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Friday, February 12, 2010


welling@weeden koo interview

via zero hedge -- richard koo is interviewed by the excellent welling@weeden.

Maybe. But with its massive store of savings, Japan didn’t have to worry about depending on the kindness of creditors in China and the Mideast as its bond rates scraped along at zero. The U.S. does.

The truth is that Japan was actually in that same precarious position, a decade ago. With Japanese government debt skyrocketing because of massive fiscal deficits, all of the ratings agencies, the IMF, the OECD — they all issued horrendous warnings against Japan. Japanese bond investors remember very well that JGBs were downgraded repeatedly, to the point where Japan’s debt was rated lower than that of Botswana, because the ratings agencies were so sure that at some point the whole thing would come crashing down and that interest rates would soar. But it never happened. And the reason is easy to understand, once you grasp the concept of a balance sheet recession. The amount of money that the government has to borrow and spend to sustain GDP is exactly equal to the amount of excess savings generated within the private sector of the economy. So that money is actually available within the private sector, even in the U.S., even in the U.K. And the U.S. is no longer a low savings rate country; the last statistic was over 6%, higher than Japan. What’s more, with companies also increasing their savings, there’s no “crowding out” and banks are only too happy to lend to the government, as the last borrower standing — and also because they don’t have to keep as much capital against loans to the government as they would against private sector loans, allowing the banks to rebuild their profits and balance sheets.

It sounds almost too good to be true —

It’s not. I believe that as more and more people in the U.S. realize that this is the mechanism at work, the fear of interest rates rising will be increasingly reduced, and I won’t be surprised to see long bond rates in the U.S. falling from where they are now. In any event, whether you start with a high savings rate or a low savings rate, once a country enters a balance sheet recession because the private sector is paying down debts, you end up having excess savings in the private sector and it is those excess savings that the government has to borrow and spend. It doesn’t have to borrow externally. So the U.S. doesn’t have to borrow from China or anywhere else. But because that’s contrary to the mind set for the last 10 or 20 years, it’s very hard for people to come around to that realization.

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from Perrone: GM, I miss you, man. you OK? things all right?

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These "unconventional" ideas are making increasing headway! pragcap moving from cautious consideration of Koo to cautious consideration of MMT... zerohedge saying positive things about Koo's ideas! (How long til MMT for them I wonder?). Still no movement from Mish though!

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First of all the balance sheet issue regarding deficits and savings (or the artifact of double- entry bookkeeping) is Econ 101. Most of the economists on the 'net have been parading it in the past few months in order to pacify the hysterical: Krugman, Hamilton, Thoma, Auerback, etc.

All of this is besides the point because the relay of funds from one custodian to another does not effect velocity or multipliers. There is no new 'money' being created. The shell game does not create more peas, it simply moves the one little, tiny, useless pea around.

Also, we are not having a credit crisis per- se, but an energy crisis where decreasing fuel availability is mediated by credit. The distortions in credit are noticeable ... but are the symptom. Declining fuel availability is the disease.

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hi perrone -- i'm fine, just busy and mostly twitterized. @dafowc if you're on the thing.

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hi hbl -- i know mish is on board with steve keen a bit, though, so that's improvement. i share some of keen's misgivings about MMT; i think the damage that can be wrought by severe currency changes are broadly underestimated by MMT theorists.

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steve, i'm sure you're reading gregory macdonald -- i think you're right in part. the financial crisis is i think has its genesis in a series of large balance of payments problems caused by inappropriate currency pegging. not just china/japan/east asia vs USD, but also germany vs southern/eastern europe.

against this unfolding crisis backdrop, however, is the aggravating factor of oil scarcity. very complex interaction between the two. would live to hear more of your thoughts.

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oops -- gregor! LOL

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These "unconventional" ideas are making increasing headway! pragcap moving from cautious consideration of Koo to cautious consideration of MMT... zerohedge saying positive things about Koo's ideas! (How long til MMT for them I

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im economist from Pakistan.i read the decline and fall of western civilization.this information is very important for me...

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