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I totally agree with your point that 'debt-fueled growth' is not real growth. However, larger countries (especially those like the US and UK that have central banks) can fuel GDP through public stimulus and (if implemented correctly) can proportionately reduce the debt ratio.
Debt ratio= Accumulated debt/Accumulated Assets. When investment in assets produces a return less than your cost of debt what happens? And "public stimulus" comes from where exactly...?
You're talking to someone who understands the Keynsian argument well enough. I submit to you that deficit spending to cushion the downturn only works when the investment in capital can produce post-recession returns above and beyond the cost of debt. But when you dive into the downturn with a massive overhang (like today), how much debt do you suppose a state would have to take on to create productive capacity to make up for the accumulated debt? And when you answer that question, then please tell me where you're going to find the demand for that capacity.
This is why I asked you earlier to point to the economy that entered a recession with the level of debt that the UK and US currently carry, and pulled out of it by more deficit spending. I'd still like to see that example, please.
Quote:
Originally Posted by ian6479
If you cut spending then you reduce GDP (like the UK right now) and actually increase your debt ratio. When unemployment rises, tax receipts fall bringing about the viscous cycle.
State spending is false GDP unless it's invested in productive capacity. See my argument above. But there comes a point where the cumulative cost of servicing debt outstrips your capacity to make up for it with productive investment. When that point is reached, a state has no choice but to reduce the interest burden on cumulative debt to ensure long term solvency. This is the uncomfortable truth I refer to in my prior message: the UK and US need to face up to the fact that they're poorer than they thought.
Quote:
Originally Posted by ian6479
If a business seeks to expand then it must do through taking on loans right?
No. If a business seeks to expand, it does so by identifying new markets, being more efficient than competitors and capitalizing on new opportunities by using the resources it saved during the good times, or attracting new investors. If successfully expanding business were only about taking out loans, I'd be an entrepreneur tomorrow.
In a tight credit market, those that have no capital in reserve or fail to attract investment should and will go out of business. That's the very essence of creative destruction.
Quote:
Originally Posted by ian6479
But the UK and US can inject their own self-funded debt driven by a 'loan' to the central bank. The UK and the US do not need to loan from other countries - in fact only a small proportion of US debt is actually held by foreign countries. Debt in public terms is totally different than private debt in that it is mostly money owed to ourselves. I'm not saying that this is a sustainable monetary policy, it isn't, but it is not anything like a credit card bill for example. So long as both countries can control inflation (in fact, some increase in the US right now would be a good thing) and the value of their currency then they should be able to adequately control debt through stimulus - so long as it is invested in job creation policies, growth areas..
So let me understand what you're saying. The UK and US should increase the money supply, thus reducing the value of savings for those who cushioned themselves for the hard times? And who is making this loan that you refer to? Nobody? And should that money should then be invested in job creation/growth area policies that do exactly what? Invest in "shovel ready projects"? What capacity would these projects create? Who would then consume the products of this capacity? And most importantly, what would the return on capital be vs. the cost of debt?
Debt ratio= Accumulated debt/Accumulated Assets. When investment in assets produces a return less than your cost of debt what happens? And "public stimulus" comes from where exactly...?
You're talking to someone who understands the Keynsian argument well enough. I submit to you that deficit spending to cushion the downturn only works when the investment in capital can produce post-recession returns above and beyond the cost of debt. But when you dive into the downturn with a massive overhang (like today), how much debt do you suppose a state would have to take on to create productive capacity to make up for the accumulated debt? And when you answer that question, then please tell me where you're going to find the demand for that capacity.
This is why I asked you earlier to point to the economy that entered a recession with the level of debt that the UK and US currently carry, and pulled out of it by more deficit spending. I'd still like to see that example, please.
State spending is false GDP unless it's invested in productive capacity. See my argument above. But there comes a point where the cumulative cost of servicing debt outstrips your capacity to make up for it with productive investment. When that point is reached, a state has no choice but to reduce the interest burden on cumulative debt to ensure long term solvency. This is the uncomfortable truth I refer to in my prior message: the UK and US need to face up to the fact that they're poorer than they thought.
No. If a business seeks to expand, it does so by identifying new markets, being more efficient than competitors and capitalizing on new opportunities by using the resources it saved during the good times, or attracting new investors. If successfully expanding business were only about taking out loans, I'd be an entrepreneur tomorrow.
In a tight credit market, those that have no capital in reserve or fail to attract investment should and will go out of business. That's the very essence of creative destruction.
So let me understand what you're saying. The UK and US should increase the money supply, thus reducing the value of savings for those who cushioned themselves for the hard times? And who is making this loan that you refer to? Nobody? And should that money should then be invested in job creation/growth area policies that do exactly what? Invest in "shovel ready projects"? What capacity would these projects create? Who would then consume the products of this capacity? And most importantly, what would the return on capital be vs. the cost of debt?
I understand that you understand Keynes economics – I just don’t understand why your arguments are against it while simultaneously seem to support the opposite. I’m happy to admit that I can’t point to examples of postwar examples whereby countries ‘spent their way out of debt’ with fiscal stimulus, but we do have a lot of experience with anti-stimulus, which is obviously hugely contractionary. We also have very little historical examples of the kind of recession we’re experiencing globally now. I would ask you: can you think of a model in which austerity is contractionary but stimulus isn’t expansionary? I doubt it. There is evidence however from fiscal expansions in the 1930s, which actually did lead to economic growth. What we do have is a model of how the world works now, and many economists from all over the world have provided countless studies that support fiscal stimulus under current conditions. Remember when conservatives were screaming about inflation and interest rates a few years ago? Well, it hasn’t happened - even given the increase in money supply and a Keynes approach so far in the US (even though a feeble one).
If we look back through history we can clearly see that conservative economic policies have caused recession and depression. We can also see that recession and depression in America were caused during times when there was less government regulation in the economy. Whenever taxes have been low, there has been a proportionately larger transfer of wealth to the richest in society – this actually preceded the Great Depression. I am not going to patronize with an explanation of the ‘new deal’ – that speaks for itself right? When Ronal Reagan became president the US had enjoyed a huge boom after WW11, whereby the highest rate of tax was actually 70%. Reagan followed the supply side model and cut taxes, lowered regulation of the economy, and cut federal spending. The result was a recession and one of the highest American poverty rates ever, just behind the Great Depression. The same was true of “Thatcherism” in the UK – in my mind, one of the worst PMs in British history.
I will also say this: no country has driven itself into a debt crisis with stimulus, nor has any country with significant debt regained investor confidence through austerity. Slashing government spending during recession further depresses the economy – it always has and always will. Spending should be decreased, but not until a full recovery is under way. Governments in both countries have spent too much during the good times and have let unregulated free market capitalism do its thing – that is the problem. Surpluses should be pursued during growth periods and deficits should be run during negative growth periods. The problem in the UK is that the government is focused on the deficit rather than jobs. In the US the attempt to slow the recession through stimulus hasn’t been strong enough – the stimulus was too small and has, to a large extent, been offset by cuts at state and local levels. A large part of it was also in the form of ineffective tax cuts and “shovel ready” programs (as you pointed out).
I don’t need to point to the results across Europe to vindicate my opposition to austerity – you only have to look at Greece, Ireland, Spain etc. It’s good to see that the noise coming from Europe is that austerity is failing, but it’s not good that the alternative doesn’t seem to be an option right now, and George Osborne has just recently spoke of the need to “stick to the plan”.
I will point to another example within the private market – GM. They also slipped into the abyss a few years ago, but thanks to a bailout (loan) they are now the world’s largest car manufacturer once more and solvent. You spoke of the cost of debt not exceeding income from GDP growth - in the US every dollar’s worth of foreign claims on America is matched by 89 cents’ worth of U.S. claims on foreigners. And because foreigners tend to put their U.S. investments into safe, low-yield assets, America actually earns more from its assets abroad than it pays to foreign investors. Now, taxes must be taken to pay the interest, and this of course imposes some cost on the economy, if nothing else by causing a diversion of resources away from productive activities into tax avoidance and evasion. But these costs are a lot less dramatic than the analogy of a household budget and certainly not anywhere near as much of a cost as unemployment and long term economic strength.
We need more, not less, government spending to get us out of our unemployment trap. And the ill-informed obsession with debt is standing in the way. Yes, the money supply should be increased - so far inflation hasn't been an issue. And yes, the value of savings could diminish depending on inflation but the largest effect is on the wealthiest, and a small price to pay for the greater good.
Blah, Blah, Blah. People need jobs-good jobs. If companies now making lots of money such as " Amazon" do not give back then it will be a non ending recession.
Yeah you are right it is everyone on the doles fault, how dare they live of a luxurious 45 pound a week when the stinking rich who really have it hard are struggling to pay taxes!
I don't disagree with the principle of your argument, but purely for the sake of accuracy the basic rate of benefit is:
Under 25 £56.25 Over 25 £71.00 Couples, civil partnerships £111.45
Not saying that is a lot mind you.
Recession? What? The UK economy has just stagnated for now. Growth of 0.1% and contraction of -0.2% are not different, except on paper. 2012, with the Queen's jubilee, the Olympics, extra bank holidays and major construction projects coming to a close, was always going to be a poor year for growth, virtually the same as 2011. Next year is when the economy should start to creep up out of the doldrums. For now, we join Ireland, Spain, and the Netherlands in technical recession (yes, the Netherlands, didn't expect that, did you!?)
Anyway, I really hope this ridiculous 'double dip' crap doesn't put the government off its deficit reduction plan. Whether the government is cutting too hard too fast or not is one thing but the government cannot borrow any more money, and debt fueled growth like the US and Japan is not an option and is not at all good long-term (Japan's economy is pretty much in the ****ter for at least the next decade)
Debt ratio= Accumulated debt/Accumulated Assets. When investment in assets produces a return less than your cost of debt what happens? And "public stimulus" comes from where exactly...?
You're talking to someone who understands the Keynsian argument well enough. I submit to you that deficit spending to cushion the downturn only works when the investment in capital can produce post-recession returns above and beyond the cost of debt. But when you dive into the downturn with a massive overhang (like today), how much debt do you suppose a state would have to take on to create productive capacity to make up for the accumulated debt? And when you answer that question, then please tell me where you're going to find the demand for that capacity.
This is why I asked you earlier to point to the economy that entered a recession with the level of debt that the UK and US currently carry, and pulled out of it by more deficit spending. I'd still like to see that example, please.
State spending is false GDP unless it's invested in productive capacity. See my argument above. But there comes a point where the cumulative cost of servicing debt outstrips your capacity to make up for it with productive investment. When that point is reached, a state has no choice but to reduce the interest burden on cumulative debt to ensure long term solvency. This is the uncomfortable truth I refer to in my prior message: the UK and US need to face up to the fact that they're poorer than they thought.
No. If a business seeks to expand, it does so by identifying new markets, being more efficient than competitors and capitalizing on new opportunities by using the resources it saved during the good times, or attracting new investors. If successfully expanding business were only about taking out loans, I'd be an entrepreneur tomorrow.
In a tight credit market, those that have no capital in reserve or fail to attract investment should and will go out of business. That's the very essence of creative destruction.
So let me understand what you're saying. The UK and US should increase the money supply, thus reducing the value of savings for those who cushioned themselves for the hard times? And who is making this loan that you refer to? Nobody? And should that money should then be invested in job creation/growth area policies that do exactly what? Invest in "shovel ready projects"? What capacity would these projects create? Who would then consume the products of this capacity? And most importantly, what would the return on capital be vs. the cost of debt?
I don't think you really understand much at all if you sincerely believe that unrestrained austerity is 'the only game in town'. What happened to the pro-austerity myth that the private sector and entrepreneurial spirit would step in and pick up the slack of a deflated and punctured public sector?
People talk about wealth creators like the clunky and heavy handed philosophy of Ayn Rand's 'Atlas Shrugged' holds any credibility. We are not bankrupt because there are too few billionaires and multi-millionaires in our country or across the Atlantic for that matter. We are broke because there are large amounts of exorbitant wealth lying dormant in bank accounts as banks refuse to lend and aggregate demand is stalled as entrepreneurs are reluctant to invest.
What you forget is that we built the NHS and the welfare state in the post-war years and it led to the biggest period of sustained growth in British history. The free market fundamentalists never appear to give credit to the Government funded schemes that created revolutionary technology like Google and took the kind of risks that the cautious private sector would never dream of taking.
Contrary to myth the filthy rich do not like taking risks. That is why the taxpayer is lender of last resort and the financial sector doesn't take responsibility for holding assets in reserve. In effect it privatises the profits and socialises the debt.
All well and good for the few but it cripples the rest of the globalised and home-grown economy. With aggregate demand stalled, no-one in employment, no-one paying taxes and no-one with money to spend an economy reliant on consumer spending and making money out of thin air (i.e. London, England, New York and America) is always going to be stuck in stagnation and a downward spiral.
So far you cannot deny that the esteemed economists and critics of the too fast too hard school of 'pulling up your bootstraps' authority have been proven correct in pinpointing all the flaws that eventually came to pass. Those who predicted this crash as well as the double dip recession (such as Nouriel Roubini) were right. Everything that we have warned has come into fruition whilst all George Osbourne's predictions have been exposed as economically pitiful or if we are to believe he has an ounce of economic nous some kind of sick joke.
Understanding Keynes doesn't mean you grasp the self-defeating purge that is a repetitive double-blow to the economy. Businesses cannot operate or function with a staff that is not educated, not healthy and less incentivised. The corporate sector are the biggest welfare recipients of them all.
They receive subsidies in the form of tax credits to top up their meagre wages. They have their workforce educated by the state (predominantly though obviously the Oxbridge elites dominate the top jobs), their employees healthcare taken care of by the state, their employees pension taken care of by the state and the infrastructure that gets their employees to work paid for by the state.
Some businesses based overseas pay little if any corporation tax at all whilst contributing disproportionately from the taxpayer propping up their businesses and absorbing all the risk. Whilst taking none of the benefits. This race to the bottom to sustain a bubble wrapped and cocooned from reality ever expanding gut of gluttony at the top end of the lopsided wage spectrum has to be balanced before it is too late.
We are in a double dip recession because you cannot cut your way out of a recession. It is that simple. History has shown that this has never worked and it never well. Conservatives point to the deficit as the reason behind this global downturn but Spain, Ireland and Iceland were in surplus when this recession hit so that argument is completely bogus.
In fact state investment is an integral part of an economy and if removed from the equation all we will be left with is cautious businessman with huge vaults and reserves of assets and resources unwilling to invest because they are operating in a country where only 10 per cent of the population can afford to go out and spend.
Creating jobs and infrastructure projects reverses this trend not only by reducing the unemployment benefits tab but by administering an injection of skills and much needed cash flow into circulation that lifts the economy and builds the training centres and innovative schemes that will generate the Google’s and technological forays into the future that will give the next generation the skills and ability to operate, contribute and thrive in a stabilised economy where balanced wage equilibrium is the fundamental key.
Without the public sector there would be no financial sector today. Without Government investment the private sector wouldn't have the confidence to take risks and invest in the infrastructure and jobs that will pave the way for our future stability.Even the Chicago school and the likes of Alan Greenspan have conceded that laissez faire was a busted flush.
Do you still believe in the hocus-pocus guff of the self-regulating market? Because it appears to me as each one of the free market fundamentalist models gets deconstructed as predicted by its detractors the stronger the rallying cry that it is all the fault of some retired nurse on a measly pension in Eastbourne or Skegness.
Not buying it. And there is an alternative to the self-serving delusion of 'market knows best' pomposity.Where will it end? And when will it reach the point where the stubborn rabble of nothing to lose austerity protaganists will concede they are wrong and change course for the good of the people? The answer is never because commenters like your good self wil forever delude yourself that however bad it gets anything else is ten times worse.
But then it is easier to be in denial when you aren't at the sharp end of the farcical and self-defeating chainsaw massacre slash n' burn demononics agenda as proposed by Ayn Rand fantacists and austerity compliant androids who have been foolishly manipulated into believing more of the same toxic medicine will eventually stimulate growth in this flagging economic climate.
Sadly there is more chance of the magical mysticism of the 'self-regulating' market leading us to salvation like a message in a bottle thrown off the white cliffs of Dover that will magically find its way to a secret marine lizard called Yoda who lives at the bottom of the sea.
A Yoda who will find the urgent message that "Mankind seeks help" and instigate a solution based around the hocus-pocus of Reaganomics where he will insist that if we all give away all our money and everything we own to billionaires who know better than we mere mortals and then we'll hold hands and chant the words:...... "May the force be with us" whilst the deficit is wiped out in one week and everyone will be dancing in rivers of gold by the end of the year as the wise oracle of bloated greed gets to work on sacraficing all for the people and social provision it seeks to sever.
Last edited by Fear&Whiskey; 05-04-2012 at 02:00 PM..
I don't think you really understand much at all if you sincerely believe that unrestrained austerity is 'the only game in town'. What happened to the pro-austerity myth that the private sector and entrepreneurial spirit would step in and pick up the slack of a deflated and punctured public sector?
People talk about wealth creators like the clunky and heavy handed philosophy of Ayn Rand's 'Atlas Shrugged' holds any credibility. We are not bankrupt because there are too few billionaires and multi-millionaires in our country or across the Atlantic for that matter. We are broke because there are large amounts of exorbitant wealth lying dormant in bank accounts as banks refuse to lend and aggregate demand is stalled as entrepreneurs are reluctant to invest.
What you forget is that we built the NHS and the welfare state in the post-war years and it led to the biggest period of sustained growth in British history. The free market fundamentalists never appear to give credit to the Government funded schemes that created revolutionary technology like Google and took the kind of risks that the cautious private sector would never dream of taking.
Contrary to myth the filthy rich do not like taking risks. That is why the taxpayer is lender of last resort and the financial sector doesn't take responsibility for holding assets in reserve. In effect it privatises the profits and socialises the debt.
All well and good for the few but it cripples the rest of the globalised and home-grown economy. With aggregate demand stalled, no-one in employment, no-one paying taxes and no-one with money to spend an economy reliant on consumer spending and making money out of thin air (i.e. London, England, New York and America) is always going to be stuck in stagnation and a downward spiral.
So far you cannot deny that the esteemed economists and critics of the too fast too hard school of 'pulling up your bootstraps' authority have been proven correct in pinpointing all the flaws that eventually came to pass. Those who predicted this crash as well as the double dip recession (such as Nouriel Roubini) were right. Everything that we have warned has come into fruition whilst all George Osbourne's predictions have been exposed as economically pitiful or if we are to believe he has an ounce of economic nous some kind of sick joke.
Understanding Keynes doesn't mean you grasp the self-defeating purge that is a repetitive double-blow to the economy. Businesses cannot operate or function with a staff that is not educated, not healthy and less incentivised. The corporate sector are the biggest welfare recipients of them all.
They receive subsidies in the form of tax credits to top up their meagre wages. They have their workforce educated by the state (predominantly though obviously the Oxbridge elites dominate the top jobs), their employees healthcare taken care of by the state, their employees pension taken care of by the state and the infrastructure that gets their employees to work paid for by the state.
Some businesses based overseas pay little if any corporation tax at all whilst contributing disproportionately from the taxpayer propping up their businesses and absorbing all the risk. Whilst taking none of the benefits. This race to the bottom to sustain a bubble wrapped and cocooned from reality ever expanding gut of gluttony at the top end of the lopsided wage spectrum has to be balanced before it is too late.
We are in a double dip recession because you cannot cut your way out of a recession. It is that simple. History has shown that this has never worked and it never well. Conservatives point to the deficit as the reason behind this global downturn but Spain, Ireland and Iceland were in surplus when this recession hit so that argument is completely bogus.
In fact state investment is an integral part of an economy and if removed from the equation all we will be left with is cautious businessman with huge vaults and reserves of assets and resources unwilling to invest because they are operating in a country where only 10 per cent of the population can afford to go out and spend.
Creating jobs and infrastructure projects reverses this trend not only by reducing the unemployment benefits tab but by administering an injection of skills and much needed cash flow into circulation that lifts the economy and builds the training centres and innovative schemes that will generate the Google’s and technological forays into the future that will give the next generation the skills and ability to operate, contribute and thrive in a stabilised economy where balanced wage equilibrium is the fundamental key.
Without the public sector there would be no financial sector today. Without Government investment the private sector wouldn't have the confidence to take risks and invest in the infrastructure and jobs that will pave the way for our future stability.Even the Chicago school and the likes of Alan Greenspan have conceded that laissez faire was a busted flush.
Do you still believe in the hocus-pocus guff of the self-regulating market? Because it appears to me as each one of the free market fundamentalist models gets deconstructed as predicted by its detractors the stronger the rallying cry that it is all the fault of some retired nurse on a measly pension in Eastbourne or Skegness.
Not buying it. And there is an alternative to the self-serving delusion of 'market knows best' pomposity.Where will it end? And when will it reach the point where the stubborn rabble of nothing to lose austerity protaganists will concede they are wrong and change course for the good of the people? The answer is never because commenters like your good self wil forever delude yourself that however bad it gets anything else is ten times worse.
But then it is easier to be in denial when you aren't at the sharp end of the farcical and self-defeating chainsaw massacre slash n' burn demononics agenda as proposed by Ayn Rand fantacists and austerity compliant androids who have been foolishly manipulated into believing more of the same toxic medicine will eventually stimulate growth in this flagging economic climate.
Sadly there is more chance of the magical mysticism of the 'self-regulating' market leading us to salvation like a message in a bottle thrown off the white cliffs of Dover that will magically find its way to a secret marine lizard called Yoda who lives at the bottom of the sea.
A Yoda who will find the urgent message that "Mankind seeks help" and instigate a solution based around the hocus-pocus of Reaganomics where he will insist that if we all give away all our money and everything we own to billionaires who know better than we mere mortals and then we'll hold hands and chant the words:...... "May the force be with us" whilst the deficit is wiped out in one week and everyone will be dancing in rivers of gold by the end of the year as the wise oracle of bloated greed gets to work on sacraficing all for the people and social provision it seeks to sever.
What a wonderful and enlightening post. Alas, it will be wasted on many (just read the post prior to yours as an example of the shallow understanding of how the economy and debt actually work and the reliance on government to provide jobs and growth throughout history).
What a wonderful and enlightening post. Alas, it will be wasted on many (just read the post prior to yours as an example of the shallow understanding of how the economy and debt actually work and the reliance on government to provide jobs and growth throughout history).
Well ian what I always find it deeply disturbing when the public are presented with the illusion that 'there is no alternative'.
Which is why it is important to dispell this myth at every possible opportunity and highlight the flaws and possible alternatives as you have done yourself in this thread.
Which is why I decided to chime in with my two cents. First time I've been back on City Data for a while but good stuff ian.Been spending quite a bit of time on comment is free of late when I get the time and the blogosphere battlefield there can get a bit exhausting but some good posters there too.
I don't expect everyone to agree but what I do expect is a reasonable debate and for pro-austerity stalwarts not to disingenuously present their position as non-ideological or as certain as night follows day.
We have to learn from history, look at our economic situation rationally but right now our coalition seems to have doggedly dug in and prepared for trench warfare while the British people are led like lambs to the slaughter like soldiers at the battle of the Somme.
And just like World War 1 one thing we know for certain is that the majors and generals of the Conservative led coalition won't budge an inch no matter how much carnage is laid bare before them on the battlefield.
Anyway, we can but hope that sanity is restored at some pont. Until 2015 we have little choice.
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.Been spending quite a bit of time on comment is free of late when I get the time and the blogosphere battlefield there can get a bit exhausting but some good posters there too.
.
