“Bye-Bye Keynes” - Questions
Robert Samuelson’s article here.
Highlights:
“Given low interest rates and the still-weak U.S. economy, it will be tempting for the U.S. government to continue running deficits and issuing additional debt. At some point, however, investors will recognize this behavior for the Ponzi scheme it is. … If history is any guide, this scenario will develop not gradually but abruptly. Previously gullible investors will wake up one morning and conclude that the situation is beyond salvation. They will scramble to get out. Interest rates in the United States will shoot up. The dollar will fall. The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified.” - Barry Eichengreen
Consumer debt levels:
Government debt levels:
The truth of the matter is, no matter how you leverage up—diversification or otherwise—leverage ultimately entails more risk. And more risk implies downside risk. By running up deficit levels we are also walking a thinner and thinner margin of confidence.
Cochrane’s response a year ago regarding the same subject.
As painful as de-leveraging will be, especially in the next few years, it is not only a nicety but a necessity—this much is clear. However, it remains to be seen how we can transition into greater austerity without entering into another recession: short-term stimulus or otherwise.
Baker’s response to Samuelson.
So some questions remain for me. Baker writes, “Japan’s debt to GDP ratio is over 200 percent, we have a very long way to go before we get there. It can borrow long-term in financial markets at interest rates a bit over 1.0 percent.”
But isn’t most of Japan’s debt domestic? Hence, lower interest rates and whatnot? Isn’t most of our debt foreign? Moreover isn’t this due to investors in Japan who are traditionally willing to save and hence given recessionary economies, wiling to lend? I wish we could the same about the US.
“Finally, what is the alternative? Tens of millions of people are supposed to go unemployed or underemployed. These are people unable to care for their children properly, unable to prepare for their own retirement, and in many cases, unable to keep their homes. Absent major stimulus, things are not going to get better for these people anytime soon. And given the consistently overly optimistic track record of forecasters, it may be close to a decade until we have fully recovered from the downturn.”
But isn’t the fear of this crisis happening again the entire point of not taking on more debt?
It seems to me that there is an implicit suggestion that US credit is nearly invincible—and I have no idea whether or not this is a true statement. But it seems that however we take on more debt, investors will place full faith and credit in us. I don’t know enough about economics to know if this is true or not but if we go more fiscal isn’t this what we are implying? That we can take on more debt without fear of investors abandoning us?
Meanwhile it does seem rather odd to me that we refuse to engage in any short-term monetary policy even though there is so much talk of extending fiscal policy. Sumner quotes the Fed:
“Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.”
As a measly undergraduate, I’m as confused. We have higher unemployment than necessary, lower inflation than wanted and we don’t want to ease up money supply?
Finally, maybe this is walking the ideological tightrope, but are these things contradictory? We have monetarists who believe they are right, fiscal guys who believe they are right, and Capitol Hill economists who are refusing to do either suggestion, and instead going for, as I supposed, natural austerity for structural health. It does seem kind of curious but we are in a recession aren’t we? We did bail out the banks while damaging structural health didn’t we? At the end of the day Baker, Sumner and nearly every other econ-tenured professor-blogger/policy wonk out there is right when they suggest that there are thousands of families going to be much poorer than necessary this upcoming year, aren’t they?
Happy holidays.
