Monday, June 06, 2011

Waiting for Godzilla

Well, it's been a loooong time since I created this blog for other purposes, which I hardly remember. But now it will mainly cover the economics I have recently taken a renewed interest in. Wrecking economies and calling it prosperity is what the world's elites have been practicing for many years. Wrote the following at Dean Baker's Beat the Press blog here a while ago, and promised myself (&Mrs. C) I would post it here, to finally get this blog started.

Dean was responding to this Washington Post story (see also here ) saying that Japan's high government debt made it less able to deal with the natural catastrophes it recently suffered. It quoted "economist" Carmen Reinhart: "When you have as much debt as the Japanese have, you're vulnerable to this kind of shock and can't do much about it." The article and this comment are some of the infinity of mainstream/orthodox economic views that are perfectly insane products of the farcical, embarassingly stupid theories which are nowadays called "economics".

So here (and yes, I know when the great Abba Lerner said something similar to Reinhart, and what he meant, and will explain to anyone interested):

Of course the Japanese just owe that dough to themselves. Macro-economically meaningless.

Of course half of it is just the Ministry of Finance - one pocket of the government owing it to the JCB - another pocket. Super-duper ridiculously meaningless.

But if anything, the high debt/gdp makes Japan more flexible. Government debt is money. [I will wax poetic on this, and its converse, in future posts].

Read Reinhart's statement correctly: "When you have as much money as the Japanese have, you’re vulnerable to this kind of shock and can’t do much about it" Sound right to you?

High debt/gdp means the Japanese private sector has a lot of cash it can dip into and immediately spend, perhaps more quickly and responsively than the government, to fix what needs fixing, what was destroyed. Sensible people will say, "If this isn't a rainy day, what is? What, are we waiting for Godzilla?"


Blogger jbpeebles said...

Government debt is money? Hmmm, sounds like a topic for Arthur at his blog.

He goes in detail on some key redefinitions of economic principles that don't appear capable of explaining the situation we're now facing.

To me, the new economic schools are nice but they miss the fundamental point which is that our nation's economic policies are set by people with a neoliberal background, which means they follow tenets of market fundamentalism like that espoused by Friedman (or at least how some have chosen to interpret Friedman now that he can't deny them, except from the grave.)

Economics is far less precise than economists would like to admit. Yet the subjectivity involved in analyzing an economy means two economists with different opinions can be right, depending on what they measure and how.

Case in point: current statistics on inflation. We know unemployment's fudged. And the motives are political and obvious: incumbents don't want the scope of the problems to be exposed. So in this respects ALL those who depend on the government for a paycheck can become quite subjective with their analysis (of course they'll pretend to be objective, in order to maintain credibility.)

So we have a political goal--low unemployment and inflation--impeding transparency. Alongside a public that can understand economics, it's vital that people are presented accurate information.

Ever since the government cut reporting of M3, the amount of money (only 3% physical cash) has expanded at least three times. And even reports of the money supply have been distorted by the shadow banking system.

The shadow banking system has created such a mammoth pile of credit money that it can't be undone. The banking and monetary systems strain under the weight of $250 trillion in derivatives.

Now some forms of these debt securities and swaps are innocuous but systemic risk is vast based purely on the raw size of debt, whatever it's real credit quality. Most of the derivatives don't have a specific present value, and are illiquid. It was only by trading junk mortgage debt for Treasuries that the 2008-9 crisis could be averted from causing total financial collapse.

Now if the debt pile were to shrink from devaluation, it'd make existing dollars buy more--the opposite of inflation, which means they buy less.

Another deflationary factor is of course unemployment, which keeps wages and spending low.

So you might be right that deflation will be a bigger threat. But I'd say the political desire to avoid a Depression will lead to Fedgov taking highly inflationary steps. Already our fiscal spending is legend. It's in Congress' nature to want to inflate its way out. Still, the interest burden on the debt (over $400bn in 2010) may further restrict spending, or not, since they can print up the interest, too.

Maybe we can have inflation and deflation at the same time.

Sun Jun 26, 11:46:00 PM  
Blogger The Arthurian said...

Good post title, Calgacus.

I am so much happier with your "Government debt is money" than with your older expression of the same thought.

That fine print there, on the Lerner:Reinhart dilemma, sounds like the stuff of a future post.

Hi, jb. Thanks for the link!!

Fri Jul 01, 03:52:00 AM  
Blogger Calgacus said...

jbpeebles: Economics is far less precise than economists would like to admit. MMT - monetary/creditary economics = accounting is the part of economics that is far more precise than everyone thinks. It is more precise because that is the way we all have decided to make it, by using money, arithmetic and accounting. I agree, the vast amount of shadow banking credit money is systematically dangerous. Because the (shadow) banksters / predators use their money, which only has value because of government guarantees and actions, to buy the government and use it to inflict poverty on everyone else. A government led by an FDR would have no trouble with these con men though. The mammoth pile could be undone easily enough - the GFC could have been used to do this.

Arthur: It's a slightly different, related thought. Government debt is money. It's the Godzilla of moneys. But there are moneys which aren't so mighty. But always, money is a form of debt, and can be defined in terms of the concept of debt. IMHO, there is nothing to knowing MMT- non-joke (macro)economics - but really knowing this. Everything else is details, consequences, obvious once you grasp it. MMTers - who have gone beyond Lerner - are nowhere near as good writers as he was, who knew brevity was the soul of wit.

Yes, I will give a short post on what Lerner said about big bad debt. A longterm plan, real life allowing, is to give a series of posts on pages or two or chapters of Lerner, which are frequently still the best I have found on many topics - but can be clarified, made even briefer by later understanding. At least a way to get more of AL out on the web for free!


Thanks to both of you for stopping by. Would have replied and posted more already, but I have been suffering from an annoying case of Ricardian Equivalence.

To wit, an (antibiotic resistant it seems) ear infection - what David Ricardo famously died from, for want of modern antibiotics. Only betook my lazy self to the doc when I reread this! Finally seems to be going away, some time after the antibiotics ran out.

Sun Jul 03, 01:13:00 AM  

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