rushmc 23
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ShcShc11 0
QuoteThat's a bogus argument, pushed by economists who have their head in a place that doesn't provide sufficient vitamin D (e.g. Krugman).
How's this working out for Greece, and the rest of the PIGs?
The fallacy of the argument is it's used to justify short term actions without fully considering the consequences in the long term. As long as there is private capital in the world, debt will be debt, period. Once private investors see governments thinking they can somehow short change their obligations, the cost of capital will increase for that government. If we ever get to the point where we no longer have private capital, then bonds simply become pieces of paper, and the system will collapse.
Your argument about "debt will be debt" because other investors will raise the interest rate is self-defeating.
The U.S, in spite of all the quantitive easing, is still considered one of THE most safest place to park your money.
http://www.bloomberg.com/apps/quote?ticker=USGG10YR:IND
That is the 10 years Bloomberg at an absolute historic low.
You seem to have a very narrow understanding of debt when you try to compare U.S situations with Greece rather than Japan 1990 lost decade or the U.S 1930 crisis(es).
The PIGS in fact shows that when you don't own your own currency (i.e: unable to print your money), the Government has little to no flexibility over its debts while Americans do have control of their currency.
anyway, see for yourself:
http://www.bloomberg.com/apps/quote?ticker=USGGT10Y:IND
-0.025 Negative Interest Rate.
The U.S is far from bankruptcy. What matters now is the sluggish economy and they need to get the American economic engine running again.
They can borrow money with little to no repercussions while the additional money will help the U.S get out of its liquidity trap.
Just needed to bury this notion that the "U.S have no money left to borrow/ America is bankrupted / we must cut deficit NOW!".
ShcShc11 0
QuoteQuote
Because by comparing the 2008-2009 crisis as being any similar to previous recession shows a lack of understanding what truly happened.
I'm curious. Being from Canada, what do you think happened?
Where do you want me to start?
I guess we can start with a small summary about the banking situation.
Consider this, from an article titled “Liquidity Crises – Understanding sources and limiting consequences: A theoretical framework,” by Robert E. Lucas, Jr. and Nancy L. Stokey:
In studies conducted by Nancy Stokey and Robert Lucas, the WHOLE banking system held approximately 50 billion $ in cash by August 2008. The banking system was clearing about 2.9 to 3 trillion $ PER DAY. This wouldn’t be so bad if the contracts said “We’l pay IF we have money”. No, most of the trades involved the promise to pay somebody in hard cash based on the contracts given. Banks would therefore have to rely heavily on the repo market to pay them back in these hard cash. If a certain bank or financial institution cannot pay back and this becomes public information, then the bank will go under through a bank run. Having 50 B$ for 3 trillion $, there is no margin for error.
Even the slightest doubt in the quality of the collaterals traded in the repo market could break the system. Guess what? 2008 was it.
SOME GRAPHS/NUMBERS
GRAPH 1
http://av.r.ftdata.co.uk/files/2011/12/NomuraChart1.png
GRAPH 2
http://av.r.ftdata.co.uk/files/2011/12/NomuraChart2.png
The basic summary:
Having basic good capital wasn't the sole problem behind the 2008 crisis. Lehman and Bear Stearns fell because brokers who had the power over their short-term financing started to worry about the collateral that was promised to them.
When confidence over the banks went poof, then financial institutions as old as Lehman will fall easily.
If the whole financial institution is put in doubt then all the large banks will become exposed to bank runs.
Point is, when confidence fell out of flavour, the Obama administration took the major steps necessary to restore this confidence. The Government was the back-stop in the relation. This is debt that is being used for good use. What do you think is going to happen if the Government said "no, we'l step back and cut our way out of this"?
The Government realized this situation and took the appropriate steps with TARP/Stimulus. This is what economists mean when they say the administration stopped the economy from a freefall. Its not big enough to bring unemployment to 4%, but it is big enough to have it stabilized in the 9-11%.
anyway...
cheers again.
ShcShc11 0
QuoteQuote
Debt isin't the same as your household / company debt.
That's a bogus argument, pushed by economists who have their head in a place that doesn't provide sufficient vitamin D (e.g. Krugman).
How's this working out for Greece, and the rest of the PIGs?
The fallacy of the argument is it's used to justify short term actions without fully considering the consequences in the long term. As long as there is private capital in the world, debt will be debt, period. Once private investors see governments thinking they can somehow short change their obligations, the cost of capital will increase for that government. If we ever get to the point where we no longer have private capital, then bonds simply become pieces of paper, and the system will collapse.Quote
Deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit.
And how did we get here? By governments spending too much in the first place, for a very long time. Now, they're between a rock and a hard place. The only solution is to reduce the size of government. Is it going to be painful? Yes it is. Western democratic governments cannot continue spending more than they have.
Since you mentioned about Europe, let's look at how expansionary austerity worked for our good friends in the U.k
More on the Euro (its a very fascinating subject to mention since its very current-event):
See Italian 10 years bond:
http://www.bloomberg.com/quote/GBTPGR10:IND
Italy's economy is sustainable yet it is constantly attacked by the market. Same principles with the banks. If it is believed that they will fail, then they will fail.
Right now, ALL european nations are under austerity (aka cut cut cut spending) and even the most optimistic economists are forecasting a European recession. The more they try to balance the budget through "budget cuts", the more they'l end up missing growth target and have the very possibility of getting into a catastrophic deflation.
This will be a lesson to the U.S too who are also looking to "cut and slash" their budget in the name of expansionary austerity.
I'l try to find graphs again in regards to Cameron's cut & slash methods and what that did to overall U.K business confidence (hint: It does not look good).
http://www.bloomberg.com/news/2011-03-27/u-k-business-confidence-index-falls-to-lowest-in-two-years.html
"U.K. business confidence declined in March to the lowest in two years, suggesting the economy may struggle to gather strength in the second quarter.
A gauge of sentiment, which aims to predict economic developments four months in advance, fell to 1 from 3 in February, London-based Lloyds Banking Group Plc (LLOY) said in an e- mailed statement today. The share of companies that were less optimistic about economic prospects increased to 44 percent from 36 percent in the previous month."
http://www.aei.org/404
AEI paper on austerity:
"there is a great deal more controversy concerning the impact of successful consolidation on GDP growth. Although empirical studies have found many consolidations coupled with expansion, the degree to which consolidation drives rather than merely accompanies expansion is disputed. Various mechanisms have been proposed through which consolidation may spur growth, including credibility effects on interest rates and the effects outlined under the expectational view. However, the literature has identified endogeneity issues in many of these studies that may cause them to overstate expansionary effects."
Cheers
Shc
ShcShc11 0
QuoteQuote
Debt isin't the same as your household / company debt.
That's a bogus argument, pushed by economists who have their head in a place that doesn't provide sufficient vitamin D (e.g. Krugman).
How's this working out for Greece, and the rest of the PIGs?
The fallacy of the argument is it's used to justify short term actions without fully considering the consequences in the long term. As long as there is private capital in the world, debt will be debt, period. Once private investors see governments thinking they can somehow short change their obligations, the cost of capital will increase for that government. If we ever get to the point where we no longer have private capital, then bonds simply become pieces of paper, and the system will collapse.Quote
Deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit.
And how did we get here? By governments spending too much in the first place, for a very long time. Now, they're between a rock and a hard place. The only solution is to reduce the size of government. Is it going to be painful? Yes it is. Western democratic governments cannot continue spending more than they have.
IMF's recent analysis:
As Carlo Cottarelli and Laura Jaramillo of the IMF note in a related analysis, this is surprising. In theory, investors should see long-term growth as most important for solvency. The fact that instead they are focused so much on short term growth has troubling implications. Tighter fiscal policy, by hurting the near term growth outlook, could actually lead to wider, rather than narrower, spreads. They note:
The fact that markets are focusing in 2011 on short-term growth developments may reflect strong risk aversion after four years of market turmoil. The unpleasant implication of this short-termism is that a tightening of fiscal policy may raise rather than reduce spreads if it is accompanied by a decline of GDP (with respect to the baseline). Indeed, the estimated coefficients imply that this would happen for a fiscal multiplier higher than 1.2-1.3 (in this case the primary balance would improve, but the debt to GDP ratio and the CDS spreads would increase).
Got that? Cut the deficit too aggressively, and the negative impact on growth and the rise in the cost of debt service from higher spreads could result in a higher, not lower, debt-to-GDP ratio.
[B] http://www.imf.org/external/np/speeches/2011/111811.htm#P62_19593
Cheers
Shc
ShcShc11 0
QuoteQuoteQuote
Debt isin't the same as your household / company debt.
That's a bogus argument, pushed by economists who have their head in a place that doesn't provide sufficient vitamin D (e.g. Krugman).
How's this working out for Greece, and the rest of the PIGs?
The fallacy of the argument is it's used to justify short term actions without fully considering the consequences in the long term. As long as there is private capital in the world, debt will be debt, period. Once private investors see governments thinking they can somehow short change their obligations, the cost of capital will increase for that government. If we ever get to the point where we no longer have private capital, then bonds simply become pieces of paper, and the system will collapse.Quote
Deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit.
And how did we get here? By governments spending too much in the first place, for a very long time. Now, they're between a rock and a hard place. The only solution is to reduce the size of government. Is it going to be painful? Yes it is. Western democratic governments cannot continue spending more than they have.
IMF's recent analysis:
As Carlo Cottarelli and Laura Jaramillo of the IMF note in a related analysis, this is surprising. In theory, investors should see long-term growth as most important for solvency. The fact that instead they are focused so much on short term growth has troubling implications. Tighter fiscal policy, by hurting the near term growth outlook, could actually lead to wider, rather than narrower, spreads. They note:
The fact that markets are focusing in 2011 on short-term growth developments may reflect strong risk aversion after four years of market turmoil. The unpleasant implication of this short-termism is that a tightening of fiscal policy may raise rather than reduce spreads if it is accompanied by a decline of GDP (with respect to the baseline). Indeed, the estimated coefficients imply that this would happen for a fiscal multiplier higher than 1.2-1.3 (in this case the primary balance would improve, but the debt to GDP ratio and the CDS spreads would increase).
Got that? Cut the deficit too aggressively, and the negative impact on growth and the rise in the cost of debt service from higher spreads could result in a higher, not lower, debt-to-GDP ratio.
[B] http://www.imf.org/external/np/speeches/2011/111811.htm#P62_19593
Cheers
Shc
S&P's comments over Merkozy's expansionary austerity and how is that going for Europe?
http://www.forbes.com/sites/steveschaefer/2012/01/13/sp-downgrades-france-to-aa-maintains-negative-outlook/
"S&P said the outcome of the Dec. 9 EU summit, and subsequent statements “lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone’s financial problems.”
Even worse, S&P said, European leaders are still partially in denial of the the real cause of the crisis, focusing on “fiscal profligacy at the periphery of the eurozone,” rather than the consequences of “rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called ‘periphery.’” Reform based chiefly on fiscal austerity, which comprises the bulk of Europe’s response to date, “risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.”
France was not the only eurozone country to feel S&P’s ax Friday. Austria was cut to AA+ from AAA; Cyprus to BB+ from BBB; Italy to BBB+ from A; Malta to A- from A; Portugal to BB from BBB-; the Slovak Republic to A from A+; Slovenia to A+ from AA-; and Spain to A from AA-. S&P left the AAA ratings of Germany, Finland, Luxembourg and the Netherlands unchanged. Unlike its view on most of the region, S&P has a stable outlook on Germany’s credit rating"
For some reason, people keep on demanding for expansionary austerity when it had and still is a very counter-productive thing to do. What makes you think it will work in the U.S?
Cheers
ShcShc11 0
QuoteQuoteQuote
Debt isin't the same as your household / company debt.
That's a bogus argument, pushed by economists who have their head in a place that doesn't provide sufficient vitamin D (e.g. Krugman).
How's this working out for Greece, and the rest of the PIGs?
The fallacy of the argument is it's used to justify short term actions without fully considering the consequences in the long term. As long as there is private capital in the world, debt will be debt, period. Once private investors see governments thinking they can somehow short change their obligations, the cost of capital will increase for that government. If we ever get to the point where we no longer have private capital, then bonds simply become pieces of paper, and the system will collapse.Quote
Deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit.
And how did we get here? By governments spending too much in the first place, for a very long time. Now, they're between a rock and a hard place. The only solution is to reduce the size of government. Is it going to be painful? Yes it is. Western democratic governments cannot continue spending more than they have.
IMF's recent analysis:
As Carlo Cottarelli and Laura Jaramillo of the IMF note in a related analysis, this is surprising. In theory, investors should see long-term growth as most important for solvency. The fact that instead they are focused so much on short term growth has troubling implications. Tighter fiscal policy, by hurting the near term growth outlook, could actually lead to wider, rather than narrower, spreads. They note:
The fact that markets are focusing in 2011 on short-term growth developments may reflect strong risk aversion after four years of market turmoil. The unpleasant implication of this short-termism is that a tightening of fiscal policy may raise rather than reduce spreads if it is accompanied by a decline of GDP (with respect to the baseline). Indeed, the estimated coefficients imply that this would happen for a fiscal multiplier higher than 1.2-1.3 (in this case the primary balance would improve, but the debt to GDP ratio and the CDS spreads would increase).
Got that? Cut the deficit too aggressively, and the negative impact on growth and the rise in the cost of debt service from higher spreads could result in a higher, not lower, debt-to-GDP ratio.
[B] http://www.imf.org/external/np/speeches/2011/111811.htm#P62_19593
Cheers
Shc
Two good points brought by this article... about the U.K and the so called "debt is taking away from our children" mentality.
http://www.project-syndicate.org/commentary/skidelsky49/English
"deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010."
"the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had."
When the monetary policies taken by the central bank is near 0 and the economy is still slugging, then you must realize that we in a liquidity trap and that intervention is and must be needed.
Hopefully, these are a bit of the summaries of the CS and hopefully broadened your understanding of the debt and the economy.
Cheers
Shc
GeorgiaDon 379
While it would obviously be silly to claim that the only way to get out of debt is to go deeper into debt, there are many times when it makes good sense for a business to borrow to invest in infrastructure that improves productivity and profitability. As long as the return is greater than the cost of borrowing it makes sense. In fact I'd guess that just about every small business starts out with a loan, as few people would have the cash in hand to buy a building for the plant or store, fleet of trucks to deliver the goods, hire staff, etc.QuoteI continue to be amazed at people who claim that the only way to get ourselves out of debt is to go deeper into debt.
Here's a 2009 analysis that shows that every dollar the government spends on the National Institutes of Health to fund basic biomedical research and train researchers leverages $3.50 in spending by the pharmaceutical industry. This industry is one of the few where the US has a significant trade surplus. There are numerous other examples where government programs leverage significant private sector activity that otherwise wouldn't be feasible for logistic or economic reasons.
Two points in response to this:QuoteYet, these same people, who have such incredible "skill" at math, can't understand that decreasing tax rates will actually increase the size of the economy (i.e., the pie gets bigger), and thereby increase the tax revenues. They insist on viewing the size of the pie as fixed, independent of any actions the government may take.
In chemical engineering speak, this is an inverse response, and it's fairly common, so common that there's a well defined word for it.
First, where is the evidence that lowering tax rates increases economic activity? The economy was growing at a much faster rate at times in the past when tax rates were also significantly higher (such as during the Clinton administration). On the other hand, lowering tax rates has historically not led to increased employment or manufacturing activity. Maybe that's due to the structure of the tax code, where reductions are not paired with incentives to keep the savings in the US, so much of the money ends up going offshore? Anyway, although tax cuts for the already wealthy has risen to the level of dogma in Republican circles, it's inherently contradictory to the concept of supply and demand driving economic activity. Just putting more money into the end of the pipeline (profit to businesses due to lower costs) won't do anything to encourage growth if demand stays flat or shrinks, and stagnant or declining income to the middle and lower income classes (who make up the overwhelming majority of the consumer market) ensure that demand will stay flat.
Secondly, chemical engineers should know that even inverse responses only happen over a defined range of variables (such as concentrations of reactants) and conditions. There is always an optimum set of conditions where the reaction is most efficient. WRT to taxes, obviously if the government taxed at 100% there would be no private sector investment and eventually tax revenues would go to 0. Similarly, if the tax rate was 0%, revenues to the government would be 0. There must be a non-zero tax rate that optimizes revenues. The assumption that lowing tax rates will increase revenues assumes we are currently above that optimum rate, but there is no evidence for that being the case. We could just as well be below the optimum, so lowering rates will just lower revenues. Given what has happened following the Bush tax cuts, I think the evidence is that we are below the optimum now, and further cuts will just further ensure the government can't meet its obligations.
Obviously, those obligations will have to be re-examined and cut back quite a lot. Unfortunately what I see happening is that political pressure to preserve popular entitlement programs will direct the cuts to less visible programs that actually stimulate economic activity (such as NIH) and in the end we will be worse off. Blind faith (i.e. belief without evidence) that tax cuts will stimulate the economy also has potential for great harm. If welfare/social security/medicare is "bread and circuses" for the 99%, further cuts to capital gains tax rates (as one example) may well be "bread and circuses" for the 1%.
Don
_____________________________________
Tolerance is the cost we must pay for our adventure in liberty. (Dworkin, 1996)
“Education is not filling a bucket, but lighting a fire.” (Yeats)
Tolerance is the cost we must pay for our adventure in liberty. (Dworkin, 1996)
“Education is not filling a bucket, but lighting a fire.” (Yeats)
Andy9o8 2
QuoteWhat is "fairness?"
It's when someone else's ox is the one getting gored.
And increases in fed regulation
if we falter and lose our freedoms,
it will be because we destroyed ourselves."
Abraham Lincoln
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