Steve Keen — Our Dysfunctional Monetary System

Steve Keen sums it all up on one sentence:

The great tragedy of the global eco­nomic malaise is that it is caused by a short­age of some­thing that is essen­tially cost­less to pro­duce: money.

It's beyond inane, especially post Keynes and post Lerner. Not that this was unknown or overlooked before. But Keynes and Lerner elaborated economic policy based on a theory that disproves the conventional approach.

Steve Keen's Debtwatch
Our Dysfunctional Monetary System
Steve Keen | Professor and Head Of School Of Economics, History & Politics, Kingston University, London

Are We Doomed? "Smart" Accounting: "The Optimal Level Of Demand Leakage Is Aggregate Suicide"

   (Commentary posted by Roger Erickson)

Demand Leakage: (when we hoard initiative by sitting on it, rather than investing it)

A situation in which capital, or income, exits an economy, or system, rather than remains within it. .. In a two sector [economics] model, all individual income is sent back to employers when goods and services are purchased, and back to employees through wages and dividends. Leakage occurs when income is taken out through taxes, savings and imports.

So the following message, parroted nearly everywhere, is cringeworthy.

Save More Tomorrow: Using Behavioral Economics To Increase Employee Saving

Save More Tomorrow (hereafter, the SMarT program) involves people who commit in advance to allocating a portion of their future salary increases toward retirement savings. This has been shown to increase retirement plan savings significantly. (hat tip John Lounsbury)

And they have the temerity to call it SMART. I guess some people are just born stupid smart.

Why, by their logic, if we save EVERYTHING, just think how rich we'd be .... and how well off (dead) the next generation would be (since we wouldn't have invested a single penny in their development)!

Weepin' Buddha on a decline! They know not what they do. 

It's not a question of forgiving them, but rather of surviving them.

An electorate is a terrible thing to waste. No wonder some wag named "Smart" retirement savings as Zombie Economics. It's essentially investing in the walking dead.

No wonder every process is too important to be left to the presumed process owners. If we listened too much to professional risk-managers, we'd avoid living.

ps: for those who missed the point;

My rant is not against saving, but against collectively saving too much, as a fallacy of scale.

We already know that that approach alone won't save us. We as a people can't "save" ourselves out of lagging aggregate income, any more than individuals (as an aggregate of cells) can stay in a race by holding their breath and saving oxygen.

Asad Zaman — Why does Aggregate Demand Collapse?

Summary of Atif Mian and Amir Sufi's House of Debt. It attributes the decline in aggregate demand to the collapse of assets held by the middle class, which led to their greatly increasing saving desire and consequent demand leakage. The summary omits stagnant wages along with increase in household debt, however, which also contributed to demand leakage as a result of the crisis and subsequent economic contraction. 

This was a crisis in the making over several decades as productivity gains were distributed chiefly to capital and top earners and workers — the 99% — borrowed more to maintain lifestyle. This was supported by increasing middle class asset values. When asset value crashed, a "balance sheet recession" ensued from which the middle class is still trying to recover.

Real-World Economics Review Blog
Why does Aggregate Demand Collapse?
Asad Zaman

Bernard Condon — Families 'Scarred' From Financial Crisis Still Afraid To Spend

Five years after U.S. investment bank Lehman Brothers collapsed, triggering a global financial crisis and shattering confidence worldwide, families in major countries around the world are still hunkered down, too spooked and distrustful to take chances with their money.

An Associated Press analysis of households in the 10 biggest economies shows that families continue to spend cautiously and have pulled hundreds of billions of dollars out of stocks, cut borrowing for the first time in decades and poured money into savings and bonds that offer puny interest payments, often too low to keep up with inflation.

"It doesn't take very much to destroy confidence, but it takes an awful lot to build it back," says Ian Bright, senior economist at ING, a global bank based in Amsterdam. "The attitude toward risk is permanently reset."

A flight to safety on such a global scale is unprecedented since the end of World War II.
The implications are huge: Shunning debt and spending less can be good for one family's finances. When hundreds of millions do it together, it can starve the global economy.

The Huffington Post
Families 'Scarred' From Financial Crisis Still Afraid To Spend
Bernard Condon | AP

Everyone trying to devalue and export their way out while enforcing austerity domestically. Not working.

Dean Baker — The Simple Reason for the Long Downturn: Housing Bubble Burst

Many economists and business writers view the duration and severity of the downturn as being a mystery. They argue that it has something to do with the financial crisis, although the exact nature of the relationship is often not quite clear, with the financial crisis looming as a dark cloud hanging over the head of an otherwise healthy economy....

First, the housing bubble created a surplus of housing, so housing is not contributing to the recovery. Secondly, consumers are still saving at a higher than usual rate, so consumption is lagging. Thirdly, the outsized trade deficit is also creating demand leakage.

There is no mystery about the downturn or the potential routes to recovery. The only problem is that the people in control of economic policy have no interest in taking the steps necessary to bring the economy back to full employment. And most of the people who write about the economy are doing their best to say that it is all just so mysterious since it is far too simple for them to understand. Happy 5th anniversary!

Truthout
The Simple Reason for the Long Downturn: Housing Bubble Burst
Dean Baker, Truthout | News Analysis

Jullian Berman — The Rich Are Hoarding Cash And It's Making Us A Lot Worse Off: Experts

America's top 1 percent saved their money at a rate of 37 percent last quarter, according to a recent survey from American Express Publishing and the Harrison Group highlighted by CNBC. That means that during that period, wealthy Americans put away about 37 cents for every dollar they earned, which is more than triple their savings rate in 2007. In addition, a Bank of America study cited in the CNBC report found that more than half of millionaires have a "substantial" amount of cash on hand and of that group, about 60 percent said they didn't plan to invest it in the next two years.

As the recovery struggles to gain solid ground, the findings indicate that even while America's wealthiest households are taking home a larger share than ever of the income pie, they're doing little to put that money to productive use in the economy, experts say. One possible solution: raising taxes on the rich.

The Huffington Post
The Rich Are Hoarding Cash And It's Making Us A Lot Worse Off: Experts
Jullian Berman

Dean Baker — "Savings Glut" Means Much of Economics Is WRONG

Dean Baker presents an account of saving and demand leakage that is in agreement with MMT.

CEPR — Beat the Press
"Savings Glut" Means Much of Economics Is WRONG
Dean Baker

Stephanie comments:

written by Stephanie Kelton, August 03, 2013 10:09 
Hi Dean, 

Saving is just another way of saying "demand leakage". Only those with a loanable funds/Say's Law view of the world see it as anything else. Unfortunately, Krugman appears to be stuck in the latter camp. He gets insufficient AD only under exceptional (short-run) conditions, currently his zero lower bound Liquidity Trap argument. This is why he can write a piece titled "The Price is Wrong" and assert that the lack of insufficient aggregate demand is due to the failure of a single price -- the real interest rate -- to adjust to its market clearing level. 

Absent the ZLB problem, you end up in a Say's Law world, which Krugman is committed to defending: 

"So why do AS-AD? First, you do want a quick introduction to the notion that supply shocks and demand shocks are different, that 1979-80 and 2008-2009 are different kinds of slump, and AS-AD gets you to that notion in a quick and dirty, back of the envelope way. 

Second — and this plays a surprisingly big role in my own pedagogical thinking — we do want, somewhere along the way, to get across the notion of the self-correcting economy, the notion that in the long run, we may all be dead, but that we also have a tendency to return to full employment via price flexibility." 

http://krugman.blogs.nytimes.com/2013/06/02/a-sad-story-i-mean-as-ad-story-wonkish

Dean Baker replies:

Krugman still believes that the economy tends to full employment
written by Dean, August 03, 2013 1:52 
Stephanie, 

i think you're right that Krugman considers the current downturn an exception because of the ZLB. In more normal times he would say that we can count on declines in the interest rate to move the economy quickly (fast enough not to need fiscal policy) to full employment.

Warren Mosler — Friday update- deficits matter, a lot!

Macro outlook. Fiscal drag increasing. No obvious offset from other sectors. Potential contraction looming.

The Center of the Universe
Friday update- deficits matter, a lot!Warren Mosler

digby — A 1 percenter tells the truth about "job creators"

Nick Hanauer, successful entrepreneur and one percenter, gave testimony on income inequality a few days ago before the U.S. Senate. His testimony in full should be posted in every break room in America:

Hullabaloo
A 1 percenter tells the truth about "job creators"
digby

(h/t Mark Thoma at Economist's View)

Bill McBride — States: Mo Money Mo Problems

Now some states are adding to the problem of demand leakage by saving (running surpluses).

Calculated Risk

States: Mo Money Mo Problems
Bill McBride

"Deficits do matter, but not how you think" — Interview with Stephanie Kelton

InvestmentNews: Does the federal government ever need to cut its deficit?

Ms. Kelton: The private sector should decide that. The public sector is the partner in the dance. The government should let the private sector lead. When the private sector wants to increase its holding of dollars and net financial assets, and save less and spend more, the only way that can happen is for another sector to spend less. If the government doesn't play ball and run a deficit, it will cause a recession. The proper role of government is to be responsive. When there's an increased private appetite, you accommodate that by running a deficit. It's irresponsible not to.

The deficit will come down by itself. I don't think policy makers should actively manage the deficit. Right now, the deficit is falling at the fastest rate since World War II. No one talks about that.

While the folks in Washington are falling all over themselves to come up with a plan to cut the deficit, it is quietly plummeting at its fastest pace in two generations because the economy has been adding jobs. Deficits rise when unemployment rises and they fall when unemployment falls.

Investment News
Deficits do matter, but not how you think, economist says
Interview with Stephanie Kelton, Professor of Economics, UMKC
(h/t Clonal Antibody via mail)

Apek Mulay — A Failure Analysis of the US Economy

Common Sense Macroeconomics 

Producers and Consumers are like two wings of a bird. If either of the wings gets hurt, the bird will no longer be able to fly. If that bird is not nursed quickly and properly, it would be disabled and either die from hunger or fall prey to a predator. With the same analogy, both producers and consumers have to prosper for a robust economy.

Before we get into more details of macro-economics, let us see where the economic profession stands at this juncture. In a recent article in The New York Times, Professor Robert J. Shiller of Yale University and a best-selling author argues that even now we don’t understand what really causes a recession and layoffs [2]. But another best-selling economist, Professor Ravi Batra, seems to have solved the puzzle of recessions by offering a new theory of unemployment. His theory relies on common sense as he argues that recessions and depressions occur when worker productivity keeps rising faster than the economy’s average real wage. He demonstrates that this happened in the 1920s, which were followed by a depression. The same thing also occurred during the 2000s and the world has been in The Great Recession since 2007.

Batra argues that worker productivity is the main source of supply while wages are the main source of demand. If productivity rises faster than wages, then supply rises faster than demand. This results in overproduction and forces the manufacturer to fire workers. Producers are the suppliers of goods, and consumers generate the demand for these goods. Consumer demand, being dependent on wages, is sustainable only if the consumers as workers earn higher salaries. If the wages of consumers do not catch up with increased supply of goods, the supplier of goods is unable to sell all that he/she has manufactured.

truthout
A Failure Analysis of the US Economy
Apek Mulay | PROUT Globe – News Analysis

Reuters — Rising Taxes Are Hurting Low-Income Americans

* Payroll tax rise, pump prices crimp spending

* Wal-Mart, Burger King, Kraft already feeling the pinch

* CEOs warn two-speed economy not improving

Feb 19 (Reuters) - It's getting tougher again at the bottom of the food chain.

Rising taxes and soaring gasoline prices have combined to slash spending power at the lower end of the economy, according to executives from fast food chains, discount retailers and other companies that cater to budget-conscious consumers.

"Unfortunately, the loss of so many middle-class jobs in this country makes it tough," said Gary Rodkin, chief executive of consumer packaged foods company ConAgra Foods, in an interview on Tuesday.

"We've got a pretty good pulse on that 80 percent of the population that's still challenged and I would say there's not marked improvement yet," he added.

The good old 80-20 rule.

The Huffington Post
Fast Food Executives: Rising Taxes Are Hurting Low-Income Americans
Martinne Geller and Lucia Mutikani | Reuters

Tim Taylor — Why are U.S, Firms Holding $5 Trillion in Cash?

... the trend toward corporations holding more in cash very much predates the Great Recession; indeed, it was already apparent back in the 1990s. Thus, along with thinking about why events of the last few years have led corporations to hold more cash, we should be thinking about influences over the last couple of decades.

The Conversable Economist
Why are U.S, Firms Holding $5 Trillion in Cash?
Tim Taylor | Managing editor, Journal of Economic Perspectives

Zero Hedge — Retirement Reality Full Frontal: Why Every 30 Year Old Must Risk It All To Be Able To Retire

...the average retirement saver will need to double their rate of savings in order to be able to retire even five years later than originally planned. If and when that sort of analysis enters into the collective consciousness of the typical American, the economic impact is likely to be grim.
As we’ve seen in the UK, higher savings rates lead to lower consumption, a decline in corporate profits, and recession.

Citi: US Credit Outlook

Zero Hedge
Retirement Reality Full Frontal: Why Every 30 Year Old Must Risk It All To Be Able To Retire

Have the folks that want to weaken Social Security, Medicare and Medicare (which funds long term care when personal resources run out) thought through the demand leakage of increasing savings?

Warren Mosler — Demand Leakages: The 800lb Economist in the Room

I can't say I've seen anyone in the deficit debates talking about the demand leakages. Not a mention in the mainstream press, financial news media, or any of the thousands of economic reports? That's like discussing the right horsepower for a truck or an airplane without any consideration of the weight of the vehicle.

Read it at The Huffington Post
Demand Leakages: The 800lb Economist in the Room
by Warren Mosler

Steve Bannister — The nagging influence of energy prices

As gasoline prices spike, consumer durable spending decreases. And vice versa. The widely recognized soft spot in 2011Q1 is seen here as a run up in gas prices and a decrease in consumer durable spending. We seem to be seeing a similar pattern this year, though consumer durable spending appears already to be recovering. If I have any short term hope for this economy, this graph is its parents. If gasoline prices continue decreasing, PCEDG will increase and help the economy grow. And vice versa.

The mechanism operates because gasoline expenditures are very price inelastic in the short run, and consumers are budget constrained. More spending on gasoline, less on durables, and most of those are manufactured in the US, so it depresses economic performance. This is a very demand-oriented story.

Read it at Naked Keynesianism
The nagging influence of energy prices

by Steve Bannister

CR — Lack of demand

It really isn't hard to understand.

Read it at Calculated Risk
Lack of demand
by Bill McBride

Zero Hedge — US Companies Are Furiously Creating Jobs... Abroad

Whatever one thinks of the practical implications of the Kalecki equation (and as we pointed out a month ago, GMO's James Montier sure doesn't think much particularly when one accounts for the ever critical issue of asset depreciation), it intuitively has one important implication: every incremental dollar of debt created at the public level during a time of stagnant growth (such as Q1 2012 as already shown earlier) should offset one dollar of deleveraging in the private sector. In turn, this should facilitate the growth of private America so it can eventually take back the reins of debt creation back from the public sector (and ostensibly help it delever, although that would mean running a surplus - something America has done only once in the post-war period). This growth would manifest itself directly by the hiring of Americans by US corporations, small, medium and large, who in turn, courtesy of their newly found job safety, would proceed to spend, and slowly but surely restart the frozen velocity of money which would then spur inflation, growth, public sector deleveraging, and all those other things we learn about in Econ 101. All of the above works... in theory. In practice, not so much. Because as the WSJ demonstrates, in the period 2009-2011,America's largest multinational companies: those who benefit the most from the public sector increasing its debt/GDP to the most since WWII, or just over 100% and rapidly rising, and thus those who should return the favor by hiring American workers, have instead hired three times as many foreigners as they have hired US workers. Those among us cynically inclined could say, correctly, that the US is incurring record levels of leverage to fund foreign leverage, foreign employment, and, most importantly, foreign leverage.

Read it at Zero Hedge
US Companies Are Furiously Creating Jobs... Abroad

Submitted by Tyler Durden

Peter Morici addresses trade deficit as demand leakage

Read it Asia Times Online
Trade deficit hits US growth
By Peter Morici
Professor at the Smith School of Business, University of Maryland School, and former Chief Economist at the US International Trade Commission

The United States should impose a tax on dollar-yuan conversions in an amount equal to China's currency market intervention. That would neutralize China's currency subsidies that steal US factories and jobs. That amount of the tax would be in Beijing's hands - if it reduced or eliminated currency market intervention, the tax would go down or disappear. The tax would not be protectionism; rather, in the face of virulent Chinese currency manipulation and mercantilism, it would be self defense.

Cutting the trade deficit in half, through domestic energy development and conservation, and offsetting Chinese exchange rate subsidies would increase GDP by about $525 billion a year and create at least 5 million jobs.