New Eastern Outlook
The Impossible Truth About MH17
I believe the author's choice of words are somewhat misleading.
"stash $2.1 trillion in profits in overseas banks"
The $2.1 trillion is net of taxes already paid from taxable income in foreign (non-US) jurisdictions. Generally speaking, these are foreign subsidiaries of a US parent company domiciled in the US for tax purposes.
The bank accounts that hold this money are legally owned by the foreign subsidiaries of US parent companies and may well be at BoA in Manhattan or not. The physical location of the actual bank account isn't important.
Also, the $2.1 trillion is an aggregate translation of all the local currencies to US dollars, It is not physical US dollars or US dollar bank balances.
The US parent company (domiciled in the US for tax purposes) would very much like to dividend the cash from the subs to the parent and then use that $2.1 trillion for shareholder dividends, share repurchases, bonuses, investments etc. However, if they do so, the US tax code will tax them on that cash dividend from the subsidiary to the parent -- hence the phrase "allowing them to stash $2.1 trillion in profits in overseas banks to avoid paying taxes"
The US multinational corporations are lobbying and playing a waiting game hoping for another tax holiday ( such as in 2004) allowing them to repatriate foreign profits to the United States without tax consequences.
The phrase stash $2.1 trillion in profits in overseas banks is a loaded one.Aces Seve.
Nancy Folbre, who recently joined the Levy Institute roster as senior scholar, was interviewed by Dollars & Sense on the topic of how conventional economics and policymaking deal with (or rather, fail to deal with) household and caring labor….Multiplier Effect
Such is the title of Tianhao Zhi’s recent paper. Zhi sums up MMT like this:MMT is getting around.
The insight that fiscal policy can be used to manage inflation, in the way that monetary policy is currently used, is not new, but is attributable to the founders of functional finance, who were the first to realize that inflation, and not the budget, is what constrains the spending of a sovereign government. Advocates of modern monetary theory (MMT), the modern offshoot of functional finance, notably Scott Fulwiller [sic] of Wartburg College, have offered policy ideas for how to implement a fiscally-oriented approach.
My view, which I elaborated on in a 2013 piece, is that the successful implementation of any such approach will need to involve the transfer of control over a portion of fiscal policy from the legislature and the treasury to the central bank. Otherwise, the implementation will become mired in politics, which will prevent the government’s fiscal stance from appropriately responding to changing macroeconomic conditions.
There are concerns that such a policy would be unconstitutional in the United States, since only the legislature has the constitutional authority to levy taxes. But there is no reason why the legislature could not delegate some of that authority to the Federal Reserve in law, in the same way that it delegates its constitutional authority to create money. In the cleanest possible version of the proposal, the legislature would pass a law that creates a special broad-based tax, and that identifies a range of acceptable values for it, to include negative values–say, +10% to -10% of earned income below some cutoff. The law would then instruct the Federal Reserve to choose the rate in that range that will best keep inflation on target, given what is happening elsewhere in the economy and elsewhere in the policy arena.
Ultimately, the chief obstacle to the acceptance and implementation of fiscal inflation targeting is the fear that it would lead to the accumulation of large amounts of government debt. And it would, particularly in economies that face structural weakness in aggregate demand and that require recurrent injections of fiscal stimulus to operate at their potentials. But for those economies, having large government debt wouldn’t be a bad thing. To the contrary, it would be a good thing, a condition that would help offset the weakness.
The costs of large government debt accumulation are not well understood–by lay people or by economists. In this piece, I’m going to try to rigorously work out those costs, with a specific emphasis on how and in what circumstances they play out. It turns out that there is currently substantial room, in essentially all developed economies that have sovereign control over credible currencies, to use expansive fiscal policy to combat structural declines in inflation, without significant costs coming into play.Philosophical Economics
The reader is forewarned that this piece is long. It has to be, in order to make the mechanisms fully clear. For those that want a quick version, here’s a bulleted summary of the key points:
The ideological and physical hold of American imperial power, buttressed by the utopian ideology of neoliberalism and global capitalism, is unraveling. Most, including many of those at the heart of the American empire, recognize that every promise made by the proponents of neoliberalism is a lie. Global wealth, rather than being spread equitably, as neoliberal proponents promised, has been funneled upward into the hands of a rapacious, oligarchic elite, creating vast economic inequality. The working poor, whose unions and rights have been taken from them and whose wages have stagnated or declined over the past 40 years, have been thrust into chronic poverty and underemployment, making their lives one long, stress-ridden emergency. The middle class is evaporating. Cities that once manufactured products and offered factory jobs are boarded up-wastelands. Prisons are overflowing. Corporations have orchestrated the destruction of trade barriers, allowing them to stash $2.1 trillion in profits in overseas banks to avoid paying taxes. And the neoliberal order, despite its promise to build and spread democracy, has hollowed out democratic systems to turn them into corporate leviathans.How could I not post a link to an article with a lede like that?
Democracy, especially in the United States, is a farce, vomiting up right-wing demagogues such as Donald Trump, who has a chance to become the Republican presidential nominee and perhaps even president, or slick, dishonest corporate stooges such as Hillary Clinton, Barack Obama and, if he follows through on his promise to support the Democratic nominee, even Bernie Sanders. The labels “liberal” and “conservative” are meaningless in the neoliberal order. Political elites, Democrat or Republican, serve the demands of corporations and empire. They are facilitators, along with most of the media and most of academia, of what the political philosopher Sheldon Wolin calls our system of “inverted totalitarianism.”
Today, is the official launch of my new book – Eurozone Dystopia: Groupthink and Denial on a Grand Scale – in Maastricht, which is an appropriate geographic location given the book proposes to dismantle the Eurozone. It just happens to be the place (Maastricht University), where we established CofFEE-Europe (a sister centre to my research centre in Australia). There are two excellent guest speakers (see below) and I am very grateful that they agreed to accept the invitations. The upshot is that I haven’t all that much time today. Over the next few days I will address some points that were raised in question time or at the reception (aka cup of tea and cakes) after the event in London last Thursday evening. There is still work to be done if the progressive side of politics is to fully understand Modern Monetary Theory (MMT) and the implications of it for policy development and choice.Hopefully, the book will have a broad and deep readership, and make a difference.
On one level, the recent financial agreement between the European Union (EU) and Greece makes no sense: not a single major economist thinks the $96 billion loan will allow Athens to repay its debts, or to get the economy moving anywhere but downwards. It is what former Greek Economic Minister Yanis Varoufakis called a “suicide” pact, with a strong emphasis on humiliating the leftwing Syriza government.
Why construct a pact that everyone knows will fail?Dispatches from the Edge
Volkswagen and Hyundai representatives have announced unprecedented plans to increase the production of their cars in Russian factories, for eastern export markets
China has become the world’s leading makers of modern railroads and equipment. It has done so as part of a long-term strategy to weld a new economic space, build entirely new markets where none before existed. They studied the European rail-makers, studied the German ICE high-speed railways, engaged Siemens and a German consortium to build the world’s first magnetically levitated (maglev) train to link Shanghai’s international convention center to its new international airport at speeds between 300-400 km per hour. Now they are working on an entire new concept of fast rail as well as negotiating with some 28 countries to build high-speed conventional rail lines. China has become the address when it comes to rails and it is changing the world as we know it.….
Arguably Godley had a version of Thirlwall's Law in his model too. As noted by Zezza: "the ideas underlying the ‘New Cambridge Hypothesis,’ which assumed... that the private sector would adjust rather quickly to a shock, to restore its desired income/assets ratio." In this sense, in the long run in a steady state Godley assumed that the net acquisition of financial assets would be zero. This would be a stock version of the flow equilibrium between investment and savings, the private balance.Naked Keynesianism
The World Trade Organization (WTO) on Wednesday ruled against India over its national solar energy program in a case brought by the U.S. government, sparking outrage from labor and environmental advocates.
As power demands grow in India, the country’s government put forth a plan to create 100,000 megawatts of energy from solar cells and modules, and included incentives to domestic manufacturers to use locally-developed equipment.
According to Indian news outlets, the WTO ruled that India had discriminated against American manufacturers by providing such incentives, which violates global trade rules, and struck down those policies—siding with the U.S. government in a case that the Sierra Club said demonstrates the environmentally and economically destructive power of pro-corporate deals like the Trans-Pacific Partnership (TPP).…
The annual salary of a new soldier could reach up to 88,000 yuan ($13,745), higher than the starting salary of many other professions, Zheng said.…
When they are discharged after two years of service, some enjoy benefits like funding for further education, while others can choose to continue military service as officers, according to Song.
Reports said 3,075 university students who served as soldiers were promoted and 1,573 of the best soldiers were recommended for postgraduate studies in 2013.Well, that's one way of dealing with youth employment and funding education. The Chinese leadership doesn't seem to think that China is running out of money.
Europe is in free fall. Nobody can doubt that any more. In fact, the is EU simultaneous suffering from several crucial problems and any one of them could potentially become catastrophic. Let’s look at them one by one.…The Vineyard of the Saker
Politics is a huge and complex world of relations between people and states. We watch the news on television and we read articles which tell us about various problems, conflicts, and state figures. Being in a giant whirlpool of information, it is difficult to fit everything into some kind of overall picture. It’s even more difficult to understand where and towards what the whole world, led by these or those political forces, is going.Fort Russ
Challenges are frightening. The fact of the existence of weapons of mass destruction has not been abolished, and this means that there is a chance that they will be used. Everyone understands that a nuclear war will destroy everyone, and it keeps the world from starting a new conflict. But the generation of those who remember the horrors of the world wars is almost gone. And history, unfortunately, teaches us that no one learns and nothing is learned. Everything is always repeated again by the same scenarios and patterns.…
There were several reasons behind China's decision, but it nevertheless came as a surprise to many. In search of stability, China has tied its currency to the U.S. dollar since 1994, usually at a low value relative to the dollar. During the 2000s, the connection helped China keep its exports competitive, with the developed world consuming its output. The West's economic collapse in 2008 meant that this model could no longer function, and China began trying to grow consumption levels so that the domestic consumer might come to fill the hole left by the faded international market.
Transforming from an export-led economic model to a consumption-led one could be described as changing from being like Germany to being like the United States, and China has tried to reproduce some of the advantages that the United States has created for itself in the same role. One of those advantages is the dominant position of the U.S. dollar in world trade, which means U.S. consumers can go deeply into debt and global demand for dollars will delay the moment at which this comes to a head by those debts being catastrophically called in. Thus China sought to grow international usage of the yuan, making strides in its attempts to do so. The next step would be for the yuan to be accepted into the International Monetary Fund's "currency," the Special Drawing Right. However, the IMF has said that China would need to liberalize its currency before such a step could take place. The IMF makes the decision every five years, with one originally set for November this year, but the institution recently pushed it back to October 2016.….
Greetings from London in the early morning! If we went back a few years and dug out all the predictions and scare campaigns that were being issued by mainstream economists and their conservative ‘think tank’ conduits about the impending disaster that would accompany the near zero interest rate regimes that the US Federal Reserve Bank had implemented it would make a great comedy sketch. There should be no surprise with the massive predictive failures of the mainstream economists in this regard. They clearly did not understand the underlying dynamics that govern the way the central bank interacts with the commercial banks. The problem is that these conservative forces are so dumb they don’t have adaptive learning mechanisms and so even in the fact of evidence contrary to their Groupthink they keep pumping out the same nonsense. The other problem is that they tend to be well funded by the right-wing establishment that they exhibit disproportionate influence on the public policy debate. That influence has turned to demands that the US Federal Reserve Bank (the central bank) increase interest rates and reverse its quantitative easing – apparently because hyperinflation is just around the corner. Nothing could be further from the truth. At present the US economy is some way into a very slow and relatively tepid recovery. But it has still some way to go and while interest rate changes have a relatively weak impact on overall growth any anti-growth noise is undesirable. It is also not justifiable given the central bank’s own logic.…
Anyway, to conclude, cheering for productivity is not going to help the world economy. The solution is to increase production: productivity will rise when production rises. The standard story as told in Mankiw’s textbook is erroneous.Mankiw has the causality reversed.
U.S. debt stands at 74 percent of gross domestic product, compared with 35 percent in 2007, based on a Congressional Budget Office report released Tuesday. That burden is expected to grow further in coming years, limiting government options for additional fiscal stimulus in the form of spending or lower taxes.
While the U.S. could follow in the footsteps of Japan, Ireland, Italy or Greece, which have racked up even higher debt-to-GDP levels, heftier deficits would be a hard political sell. After all, Congress has been loathe to borrow, curbing spending through "sequester" limits and pushing the nation to the brink of default in 2011 amid disputes over a debt-limit extension.
Partly for that reason, the Bank for International Settlements has warned that still-low rates around the world pose a looming economic risk.
The weekly number of U.S. oil rigs actively drilling has dropped by nearly 57% year-over-year http://t.co/mRtK081bXz pic.twitter.com/gCnH9KfYvb— MarketWatch (@MarketWatch) August 26, 2015
"in the aftermath of when the bubble burst in 2008, that all of the growth in the economy has only been in the financial sector,"
His opposition to austerity is actually mainstream economics, even backed by the conservative IMF. He aims to boost growth and prosperity.…
Despite the barrage of media coverage to the contrary, it is the current government’s policy and its objectives which are extreme.…
We the undersigned are not all supporters of Jeremy Corbyn. But we hope to clarify just where the “extremism” lies in the current economic debate.The Guradian
According to Carlo Coattarelli, an IMF Executive Director, "Monetary policies have been very expansive in recent years and an adjustment is necessary…It's totally premature to speak of a crisis in China.
Coattarelli reiterated the IMF's prior forecast of a 6.8 percent expansion of the Chinese economy for 2015. While this rate of growth is quite respectable, it is less than 2014's growth of 7.4 percent. To put that figure into perspective, IMF predicts global growth at 3.3 percent for 2015, and US economic growth a mere 2.5 percent. That makes China's economic growth still quite admirable and well ahead of most other major economies.
According to the IMF, the slowing of the Chinese economy is natural. Although it created a shock to the global financial markets, the IMF believes this was merely reactionary and not indicative of long-term institutional weakness. The IMF sees the slowdown as the natural consequence of years of rapid growth with little breaking, even as the rest of the world suffered a slowdown.Markets (over)reacting to "bad news," or just looking for an excuse to correct?
A lifetime ago, Krugman wrote that mathematical models were useful because they took implicit, inconsistent assumptions and make them both explicit and consistent. This was an aid to clear thinking.
His current thinking on monetary operations has a number of implicit assumptions, which is why he believes a fiat state has the same constraints and responsibilities as a household, and why his thinking fundamentally comes from the "sound finance" school of thought and not the "functional finance" school of thought proposed by Abba Lerner back in 1951.
Mosler: … the US public debt, for example, is nothing more than the dollars [as tax credits] spent by the govt that haven’t yet been used to pay taxes. Those dollars constitute the net financial dollar assets of the global economy (net nominal savings), as actual cash, or dollar balances in bank accounts at the Federal Reserve Bank called reserve accounts and securities accounts. Functionally, it is not wrong to call these dollars the ‘monetary base’.Currency as tax credits are liabilities held by nongovernment as financial assets. In aggregate, these assets are net of nongovernment creation of the unit of account through lending (loans create deposits). Borrowing and lending in nongovernment in a unit of account must net to zero as an accounting identity. Any net financial assets can only come from the currency issuer as a liability of the issuer that is correspondingly the asset of currency users.
I am currently working on an introductory chapter to a collection I have prepared for my publisher (Edward Elgar) which describes the evolution of Modern Monetary Theory (MMT). The task might appear to be straightforward but in fact is rather vexed. There is considerable dispute as to where the roots lie. A specific debate is the importance of the work of John Maynard Keynes. Many Post Keynesians, almost by definition, believe that Keynes was a central figure in the development of what we now call Post Keynesian economics, although that ‘school of thought’ evades precise identification and is certainly anything but homogenous. There are MMT proponents, who while sympathetic which much of Post Keynesian theory, disagree on key propositions – specifically relating to debt and deficits (as an example). But then they also point to Keynes’ work as seminal in the development of MMT. My own view is that many of the important insights in Keynes were already sketched out in some detail in Marx. Further, the work of the Polish economist Michał Kalecki was much deeper in insight than the work of his contemporary, Keynes. But for me the real sticking point against Keynes was his view that fiscal deficits should be balanced over the business cycle and that would allow governments to pay back debt incurred in the deficit years. That view has crippled progressive thought ever since and is antithetical to MMT. The debate also has resonance with the current leadership struggle within the British Labour Party about fiscal deficits and the claims by the ‘socialist’ candidate, Jeremy Corbyn that he will “balance the budget” when unemployment is low so as to avoid inflation. This view derives from the adoption by progressives of Keynes’ views, whether they know that or not. It is a mistaken view and retards progressive policy development.…Bill Mitchell – billy blog
Best Buy share pop a quick 9.8% after earnings, just about recouping the losses of the prior 4 sessions. Comp sales rise 3.8%.— Julie Hyman (@juleshyman) August 25, 2015
|Clueless reporters, Girlie men.|
Clearly, Pope Francis’s criticisms of capitalism (as I have discussed here and here) have touched a nerve. They certainly have in the case of Harvard’s Ricardo Hausmann, who attempts to argue both that capitalism is not responsible for causing poverty and that more capitalism will eventually eliminate poverty.
Hausmann’s story is a very familiar one. What it comes down to is the idea that the majority of people before capitalism arrived one the scene were poor and as capitalism develops and more and more people became wage-laborers with rising real wages. But areas of the world still remain outside of capitalism and those people will remain poor unless and until capitalism is allowed to fully develop.
It’s a story that is as old as Adam Smith’s Wealth of Nations, and it’s been told and retold by generations of classical and neoclassical economists ever since.
Their story is certainly right about one thing: capitalism does create the promise of ending poverty.
The problem is, their story conveniently overlooks important aspects of the development of capitalism—all the ways capitalism has over the course of its history created more, not less, poverty. I’m thinking of four instances in particular.…Occasional Links & Commentary
The introduction of anti-Russian sanctions in relation to the Ukraine crisis resulted in the decline of Russia's economy only by 0.5-0.6 percent. Russian experts believe that first and foremost the economy is affected by oil prices, not the sanctions.This seems to be the consensus view.
Young Americans are priced out of buying homes and many are priced out from even renting. And somehow this is the group that is going to buy all the crap shack turnover once baby boomers decide to downsize either by choice or by nature.Dr. Housing Bubble Blog
A fleet of 400 made-in-China taxi cabs arrived in Venezuela on Sunday, the first shipment of an agreement to supply the country with 20,000 Chery cars, said a senior Venezuelan official.
"In 2015, we will bring 10,000 taxis and the remaining 10,000 in 2016," the country's transport minister Haiman El Troudi said, adding that the financing will be via state banks.…No USD involved.
Jeremy Corbyn’s rise to prominence is revealing. It shows a Labour party bereft of intellectual leadership. Politics is crying out for inspiring policies – ambitious, radical policies, which positively address economic challenges. It seems that the best Labour can come up with is “back to the 1980s”. To this extent, Yvette Cooper is spot on:
Sample of One“the truth is that Jeremy [Corbyn] is offering old solutions to old problems, not new answers to the problems of today. We have to look the 21st century in the eye, face up to the future. That’s where we will find the new radicalism, the answers in the modern fight for social justice, equality and solidarity. Not the old answers of the past.… And I want to show today that there is an alternative that is both radical and credible, true to our values, but serious enough to win.”
The problem is, she has no “radical and credible” ideas. Corbyn is radical and wrong, Cooper wants to be radical and has … “sure start” and “clean coal”. Both are good ideas, but neither are radical nor inspiring.
What’s most damning is the fact that radical, innovative and credible policies are available – Labour’s leadership needs to get out more. Here are four examples:…
Hyman Minsky (1919–1996) was a distinguished American scholar and prominent post-Keynesian economist. In the wake of the 2008-2009 crisis Minsky’s invaluable scientific contribution has widely spread, but soon he has unfortunately disappeared from public and economic discussions.
While most of the mainstream economists are of the view that economic busts are the outcome of various external shocks, Minsky held that the capitalist system itself generates shocks through its own internal dynamics and financial capitalism is inherently unstable. A key mechanism that pushes an economy towards an inevitable crisis is the rampant speculation and the accumulation of debt by the private sector (investors, banks, companies). Minsky claimed that in prosperous times, when corporate cash flow rises beyond what is needed to pay off debt, actors take on more risk and a speculative euphoria develops. Soon thereafter debts exceed what borrowers can pay off from their incoming revenues (especially during the period of monetary tightening) which in turn produces a financial crisis. This slow movement of the financial system from stability to fragility followed by sudden major collapse is famously known as “Minsky moment”.…Economic Sociology and Political Economy
The 2012 Page, Bartels, and Seawright paper makes interesting reading. I came across it via the Krugman blog and recommend it to you all.
The key is that this is a first small attempt to quantify the difference in perspective between the ‘wealthy’ and the ‘general public’. The paper is thus an important step along the way towards understanding why it is that so much of our political discourse seems totally blind to the reality as experienced by the vast majority of our citizens.
If, like me, you have come to believe that our policy makers have a narrow focus and that their focus overlaps more with that of the wealthy and/or big business than it does with ordinary folk, then this paper is a start to getting empirical support for that feeling.
The paper’s concluding paragraph is worth quoting in full:
“Even without being able to gauge the actual political power of wealthy citizens, we can confidently reject the view that extensive political power by the wealthy would be of little practical importance anyway because their political preferences are much the same as everyone else’s. On many important issues the preferences of the wealthy appear to differ markedly from those of the general public. Thus, if policy makers do weigh citizens’ policy preferences differentially based on their income or wealth, the result will not only significantly violate democratic ideals of political equality, but will also affect the substantive contours of American public policy.”
This is the point: the ability of wealth to affect policy, substantially increased by recent trends and legal decisions, is subverting the very foundation of America’s self-image and self-justification. It is no longer a democracy, or is nearly so, and is rapidly declining into plutocracy.….The Radford Free Press
What can we do? What should we do?Roger Farmer's Economic Window
First: Give the Fed the power to buy a value weighted Exchange Traded Fund that contains every publicly traded stock. Commit to support the ETF by buying stocks. Pay for the shares by borrowing, or by trading Social Security Trust Fund.
Second: Raise the money interest rate to bring us back to normality and restore normal functioning of monetary policy.
If we do not act, and act soon, we are headed for another Great Depression.
The precautionary principle can be understood as follows: "if an action or policy has a suspected risk of causing harm to the public or to the environment, in the absence of scientific consensus that the action or policy is not harmful, the burden of proof that it is not harmful falls on those taking an action." Prior to reading De Goede's book I had two general reflections on the nature of precautionary principles (PP); first, the application of a PP is a means of pausing action, that is, as a moral tool that (a) could be used by Libertarians and Conservatives to slow down the machinery of government decision-making and (b) could be used by Progressives and Environmentalists to call attention to harmful, social consequences of policies on folk (or non-folk) that lack lobbying power. For, the precautionary principle is a natural accompaniment of uncertainty: if you don't know the wide consequences of an action on bystanders, you should be careful about advocating/pursuing it. It is a way to shift the burden of proof.…This is not just speculative moral philosophy. In today's climate it affects everyone.
But rather than debating the merits of the precautionary principle, here I call attention to the key point in De Goede's book: in (urgent) contexts that focus on precaution (e.g., security), "the appeal to uncertainty replaces the demonstration of evidence as grounds for taking action" (174; see also p. 199). If this merely upends familiar habits of thought (and threatens cherished conservative principles), this would not be very disconcerting. But as De Goede notes, once such ideas get widespread bureaucratic uptake (not just in context of terrorism), a state of emergency is normalized and legally recognized. That's not just bad news for Libertarians and Conservatives.It's short, easily understood and worth thinking about.
On a day of equity market plunges around the world, it seems timely to recommend the new book from George Akerlof and Bob Shiller, Phishing for Phools: The Economics of Manipulation and Deception. Princeton University Press have put the introduction online for free.…The Enlightened Economist
As I noted in last week’s post “Is This The Great Crash Of China?”, the previous crash of China’s stock market in 2007 lacked the two essential pre-requisites for a genuine crisis: private debt was only about 100% of GDP, and it had been relatively constant for the previous decade. This bust however is the real deal, because unlike the 2007-08 crash, the essential ingredients of excessive private debt and excessive growth in that debt are well and truly in place.
China’s resilience against credit crises came to an end in 2009, when in a response to government directives, Chinese banks began lending to anyone with a pulse. As Figure 3 in last week’s post showed (reproduced below as Figure 3 below), the growth in private debt rocketed from 17% per year at the beginning of 2009 (versus nominal GDP growth of 8% at the same time) to 37% per year by the beginning of 2010 (nominal GDP growth peaked six months later at 20% per year). By the beginning of this year, private debt had hit 180% of GDP and had grown by over 80% of GDP in the previous seven years.
This was the fastest growth in credit in any country, EVER. It dwarfs both Japan’s Bubble Economy and the USA’s combination of the DotCom and Subprime Bubbles. China’s bubble drove private debt up by as much in 5 years as Japan managed in over 17 years, and more than the USA’s debt rose in the entire Clinton-Bush debt bubble from 1993 until 2010….Forbes
If the effects of the crash cannot be reversed with monetary policy, that leaves fiscal policy — that old, neglected, unpopular tool — to fight any breakouts of deflation or mass unemployment.
Or it leaves central banks to try really radical policies that emulate the directness of fiscal policy, like literally throwing money out of helicopters or OMFG. [Overt Money Financing]Azizonomics
Stock market bubbles are fulled on speculation – on what Guzman and Stiglitz (2015) call tellingly ‘pseudo wealth’. It is the collapse in that pseudo wealth that causes aggregate demand collapse in the wider economy.Karl Marx called it "fictitious capital," which is the term that Michael Hudson uses for it now.
Warren Mosler offers a good analysis of Paul Krugman's article "Debt is Good." I try to avoid writing "Paul Krugman does not get it" articles, as that is already a crowded field. However, since the article caught a lot of attention, and is right up my alley, I feel I should comment on it.
One could summarise Mosler's article as that Krugman is directionally correct, but he is still not thinking about things properly. His idea (which he attributes to Ricardo Caballero of M.I.T.) that government debt is "good" because it provides a "safe asset" to investors is hardly novel. It was discussed in depth decades ago by Hyman Minsky, and probably many other economists that I am less familiar with. This offended some fiscal conservatives, but this is because many of them refuse to accept that a central government liability is an asset to the non-central government sector. (We could say "private sector," but that may seem like a strange label for entities like the Chinese reserve managers. It is actually reasonable, since those Chinese reserves are being accumulated to advance Chinese business interests.) Although they want to reduce government debt, they do not offer any mechanism to reduce private sector financial assets.
In Understanding Government Finance, one of the key themes is the central role of central government liabilities for liquidity management. The only way to avoid the use of government bonds in liquidity management is to create bank reserves, which are just a form of government liabilities that have particular restrictions on which entities can (and must) hold them. Although I am allergic to the term, reserves are a form of "financial repression" on the banking system.….Bond Economics
Capitalism gives only what we can extract from it.The term "capitalism" means that capital is prioritized over people (labor) and the environment (land) as a factor of production. Because favoring capital in necessary for growth (read increased wealth) and a rising tide lifts all boats. In other words, trickle down.
The Project Syndicate recently (August 6, 2015) published an Op Ed by conservative Edmund Phelps – What Greece Needs to Prosper. The article was widely syndicated by the conservative media and represents part of the conservative narrative to conveniently revise history when the facts violate the conservative ideological agenda. It is an appalling article. We are now in a phase of “Austerity denial”, where conservatives attempt to massage history to avoid the unpalatable conclusion that the massive austerity that has been imposed on certain countries by the IMF and its partners in crime (in Greece’s case the European Commission and the ECB) has caused huge declines in GDP (levels and growth rates) and deliberately led to millions of people becoming jobless with associated rises in poverty rates. That causality is undeniable.This is the great thing about the "science" of economics. Those who practice it can get it to say anything they want by either fiddling with the assumptions or torturing the data. It's not science, but pseudoscience — storytelling.
In his campaign presentation on the economy a few weeks ago, Corbyn suggested giving the BoE “a new mandate to upgrade our economy to invest in new large-scale housing, energy, transport and digital projects: QE for people instead of banks”. The plan is based on proposals from Corbyn’s main economic adviser, tax campaigner Richard Murphy.…
Murphy suggests that this form of QE is only now being considered because “money has only recently been properly
understood for the first time”. He seems to believe that advances made in the subfield of economics known as “modern monetary theory” (MMT) make people’s QE feasible. (Crudely, adherents of MMT hold that governments with the power to issue their own currencies will always be solvent, and that inflation is caused primarily by resource constraints, rather than monetary growth.)
By contrast, most other economists, commentators and politicians – Labour and Conservative – view people’s QE as having obviously dangerous inflationary consequences.
Why is that?
It would fatally compromise the BoE’s standing on global credit markets. As Robert Peston put it in his BBC blog,m“the lore of central banks – which, rightly or wrongly is almost universally accepted by investors – says that central banks should only look at whether there is too much or too little money in the economy… and not at narrowerquestions, such as whether there are enough roads or houses being built in Britain”.
If markets believe the BoE is no longer exercising judicious restraint in its creation of new money, and is instead the de-facto vehicle for funding politically popular projects, sterling would weaken and inflation rise.
By how much? That’s impossible to say. But even if we are not talking about Weimar Germany, there is little doubt that investors would conclude that the risk of investing in sterling and the UK had grown.
So why does everyone and their dog use Rational Expectations? Manski says that, basically, it's because A) it's easy, and B) there's no obviously better alternative:Another part of the reason must be the data used in empirical research. As illustrated in Section 2, choice data do not necessarily enable one to infer the expectations that decision makers hold. Hence, researchers who are uncomfortable with rational expectations assumptions can do no better than invoke some other unsubstantiated assumption. Rather than speculate on how expectations actually are formed, they follow convention and assume rational expectations.I'd add a third, more cynical reason: Rational Expectations can't be challenged on data grounds. If you measure expectations with surveys, people can poke holes not just in your theoretical model, but in the expectations data that you gathered and the econometric methods that you used to extract a signal from it. But if you assume Rational Expectations, they can only poke holes in the model itself. Basically, substituting theoretical assumptions for empirical results makes a model a more hardened target. If it makes the model less able to fit the data at the end of the day, well..."all models are wrong", right?
Anyway, everyone should go read Manzi's entire paper. Very interesting stuff, even if a decade old.
Why do economists so often assume that they and the decision makers they study share rational expectations? Part of the reason may be the elegant manner in which these assumptions close an economic model. A researcher specifies his own vision of how the economy works, and he assumes that the persons who populate the economy share this vision. This is tidy and self-gratifying.Noahpinion
I was recently asked to take part in a roundtable co-organised by Nik Gowing and CIMA (the Chartered Institute for Management Accountants). The roundtable was designed to feed in to the Churchill 2015 conference in November, and was on the subject of ‘thinking the unthinkable’ with regard to global leadership. The premise, which I agree with, is that the world is changing rapidly, such that those in positions of authority who are meant to lead us through such problems are being overwhelmed by multiple wicked problems.
These wicked problems include: climate change; ISIS; the Arab Spring (which I see as a generally good thing); the financial crisis of 2008 and the ensuing global recession; and rising tensions between the West and Russia.
I thought I would share my thoughts, some of which I shared at the roundtable, on this (hugely complicated) subject via a blog article.
Ultimately, I see these wicked problems arising from a tension between two broad points: the world looks more like a closed system that is now hitting capacity constraints; and we are employing a ‘simple systems’ mind-set to what are complex system problems.
The World as a Single, Closed System
The first point is that the world is now behaving more like a single, closed system than at any point in human history. It isn’t actually a closed system because it is open to the sun’s energy but, if I were to put it bluntly, there is no longer any ‘outside’ from which we can import solutions and export problems. At the same time, feedback effects have become more pronounced, and the earth’s capacity constraints have begun to be tested by the simultaneous growth of the human population and its average per capita consumption.
These features appear to have arisen from the stunning advances in transportation technology over the past hundred years or so and, more recently, by the advancement of information and communication technology. All of this has cultivated a much more integrated, interacting world.
Prior to this, for several hundred years, the world was organised, both in a real and a legal sense, in to nation states, which operated – broadly speaking – like small open systems. In such a world, you can generally ignore the impact you have on the wider host system. You can also export some types of problem (sending convicts to other shores, for example) and import solutions to other types of problem (invading resource-rich countries, importing slaves etc.).
And, generally speaking, the more powerful countries were more able to seek solutions from their outside than the less powerful, and they could do this without any expectation of a significant detrimental response / feedback. Hence, empires were built.
We have moved away from this world for the reasons cited above: transportation technology, ICT, and increases in population and per capita consumption. Of course, the resulting wicked problems are not only important at the global level for national politicians and diplomats: they are also challenging the senior executives of organisations of varying sizes and types. The environment for many directors has changed, and continues to change, rapidly.
The ‘Simple Systems’ Mind-Set
The second point is that the dominant way of thinking in the world is reductionist, linear and static. Reductionism is the idea that we can break a whole system in to parts to understand it; linearity is the notion that cause is proportional to effect (i.e. small causes create small effects and vice versa); and by static I mean that dynamical effects are either ignored or under-emphasised.
In my opinion, this ‘simple systems’ thinking is demonstrated most clearly in orthodox Western economics. But economics is not merely an exemplar here, it is also important because it has widespread effects on corporations and governments all over the world. It frames decision making concerned with trillions of dollars of resources.
Now, an important point to note here is that the simple systems mind-set is a reasonable approximation for decision-making in the old world of multiple small open systems. Indeed, the relationship between the two is brought in to focus if we make the inverse point: we can imagine this simpler mind-set emerging in this old world as a reasonable approximation of how it works. Our pattern-recognition capabilities are, after all, concerned with reasonably approximate hypotheses.Synthesis
In my opinion, and this is the core point of this article, the global wicked problems listed above have arisen because we are living in a world for which the simple systems mind-set is no longer a sufficient approximation. Among other things, the world in which we now live has no outsides, it is prone to cascading effects (like global financial crises) and acute feedback effects.