have plenty of money and restore their balance.
Which is why you have to give those without power and influence an alternative income source if they want it. Otherwise you can't make your distribution decisions stick.
"they use their power and influence to screw down those who don't have plenty of money and restore their balance. " Don't they do that anyway? They are constantly pushing to the right. Agree strongly on the last bit though.
If you take tax off people with plenty of money, they use their power and influence to screw down those who don't have plenty of money and restore their balance.
Right. And this is where capitalism becomes antithetical to democracy.
Under capitalism, wealth = power. In the end society is about who is in control. Capitalism is designed to keep the wealthy in control of a society based on monetary economics. This results in oligarchic plutonomy rather than democracy. A republic under capitalism is an oligarchy masquerading as a democracy.
"Which is why you have to give those without power and influence an alternative income source if they want it. Otherwise you can't make your distribution decisions stick." Job Guarantee
You would have to look at who is holding most bonds, and liabilities relative to incomes... Seniors and retired people would benefit from a rate hike probably, people with deposits too. But the people who has to increase spending are mostly people which has no relevant savings, very few people has more than 1000USD (!), and really few more than 10k, in bank accounts according to recent reports, or has savings at all. Young people doesn't, and a lot of seniors barely have shit.
Most people has more liabilities than assets or does not hold any relevant security that would benefit from hikes. So a rate hike will hurt more than help usually, is basically a subsidy for bankster, but is also true than households have deleveraged a lot in the USA in the last years so the overall balance may be positive for households, but it will trigger a lot of junk bonds default rather fast that have built up during the permanent zero rate years.
I don't believe in trickle down so the wealthy getting more wealthy is not going to change much overall.
The idea that it would be beneficial through the interest income channel is based on the assumption that overall the hike would be benefitial because the asset side of the balance sheet is solid enough.
My take is that there is a lot of garbage around due to the low rates in the last years (mini-housing bubbles, the fake start-up valuation-IPO complex, overloaded junk bond market specially on oil sector, the stock buy-back schemes), basically a lot of schemes faking a sustainable 'recovery' and creating a fake feeble situation. in addition the job market has been "crappified" and incomes aren't really able to sustain higher mortgage rates except for the managerial and capitalist class who keeps sucking the life of the 90-95% of the population, income is skewed (both in demographic and class terms) and people who needs to the spending will be hurting more than helping from hikes as they hold more liabilities than assets. Stronger dollar (which would be the result of a rate hike) will also hurt job market and further crappification.
Is hard to say, but I doubt the FED will risk any significant rate hike, if any (I'm favoring no hike at all right now, contrary to common say, or something ridiculously low to the point of not having any effect, just because 'expectations' and all that stuff). They have trapped themselves, but is not like they could do anything anyway.
With current spending the best you can aim for is muddle through, but as we are watching the economy is already on a real recession (in everything but name) so not even solving the debt ceiling will result in a better situation.
Thanks Ignacio, I learned more from your explanation but also more or less how I understand it.
That is also why Matt and Mike's call for an increase confuses me. I guess there is a split on the effect rates have on the economy at this time with regards to the interest income channel?
DAB it (UST interest) is more complex than what the MMT top-enders make it out to be...
They have a pretty substantial cognitive bias here against "banksters" (class consciousness) that prevents them from being objective/scientific... also it is what leads them to not understand forex imo.... the MMT top-enders are basically monetarists/QTM people in the forex area because of the "banksteritis" that infects them they dont understand the transactions triggered by compliance as they at core think banks do not seek to comply... well they do.
Many less than wealthy households in the US have substantial indirect benefits of UST interest either in ERISA accounts or bank savings accounts/USG only munnie-market funds...
imo there will be a BIG US domestic multiplier to any first order increase in UST interest payments...
Given that the subject area is far too complex to accurately predict (interest change effects), especially with comments here at MNE, yours and Mike's opinion that interest rate increases will have a net positive impact is just that....a belief. Its not scientific or objective. Your not any less informed by your biases than "MMT top-enders".
Maybe you will be right, maybe you will be wrong. But as of right now, you are just guessing. Exactly like everyone else.
Matt is far too complex not because there are non-financial who hold UST, but because there are two sides of the balance sheet and different actors have different incomes agianst those liabilities or assets. Your view is as simplistic as 'MMT top-enders' and not scientific/objective in anyway.
Some people will benefit from it, others won't. The multiplier effect you talk about are to some extent based on beliefs on how much will "trickle down". For example how much seniors on retirement increase spending for a mere increase of a 1% hike, or how much will the certain administrations increase spending because the extra income.
I'm not saying is not happening, I'm saying that there are other things at play: most people does not have savings at all but has mortgages, there is a lot of debt which is only sustainable at zero-bound rates, appreciation of USD will most likely hurt the labor market, etc.
No one can predict how it all plays, your theory is not scientific neither is anyone else and not even CB's or government statistics can produce consistent models to calculate it (hence why central planning of interest rates is just dumb) as they don't have the capacity to process the data (which is not readily available anyway).
The only thing we know for certain is that it will help banks and a lot of non-bank financial, and that is a fact (does not mean anything by itself either).
As Keynes observed, allocation of funds is based on expectations and confidence since these subjective factors affect liquidity preference, which is essentially the saving propensity. Shifting saving, investment, and consumption propensities affect private affect the economy through changing levels of demand. This ratio is not constant in a monetary economy and varies with changing conditions, perceptions, and "animal spirits." So government needs to supply the desired saving relative to conditions in order to prevent the paradox of thrift form taking hold of the economy.
So the shift in propensities to save, consume and invest is probably not objective but rather at least partially subjective and also dependent on changing conditions in the economy, including the global economy.
There are a lot of factors in play. It's really difficult to know how they will play out with a small rate hike, as far as I can tell.
Re: interest rates. FRED tells us that rate changes correlate to economic activity. But correlation does not prove causation. The FED changes rates in response to whether it views the economy as "too cold," "too warm," or "just right." So we would expect to see a correlation even if interest rates had zero economic impact.
The debate over interest rates may never be settled.
Taking everyone into account as best I can as well as research on the st louis fed graphs I guess my opinion is about where I have been. Except with a better understanding from Matt and Tom's side it seems everyone is about right in that there always has seemed to be a bit of an expansionary bias, as the MMT top-enders have pointed to, which I believe Matt states the reasons for, and may be felt to a greater extent in these time for the reasons Tom points to.
41 comments:
Warning: if you don¡'t want to get depressed don't read the comments.
P.S: We are so screwed...
He might be right. But to make his case better, it would have helped if he had looked at total debt to income.
"He might be right"
Blimey Dan are you going soft on DG? Haven't seen a spat between you 2 for ages.
ha AB I thought it was a good comment ;)
Fair point by Dan Matt but going into the comments DG said he only had 700 words so couldn't cover everything. Private debt to GDP ratio obviously extremely important.
"Private debt to GDP ratio obviously extremely important."
But probably not as important as DG and the crew like to believe. There's this little thing called 'forbearance' that screws up their disaster models.
We saw a lot of forbearance after the 2008 crash that kept the banks afloat. You'd see that even more if the liability side was funded mostly by the central bank.
It's the change in debt ratios that's the kicker since that tends to overstimulate the economy and lead to over investment.
"It's the change in debt ratios that's the kicker since that tends to overstimulate the economy and lead to over investment."
Yep I know all that, Minsky's ponzi finance stage. Should have been clearer sorry :)
Banks will just be nationalised again anyway.
Sorry guys. I was talking about private debt to GDP. Should have been more clear. What I meant is that there is much more to look at than just what is happening to housing prices. For example, in the US households have deleveraged dramatically. So it would be very misleading at this point to suggest we are getting close to a 2008 scenario on that basis.
https://research.stlouisfed.org/fred2/series/HDTGPDUSQ163N
Of course, there are many other economic indicators that are very worrisome, as Tom notes. Many of the headwinds, though, are blowing from to the broader global economy - not just economies like the US and UK - and so people should be taking a broader look than David Graeber is looking at here. Right now, I would be more worried about an emerging market storm blowing in over Europe and into the US and the UK than a US and UK housing storm blowing out to the rest of the world.
Very true Dan International trade is horrible. Air Cargo picture (what I do) is nasty, Rates are getting ridiculously low.
I was impressed that Graeber went into Godley's sectoral balances.
Like Australia and Canada, the UK's housing market seems to have been aided in part by wealthy foreigners who view it as a safe place to park their money? That may change if China continues to slide into recession, or if the Sauds tighten their belts.
As for timing the next crash, we can only point out that the fundamentals are unsound. The rest is up to "animal spirits" and politics.
Could be corrupt foreigners bidding up UK property and paying cash ...
@Dan Kervick, true that US households have deleveraged, but the business sector has taken on debt. Next crash in US will involve business debt. Junk bonds, overcapacity, etc..
We're already in a global recession, as evidenced by falling commodity prices and as Andy pointed out, weakness in shipping.
"Bidding up UK property and paying cash"
Definately the case in Central London. Prices are just obscene.
US is looking at an additional 80B in discretionary this year (current budget deal) plus we can depend on the usual non-discretionary demographic increases in the xfer programs... if we get the interest rate increase on top of that it will be pretty solid this year...
inequality will increase and the needy will stacked out at the curb as usual...
A $200B yoy increase here would be very good in light of continued oil price in toilet... if we can get the 80 discretionary and 100 from xfer demographics and addl 20 in interest we would get the 200 and be off to the races a bit... S&Ps to 2500+ ... USD probably starts to roll over as consumers will have ability to pay a bit higher price for imports,
All zombie eyes on USD system...
Household debt service ratio at 35 yr low.
http://www.federalreserve.gov/releases/housedebt/
Mal how dare you introduce some stock-flow consistency here!!!!! Some nerve!
I'm with Matt. If the budget deal/debt ceiling is passed, then we're good to go. Not gangbusters, but no crash. Then with the eventual rate hike, that will be further fiscal expansion.
Right now, I would be more worried about an emerging market storm blowing in over Europe and into the US and the UK than a US and UK housing storm blowing out to the rest of the world.
Probably right. The EMs are getting hit and some adopting austerity under right wing pressure, Brazil for instance. This will hit developed nations exports and unless fiscal balances the decrease, it will negatively affect growth, investment and employment everywhere, starting at the periphery and migrating toward the core.
"Capital flight," often s euphemism for money laundering, is driving up RE prices in desirable areas, in particular London, Manhattan, and coastal California. Lots of cash buyers in these areas.
I've always understood rate hikes to only be slightly inflationary if at all. Why would a rate rate hike be anything other than a subsidy for the banks?
The world will muddle along with below par growth for as long as deficit hawks are in the ascendancy and the public continues to believe the deficit bullshit.
Japan is the role model, a little burst of spending, media deficit frenzy, then foot on the brake. Rinse, wash, repeat for 25 years.
Laugh my ass off if a country goes rogue on deficit spending and whoops it up. Even funnier if it was Canada.
If we calculated GDP as we did four years ago the U.S. would be in or teetering on the edge of technical recession. Things look ok because the BEA effectively adds a couple percentage points to make the White House appear competent.
"Yep I know all that, Minsky's ponzi finance stage."
The challenge is managing the income distribution to get past that.
But that requires ongoing state intervention - probably on a discretionary basis. And that's a no-no to those who are fundamentally against a strong state.
Nice to see Graeber introducing sectoral balances to the plebs. However he gets very near saying that when government pays off $X of debt, private debts must rise by $X. That’s nonsense. When govt runs a surplus of $X, PSNFA will fall by $X. As to whether private sector debts rise, that depends amongst other things on who the extra tax to bring about the surplus is taken from. If it’s taken from the less well off, then debts would rise a bit, I’d guess. But if it was all taken from those with plenty of money, private debts wouldn’t rise by much.
"But if it was all taken from those with plenty of money, private debts wouldn’t rise by much."
That ignores second order effects.
If you take tax off people with plenty of money, they use their power and influence to screw down those who don't have plenty of money and restore their balance.
Which is why you have to give those without power and influence an alternative income source if they want it. Otherwise you can't make your distribution decisions stick.
"they use their power and influence to screw down those who don't have plenty of money and restore their balance. "
Don't they do that anyway? They are constantly pushing to the right.
Agree strongly on the last bit though.
If you take tax off people with plenty of money, they use their power and influence to screw down those who don't have plenty of money and restore their balance.
Right. And this is where capitalism becomes antithetical to democracy.
Under capitalism, wealth = power. In the end society is about who is in control. Capitalism is designed to keep the wealthy in control of a society based on monetary economics. This results in oligarchic plutonomy rather than democracy. A republic under capitalism is an oligarchy masquerading as a democracy.
"Which is why you have to give those without power and influence an alternative income source if they want it. Otherwise you can't make your distribution decisions stick."
Job Guarantee
So what's this about you guys saying a rate hike would be good for the economy. It's more that just a subsidy for the banks?
You would have to look at who is holding most bonds, and liabilities relative to incomes... Seniors and retired people would benefit from a rate hike probably, people with deposits too. But the people who has to increase spending are mostly people which has no relevant savings, very few people has more than 1000USD (!), and really few more than 10k, in bank accounts according to recent reports, or has savings at all. Young people doesn't, and a lot of seniors barely have shit.
Most people has more liabilities than assets or does not hold any relevant security that would benefit from hikes. So a rate hike will hurt more than help usually, is basically a subsidy for bankster, but is also true than households have deleveraged a lot in the USA in the last years so the overall balance may be positive for households, but it will trigger a lot of junk bonds default rather fast that have built up during the permanent zero rate years.
I don't believe in trickle down so the wealthy getting more wealthy is not going to change much overall.
The idea that it would be beneficial through the interest income channel is based on the assumption that overall the hike would be benefitial because the asset side of the balance sheet is solid enough.
My take is that there is a lot of garbage around due to the low rates in the last years (mini-housing bubbles, the fake start-up valuation-IPO complex, overloaded junk bond market specially on oil sector, the stock buy-back schemes), basically a lot of schemes faking a sustainable 'recovery' and creating a fake feeble situation. in addition the job market has been "crappified" and incomes aren't really able to sustain higher mortgage rates except for the managerial and capitalist class who keeps sucking the life of the 90-95% of the population, income is skewed (both in demographic and class terms) and people who needs to the spending will be hurting more than helping from hikes as they hold more liabilities than assets. Stronger dollar (which would be the result of a rate hike) will also hurt job market and further crappification.
Is hard to say, but I doubt the FED will risk any significant rate hike, if any (I'm favoring no hike at all right now, contrary to common say, or something ridiculously low to the point of not having any effect, just because 'expectations' and all that stuff). They have trapped themselves, but is not like they could do anything anyway.
With current spending the best you can aim for is muddle through, but as we are watching the economy is already on a real recession (in everything but name) so not even solving the debt ceiling will result in a better situation.
Thanks Ignacio, I learned more from your explanation but also more or less how I understand it.
That is also why Matt and Mike's call for an increase confuses me. I guess there is a split on the effect rates have on the economy at this time with regards to the interest income channel?
DAB it (UST interest) is more complex than what the MMT top-enders make it out to be...
They have a pretty substantial cognitive bias here against "banksters" (class consciousness) that prevents them from being objective/scientific... also it is what leads them to not understand forex imo.... the MMT top-enders are basically monetarists/QTM people in the forex area because of the "banksteritis" that infects them they dont understand the transactions triggered by compliance as they at core think banks do not seek to comply... well they do.
Many less than wealthy households in the US have substantial indirect benefits of UST interest either in ERISA accounts or bank savings accounts/USG only munnie-market funds...
imo there will be a BIG US domestic multiplier to any first order increase in UST interest payments...
Matt-
Given that the subject area is far too complex to accurately predict (interest change effects), especially with comments here at MNE, yours and Mike's opinion that interest rate increases will have a net positive impact is just that....a belief. Its not scientific or objective. Your not any less informed by your biases than "MMT top-enders".
Maybe you will be right, maybe you will be wrong. But as of right now, you are just guessing. Exactly like everyone else.
I have looked it Auburn looking at past rates and what it has done to withdrawals in the Interest on UST Securities line item in the DTS...
What do you mean it is not "objective"?
Look at the z.1 as far as UST ownership there is like $4 trillion not held by banks or foreigners...
MMT top enders say "all it does is help the banks!"
Meanwhile, $trillions are manifestly NOT held by banks... look at the z.1
State and local govts own $trillions, insurance companies, ERISA accounts, etc...
I am being objective... here is the definition of objective: "not influenced by personal feelings or opinions in considering and representing facts."
OK... the FACT is many other than banks own USTs either directly or indirectly... that is the objective FACT...
They are NOT objective and are MANIFESTLY BIASED... I on the other hand am NOT biased here...
Here:
http://www.federalreserve.gov/releases/z1/Current/z1r-4.pdf
Table L.210
14 Trillion out, depository institutions have 424B....
"all it will do is give free munnie to the banks!" .... LOL!
Matt is far too complex not because there are non-financial who hold UST, but because there are two sides of the balance sheet and different actors have different incomes agianst those liabilities or assets. Your view is as simplistic as 'MMT top-enders' and not scientific/objective in anyway.
Some people will benefit from it, others won't. The multiplier effect you talk about are to some extent based on beliefs on how much will "trickle down". For example how much seniors on retirement increase spending for a mere increase of a 1% hike, or how much will the certain administrations increase spending because the extra income.
I'm not saying is not happening, I'm saying that there are other things at play: most people does not have savings at all but has mortgages, there is a lot of debt which is only sustainable
at zero-bound rates, appreciation of USD will most likely hurt the labor market, etc.
No one can predict how it all plays, your theory is not scientific neither is anyone else and not even CB's or government statistics can produce consistent models to calculate it (hence why central planning of interest rates is just dumb) as they don't have the capacity to process the data (which is not readily available anyway).
The only thing we know for certain is that it will help banks and a lot of non-bank financial, and that is a fact (does not mean anything by itself either).
and btw unqualified chimpanzee-studier Graeber ripped of one of Bill's charts without attribution...
As Keynes observed, allocation of funds is based on expectations and confidence since these subjective factors affect liquidity preference, which is essentially the saving propensity. Shifting saving, investment, and consumption propensities affect private affect the economy through changing levels of demand. This ratio is not constant in a monetary economy and varies with changing conditions, perceptions, and "animal spirits." So government needs to supply the desired saving relative to conditions in order to prevent the paradox of thrift form taking hold of the economy.
So the shift in propensities to save, consume and invest is probably not objective but rather at least partially subjective and also dependent on changing conditions in the economy, including the global economy.
There are a lot of factors in play. It's really difficult to know how they will play out with a small rate hike, as far as I can tell.
Re: interest rates. FRED tells us that rate changes correlate to economic activity. But correlation does not prove causation. The FED changes rates in response to whether it views the economy as "too cold," "too warm," or "just right." So we would expect to see a correlation even if interest rates had zero economic impact.
The debate over interest rates may never be settled.
The debate over interest rates may never be settled.
The question is over causation. Which is the dependent and independent variable? Is this relationship constant? How to know this?
Taking everyone into account as best I can as well as research on the st louis fed graphs I guess my opinion is about where I have been. Except with a better understanding from Matt and Tom's side it seems everyone is about right in that there always has seemed to be a bit of an expansionary bias, as the MMT top-enders have pointed to, which I believe Matt states the reasons for, and may be felt to a greater extent in these time for the reasons Tom points to.
I can live with that for now! thanks guys
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