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Wednesday, March 25, 2009

 

BoE, tories oppose fiscal stimulus


on the heels of a failed gilt auction of potentially historic consequence, bank of england governor mervyn king attacked prime minister gordon brown for the profligacy of his labor government. via rolfe winkler and the times:

The Governor of the Bank of England laid bare tensions between Gordon Brown and the Treasury yesterday by warning that Britain could not afford a second economic stimulus in the Budget.

Mervyn King threw caution to the wind as he sided with Alistair Darling and the CBI against Downing Street in raising strong doubts over any prospect of another round of “significant fiscal expansion” next month.


"we've got to start living within our means," says tory leader david cameron. you picked a fine time to start trying, mr. cameron.

this reinforces my deep and growing dismay that the political and monetary authorities in britain and elsewhere do not understand the nature of their problems. this is a balance sheet recession -- private incomes are being diverted from consumption to savings and debt repayment, private balance sheet are trimming debt and trying to replace lost equity following the greatest asset shock in eighty years. it is precisely now that government must use its balance sheet capacity to pull cash directed at banks out and spend it to prevent a demand collapse and far greater problems.

in other words, while the citizens of the western world finally set about living well within their means, if a ghastly depression is to be avoided then the government absolutely cannot.

what's worse, because the authorities still believe that the nature of their problem is not credit demand but credit supply -- that is, they incorrectly presume that people will borrow if only the banks would lend -- they are directing valuable and limited government balance sheet toward recapitalizing banks instead of supplementing demand.

this same dynamic is playing out almost identically in the united states. as winkler notes, the obama press conference last night was for a time dominated by concerns over government deficits and debt. while that concern is not utterly misguided, oppositional republican hysteria about the damage being wrought by govenrment indebtedness -- not the fiscal reality, but the abstracted concept -- is.

in truth, economic collapse will be the surefire product of NOT financing fiscal stimulus at least almost as large as the newfound propensity of american households and businesses to save and pay down debt. to the extent that governments borrow heavily to recapitalize banks that could recapitalize themselves with time and restructuring, i agree that borrowing is poor policy. but that does not lessen the high probability that the only bulwark between today and economic disaster is the government spending which can keep money supply at current levels even as the entire private sector deleverages en masse. should it not, past experience shows that the ensuing devastation of tax revenues will guarantee even larger deficits in spite of reduced spending.

mervyn king, england's tories and american republicans at a minimum have the problem precisely wrong (which is not to say that labor and the democrats have it right). they are as a result unwittingly recommending a 'greater depression' as a solution to the problem, rather than a problem in need of a solution. that they are further succeeding by some measure to frame the public debate in both countries regarding government deficits is heart-rending.

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The problem with your analysis is that "stimulus" isn't on the table right now --- what Barack Obama and the Democrats call "stimulus" is wealth transfer. There is no job creation in what he has done, other than government job creation. So a big, bloated, unaffordable government goes into mind-boggling more debt to become even bigger, more bloated, and incredibly unaffordable. Pardon the opposition parties for trying to stop that. Perhaps there would be less opposition to Obama's spending if he weren't shoveling money to his masters on Wall Street and his unproductive constituencies.

If Obama, or Gordon, were proposing spending on things that made sense, that would actually stimulate the economy, you might get a better result.

As it is, it seems as if you are only exposing your party bias.

 
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no party bias, steve - i am an equal opportunity disdainer of political parties. this isn't abortion or gun control or some other godforsaken moral abstraction. i just think the republicans are wrong on the mechanics of what is happening.

like it or not, and contra some political dispositions, government-dependent job creation is in fact job creation. the checks cash, the money gets spent. i prefer the more efficient private sector variety, and i have nothing against government spending its money on private businesses, but we are not going to be getting significant private sector expansion -- and i think it is essential to realize first that THINGS HAVE CHANGED. the private sector has many years of balance sheet repair ahead of it, when it will not be expanding at all and in many cases downsizing and paying off debt.

in such a situation, the private sector will be paying back loans, not taking them out. if that is allowed to happen without government stepping up to borrow deposits out of the banks, the result will be a collapse in money supply and widespread bankruptcies -- which is what happened to this country between 1929-33. moreover, the data clearly show that the resulting collapse in tax revenue creates even larger deficits than would have been seen as a result of government demand management.

this is important to note, and the data is quite clear form previous crises: the consequence of refusing to use government to maintain economic activity is NOT SMALLER deficits -- it is LARGER deficits. if you dislike government debt, paradoxically, you should encourage government to borrow and spend private savings now.

in this environment of balance sheet consolidation, only the government can realistically turn over the new cash flows into the banks to prevent a depression.

moreover, government should be able to do so with no serious threat to the currency PROVIDED that it does not continue to borrow out these new savings flows for purposes that are truly not economic -- such as injecting lots of capital into the banks. they don't need to. banks can slowly recapitalize by net interest differential over time if they are shown plenty of regulatory forbearance. as much was done in the aftermath of the latam crisis from 1982-95, and in japan from 1990-2005.

 
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I suspect the suspicion with government job creation is concern that the "stimulative" intent might mutate into "jobs for life for my constituents" that one associates with some of these boondogles (TVA, various toll roads).

It would be all well and good to blow a couple of billion to hire contractors to build a bridge who will then blow their cheques on goodies, which will be produced by workers in factories, and so on..

I think it may be an entirely different issue if in practice we end up blowing those billions hiring bureaucrats whose only product in to interfere in people's lives and businesses (those who still have businesses that is)

Or perhaps shooting money into the pockest of nonproductive groups who appear to have limitless time to petition government to spend money on their pet issues and could use that money to hire a some beltway bandits with the right connections to turn a one time stimulus cheque into a permanent line item on the budget with all the requisite staff.

 
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"like it or not, and contra some political dispositions, government-dependent job creation is in fact job creation."

But it is not wealth creation. It does not improve the factors of production. We have too many nonproductive people in this society, and all you propose is creating more --- with all the attendant and permanent costs --- benefits, retirement plans, etc. And when did we ever create a temporary government job?

This is foolishness. And, by the way, do you even know what the Republicans are proposing that you disdain so much? You won't find out listening to CNN or MSNBC. All you will hear are the same strawman arguments that the Obama propaganda machine spits out. The Republicans are not being given a hearing. Barney, Nancy, and Harry shut them down. There is no debate going on in this Congress, only corrupt power being wielded.

This government is not the solution.

 
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But it is not wealth creation.

i wouldn't dispute that, steve.

but the realization has to emerge that we've spent the last twenty years in this country not creating anything like the wealth most people thought we were. what we were doing -- with the complicity of both political parties -- was recklessly levering up the private sector -- much more so than the public, where the debt float remains well under 50% of GDP -- which gave the temporary appearance of wealth. now the bill has come due on that debt.

the result is a nascent balance sheet recession, and private sector growth is simply not an option from this point. i would direct you to richard koo's presentation. again, we would all prefer private sector growth and wealth creation. but the reality is that this will not happen until the private sector balance sheet is repaired, and that will be several years doing as it has to liquidate one of the most titanic debt bubbles in the history of man.

what we're really discussing is how to tide over that period of balance sheet repair between now and the beginning of the next great growth cycle.

we can have government do nothing and watch as money supply and economic activity crash until we get to the point where the private sector is too poor to divert income or savings to balance sheet repair -- which is the equilibrium approached (but never reached) in the 1929-33 -- and then try to start growing from the wreckage of that very low level.

or we can carefully use government balance sheet to manage demand in order to prevent an economic collapse -- as was done in the US, germany and elsewhere from 1933-45 on, as well as in japan from 1990-2005. this will keep income flowing to households and businesses, enabling them to largely pay down debt from income and savings rather than simply defaulting on it en masse. once the necessary deleveraging has been effected -- likely several years' time of low or no growth -- we can resume growth from a much higher level. this will have the advantage of generating a lot more tax revenue out of lower tax rates (because the absolute level of economic activity is much higher), allowing the economy to generate the revenues that push the government into long-awaited and very desirable surplus while reducing the load as a percentage of GDP.

you obviously from your comments view events through a thick partisan political lens, and that's fine. but i would say that, as damaging as 'keynesian' stimulus is in a healthy economy, so it is necessary to avoid disaster in a sick economy. inflexible political ideologies that forward the same prescriptions under all circumstances, regardless of which party they are identified with, are inevitably counterproductive at points -- and this, i fear, is that point for the deficit hawks in both parties.

if it helps me in your eyes, my mainstream news source is bloomberg. :) i don't watch any cable or network news -- don't see the point.

 
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I suspect the suspicion with government job creation is concern that the "stimulative" intent might mutate into "jobs for life for my constituents" that one associates with some of these boondogles (TVA, various toll roads).

in truth, anon, private sector balance sheet repair is likely to take a long time -- ten years? fifteen? we are looking, after all, at retiring private sector debt on the order of 200% of GDP. the channels of government spending are certainy likely to calcify. that doesn't relieve us of the obligation.

koo notes that it barely matters what it's spent on from a macro perspective -- the important part is that it is spent to prevent monetary aggregate and economic collapse. indeed, i think good spending is infrastructure repair -- does not add to problems of overproduction as it largely is replacement, but still necessary for continued long-term economic function. but, washington being what it is, i'm also certain both parties will be sure their patron's troughs are filled to overflowing.

 
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more from ed harrison on this point.

 
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