Guest post by Azizonomics.
But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.
— ShitKrugmanSays (@ShitKrugmanSays) August 31, 2012
Krugman claims the US private sector is financing the deficit, not China:
So who’s actually financing the US budget deficit? The US private sector. We don’t need Chinese bond purchases, and if anything we’re the ones with the power, since we don’t need their money and they have a lot to lose. In fact, we don’t want them to buy our bonds; better to have a weaker dollar (a point that the Japanese actually get.)
Lots of people keep getting this wrong, even after all these years. But really, truly, the last thing we need to worry about is whether the Chinese love our bonds.
He cites as evidence that the current account deficit as a percentage of GDP is way down since before 2008:
Guest post by Azizonomics.
Many Keynesians really hate the concept of liquidationism. I’m trying to grasp why.
Paul Krugman wrote:
One discouraging feature of the current economic crisis is the way many economists and economic commentators — apparently ignorant of what went on over the last 75 years or so of macroeconomic debate — have been reinventing old fallacies, imagining that they were coming up with profound insights.
The Bank for International Settlements has decided to throw everything we’ve learned from 80 years of hard thought about macroeconomics out the window, and to embrace full-frontal liquidationism. The BIS is now advocating a position indistinguishable from that of Schumpeter in the 1930s, opposing any monetary expansion because that would leave “the work of depressions undone”.
Andrew Mellon summed up liquidationism as so:
The government must keep its hands off and let the slump liquidate itself. Liquidate labor, liquidate stocks, liquidate the farmes, liquidate real estate. When the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. A panic is not altogether a bad thing. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.
SPIEGEL: Mr. Krugman, does Greece have to leave the euro zone?
Krugman: Yes. I don’t see too much alternative now. It’s going to be terrible in the first year if they do leave. So I am really reluctant to say that it’s a little bit like shouting “Fire!” in a crowded theater, but what is the realistic option here? It’s not as if anything anyone’s proposing has any hope at all of getting them out of the mess they’re in.
SPIEGEL: If Greece should leave, will this finally contain the euro crisis or, rather, make things worse?
Krugman: What happens if Greece leaves? Then you have again a bank run in other peripheral countries because they’ve set the precedent. But, again, that could be contained with lending from the ECB (European Central Bank). What has to happen is that the ECB has to be willing to replace all euros withdrawn as is necessary. And I think the case we’re making for that lending becomes a lot easier because the Greeks were actually irresponsible. The Greeks actually did behave badly, and so the political case for unlimited exposure to Greece is very hard to make. A much easier case to make is for Spain and then Portugal and Italy, all of which did nothing wrong on the official side. So you could argue that the bad actor has been ejected, but we need to save the good actors.
Guest post by Azizonomics.
Bloomberg viewers estimate that Ron Paul was the winner of the clash of the Pauls. But that is very much beside the point. This wasn’t really a debate. Other than the fascinating moment where Krugman denied defending the economic policies of Diocletian, very little new was said, and the two combatants mainly talked past each other.
The real debate happened early last decade.
Readers are free to make up their own minds who won that one.
And so, round two. From Paul’s FT editorial today:
Control of the world’s economy has been placed in the hands of a banking cartel, which holds great danger for all of us. True prosperity requires sound money, increased productivity, and increased savings and investment. The world is awash in US dollars, and a currency crisis involving the world’s reserve currency would be an unprecedented catastrophe. No amount of monetary expansion can solve our current financial problems, but it can make those problems much worse.
By Edward Harrison of Credit Writedowns.
I think this video is worth watching because Keen gets to the heart of the issues with the standard approach toeconomics. He says that banks, money and debt are front and center in reality as we now see after the crisis. Consequently, they should also be integral in economic models. I have made exactly the same criticisms in the past. See my piece on the origins of the next crisis which is holding up well in the two years since I wrote it.
For me, the bottom line here is that the crisis is really not over. We need authoritative people like Blinder telling us we’ve got it wrong if we are to have a reasonable chance of getting out of this unscathed. I lobe that kind of stuff – more please! My fear is that the debt and banking problems re-assert themselves in the next downturn to cause significant economic damage. And since I am predicting this is what is likely to occur, it’s not just a worry, it’s something more than that.
Greece news still dominating the screens. So many flashes, but still no clarification of how Greece is to be fixed. According to the latest, Troika is to be permanently based in Greece. As we suggested some weeks ago, Greece is soon a German colony. At least they can drop the heavy army budget then.
While the Greek people slowly realize Venizelos sold them out, it is time to move on and start reading of other economic issues. Some insight from Krugman via Playboy;
Market is not worth trading, as volumes are run by juniors on the desks. For all those who have forgotten what they learnt at Econ 101, here is a great year end piece by the Economist.
Warren Mosler, an innovative carmaker, a successful bond-investor and an idiosyncratic economist, moved to St Croix in 2003 to take advantage of a hospitable tax code and clement weather. From his perch on America’s periphery, Mr Mosler champions a doctrine on the edge of economics: neo-chartalism, sometimes called “Modern Monetary Theory”. The neo-chartalists believe that because paper currency is a creature of the state, governments enjoy more financial freedom than they recognise. The fiscal authorities are free to spend whatever is required to revive their economies and restore employment. They can spend without first collecting taxes; they can borrow without fear of default. Budget-makers need not cower before the bond-market vigilantes. In fact, they need not bother with bond markets at all.
The neo-chartalists are not the only people telling governments mired in the aftermath of the global financial crisis that they could make things better if they would shed old inhibitions. “Market monetarists” favour more audacity in the monetary realm. Tight money caused America’s Great Recession, they argue, and easy money can end it. They do not think the federal government can or should rescue the economy, because they believe the Federal Reserve can.
“We are concerned about the World Economy”.
Listen to a great debate by some of the brightest economists of the world. Rosenberg/Krugman and Summers/Bremmer. Must see video below.