Comments on: Why Richard Koo’s idea won’t save the Eurozone A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Eskola Thu, 19 Apr 2012 14:03:08 +0000 Euro or dollar system doesn’t require the four figures to add up to zero. Under these currencies new money is created when new credit is created. This is called credit expansion. Conversely, under credit contraction the total amount of credit and therefore the total amount of money in the currency system decreases.

Therefore, when private sector chooses to pay back their debt ie. deleverage, there is no need for Gvt to step in and start to borrow. Unless of cource the policy makers don’t want the credit contraction to happen.

By: FifthDecade Thu, 19 Apr 2012 04:23:34 +0000 @revelo You’ve missed out a vital descriptor – the time frame over which the budget should be balanced… every quarter? Each year? Why stick at an arbitrary 12 month period, why not go for 15 months? What about an electoral cycle of 4/5 years (depending on country)? What about balancing the budget over the business cycle? If you stick rigidly to too short a period of time for the budget to be balanced over, you get an artificial imbalance which skews policy and accentuates boom and bust; in good years, government spending is low, in bad years the same dollar spend is high as a percentage.

So you either allow for variability in government spending (no more political promises can be kept, if they are now) or you match the budget balancing over the time frame of the variability – which is itself a variable (the length of the business cycle is not related to astrophysical events ie the calendar year). But if you do that, you have to explain why the Govt keeps surpluses in the good times and doesn’t pay them back to taxpayers as tax rebates. If you pay them out as tax rebates to win votes, you’re going to end up with a deficit later when the cycle moves out of boom into bust. Because one of the main roles of government is to build and run infrastructure, annual spending is far less changeable than the budget balancers would like it to be.

This isn’t rocket science, heck, even that history book, the Bible, mentions Pharaoh being advised to keep seven years of grain as a reserve against times of famine; whatever happened to prudently keeping money in reserve?

By: FinanceChicken Wed, 18 Apr 2012 17:32:11 +0000 Koo’s idea seems to attack the symptom, not the cause. Having more bond holders might help bond prices but the real problem is that there is too much debt.

have a look at this: 4/no-crisis-is-not-over.html

By: revelo Wed, 18 Apr 2012 01:02:31 +0000 @TFF if the government refused to run a deficit, that would set up a battle royale between the various interest groups which benefit from government spending, especially retirees, versus the taxpayers. Ultimately, both would lose. Retirement ages would go up substantially, other entitlements would be cut substantially, taxes which have little or no immediate effect on economic activity (property taxes and especially taxes on the land rather than the improvements, inheritance taxes) would go up dramatically, other taxes might rise, depending on what side of the Laffer curve they are on now. For parts of Europe, raising income and payroll taxes is going to be counter-productive, given how high these taxes are already. But even the taxes were set optimally, balancing the budget would lead to short-term massive deflation. Everyone would go bankrupt and the debt overhand would be cleared up. The owners of debt (the rich) would be devastated like they were back in the Great Depression. The poor would do okay because modern societies won’t tolerate actual starvation. The middle-class would be wiped out in the short-run, but they’d bounce back once the deflation was over. In short, a balanced budget and massive deflation and liquidation would be wonderful for Main Street and a disaster for Wall Street. Anyone arguing that a balanced budget is bad for the common people is really trying to keep Wall Street fat and happy.

By: TobyONottoby Tue, 17 Apr 2012 18:41:47 +0000 KenG_CA, kentwillard, DrGoose, SteveHamlin –

Nice comments to accompany this article!

By: spectre855 Tue, 17 Apr 2012 18:31:01 +0000 This is why I enjoy Felix’s blog so much. I think I’ve learned more about economics just from reading the comments here than I did in college.

By: SteveHamlin Tue, 17 Apr 2012 17:02:24 +0000 @fresnodan: “it would be clearer just to roll it into a simpler identity – GDP equals consumption and production” You just restated the starting definition of GDP: now you need some way to total up that consumption and production. The traditional GDP components help to do that.

Under your view, instead of private entities producing and consuming less and the government producing and consuming less (GDP goes down), you have all entities producing and consuming less (GDP goes down). It doesn’t change anything.

The GDP accounting identity components are merely a deconstruction of how you’re wanting to look at it, and that is useful because it allows the available data sources to map to the separate components.

I suspect you’re thinking of some sort of full Ricardian Equivalence, which as applied here might argue that any governmental debt-financed spending cancels out any aggregate demand increase from that spending, because rational taxpayers know they’ll have to pay for that debt via higher taxes in the future, so as a result they’ll immediately save for those future taxes, and those increased savings contemporaneously and completely offset any increased spending. It’s a ridiculous concept that only applies in theory, with rigid assumptions about human behavior that do not have basis in the real world. Homoeconomis Rationalis is a mythical creature akin to Bigfoot.

By: SteveHamlin Tue, 17 Apr 2012 16:42:39 +0000 @MrRFox: “But if government steps in with bigger deficits to stoke demand, aren’t the people getting equally poorer when the additional government indebtedness is included in the calculation?”

Not if the governmental spending causes productive economic returns in excess of the real debt rate, and those returns would not have otherwise happened (see the current output gap for permanently lost wealth creation opportunity) – in that case, then that debt creates a net value-add.

Does borrowing money to build a factory make the company poorer? Only if the investment does not generate enough economic return to pay off the loan.

Were the nation’s infrastructures & systems worth building, and did they generate positive economic returns for the nation? I’d say most of those expenditures did.

If the government spending generates a lower return than the real interest rat of that debt, then it is value destroying (however, I’m also thinking of Keynes’ aphorism that in times of high unemployment, then it is a positive result to even pay a man to dig a hole and pay another man to fill it up, so in an output gap environment, the spending might not even need to be that productive.)

By: fresnodan Tue, 17 Apr 2012 16:25:58 +0000 I agree with you Mr. Fox.
I never quite understand in these “accounting identities” that government is some magic entity separate from the rest of the economy. How exactly is government spending different from and not a part of “consumption?” Yes, government can “Print” but the relationship between that and actual production and consumption doesn’t appear so linear (if if is, why aren’t we doing better?)
Now I am not one who believes that government doesn’t produce ANYTHING of value (streets, traffic signals, police, courts, schools, water works, etcetera) – there is government expenditures and government income (taxes as well as fees and even patents) – but it would be clearer just to roll it into a simpler identity – GDP equals consumption and production. (oh yeah, and export and import but it still is buying and earning).
Long story short – prices and incomes have to match and we may very well be spending more than we are earning – I suspect economists don’t want to say the standard of lving is going down (in “real” terms)

But I would also note that as long as central banks create money and give it to bankers to loan to people who cannot afford to pay back the loans on their underwater homes, when the bankers have demonstratably proven that they don’t know how to judge credit risk or economic return accurately, we are gonna remain in a stagnant economy. I guess I don’t buy that the Wizard of Oz knows what he is doing anymore…

By: MrRFox Tue, 17 Apr 2012 15:52:53 +0000 @Steve Hamlin – you wrote – “That’s why governmental austerity when private balance sheets are deleveraging is catastrophic – every component of economic activity is decreasing, which is the same as saying GDP is decreasing, which is the same as saying those people, on average, are getting poorer.” (SH)

Yes, they would be getting poorer in the scenario you describe. But if government steps in with bigger deficits to stoke demand, aren’t the people getting equally poorer when the additional government indebtedness is included in the calculation? The government’s incremental debt is actually the people’s debt, isn’t it?

Government intervention as you describe, which is the current practice, amounts to kicking the can … and not more than that, doesn’t it?