The Financial Mess

[Crocefisso]

For the vast majority of us, the idea that we're going to have a difficult financial and social future has been made apparent by the recent financial fiascos in the Eurozone and US, the riots in Athens and London (and other UK cities), Madrid protests, and even the Arab Spring - much of which is, realistically, a reaction not just to dictatorship, but also to massive unemployment rates (often 30%+) and economic stagnation across the Arab world (the Arab world's growth figures are the lowest in the world).

 

In the west, the idea that the age of our global hegemony is beginning a decline, or has at least taken a severe blow, is becoming a cold, hard fact, as demonstrated by the recent events in the financial markets and in governments across the western world. Below is an explanation (or my take on) of the issues.

 

The USA

 

In the US, a routine debt-ceiling increase was manipulated for political gain by the Republican Party, who used their majority in the House of Representatives to their advantage. Subsequently, Barack Obama - a paltry negotiator at the best of times - failed to get the extra tax revenues he wanted, while the Republicans (thanks largely to the uncompromising Tea Party and their reckless brinkmanship) got both the spending cap and the cuts they wanted. The debt-ceiling was also raised enough to be an issue only after the 2012 election.

 

The US currently has debts at 98% of GDP (and a 10.6% budget deficit), though this is expected to rise to 102% in 2012. The US economy grew by a shockingly low 0.4% in the first quarter of this year, followed by 1.3% in Q2, and the general consensus is that US growth this year will be just 2%, as opposed to the 4% predicted earlier in the year.

 

S&P's downgraded the US credit rating subsequent to the debt deal, from AAA to AA+, citing not only the state of the nation's finances, but also the inability of their politicians to get things done (again, the GOP must take most of the blame). I can only see this getting worse; while Europe's politics seem to get closer to the centre each year, the ideological rift between the right, which is veering towards more extreme views, and the left, which is doggedly trying to follow in Europe's footsteps, is widening.

 

Europe

 

Europe, the cradle of civilisation, is even more screwed than the US. Thus far three fairly small economies have needed bailing out - Portugal, Ireland, and Greece - with the latter being the worst off. Spain and Italy are threatening to tip the Euro over the edge and destroy the European federalist dream. The biggest problem has been their exorbitant borrowing from the European Central Bank over the years, which has reached levels they've never been able to pay back. The 2007-8 crisis is the root of the problem. Portugal and Ireland I won't discuss.

 

Greece, which has needed a bailout and a half, is the biggest problem. It's got a CC credit rating from S&P's for a reason. Chiefly, the Greek government lied about the state of public finances in order to ditch the drachma in favour of the euro. Greece subsequently borrowed madly from the ECB. The Greek government is also very lazy and inefficient when it comes to raising revenues via taxes, and many people dodge having to pay to the state. Simultaneously, Greece has the largest (proportionally) and least efficient public sector in Europe - ie, they're lazy - which has meant a lot of state expenditure for very little gain. Private investors have had to contribute $53 billion to reduce Greek debt, and the Greek government must in return begin an austerity programme of spending cuts and privatisation of their inefficient public services. Greece's sovereign debt is over 150% of GDP and its real GDP growth for 2011 at -3.5% or so - ie, they're probably going to need a proper bail-out at some point.

 

To prevent contagion, the ECB has also been given cash (I think) to buy up Greek government bonds, so as to prevent contagion.

 

Spain and Italy look to be on the brink. I think the ECB may even be buying up Spanish and Italian bonds.

 

Spain is a country reliant upon tourism and tourism-based construction. The 2007-8 recession collapsed these industries, because of their reliance upon British and German tourists and retirees. These industries remain damaged and Spain's unemployment rate stands the wrong side of 20%, with young unemployment around 50%. Luckily, Spain's economy is smaller than Italy's, and thus much larger than Greece's, Ireland's or Portugal's, and it's sovereign debt stands at just around 75% of GDP. It's the unemployment and poor growth that is the issue that might need it to be bailed out, but a Spanish bailout would be financially viable (just about, and at a huge cost to many French and German taxpayers). The Spanish PM, Zapatero, has called for an early election in November, so as to solve the political aspect of the crisis.

 

Italy's collapse would be the end of the euro dream. Though its economy looks healthier than Spain's on the surface, it has a number of underlying issues. First, Italy's debt - proportionally second only to Greece, at around 125% of GDP, and the largest absolute figure of all the wobbly countries - would be too big for the EU to handle. Second, Italy's growth stands at 1%, and has stayed at this general level for over a decade; ie, Italy has a long-term problem with economic growth that may be hard to resolve. Third, Spain is a fairly functional democracy. Italy is totally dysfunctional; it is always ruled by coalitions, and Berlusconi's right wing coalition has looked fraught in recent months, what with Rubygate and the loss of the Milan mayorship - if it grew too unpopular, then Berlusconi's key coalition partner, the racist, xenophobic, populistic Lega Nord (the Italian Tea Party) may feel tempted to jump ship and cause an all too common government collapse. A left wing coalition, such as those under Prodi, would likely be less decisive and more short lived than a Berlusconi government.

 

Ultimately, Italy's survival - key to the survival of the Eurozone - depends on Italy's solvency (Berlusconi repeatedly claims Italy is solvent; this had better be true). The ECB has bought some government bonds, but it doesn't have the funds to help Italy or Spain. They just alleviate the issue a little.

 

In the end, Merkel and Sarkozy are going to have to act decisively. They may have to do some more bailing out, at great expense to their taxpayers (this is almost inevitable). If the Euro is going to survive long-term, closer fiscal union is (in my view) a must, and power must be devolved either to the European Central Bank or some other EU body.

 

Switzerland

 

There is very little I have to say on Switzerland. For the most part, the Swiss can be contented and smug that they've opted out not only of the eurozone, but of the EU altogether. But there have been repercussions for Switzerland from recent events. The only one that comes to mind is the over-appreciation of the franc against the backdrop of crises of the euro and dollar. Attempts by the Swiss National Bank to prevent this, largely because of the adverse effects on Swiss exports. The measures introduced were: an increase in supply of francs and interest rates around the 0% mark.

 

Efforts to prevent investors buying francs have been largely unsuccessful, however, largely because of the continuing crises across the world. In the absence of clear-cut solutions to the US and European economic crises, it seems unlikely that the over-appreciation of the franc will be curbed in the immediate future.

 

 

I realise I've not touched upon a great many factors in all of these problems, such as the markets' response. I've written virtually all of this from memory, so please do correct me on any errors I've made (I've probably confused the ECB with the EFSF a few times).

 

Sections on Britain, Japan and the Arab world/Middle East will all be added in due course. I hope that everything here is enough to stimulate discussion.

 

23 Aug: Switzerland is up

[obfuscator]

Good topic, nice detail :thumbup:

 

Debt has been a problem for a while, fueled by idiotic and naive politicians. I've no doubt that the world is headed for a massive economic change - and it'll look very different once we come out.

[Danqazmlp]

The world goes through recessions, depressions and growth so frequently that I actually don't get all of the hype things get. Overall, the world will recover and has done many many times in the past. Yes it tkes work, but the Euro Zone, America, The 'West' will not fall. Go 15 years into the future and this will have all been forgotten when the next 'credit crunch' comes along and the next generation, our children claim it to be the end of the financial world. That's almost all I have to say on the matter.

[obfuscator]

The world goes through recessions, depressions and growth so frequently that I actually don't get all of the hype things get. Overall, the world will recover and has done many many times in the past. Yes it tkes work, but the Euro Zone, America, The 'West' will not fall. Go 15 years into the future and this will have all been forgotten when the next 'credit crunch' comes along and the next generation, our children claim it to be the end of the financial world. That's almost all I have to say on the matter.

But see, that's just the tip of the iceberg.

 

The world's population (particularly the west) is aging rapidly and within the next ten years the population distribution will no longer be sufficient to sustain the economic model we've been living off of for the last several decades.

 

Our society in its current existence is incredibly new in terms of overall human history - all regimes and societies throughout history have failed eventually, I can't see why ours will be any different. Debt may be the catalyst.

[Danqazmlp]

I wouldn't actually say any social structures have failed (maybe Russian Communism). Many evolve and slowly change over time but in essence stay the same for centuries. I was thinking about this earlier, noticing that essentially we have been a consumerist society at some level for at least 700 years (At least in Britain). People have always wanted the best things for themselves, as cheaply and as easily as possible. Ways of attaining that may have changed, regulations, wealth levels etc change, but the core of our civilisations stay the same.

 

I do acknowledge that systems within society, such as regulations, the importance of banks and non-physical money may change at some point, but society as a whole will not, we will still consume, strive for the best items available to us and still rely on governments to aid us when we get old or run out of money. Some of us may get wealthier, some poorer, some countries may go through the same, but in essence, the world will not change massively within the next hundred years bar a war happening between two major countries.

[obfuscator]

I wouldn't actually say any social structures have failed (maybe Russian Communism). Many evolve and slowly change over time but in essence stay the same for centuries. I was thinking about this earlier, noticing that essentially we have been a consumerist society at some level for at least 700 years (At least in Britain). People have always wanted the best things for themselves, as cheaply and as easily as possible. Ways of attaining that may have changed, regulations, wealth levels etc change, but the core of our civilisations stay the same.

 

I do acknowledge that systems within society, such as regulations, the importance of banks and non-physical money may change at some point, but society as a whole will not, we will still consume, strive for the best items available to us and still rely on governments to aid us when we get old or run out of money. Some of us may get wealthier, some poorer, some countries may go through the same, but in essence, the world will not change massively within the next hundred years bar a war happening between two major countries.

Roman empire

greek empire

colonial england

indian empire

soviet russia

ancient egypt

ancient mesoptomia

ancient israel

 

That's a short list.

 

We're approaching a problem we've never had before - a massive population and a demographic shift. The current way we live isn't sustainable - and there will be a lot that's going to change.

I won't be alive 100 years from now, but I'll wager the world will be completely different, and our current society nothing but a distant memory.

[Danqazmlp]

I wouldn't actually say any social structures have failed (maybe Russian Communism). Many evolve and slowly change over time but in essence stay the same for centuries. I was thinking about this earlier, noticing that essentially we have been a consumerist society at some level for at least 700 years (At least in Britain). People have always wanted the best things for themselves, as cheaply and as easily as possible. Ways of attaining that may have changed, regulations, wealth levels etc change, but the core of our civilisations stay the same.

 

I do acknowledge that systems within society, such as regulations, the importance of banks and non-physical money may change at some point, but society as a whole will not, we will still consume, strive for the best items available to us and still rely on governments to aid us when we get old or run out of money. Some of us may get wealthier, some poorer, some countries may go through the same, but in essence, the world will not change massively within the next hundred years bar a war happening between two major countries.

Roman empire

greek empire

colonial england

indian empire

soviet russia

ancient egypt

ancient mesoptomia

ancient israel

 

That's a short list.

 

We're approaching a problem we've never had before - a massive population and a demographic shift. The current way we live isn't sustainable - and there will be a lot that's going to change.

I won't be alive 100 years from now, but I'll wager the world will be completely different, and our current society nothing but a distant memory.

 

I did mention Soviet Russia. As I said though, I don't see any of them as being failures. History books often represent them as having a fixed end, very sudden and catastrophic, but in reality they merely evolved into a new form, be it a government taking over from a monarchy or Empires falling to republics. I do not disagree that society will change, but it will not be anything sudden and nothing that happens short of a war will catastrophically change society in a very short term. Especially in the modern world with more people than ever involved in decision making in major countries, things go very slowly and are moderated heavily.

[obfuscator]

Really? In one week, three major financial institutions in the states failed, and it set off a huge recession.

 

Imagine if the united states government defaulted - do you think the worldwide impact would be less then the crash of 08?

 

EDIT: I feel I should clarify - I don't necessarily think society is going to collapse in an instant. But I believe a combination of bad decisions by our leadership, but citizens as well, is leading us to an incredibly bleak and uncertain future.

[Danqazmlp]

But how much exactly did that effect society as a whole? People spent a bit less for a couple of years, unemployment percentages rose a few %, but social structures stayed in tact, the vast majority of business' stayed afloat, most governments have remained unchanged (in structure, not by way of scheduled elections) and we are all still here in mostly the same seats as we were when the financial crisis started around three years ago.

 

Society is very elasticated, we easily ride out most of what happens. I guess what I'm trying to say is that a lot of what happened to the worlds banks has had little effect on how the world works on the streets, and I can't see that changing in any catastrophic manner at all. It will slowly evolve, but nothing more.

[obfuscator]

But how much exactly did that effect society as a whole? People spent a bit less for a couple of years, unemployment percentages rose a few %, but social structures stayed in tact, the vast majority of business' stayed afloat, most governments have remained unchanged (in structure, not by way of scheduled elections) and we are all still here in mostly the same seats as we were when the financial crisis started around three years ago.

 

Society is very elasticated, we easily ride out most of what happens. I guess what I'm trying to say is that a lot of what happened to the worlds banks has had little effect on how the world works on the streets, and I can't see that changing in any catastrophic manner at all. It will slowly evolve, but nothing more.

That's because what happened was really not all that major. Think back to the great depression and how much that changed society - that's a little more like what we're heading for.

 

I think what happens to world banks has more effect than you realize. If the government defaults on their debt, everything changes, massively, including the value of money, imports/exports - it's an event with far reaching consequences.

[Veiva]

I need to write an ultimatum. Truly, truly.

 

The government is run, as stated before, by stubborn and idiotic buffoons. There is rarely a sane voice in Washington (in fact, I cannot name one right this second; then again, I don't keep up to date on every political figure, especially ones that are rarely in any sort of news). Short term sacrifices need to be made in order for long term survival. Things I'd think would help:

 

1. Social welfare for the most part needs to be ridden of. The government is much worse as far as handling money, especially considering it's not their own. I may sound cold hearted, but the current generation pays for the previous generation, and as the previous generation expands and the future generation contracts, it is unsustainable. People should be required to invest on their own. For example, most people who invest 10% of their income can end up with over $1m or so USD, including interest, in basic investments (by basic, I mean generally non-risky investments; not the stock market!) before or by the time they retire. After all, the Social Security tax rate is at about 10%, so you're losing out 10% every month regardless, be most of it paid by the company you work for or by yourself.

 

Say the Social Security tax was lowered to 1%-2%, to only help those who are disabled and as a consequence would be unable to sustain themselves, and the rest that would normally be tax must be invested. The government wouldn't have to pay for your retirement. After all, you're not getting the full value out of your 10% tax. The government bureaucracy is unaccountably inefficient, since it has to go through so many loops. The only problem with this is that how would you pay for those in retirement? I guess they'd rather live out their days in comfort and die, then let the world burn (reminds me of those who drive gas-guzzling SUVs).

 

2. Invest in science. By science, I mean reform NASA, invest in alternate energy, etc. It would create incentives and would stimulate the economy. After all, who wants to become a physicist if there is no sustainable income that would come about as a result of such a career path? NASA, from '59-'69, nearly doubled the money that was invested. As a whole, we'll need these investments in the future. Humanity on Earth, as it is, cannot be sustained in the current way much longer. If more money was pumped into furthering scientific discovery, life as we know it would be greatly improved, not for those of us in "1st world countries," but for all the world.

 

3. The obvious: cut spending, increase taxes. Doing one or the either is not really going to help in the current state. Cutting taxes is akin to increasing spending, and the opposite is only a short term solution. In order to protect the future, we must bear the brunt of the impact now. There is no other solution, unless, again, we want our future generations to be left to burn.

 

I know people are going to come down on me, so I guess I'm an aspiring stubborn and idiotic buffoon; but I am sure there is a voice of reason in this post.

[Danqazmlp]

It is indeed hard for me to see just how much of an effect they have as I haven't studied the great depression in much depth before and something like a world superpower defaulting hasn't happened before as far as I'm aware. I can see that there would be consequences, but the sale of them and how deep they would go in society isn't very obvious to me at all.

 

EDIT: I agree with all of the above, except getting rid of social welfare. It does however need tightening up and made much stricter, but there are those who do legitimately need help and wouldn't survive without help from governments. This is generally what all governments need to do on a huge scale, comb through everything and tighten budgets, cutting excess fat which isn't needed and generally tidying up the whole system.

[obfuscator]

I don't know if I agree with cutting social welfare, though I'm all for reforming it.

 

But I agree with the rest :thumbup:

[Assume Nothing]

Seems like a long post to fully read at this time of night.

 

I'm unsure what you mean by 'if the Euro is viable'. The problem I see with the Euro is the base interest rates - with booming growth in Germany and the economic crisis in Greece, it's clear that there needs to be a better system which governs the base rates, as it has a significant effect on economic growth and decline.

 

Hmmm. Could you also clarify the effects of Eastern markets such as China, and the social/political/economical effects of them being the largest creditor to the US?

[obfuscator]

Seems like a long post to fully read at this time of night.

 

I'm unsure what you mean by 'if the Euro is viable'. The problem I see with the Euro is the base interest rates - with booming growth in Germany and the economic crisis in Greece, it's clear that there needs to be a better system which governs the base rates, as it has a significant effect on economic growth and decline.

 

Hmmm. Could you also clarify the effects of Eastern markets such as China, and the social/political/economical effects of them being the largest creditor to the US?

Actually, I read an interesting article about this just today.

 

What does that mean? In 2010, the U.S. spent about $663 billion on its military, China about $78 billion. If the Peoples Republic carries on buying American debt at the rate it has in recent times, then within a few years U.S. interest payments on that debt will be covering the entire cost of the Chinese armed forces. In 2010, the Pentagon issued an alarming report to Congress on Beijings massive military buildup, including new missiles, upgraded bombers, and an aircraft carrier research and development program intended to challenge U.S. dominance in the Pacific. What the report didnt mention is whos paying for it.

 

Answer: Mr. and Mrs. America.

 

To return to the Presidents declared strategy: Weve got a big hole that were digging ourselves out of. Every politicians First Rule of Holes used to be: when youre in one, stop digging. If you dont, as every child knows, eventually you dig so deep you come out on the other side of the worldsomeplace like, oh, China. By 2015 or so, the Peoples Liberation Army, which is the largest employer on the planet, bigger even than the U.S. Department of Community-Organizer Grant Applications, will be entirely funded by U.S. taxpayers. As Bugs Bunny is wont to say when his tunnel comes out somewhere unexpected: I musta took a wrong turn at Albuquerque. Indeed. When the Commies take Taiwan, suburban families in Albuquerque and small businesses in Pocatello will have paid for it.

 

And even that startling scenario is premised on the most optimistic assumptionsof resumed economic growth but continued low interest rates. If interest rates were to return to, say, 5.7 per cent (the average for the period 1990-2010), the debt service projections for 2015 would increase from $290 billion to $847 billion. China would be in a position to quadruple its military budget and stick U.S. taxpayers with the bill.

 

http://www2.macleans.ca/2011/08/18/get-ready-for-armageddon/

[sees_all1]

The USA

 

In the US, a routine debt-ceiling increase was manipulated for political gain by the Republican Party, who used their majority in the House of Representatives to their advantage. Subsequently, Barack Obama - a paltry negotiator at the best of times - failed to get the extra tax revenues he wanted, while the Republicans (thanks largely to the uncompromising Tea Party and their reckless brinkmanship) got both the spending cap and the cuts they wanted. The debt-ceiling was also raised enough to be an issue only after the 2012 election.

 

I wouldn't have assessed it that way...

 

Anyhow, there's three things that people are probably missing:

 

1. The U.S.'s problem isn't a revenue problem, it's a spending problem.

Yes, revenue is down, but spending is up nearly 100% from 10 years ago.

 

2. The "cuts" that the Republicans weren't actually cuts by a reasonable definition. The Congressional Budget Office scores budgets on a ten year basis, with an assumption that the federal government will grow by 3-10% per year. The "cuts" that the Republicans got were actually reductions in the amount the federal government will increase, instead of spending less from one year to the next.

If the budget was frozen at its current level for 10 years, the CBO would have said they planned on cutting something like 9.4 trillion dollars.

 

3. Congress can't bind future Congresses with their budget projections. The real amount the budget was reduced this year was about a billion dollars, and that's all that is guaranteed.

[obfuscator]

Even though they don't have a revenue problem, taking real, effective action to reduce this debt requires higher taxes.

[sees_all1]

Even though they don't have a revenue problem, taking real, effective action to reduce this debt requires higher taxes.

As far as the theoretical goes, this isn't necessarily the case.

[hide=Laffer curve]

This is actually a pretty interesting concept. While the theoretical does nothing to predict where the "best rate" might be, it does show that higher doesn't necessarily raise more revenue.

http://en.wikipedia.org/wiki/Laffer_curve

[/hide]

 

Two images below - highest marginal rate, and tax revenue as a percentage of GDP.

[hide]

[/hide]

 

As far as tax policy goes, I think we'd have a whole lot of good if the tax code was simplified, all rates reduced, and all loopholes were eliminated. Given D.C.'s group-think and doublespeak, I doubt we'll see it happen in the near future.

[Giordano]

Above post ^

 

I agree. The whole system is inefficient at targeting those who need to be taxed and how much. A raise in taxes would only mean a raise in taxes for the working class; corporations would get discounts and the rich won't pay much more.

 

 

We have to go back to the basics: if you're spending more than you earn there's going to be a problem. A moderate debt is fine, we've been surviving for centuries on it, but the way we're spending now is extreme.

 

The War on Terrorism and Drugs are, I think, the two biggest reasons for the overspending. Ironically, education and public services are being reduced. :rolleyes:

[magekillr]

Before reading any posts, here's my two cents:

 

USA

 

The USA doesn't have a debt/deficit problem in the short or medium term. We are in a deflationary spiral. I've said it since 2009: the stimulus we passed was entirely too small to fill the gap in demand that has eroded since the housing bubble busted. Thus unemployment is still high, demand is still low, and growth is anemic and weak (and could possibly go back to recession). This will continue until the housing market is fixed (which Treasury's HAMP program has been an abysmal failure). Moreover, despite the downgrade -- which in my opinion was entirely political, and it was because the DoJ was planning to investigate the agency -- US debt has been getting cheaper and cheaper. In fact, people are practically paying the US to borrow. Interest rates are NEGATIVE:

 

 

We should be spending money until the bond market tells us to stop.

 

And even if you dislike spending money on -- in addition to trains -- roads and water pipes and bridges and the electrical grid, presumably you don't dislike money in your pocket. So, relative to baseline taxation and borrowing, the federal government right now should cut taxes by $X billion and increase borrowing by $X billion, and then later raise taxes by $X billion and decrease borrowing by $X billion.

 

This amounts to buyers of Treasury notes giving taxpayers a negative-interest loan. I'm finding it really hard to come up with a coherent and non-sociopathic political orientation that would disapprove of this plan, but I've only been trying for about two minutes.

 

The stimulus and discretionary spending are a drop in the bucket compared with our structural deficit in Medicare. When we fix our health care system, we fix our long-term debt crisis. It's only a crisis in the long-term. The market has been telling us this since forever. But the conservatives keep telling me that runaway inflation and Bond Vigilantes are right around the corner...any day now...any day...(not). A few conservatives, like Bush's speech writer David Frum, have been coming around to seeing that they were wrong, but the GOP is a religious organization, not a political party. If the last debate didn't tell you that, nothing will (when asked if they would accept an agreement to raise taxes $1 for every $10 in spending cuts, every presidential candidate said "no").

 

But we can't expect to get much stimulus or economic growth while Republicans control any branch of government. It is absolutely vital that they're defeated, and badly.

 

Europe

 

Thanks to the recent actions by the ECB, Italy and Spain have started to avert disaster. But now we're learning that both France AND Germany are starting to face weak growth themselves (when the rest of the world is sucking, what else can you guys expect?) They seemed to think that inflation in Germany would be far worse than staving off financial collapse everywhere else; wrong answer, fellas. The Euro as a currency can be saved, but only if there's a way to make it workable. Right now it's acting like a defacto Gold Standard, where Ireland, Portugal and Greece are forced to bear the brunt of high interest rates and default when they instead could have devalued their currency and endured high inflation. Neither would have been ideal, but controlling your own currency is absolutely vital in a crisis like this. In fact, if the UK joined the Euro, they'd be in some deep [cabbage] right now.

 

Speaking of the UK: austerity? A disaster, just as I said it would be. There was no bond market forcing it on you Brits, either. George Osborne and his ilk can talk about ice storms and nuclear meltdowns as being the fault of flatlined growth, but the reason is due to austerity. Oh sure, it hasn't even totally kicked in yet (which is what really worries me), but that's just it. Investors don't see any growth in the future, so why risk their money with such [cabbage] demand? A good sign, though:

 

Bank of England policy maker Adam Posen’s 11-month push for more stimulus is now shaping the debate among officials as they consider whether the U.K. needs more quantitative easing to fight the danger of Europe’s crisis.

 

With no policy maker seeking an interest-rate increase after Spencer Dale and Martin Weale switched votes, the discussion on the Monetary Policy Committee has shifted toward Posen’s agenda

 

Posen’s BOE Stimulus Push Shapes Debate as European Debt Crisis Persists

 

It's good to see at least someone in charge has some sense. The UK should not have committed to austerity measures. It was and continues to be a mistake. I just hope the US doesn't enact such immediate cuts ourselves.

 

In the end, I'd like the Euro gone. I just don't see any way to make it workable. Also, Merkel and Sarkozy are talking about balanced budgets being forced on any Eurozone members. Are they out of their bloody minds? Look, as with our states which mostly require kind of fake balanced budgets, it isn't necessarily (though I still think wrong) horrible as long as there is a central government which can step in. But absent automatic regional transfers during recessions, this is just a horrible horrible policy. The Euro (the entity, not the currency) should hold up and keep trade as free as it possibly can, but many economists predicted that it (the currency) wouldn't survive its first crisis because of how ill-thought out it was.

 

Big edit: it looks like I'm going to have a lot of fun showing how wrong sees_all1 is, but I'll save that for later. I'm too tired right now.

[obfuscator]

The USA doesn't have a debt/deficit problem in the short or medium term. We are in a deflationary spiral. I've said it since 2009: the stimulus we passed was entirely too small to fill the gap in demand that has eroded since the housing bubble busted. Thus unemployment is still high, demand is still low, and growth is anemic and weak (and could possibly go back to recession). This will continue until the housing market is fixed (which Treasury's HAMP program has been an abysmal failure). Moreover, despite the downgrade -- which in my opinion was entirely political, and it was because the DoJ was planning to investigate the agency -- US debt has been getting cheaper and cheaper. In fact, people are practically paying the US to borrow. Interest rates are NEGATIVE:

 

The US came within a week of defaulting on their debt - and you're saying there's no debt/deficit problem in the short term?

 

I agree that the stimulus was too weak - but realistically I think it was all that could be done. There's no point in trying to spend yourself out of a hole in the short term only to dig yourself in deeper long term.

 

 

We should be spending money until the bond market tells us to stop.

 

No, we shouldn't, because that's what got us into this mess in the first place.

 

And even if you dislike spending money on -- in addition to trains -- roads and water pipes and bridges and the electrical grid, presumably you don't dislike money in your pocket. So, relative to baseline taxation and borrowing, the federal government right now should cut taxes by $X billion and increase borrowing by $X billion, and then later raise taxes by $X billion and decrease borrowing by $X billion.

 

I don't dislike spending money at all, in fact I encourage it. What I dislike is spending money I don't have.

 

 

The stimulus and discretionary spending are a drop in the bucket compared with our structural deficit in Medicare. When we fix our health care system, we fix our long-term debt crisis. It's only a crisis in the long-term. The market has been telling us this since forever. But the conservatives keep telling me that runaway inflation and Bond Vigilantes are right around the corner...any day now...any day...(not). A few conservatives, like Bush's speech writer David Frum, have been coming around to seeing that they were wrong, but the GOP is a religious organization, not a political party. If the last debate didn't tell you that, nothing will (when asked if they would accept an agreement to raise taxes $1 for every $10 in spending cuts, every presidential candidate said "no").

 

I agree with fixing the health care system, but how exactly do you propose we do that? Just because you claim something is a crisis in the long term (which I disagree with) also doesn't mean we should do nothing to fix it in the short and medium terms.

[Crocefisso]

As far as tax policy goes, I think we'd have a whole lot of good if the tax code was simplified, all rates reduced, and all loopholes were eliminated. Given D.C.'s group-think and doublespeak, I doubt we'll see it happen in the near future.

This is a problem that I've heard a lot about and considered mentioning; the American tax system is very convoluted and this likely affects the state's revenues negatively. As far as change goes, there are too many conflicting interests in Washington for any real change to happen in the foreseeable future.

[obfuscator]

As far as change goes, there are too many conflicting interests in Washington for any real change to happen in the foreseeable future.

 

Unfortunately this is completely true, and I believe it will eventually prove catastrophic for the US.

[SwreeTak]

The financial mess is something which I have read and seen quite a lot about. It was therefore interesting to read this your summary of it here on TIF.

I just wanted to say that it is good to see that the subject is up here to discussion. Oh, and yes, of course, that I am happy that I live in Sweden and that we still have our SEK (and not those stupid euros).

[magekillr]

The USA doesn't have a debt/deficit problem in the short or medium term. We are in a deflationary spiral. I've said it since 2009: the stimulus we passed was entirely too small to fill the gap in demand that has eroded since the housing bubble busted. Thus unemployment is still high, demand is still low, and growth is anemic and weak (and could possibly go back to recession). This will continue until the housing market is fixed (which Treasury's HAMP program has been an abysmal failure). Moreover, despite the downgrade -- which in my opinion was entirely political, and it was because the DoJ was planning to investigate the agency -- US debt has been getting cheaper and cheaper. In fact, people are practically paying the US to borrow. Interest rates are NEGATIVE:

 

The US came within a week of defaulting on their debt - and you're saying there's no debt/deficit problem in the short term?

 

Do you know why it came within a week of defaulting? It's because Republicans are bat[cabbage] crazy and held it ransom. We only came within a week of defaulting because of the debt ceiling. In effect, it's making Congress appropriate money they've already appropriated. It should be eliminated. There's a short-term political problem, and that's having Republicans control any branch of Congress. Republicans are pretty new to governing -- from 1931 to 1995, the Republicans had control of the House of Representatives only twice, and both times they had it for only a single two-year cycle. The history of the Senate is much the same. The Democrats took over the Senate in 1932 and held it with the same two brief interruptions (1946-47 and 1953-54) until the Reagan Revolution swept them into power in 1981. They lost their majority after the 1986 midterms and gained it back in 1994.

 

Moreover, if it came down to it, there were methods to go around Congress and the debt ceiling. We weren't going to default.

 

I agree that the stimulus was too weak - but realistically I think it was all that could be done. There's no point in trying to spend yourself out of a hole in the short term only to dig yourself in deeper long term.

 

When interest rates are this low, it makes a lot of sense. It's cheaper to spend now on infrastructure and investment than it has ever been (I think interest rates are at their lowest levels since WWII). When we have 9% unemployment and negative interest rates, there is no better time than now to spend money. Bill Gross says the same thing:

 

“Government must temporarily assume a bigger, not a smaller, role in this economy, if only because other countries are dominating job creation with kick-start policies that eventually dominate global markets.” But what about the deficit? “Deficits are important, but their immediate reduction can wait for a stronger economy and lower unemployment. Jobs are today’s and tomorrow’s immediate problem.”

 

Gross goes on to offer some ideas for how the government can goose job growth, both in the short term and the long term. Some of them I find convincing, some of them I don’t. But his overall point is well-taken, and more subtle than some commentators are giving it credit for: Politicians have increasingly been pretending that deficit reduction slices, dices and blends. Don’t believe them. Cutting deficits tends to destroy jobs. And though the deficit matters in the long run, we need to survive the short run first.

 

Gross’s credentials as a deficit hawk are unimpeachable, but he’s arguing here that, to be a deficit hawk over the long term, you need to be jobs-focused now, as no economy with 9 percent unemployment is going to achieve the growth necessary to get its deficit under control. And he’s right. The question is whether his call for the government to refocus on jobs and brush aside fantasies that deficit reduction is also job creation will get as much attention as his concerns about debt and deficits.

 

Bill Gross: Deficit reduction can — and should — wait

 

 

No, we shouldn't, because that's what got us into this mess in the first place.

 

It's maybe what got Greece into this mess in the first place, but what got us into this mess into the first place was a global financial bubble combined with banking deregulation. Spain and Ireland were running sound budgets in 2007. And now all of the sudden they're in trouble? It's not because they took on too much debt, it's because of a global financial meltdown due to a collapsed housing bubble. It has [bleep] all to do with debt and deficits (again, except for maybe in Greece, which frankly shouldn't have been admitted into the Eurozone in the first place).

 

I don't dislike spending money at all, in fact I encourage it. What I dislike is spending money I don't have.

 

If someone offered you a negative interest loan over a 10 year period -- they are paying you to spend money -- you wouldn't do it? Even with the prospect of future growth? Every business spends money that they "don't have" because of the prospect of future growth and profits. I just spent money I didn't have to attend college. Are you saying I should have paid cash?

 

I agree with fixing the health care system, but how exactly do you propose we do that? Just because you claim something is a crisis in the long term (which I disagree with) also doesn't mean we should do nothing to fix it in the short and medium terms.

 

Fixing the short and medium term deficit is such small potatoes when compared with Medicare; it will slow growth and make the crisis worse. I don't think you realize just how crushing America's health care system is. If we had England's level of health care spending per capita, we would be running long-term budget SURPLUSES.

 

Not to mention that the best way to reduce the deficit is to create jobs. This is why investors are pouring into US Treasuries: they fear lack of growth more than debt.