Posted by: Dirk | July 14, 2016

Sectoral balances of the eurozone

This afternoon I devoted to the sectoral balances of the eurozone. The current account is inverted, the public deficit a deficit and the private sector financial surplus a surplus. Some of the recent data is probably a forecast. I let the data speak for itself for now. Just one comment: the only country not able to run a consistent and significant surplus in the private sector is Greece. This is situation is hardly sustainable as debts are more easily repaid when a surplus exists. Continuation of the debt structure into the future is hence possible, but not likely.

Here the sectoral balances (in % of GDP; data from AMECO):













I’m very excited to be working on the index of my book with the above title, which is the last thing I have to prepare before the book goes into production. For those who can’t wait – there are a few out there, I know –  there is the course at the summer school of Maastricht University from July 18-22. Below you find the table of contents of my book. The summer school course will cover all chapters.

Table of Contents

Table of Contents


Part I – Theoretical Foundations

Chapter 1. Substance and purposes of economic activity

Part II – Money and Credit

Chapter 2. Debts and balance sheets

Chapter 3. The creation of bank deposits (deposits)

Chapter 4. The creation of central bank deposits

Chapter 5. The instruments of a central bank (monetary policy)

Chapter 6. The creation of sovereign securities (fiscal policy)

Chapter 7. The sustainability of the financial system

Chapter 8. Inflation and deflation

Part III – Analysis

Chapter 9. A macroeconomic model

Chapter 10. Europe before the euro

Chapter 11. The situation with the euro

Part IV – Reform

Chapter 12. How do we restore demand?

Chapter 13. The future – with or without the euro?


Further readings


Posted by: Dirk | July 4, 2016

Negative interest rates – Koo vs Palley

I just read into Tomas Palley’s ‘Why Negative Interest Rate Policy (NIRP) is Ineffective and Dangerous‘, which is a very good paper. There is one paragraph thought where Palley seems to contradict Koo, who is an expert on QE and Japan:

Monetary policy works by decreasing the money market risk free interest rate, lowering the price of credit and the return on money. That induces firms to change the composition of their financing and asset holdings. A negative interest rate will have several effects. First, firms will switch from equity finance to loan finance because loan finance is cheaper. They can do this via debt financed share buybacks and special dividends to shareholders, which is exactly what has been happening since the 2008 recession. The result is increased corporate indebtedness and more leveraged balance sheets.

Richard Koo has described Japan, where interest rates has been zero for many years, and where QE has moved long-term interest rates very close to zero as well, as a country where the private sector does not want to have any external debt. Half of the countries corporations featured in the NIKKEI stock market index have no external debt. They used low interest rates to ‘move clear’. I wonder whether negative interest rates will have the same effect. It is a question of expectations. If a fiscal stimulus is expected at some point, then interest rates in the future will go up. This means that debt should be reduced, not expanded, during times of low and negative interest rates.
We will have to wait and see.
Posted by: Dirk | June 30, 2016

Japanese bank is revolting, isn’t it?

The FT reports on the situation in Japan:

JGB dealers said it sent a “very clear message to the central

By quitting the elite group, BTMU would be making a symbolic gesture
rather than disrupting the ¥10tn a month market for new JGB issuance:
for the past three years as part of quantitative and qualitative
easing, virtually all government issuance has been bought up by the BoJ.

The subtitle of the article reads ‘Damage wrought by negative interest rates prompts revolt by country’s biggest financial group’. And what a revolt it is! The Japanese government has received the ‘very clear message’ and surely is struggling to find a solution to this non-issue. If ‘all government issuance has been bought up by the BoJ’, why should the Treasury sell government bonds to the banks only so that they can sell them to the Bank of Japan (central bank of Japan) for a small profit?

The inflation rate in Japan hovers around 0%, and the latest news from the production side are not good. If Japan would only increase fiscal spending, it would have more economic growth, more inflation, and less unemployment, all of which is good. Higher economic growth and higher real wages will probably follow in the medium term. However, it seems that this is not what the press discusses. Here is an excerpt from an article on fiscal policy in Japan:

On the fiscal side, it remains doubtful if Japan’s fiscal system can stay robust as the Abe administration is likely to expand fiscal spending following the second postponement of the consumption tax hike from 8 percent to 10 percent. Under the circumstances, the concept of controlled inflation can be of great use. In this connection, it is important to be careful not to confound two fiscal challenges when addressing the issue of returning the country to a sound fiscal footing. One of the challenges is a near-term reduction of year-after-year fiscal deficits and the other is a long-term curtailment of outstanding government debt.

Why Japan should worry about these two ‘fiscal challenges’ is not clear to me. Japan has its own currency, and the Bank of Japan can buy up all the government bonds and it does. There seem to be no problems with this policy in terms of ‘sound fiscal footing’. Just the opposite appears to be the case: it is a very sound policy that the central bank buys all government bonds because this signals to investors that the government cannot go bankrupt. This helps to bring about low interest rates and hence improves economic policy-making.

So, there is no revolt.

Posted by: Dirk | June 24, 2016

EU without England? Not funny.

The Atlantic has an article named The Problem With Inequality, According to Adam Smith. One paragraph reads:

Yet there remains a broad consensus, even among scholars of the period, that Smith was concerned by poverty but not by economic inequality itself. According to this view, Smith hoped to ensure that all members of society could satisfy their basic needs, but he was untroubled by relative differences in income and wealth. As long as everyone has food on their tables, clothes on their backs, and a roof over their heads, the thinking goes, it does not matter if some have far more than others. Indeed, it is often claimed that Smith saw economic inequality as a manifestly good thing.

I have pointed out in 2012 that the Prometheus edition of “The Wealth of Nations” is abridged and that a major quote from book 5, chapter 1 is missing:

Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.

This is only one sentence from some longer paragraphs that Smith has on the the sovereign (my highlighting):

It is in the age of shepherds, in the second period of society, that the inequality of fortune first begins to take place, and introduces among men a degree of authority and subordination which could not possibly exist before. It thereby introduces some degree of that civil government which is indispensably necessary for its own preservation: and it seems to do this naturally, and even independent of the consideration of that necessity. The consideration of that necessity comes no doubt afterwards to contribute very much to maintain and secure that authority and subordination. The rich, in particular, are necessarily interested to support that order of things which can alone secure them in the possession of their own advantages. Men of inferior wealth combine to defend those of superior wealth in the possession of their property, in order that men of superior wealth may combine to defend them in the possession of theirs. All the inferior shepherds and herdsmen feel that the security of their own herds and flocks depends upon the security of those of the great shepherd or herdsman; that the maintenance of their lesser authority depends upon that of his greater authority, and that upon their subordination to him depends his power of keeping their inferiors in subordination to them. They constitute a sort of little nobility, who feel themselves interested to defend the property and to support the authority of their own little sovereign in order that he may be able to defend their property and to support their authority. Civil government, so far as it is instituted for the security of property, is in reality instituted for the defence of the rich against the poor, or of those who have some property against those who have none at all.

The judicial authority of such a sovereign, however, far from being a cause of expense, was for a long time a source of revenue to him. The persons who applied to him for justice were always willing to pay for it, and a present never failed to accompany a petition. After the authority of the sovereign, too, was thoroughly established, the person found guilty, over and above the satisfaction which he was obliged to make to the party, was likewise forced to pay an amercement to the sovereign. He had given trouble, he had disturbed, he had broke the peace of his lord the king, and for those offences an amercement was thought due. In the Tartar governments of Asia, in the governments of Europe which were founded by the German and Scythian nations who overturned the Roman empire, the administration of justice was a considerable source of revenue, both to the sovereign and to all the lesser chiefs or lords who exercised under him any particular jurisdiction, either over some particular tribe or clan, or over some particular territory or district. Originally both the sovereign and the inferior chiefs used to exercise this jurisdiction in their own persons. Afterwards they universally found it convenient to delegate it to some substitute, bailiff, or judge. This substitute, however, was still obliged to account to his principal or constituent for the profits of the jurisdiction. Whoever reads the instructions which were given to the judges of the circuit in the time of Henry II will see clearly that those judges were a sort of itinerant factors, sent round the country for the purpose of levying certain branches of the king’s revenue. In those days the administration of justice not only afforded a certain revenue to the sovereign, but to procure this revenue seems to have been one of the principal advantages which he proposed to obtain by the administration of justice.

This scheme of making the administration of justice subservient to the purposes of revenue could scarce fail to be productive of several very gross abuses. The person who applied for justice with a large present in his hand was likely to get something more than justice; while he who applied for it with a small one was likely to get something less. Justice, too, might frequently be delayed in order that this present might be repeated. The amercement, besides, of the person complained of, might frequently suggest a very strong reason for finding him in the wrong, even when he had not really been so. That such abuses were far from being uncommon the ancient history of every country in Europe bears witness.

When the sovereign or chief exercised his judicial authority in his own person, how much soever he might abuse it, it must have been scarce possible to get any redress, because there could seldom be anybody powerful enough to call him to account. When he exercised it by a bailiff, indeed, redress might sometimes be had. If it was for his own benefit only that the bailiff had been guilty of any act of injustice, the sovereign himself might not always be unwilling to punish him, or to oblige him to repair the wrong. But if it was for the benefit of his sovereign, if it was in order to make court to the person who appointed him and who might prefer him, that he had committed any act of oppression, redress would upon most occasions be as impossible as if the sovereign had committed it himself. In all barbarous governments, accordingly, in all those ancient governments of Europe in particular which were founded upon the ruins of the Roman empire, the administration of justice appears for a long time to have been extremely corrupt, far from being quite equal and impartial even under the best monarchs, and altogether profligate under the worst.

I don’t see any of this discussed in the article, but I think that it is too important not to be brought up.

This is from the OECD economic outlook June 2016’s editorial, written by OECD Chief Economist Catherine L. Mann:

Fiscal policy must be deployed more extensively, and can take advantage of the environment created by monetary policy. Governments today can lock in very low interest rates for very long maturities to effectively open up fiscal space. Prioritized and high quality spending generates the capacity to repay the obligations in the longer term while also supporting growth today. Countries have different needs and initial situations, but OECD research points to the kind of projects and activities that have high multipliers, including both hard infrastructure (such as digital, energy, and transport) and soft infrastructure (including early education and innovation). The right choices will catalyse business investment, which, as the Outlook of a year ago argued, is ultimately the key to propelling the economy from the low-growth trap to the high-growth path.

Interesting. I don’t share the idea of fiscal space – governments in debt in their own currency cannot go bankrupt – but this probably is as far as the OECD can go with respect to fiscal policy. Let me rephrase this paragraph for the layman:


Finally, in 2016, ECB, IMF and OECD call for the right policies. It’s about time.

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

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