This is from his column at Project Syndicate:

In the United States, the Congressional Budget Office estimates that the federal government debt doubled over the past decade, from 36% of GDP to 74% of GDP. It also predicts that, under favorable economic assumptions and with no new programs to increase spending or reduce revenue, the debt ratio ten years from now will be 86% of GDP.

The odd thing is: actual government debt to GDP for the US is 106% (source). So, if we go from 106% to 86% in ten years and the trend continues, then we’ll hit 6% in fifty years, which is 2066. How does that square with Feldstein’s first paragraph?

A major common problem that deserves their attention is the unsustainable increase in the major developed countries’ national debt. Failure to address the explosion of government borrowing will have adverse effects on the global economy and on debt-burdened countries themselves.

There is another odd scenario:

Even more worrying, the annual deficit ratio will double in the next decade to 4.9% of GDP, putting the debt on track to exceed 100% of GDP

I’m scratching my head here. Why will the deficit double? Are we still “under favorable economic assumptions”? Will 100+% still be lower than the 106% of today? This text needs further elaboration because as it stands numbers are pulled out like a rabbit from a hat. This spectacle leaves the reader wondering how scientific it is to claim to know where government debt to GDP ratios will be in 10, 20 or 30 years.

I completely disagree with the idea that there is too much government debt right now – there is not enough! After all, each US dollar of public debt is transformed into one US dollar of private net financial wealth, either in the form of treasury bonds (or bills or notes) or money. Government should spend to get rid of unemployment, and not cut spending in order to ‘stabilize public debt’.

Mixing euro zone countries with no sovereign currency with cases like the US and Japan is completely confusing. If you really want to understand government debt, you need to go through the balance sheets. I did the exercise for the euro zone, with my book coming out in September 2016. If the ECB keeps on buying euro zone government bonds on secondary markets, no euro zone government can go bankrupt. This is a political problem, not a technical one. In a modern monetary economy set up well, the risk of default on government bonds issued in domestic currency is zero.

Posted by: Dirk | May 12, 2016

NY Times and Bernie Sanders

I understand that in times of love, war and primaries truth doesn’t count much. Nevertheless, I am surprised to see a NY Times article containing paragraphs like these:

In the early decades of the 20th century, local governments across the country poured money and resources into an impressive expansion of secondary education. Between 1910 and 1940, the high school graduation rate of American 18-year-olds increased to 50 percent from 9 percent.

Finally, the government directly created jobs — whether in the burst of infrastructure investment in the 1930s that gave us the Hoover Dam, among other huge projects, or the tenfold increase in federal spending from 1939 to 1945 as the government built up the military-industrial complex to fight Germany and Japan.

Why American politics turned against this successful model of pragmatic policy-making remains controversial. Perhaps it was the increasing footprint of money in politics, which has given more clout to corporate interests lobbying for smaller government and lower taxes. Maybe desegregation led to increasing distrust in government by white voters. Perhaps it was the combination of a recession and high inflation of the 1970s, which discredited interventionist government policies.

The last sentence is a political myth, I think. Vietnam War and oil price shocks played no minor part in the stagflation episode, and both should not be blamed on interventionist government policies. Wage-price spirals might have played a bigger role, but there seems to be a lack of serious research on ‘The Strange Death of Keynesianism’.

The article ends with the sentences: ‘So what’s holding us back? The loss of a vision, once shared across much of the ideological spectrum, of what government can accomplish, when it is allowed to do its job.’

This is a sad end to a story that otherwise inspires hope. I wonder whether a vision that is shared across much of the ideological spectrum is necessary. The way that politics usually works, a simple majority will do. Given that many people prefer not to vote or are disenfranchised, that majority might not be that large in the end. And Sanders has a vision that comes quite close:

The American people must make a fundamental decision. Do we continue the 40-year decline of our middle class and the growing gap between the very rich and everyone else, or do we fight for a progressive economic agenda that creates jobs, raises wages, protects the environment and provides health care for all? Are we prepared to take on the enormous economic and political power of the billionaire class, or do we continue to slide into economic and political oligarchy? These are the most important questions of our time, and how we answer them will determine the future of our country.

is curve

Politico reports on Donald Trump and his supposed plan to renegotiate debt:

“I said if we can buy back government debt as a discount. In other words, if interest rates go up and we can buy bonds back as a discount, if we are liquid enough as a country we should do that. In other words, we can buy back debt as a discount,” the presumptive Republican nominee said in a telephone interview on CNN’s “New Day.”

Those who said he wants to buy debt and default on it are “crazy,” he added.

“This is the United States government. First of all, you never have to default because you print the money. I hate to tell you. So there’s never a default. But the point is it was reported in the New York Times incorrectly,” he said, referring to a critical Times article that ran on Friday.

Trump is correct. The US technically cannot go bankrupt, at least until they want to (buy not pushing outwards the debt ceiling, for instance). They can always let the central bank – the Fed – buy government bonds so that the government never has to worry about having access to central bank deposits (which we might call money). The May 5th excerpt from the Fed’s balance sheet features this asset:

U.S. Treasury securities – 2,461,443 (million USD)

So, I have to say that yesterday’s article was based on misleading information that the NYT seems to have published, with Paul Krugman picking it up later and me publishing on top of this. Sorry.

Posted by: Dirk | May 9, 2016

Failing in the 21st century: US vs euro zone

Paul Krugman writes about Donald Trump’s economic plans today in the NYT:

Last week the presumptive Republican presidential nominee — hard to believe, but there it is — finally revealed his plan to make America great again. Basically, it involves running the country like a failing casino: he could, he asserted, “make a deal” with creditors that would reduce the debt burden if his outlandish promises of economic growth don’t work out.

The reaction from everyone who knows anything about finance or economics was a mix of amazed horror and horrified amazement. One does not casually suggest throwing away America’s carefully cultivated reputation as the world’s most scrupulous debtor — a reputation that dates all the way back to Alexander Hamilton.

The Trump solution would, among other things, deprive the world economy of its most crucial safe asset, U.S. debt, at a time when safe assets are already in short supply.

This is actually not so surprising. Decade after decade passed in which economists and politicians lied and lied and lied about government debt, the banking system and finance in general. Hocus pocus like the efficient market hypothesis, New Keynesian macroeconomic models and such passed for serious scientific theories, even though they did not feature money. The euro zone has started with a completely insane setup, basically declaring that there is no European safe asset in the financial market. Governments are now liable to go bankrupt if markets judge them to be bankrupt – Mario Draghi already helped to stop this doom loop, to the disgust of most German economists/politicians. Given that government bonds are fundamental for anchoring interest rates, which is somewhat complicated to explain, there is no sense in wishing for governments to go bankrupt. Do you want to become like the euro zone after the recent disasters?

Now Trump comes forwards with his great plan. That reducing government debt the Trump way reduces private sector wealth one-to-one he does not say. Probably he doesn’t understand it. For me, this is the symptom of intellectual decay of the past 3+ decades. What brought this decay in common sense and culture about would be an interesting question. Nevertheless, one consequence seems to be clear: economics needs more common sense and less mathematical distraction from some of the core facts of our monetary system. Sciences are supposed to enlighten.

Posted by: Dirk | April 28, 2016

1,610,900 Spaniards live in households with no jobs

According to Spanish media, the number of Spaniards living in households where none of the members has any job stands at 1,610,900 (source: El Mundo, original data at INE). This is a very sad story. As Reuters reports, unemployment in Spain has ticked up in the first quarter. Even though this is typical for winter, the unemployment rate still stands at 21%, which is a dangerous level. Given all the talk about Brexit one wonders what Spanish voters would do if they were confronted with the question of Spexit. If a country cannot guarantee jobs for its population, how is political stability achieved? The answer is difficult to find, but probably the country’s institutions needs to be rearranged so that mass unemployment can be addressed.

Spain, which is facing new elections soon if nothing surprising happens, will have to find political solutions for political problems. One indication of what might work is the recent increase in economic growth that came with a higher government deficit, as reported by Reuters. Perhaps more government spending could help any economy where the private sector does not and cannot spend enough to achieve full employment?

On a personal note, I find it odd that the social problems resulting from austerity policies get almost no media coverage unless there are elections, the government breaks the deficit rules or the government is threatened with bankruptcy. In the US, “the” dictum for presidential elections is “It’s the economy, stupid”. Why do European politicians, why does European media think that we’re different?

At the end of February, I had a discussion on the political consequences of austerity politics. I couldn’t get myself to come up with even one single head of state who did austerity policy and got reelected inside the usual rhythm of elections. Tsipras of Syriza in Greece was re-elected, but that was hardly a year after he came to power. German chancellor Merkel got reelected, but she didn’t do austerity policies at home: the black zero (a balanced government budget) has been achieved by higher tax income, not lower spending. Ireland and Spain both had governments that did not win reelection lately, and I can’t think of a country in the euro zone where the government cut spending and got reelected in the period of 2008/09 till today.

Since new political parties can be created from nothing, we’ll see more new parties entering the European policy space. Whether they have any good strategies remains to be seen.

Posted by: Dirk | April 22, 2016

US Industrial Production Index – Not so good news

I was just looking at US data and found the FRED2 stats for the US Industrial Production Index not so good news:

IPIThe index had surpassed the pre-crisis peak from late 2007 in late 2014, but now it is back under its pre-crisis peak. This seems to say that the US has a problem. A fall in the index used to be a sure indicator for an upcoming recession. Let’s see if this time it’s different.

Wolfgang Streeck has given an interview to the Spanish magazine CTXT. He says:

Creo que hay que acabar con el euro, es un desastre. En tanto en cuanto exista el euro en su forma actual, la situación de los países mediterráneos continuará empeorando y la de los alemanes, mejorando. No hay posibilidad de crear mecanismos igualitarios en Europa. Hay gente de los países del sur que tiene la esperanza de que en algún momento, alguien convencerá a los gobiernos del norte de que les interesa rebajar la competitividad de la economía alemana para incrementar la de la italiana. Esto es una completa ilusión.

A translation into English would roughly look like this (I am neither native in English nor in Spanish, so I kept as close to the Spanish as I could):

I think we have to abandon the euro, which is a disaster.  que hay que acabar con el euro, es un desastre. Insofar as the euro exists in its actual form, the situation of the Mediterranean countries will continue to worsen and that of the Germans will continue to improve. There is no possibility of creating egalitarian mechanisms in Europe. There are people in the countries of the South that have the hope that at some moment, somebody will convince the governments of the South that it would be of interest to put down the competitiveness of the German economy to help increase that of the Italian. This is a complete illusion.

So, Streeck ignores the taboo that exists in the group of academic economists, which is that the euro cannot be put into question. However, I do not agree with Streeck’s economics. The German government is not supposed to decrease the competitiveness of its economy, but is supposed to create more demand so that the current account moves towards balance. This, I believe, is still in the cards. However, I do not think that it will happen with the government that Germany now has, nor with the next one. The taboo regarding the euro has worked quite well, and it will take some years to break down the ideas of competitiveness and bad debt/Swabian housewife so that we can move forward again. Perhaps European integration will break down before that happens, but then this is the result of an intellectual failure of European elites. It would not be the first time.

Posted by: Dirk | April 19, 2016

John Smithin on money (INET video)

It is always interesting to see other economists talk about the very same things that oneself is teaching. I prefer to show much more balance sheets, John Smithin uses puzzles and controversies to structure his lecture. This is a widespread way of “doing economics”, but I have my doubts about it. While history of economic thought is a very interesting subject, students should first be taught what we think today and then go back. Otherwise their head gets stuck in old bottles with old ideas, and they are biased towards the older stuff. This is a psychological problem that Kahneman and others have pointed out many times. What you first hear/see/think you will take as true unless some heavy intellectual lifting makes you understand that it’s not. This is why I find it wiser to start with a description of the actual monetary and financial system and only then return to the neoclassical school, Keynes, Wicksell, Knapp, etc. Having said that, I nevertheless recommend the video to students.

The title of this article is a quote from a recent research paper by the European Central Bank (ECB). The sentence is hidden in footnote 7 on page 14:

ecbequityThis is very interesting because the president of the German central bank, Jens Weidmann, had this to say in an 2014 interview published on the website of Bundesbank:

But the USA, England, Japan – they have all been buying up an abundance of government bonds since the financial crisis. Why are we in Europe, in particular, so cautious?

There are good reasons for this. First and foremost, we have a currency union and not a federal state. We have agreed to share a single currency but that each nation would be individually liable for its sovereign debt – because each country also individually decides on its fiscal and budget policy. However, once euro-area central banks begin to buy sovereign bonds of all countries, they then instantly assume joint liability. They together, and thus ultimately the taxpayer, would be on the hook for losses on these purchases.

Wrong. The taxpayer is not ultimately on the hook for losses at the central bank stemming from purchases of any financial assets, including government bonds. What is wrong today must have been wrong on 2014.

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