Edward Chancellor on the Paradox of Public Thrift and Other Links

31 Comments
  1. Stevie b. says

    Ed – re the paradox of public thrift – we’ve been round this block an awful lot of times! The answer is simple. Even if it’s right, the world will not wear the Auerbach/Parenteau solution. Period. No more debt on top of too much debt already! We are beyond the point of any return. Pain is unavoidable. Simple.

    1. Marshall Auerback says

      Steve b , we’ve been around this block a bunch of times, but you clearly
      haven’t been paying attention along the way. It’s clear you clearly have no
      understanding of basic accounting identities. Doing what you suggest means
      you’ll get the pain and you’ll still have the debt short of some major debt
      repudiation, restructuring. I’m not even clear what you’re advocating.
      Straight liquidation? That worked really well in the 1930s, didn’t it.
      You have no argument that makes any sense as a point of simple monetary
      operations, but simply advocate this notion that “pain is unavoidable”. That’s
      not an argument. That’s a cult-like assertion. But simply asserting
      something doesn’t make it true.

      In a message dated 6/6/2010 12:41:24 P.M. Mountain Daylight Time,
      writes:

      1. Stevie b. says

        Marshall – I’m not a ruddy economist (thank god). It’s not MY understanding or lack of it that I’m talking about. It’s the way things are perceived in the real world of ordinary mortals as reflected by their politicians. For example, see the drift of the recent G20 meeting as described by George Osborne.

        1. Marshall Auerback says

          That’s fine. So because George Osborne is a complete idiot and because Angela Merkel is about to destroy what’s left of the euro zone, I’m not allowed to criticise the complete lack of coherence in their positions? Reality check, please. Their fractured fables do not even hold up under their own twisted, tortured logic. And yet, they persist, ideologically blindered to even matters of simple fact, like the current level of private market interest rates. The Cult. It’s the Cult of the Vampire Squid. Lord Turner’s Cult. Seriously – these deficit hysterrorist cultists have checked their capacity to reason consistently and coherently at the doors of their bloody temples to finanzkapital. You ought to view Lord Adair Turner’s speech at the inaugural INET conference in the Great Hall of King’s College at Cambridge a month or so back – it can be found on INET’s website, and the key passage is about 10-15 minutes in. The answer, my friend, is a four letter word: it’s a CULT, brainwashed to see only one financial imbalance as plausibly unsustainable, namely, everywhere and always, the fiscal balance. Read Ric Mishkin’s 2006 report on Iceland, and scour it for mention of any other financial imbalances than the fiscal imbalances. You’ll find little recognition of the reality of Iceland’s situation pre-crisis, yet Mishkin is no dope. Pointing out this stuff does not make me a fantasist.

          1. Stevie b. says

            Marshall – I love reading what you say and the effort you put into it – just because George, Angela & even the irrelevant I don’t “get it” (yet) does not of course mean you’re either fantasizing or wrong. Please keep banging on by all means! Maybe those in power will listen – unfortunately when it’s too late perhaps.

            At the risk of sounding stupid, the problem as i naively see it is that if your theory/rationale doesn’t work within a certain indeterminate time-scale, instead of 20% unemployment v 80% employed under an alternative scenario, we could conceivably end-up the other way round, and those retirees on a fixed income could end-up penniless. In this regard, your suggestion of a tax on interest income to sort things out would be a massive, unwarranted kick in the( false) teeth of those who had prudently saved for their retirement.

            At the risk of sounding stupid, the problem as i naively see it is that if your theory/rationale doesn’t work within a certain indeterminate time-scale, instead of 20% unemployment v 80% employed under an alternative scenario, we could conceivably end-up the other way round, and those retirees on a fixed income could end-up penni/centless.

          2. Marshall Auerback says

            I think if we continue along the road suggested by the G20 over this past
            weekend, we shall almost certainly get 80% unemployed and 20% gainfully
            employed. That’s my greatest fear right now. Those in power will listen when
            there’s blood in the streets. Poke an injured tiger enough times with a
            stick and see what happens.

            In a message dated 6/7/2010 1:26:46 A.M. Mountain Daylight Time,
            writes:

            Stevie b. (unregistered) wrote, in response to Marshall Auerback:

            Marshall – I love reading what you say and the effort you put into it –
            just because George, Angela & even the irrelevant I don’t “get it” (yet) does
            not of course mean you’re either fantasizing or wrong. Please keep banging
            on by all means! Maybe those in power will listen – unfortunately when
            it’s too late perhaps.

            At the risk of sounding stupid, the problem as i naively see it is that if
            your theory/rationale doesn’t work within a certain indeterminate
            time-scale, instead of 20% unemployment v 80% employed under an alternative
            scenario, we could conceivably end-up the other way round, and those retirees on a
            fixed income could end-up penniless. In this regard, your suggestion of a
            tax on interest income to sort things out would be a massive, unwarranted
            kick in the( false) teeth of those who had prudently saved for their
            retirement.

            At the risk of sounding stupid, the problem as i naively see it is that if
            your theory/rationale doesn’t work within a certain indeterminate
            time-scale, instead of 20% unemployment v 80% employed under an alternative
            scenario, we could conceivably end-up the other way round, and those retirees on a
            fixed income could end-up penni/centless.

            Link to comment:
            https://pro.creditwritedowns.com/2010/06/edward-chancellor-on-the-paradox-of-public-thrift-and-other-links.html#comment-55089925

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    2. Marshall Auerback says

      Let’s take this paradox of public thrift and use a very basic example to
      show that it does work. Mary who usually eats a hamburger at Macdonald’s
      every day. She decides to forego one hamburger per week, to accumulate
      savings. Of course, so long as she sticks to her plan, she will add to her savings
      (and financial wealth) every week.
      The question is this: what if everyone did the same thing as Mary—would
      the reduction of the consumption of hamburgers raise aggregate (national)
      saving (and financial wealth)?
      The answer is that it will not. Why not? Because Macdonald’s will not sell
      as many hamburgers, it will begin to lay-off workers and reduce its orders
      for bread, meat, catsup, pickles, and so on.
      All those workers who lose their jobs will have lower incomes, and will
      have to reduce their own saving. You can use the notion of the multiplier to
      show that this process comes to a stop when the lower saving by all those
      who lost their jobs equals the higher saving of all those who cut their
      hamburger consumption. At the aggregate level, there is no accumulation of
      savings (financial wealth).
      Of course that is a simple and even silly example. But the underlying
      explanation is that when we look at the individual’s increase of saving, we can
      safely ignore any macro effects because they are so small that they have
      only an infinitely small impact on the economy as a whole.
      But if everyone tries to increase saving, we cannot ignore the effects of
      lower spending on the economy as a whole. That is the point that has to be
      driven home. We could do what Ireland has tried to do, but I don’t see
      that making things better. That’s sheer idiocy. (And Ireladn, by the way,
      shows what happens when nations set themselves up just as revenue dependent
      as the US States, but with no US Treasury to run the deficits for them.)

      In a message dated 6/6/2010 12:41:24 P.M. Mountain Daylight Time,
      writes:

      1. Eludog says

        Marshall, excuse my ignorance as I have only recently followed this site, but it seems you believe there is little good that comes from austerity at this point. Ireland is your proof, and it is obvious their plan has not worked. So do you simply believe we spend and spend some more to get ourselves out of the current malaise or is debt restructuring and defaults a necessity? I don’t think there is another option. Thx for any response.

        1. Marshall Auerback says

          Eludog,

          You want other examples? Try every single country that has drunk the IMF’s economic poison over the past 30 years. The deployment of fiscal austerity during the Asian financial crisis in 1997/98 greatly exacerbated these countries’ respective downturns. I know because I was advising the Malaysian gov’t in 1998 against the insane policies being foisted on them like the IMF.

          It was only when countries like Malaysia, Thailand, Korea, etc., reflated that they managed to grow and break the deflation.
          Same thing with Argentina on 2001.

          By contrast, look at what is happening to countries like Latvia and Estonia. They are taking their pain and cutting gov’t spending aggressively, as all of the Austrian enthusiasts recommend. Result? 22.5% unemployment in Estonia and 20% unemployment in Latvia. Oh, but Estonia;s government budget deficit is a mere 1.7% of GDP so they must be doing a great job.

          See how that will work in the euro zone or the US.

          1. Eludog says

            I don’t disagree that austerity is a slow death. I hope most people realize that. You believe in reinflating an economy which makes sense. I think most of think controlled inflation is the key. But how does a country reinflate its economy without letting it get out of control? How do governments prop up the private sector to stoke inflation without igniting very high inflation rates? I think 15% inflation for a few years would be great for the developed world, but I’m not clear on how governments would go about executing this.

          2. Marshall Auerback says

            Tell me how you get the inflation? The inflation would be from too much aggregate demand and a too small output gap. Do you think we have that today anywhere in the world? That would mean that fateful day would be an economy with maybe 4% unemployment and 90%+ capacity utilization and an overheating economy in general. Sounds like that’s the goal of deficit spending to me- so in fact, by implication you are saying deficit spending works when you express these concerns on inflation And if we do need to raise taxes to cool things down some day, we can start with a tax on interest income if we want to cut payments to bond holders. Regarding the supposed default alternative to inflation, in the full employment and high capacity utilization scenario that might call for a tax increase to cool it down, I don’t see how default fits in or why it would even be considered. In fact, with our countercyclical tax structure, strong growth that follows deficits automatically drives down the deficit, and can even drive it into surplus, as happened in the 1990’s. In that case one must be quick to reverse the growth constraining surplus should the economy fall apart as happened shortly after y2k. Unfortunately Treasury Secretary Geithner, a slave to conventional economic wisdom, and the rest of the G20 are acting out the deficit hawk position, acting as if they do indeed believe the US has run out of money, is dependent on its creditors, and could be the next Greece. They speak as if they have no idea that the euro nations operate within a unique institutional structure that puts them in a ‘revenue constrained’ financial position similar to the US States, but with nothing equivalent to the US Treasury to run the countercyclical deficits for them. They speak as if they have no idea that the US, UK, Japan, and others with ‘normal’ central governments taxes function to regulate aggregate demand, and not to raise revenue per se. They act as if they don’t realize they can immediately make the fiscal adjustments- cut taxes and/or increase government spending- that will restore aggregate demand, employment, and output. The results of allowing a universal lack of aggregate demand to persist are already tragic, and if policy continues along the line of this weekend’s G20 results no relief is in sight, and it could all get a whole lot worse.

        2. Marshall Auerback says

          It’s very simple: in any accounting period, total income in an economy must equal total outlays, and total saving out of income flows must equal total investment expenditures on tangible assets. The financial balance of any sector in the economy is simply income minus outlays, or its equivalent, saving minus investment. A sector may net save or run a financial surplus by spending less than it earns, or it may net deficit spend as it runs a financing deficit by earning less than it spends.Furthermore, a net saving sector can cover its own outlays and accumulate financial liabilities issued by other sectors, while a deficit spending sector requires external financing to complete its spending plans. At the end of any accounting period, the sum of the sectoral financial balances must net to zero. Sectors in the economy that are net issuing new financial liabilities are matched by sectors willingly owning new financial assets. In macro, fortunately, it all has to add up. This is not only true of the income and expenditure sides of the equation, but also the financing side, which is rarely well integrated into macro analysis.We can next divide the economy into three major sectors: the domestic private sector (including households and businesses), the government sector, and the foreign sector and ask a simple question relevant to current developments. What happens if the domestic private sector tries to net save, with no attending change in the government or foreign sector financial balances?If households attempt to net save by spending less than they are earning, and businesses attempt to net save (reinvesting less than their retained earnings), then nominal incomes and real output will be likely to fall. Money incomes and economic activity will tend to contract until private savings preferences are reduced (with essential goods and services taking up a larger share of household income as incomes fall), or until depreciation leaves businesses and households inclined to invest once again in durable assets. Common sense suggests that a drop in private income flows while private debt loads are high is an invitation to debt defaults and widespread insolvencies – that is, unless creditors are generously willing to renegotiate existing debt contracts en masse.In other words, such a configuration is an invitation to Irving Fisher’s cumulative debt deflation spiral which I’ve discussed before. So unless some other sector is willing to reduce its net saving (as with the foreign sector recently, via a reduction in the US current account deficit as US imports have fallen faster than US exports) or increase its deficit spending (as with the federal budget balance of late) then the mere attempt by the domestic private sector to net save out of income flows, given the existing private debt overhang, can prove very disruptive.

      2. Stevie b. says

        Marshall – so because hamburgers were over-consumed means they have to continue to be overconsumed regardless of whether the previous overconsumption was excessive or not? Heaven forfend we should redeploy hamburger workers into something more productive, even if it takes longer than you would like. I remember the miners strikes here in the UK in the ’80s. A generation suffered as a consequence of previous excesses which could no longer be allowed to continue. But unfortunately that’s what happens with excess.

        And re Ireland – what do you think of Volker’s comments?
        http://www.nybooks.com/articles/archives/2010/jun/24/time-we-have-growing-short/?page=2

        Finally, I keep reading about spending more/printing more/borrowing more, all for a bit more until the recovery is more assured. Despite all your tireless and appreciated efforts, I just cannot, I cannot get my head round the fact that if the recovery does not become more assured by 2011/2012/2013 or whenever, we just blithely keep going ad nauseam til it does. I just can’t believe the world will simply lie back and think of America and take it all without meaningful negative consequences, especially for example for those on fixed incomes whose fortunes seem of little concern to you during the (potentially prolonged) period you lust after full employment of any sort regardless of the cost.

        1. Marshall Auerback says

          Don’t take the analogy so literally, Stevie. You don’t seem to grasp that the concept applies to anything, productive or otherwise.

          1. Stevie b. says
          2. Stevie b. says

            Marshall – still keen to know if you can see flaws in the rationale for the chart above. If it’s sound, aren’t we shafted big-time – even if we try extra stimulus?

          3. Marshall Auerback says

            I can’t see the chart, so can’t comment, but if you send me the link,
            perhaps I’ll have a better idea.

            In a message dated 6/7/2010 11:59:34 A.M. Mountain Daylight Time,
            writes:

            Marshall – still keen to know if you can see flaws in the rationale for
            the chart above. If it’s sound, aren’t we shafted big-time – even if we try
            extra stimulus?

          4. Stevie b. says

            Marshall – thanks – sent links – one’s a pdf and takes a while to load.

          5. Flimflamman says

            Well, my name is Ed, but not ‘the’ Ed. I’m responding anyway.

            Assuming the chart is accurate, it is in any case useless since – for one thing – it tells us nothing about the target[s] of the deficit spending. All spending is not equal, so, for example, direct support of employment through a Job Guarantee would have been far more effective in supporting the economy than the bailouts of failed financial institutions.

            The paper makes all the usual errors found in mainstream economics, not least the failure to differentiate between sovereign and non-sovereign nations. Useless again.

            Ed (not that one)

          6. Marshall Auerback says

            Agreed, even if you are not that “Ed”.

          7. Stevie b. says

            Ed (not that one) – thanks – interesting point. I had asked the following when I sent the link to the chart to Marshall:

            “I just wonder – and I’m mathematically challenged – that adjusted and to account for inflation over the period, wouldn’t we actually now need say 7 times as many borrowed $$ for the same growth effect of 1 extra borrowed $ from 50 years ago? So could the whole thing be much less meaningful than it appears…unless of course i’m missing something?”

            Marshall’s response was that I wasn’t missing anything, so unless someone knows better, I defer to his opinion (a bit reluctantly cos it seemed such a simple graphic illustration of where it was all going pear-shaped)

          8. Marshall Auerback says

            No, my response was that you weren’t missing anything if you assumed a
            government budget constraint, which clearly applies in the case of Greece but
            not the US.

            In a message dated 6/7/2010 3:46:02 P.M. Mountain Daylight Time,
            writes:

            Stevie b. (unregistered) wrote, in response to Stevie b. (unregistered)

            Ed (not that one) – thanks – interesting point. I had asked the following
            when I sent the link to the chart to Marshall:

            “I just wonder – and I’m mathematically challenged – that adjusted and to
            account for inflation over the period, wouldn’t we actually now need say 7
            times as many borrowed $$ for the same growth effect of 1 extra borrowed $
            from 50 years ago? So could the whole thing be much less meaningful than it
            appears…unless of course i’m missing something?”

            Marshall’s response was that I wasn’t missing anything, so unless someone
            knows better, I defer to his opinion (a bit reluctantly cos it seemed such
            a simple graphic illustration of where it was all going pear-shaped)

            Link to comment:
            https://pro.creditwritedowns.com/2010/06/edward-chancellor-on-the-paradox-of-public-thrift-and-other-links.html#comment-55182020

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          9. Bob_in_MA says

            Marshall,

            I understand your argument, but like so many arguments of mainstream economists, it seems to apply to flows and ignore levels.

            It seems to presuppose that no aggregate–household, business and public– level of debt is unsustainable. So whatever the level of debt was at the start of the adjustment/crisis is reasonable and serviceable.

            For instance, say a $Trillion in mortgages is already gone because the borrowers couldn’t service the debt. That debt has now been replaced by public debt that will need to be serviced.

            But certainly there is some aggregate level of debt that is unsustainable, and it seems pretty obvious we are near that point. At that point, it may be necessary for the house of cards to come down.

            A real test for me would be to know how many 30-year Treasury bonds Paul Krugman is buying? He’s correct that demand is keeping rates low and they may even go lower. But at some point, the people holding 30-year Treasuries are going to have their a$$es handed to them.

          10. Marshall Auerback says

            You lost me with your first sentence. Flows are all that matter. You don’t speak about a “stock” of GDP, so how you can speak of a “stock” of debt? It’s comparing apples with oranges. When a speaker claims that government budget deficits are unsustainable, that government must eventually pay back all that debt, ask him or her why the US government has managed to avoid retiring debt since 1837—is 173 years long enough to establish a “sustainable” pattern? Perhaps we might can go on another 173 years or so without the government going “bankrupt” even though it will run deficits in most years.

          11. Bob_in_MA says

            Well, you just made my point. Thanks.

            Your argument amounts to, we’ve never had to retire debt, ergo, we never will. That seems a little facile, if not downright fatuous.

            Your position is if debt levels were 500%, 1000%, or 10000% of GDP, it isn’t important. History shows your position is nonsense.

          12. Marshall Auerback says

            Not really. You missed my point. You are using a household analogy, which is inapplicable for a sovereign government issuing debt in its own currency. The debt level per se doesn’t matter. What matters is the economic context.

            You made a broad sweeping statement, which is not factually correct. You miss the key insight is that if a government issues a currency that is not backed by any metal or pegged to another currency, then there is no reason why it should be constrained in its ability to “finance” its spending by issuing currency. While it is commonly believed that continual budget deficits will bankrupt the nation, in reality, those budget deficits are the only way that our private sector can save and accumulate net financial wealth. Budget deficits represent private sector savings. Or another way of putting it: every time the government runs a deficit and issues a bond, adding to the financial wealth of the private sector. (Technically, the sum of the private sector surpluses equal the sum of the government sector deficits, which equals the outstanding government debt—so long as the foreign sector is balanced.)

            Of course, the opposite would also be true. Assume we have a balanced foreign sector and that the government runs a surplus—meaning its tax revenues are greater than government spending. By identity this means the private sector is spending more than its income, in other words, it is deficit spending. The deficit spending means it is going into debt, and at the aggregate level it is reducing its net financial wealth. At the same time, the government budget surplus means the government is reducing its debt. Effectively what happens is that the private sector returns government bonds to the government for retirement—the reduction of private sector wealth equals the government reduction of debt.

            Go back to the Clinton years when the federal government was running the biggest budget surpluses the government has ever run. Everyone thought this was great because it meant that the government’s outstanding debt was being reduced. Clinton even went on TV and predicted that the budget surpluses would last for at least 15 years and that every dollar of government debt would be retired. Everyone celebrated this accomplishment, and claimed the budget surplus was great for the economy.

            In the middle of 2001, I made several arguments against this. First, I pointed out that the budget surplus meant by identity that the private sector was running a deficit. Households and firms were going ever farther into debt, and they were losing their net wealth of government bonds. That was true. Second, I argued that this would eventually cause a recession because the private sector would become too indebted and thus would cut back spending. In fact, the economy went into recession within half a year. Third, I argued that the budget surpluses would not last 15 years, as Clinton claimed. Indeed, I expected they would not last more than a couple of years. In fact, the budget turned around to large and growing deficits almost immediately as soon as the economy went into recession. And of course we still have large budget deficits. No one talks any more about achieving budget surpluses this decade; almost everyone agrees that we will not see budget surpluses again in our lifetimes—if ever.

            The question is whether the US government can run deficits forever. The answer is emphatically “yes”, although there might be times when it chooses for reasons of inflation not to do so. If you look back to 1776, the federal budget has run a continuous deficit except for 7 short periods. The first 6 of those were followed by depressions—the last time was in 1929 which was followed by the Great Depression. The one exception was the Clinton budget surplus, which was followed (so far) only by a recession. Why is that? By identity, budget surpluses suck income and wealth out of the private sector. This causes private spending to fall, leading to downsizing and unemployment. The only way around that is to run a trade or current account surplus. The problem is that it is hard to see how the US can do that—in fact, our current account deficit is now rising toward 7% of GDP. All things equal, that means our budget deficit has to be even larger to allow our private sector to save. Given our current account balance, the budget deficit would have to reach 9% of GDP to allow our private sector to have a surplus of 2% of GDP.

            I don’t want to give the impression that government deficits are always good, or that the bigger the deficit, the better. The point I am making is that we have to recognize the macro relations among the sectors. If we say that a government deficit is burdening our future children with debt, we are ignoring the fact that this is offset by their saving and accumulation of financial wealth in the form of government debt. It is hard to see why households would be better off if they did not have that wealth. If we say that the government can run budget surpluses for 15 years, what we are ignoring is that this means the private sector will have to run deficits for 15 years—going into debt that totals trillions of dollars in order to allow the government to retire its debt.

            Again it is hard to see why households would be better off if they owed more debt, just so that the government would owe them less. There are other differences between the federal government and an individual household.

            The government is the issuer of our currency, while households are users of the currency. That makes a big difference, and one explored in many other CFEPS publications. However, the purpose of this particular note is to explain why we cannot aggregate up from the individual household situation to the economy as a whole. The US government’s situation is not in any way similar to that of a household because its deficit spending is exactly offset by private sector surpluses; its debt creates equivalent net financial wealth for the private sector. If you still think I am making your point, this you aren’t understanding the argument.

  2. Edward Harrison says

    People like me were writing anti-deficit hawk posts in November 2008 saying:

    “Recently, deficit hawks have been pushing a nefarious line of argument that I need to debunk right here and right now. The line goes as follows: we need to spend government monies now to get the economy back on its feet. In a couple of years, we can signal all clear and then raise taxes on the middle class in order to reduce the deficit again, much as we did in 1993.”
    https://pro.creditwritedowns.com/2008/11/beware-of-deficit-hawks.html

    Yet, no one has listened. The deficit hawks gained sway. And now the inevitable retrenchment and depression will occur. I have long felt there was a certain inevitability to it. At a minimum, we do see people like Chancellor and Martin Wolf who understand the folly. But, there is no way now to stop this train wreck. It’s going to happen.

    The REASON in my opinion is Barack Obama and Tim Geithner. They effectively demonstrated that crony capitalism was too entrenched to trust the government to apply effective stimulus. They have discredited stimulus as a policy tool. And even tax cuts and deficit spending are now seen as irresponsible because of their efforts. They gifted the financial services industry billions and are still bailing them out via Fannie and Freddie. Afterwards, they went on the Healthcare boondoggle which is rightfully seen as a giveaway to the healthcare insurance companies resulting from secret closed door agreements with the Obama Administration. It stinks to high heaven and Americans are willing to go with fiscal austerity if only to stop this predatory transfer of wealth.

    You have to understand the psychology: people are outraged, angry that they live in a world of hurt while others in favored status are making millions purely because the government bailed them out on our dime. People are willing to cut off their right arm, undergo austerity, endure depression if it means levelling the playing field.

    I think people like Stevie B. get it that austerity means Depression as Marshall has often argued.

    But what is the choice politically speaking? The outrage is palpable. What if instead of bailouts and handouts we saw jobs programs and nationalization of bankrupt lenders? Don’t you think people would believe stimulus was about helping out households? How about this: what if interest rates were 3% instead of 0.25%, don’t you think people would feel that savings was rewarded and that the purpose of stimulus was to repair household balance sheets?

    This is how I see it:

    https://pro.creditwritedowns.com/2009/11/barack-obama-if-we-keep-on-adding-to-the-debt-that-could-actually-lead-to-a-double-dip.html

    The only question we have to ask ourselves is whether we want to reduce debt by:

    The Liquidation Scenario. decreasing aggregate demand and precipitating a major depression in order to liquidate zombie companies and malinvestment. This would cause a massive wave of defaults and decrease debt burdens significantly through bankruptcy and debt repudiation. or;

    The Glide Path Solution. increasing aggregate demand by maintaining government spending while trying to liquidate zombie companies and malinvestment. This would allow the private sector to decrease debt burdens significantly over time through increased savings. It also has the benefit of reducing dependency on foreign sources of capital. The downside is a major increase in government debt, the spectre of big government and a long muddle through.

    As I have said previously, the Obama Administration is doing neither of the above. It has opted for a third Herbert Hoover solution:

    The Hoover Status Quo. decreasing aggregate demand and precipitating a double dip recession in order to reduce government deficits. This would cause a wave of defaults and decrease debt burdens through bankruptcy and debt repudiation. Meanwhile they will try to prop up zombie companies and maintain malinvestment. This would simultaneously prevent the private sector from decreasing debt burdens through increased savings and maintain dependency on foreign sources of capital – all without ending the spectre of big government.

    I have advocated the glide path solution. But I see the liquidation scenario as much better than the present path – especially since, with the present course, we are witnessing crony capitalism on a massive scale. The problem with the liquidation scenario is a lower standard of living and the prospect of geopolitical tension, social unrest, poverty, and war.

    The Herbert Hoover solution we are now using leads to a Japanese outcome at best or a Great Depression outcome at worst.

    Obama is going to follow Hoover by having promoted bailouts and a misallocation of investment into the bloated FIRE sector while allowing massive unemployment because of an apprehension that a jobs program would be socialism when we see as plain as day that the private sector won’t hire.

    With the G-20, now onboard with austerity around the globe, GDII is coming. I am now pretty well convinced of this. I will be writing a post to outline this soon.

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