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Stop the madness now!

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By Edward Harrison of Credit Writedowns.

A reader at Naked Capitalism asked us to respond to a recent article from the Christian Science Monitor asking Does US need a second stimulus to create jobs?

Marshall Auerback has already done some heavy lifting – and taken all of the heat in the comments. He says emphatically yes.

Now I want to take a crack at this. My short answer is no. But before I go into this, as an aside, I wanted to mention Marshall’s new smiling, happy picture up at the great blog New Deal 2.0 where he now writes.  Earlier, when Credit Writedowns was hosted at Blogger, he used a picture best described as a mug shot in his profile, but he has changed that one too (although he smiles there a little less). He thinks we haven’t noticed this sleight of hand.  Well I have! Once upon a time, Marshall wrote with a man I called all bearish, all the time this summer. Take a look at that post; you don’t see him smiling now do you? We have Lynn Parramore, New Deal 2.0’s editor to thank for making Marshall Auerback into an optimist.

Different policy choices

But all teasing aside, I do want to take the opposite side of this trade.  You see I too was a deficit hawk. And while I may have been backing fiscal stimulus, I have felt conflicted for doing so. Here’s how I see it.

You have four options:

  1. No stimulus. Let the chips fall where they may. Yves Smith calls this the ‘Mellonite liquidationist mode.’ The thinking here is that trying to avoid the inevitable bust only makes it that much larger. And the economic policies during recessions in 1991 and 2001 seem to bear that out. The Harding Recession of 1921 is commonly seen as gold standard response.
  2. Monetary stimulus only. Quantitative easing mania. My understanding is this is what Ambrose Evans-Pritchard has been advocating.   The thinking here is that the flood of money and the low rates will eventually jump start the economy. No deficit spending needed.
  3. Monetary and fiscal stimulus.  Full tilt Keynesian. This is the Krugman view. The thinking here is that one needs to credibly commit to higher inflation and close the output gap to avoid a deflationary spiral. If that is insufficient, then one needs to go full bore on fiscal stimulus aka deficit spending. And if that doesn’t work, subsidize jobs. The New Deal is commonly seen as the gold standard response.
  4. Fiscal stimulus only. Deficit spending. I have been talking up this view. The thinking here is that we need to both close the output gap to prevent a deflationary spiral and revive private sector savings in order to promote deleveraging.

There is no magic bullet here.  We are living through a situation unique in time with few historical precedents. And there are a lot of competing ideas being tossed about. So policy makers are groping around, desperately seeking the holy grail of depression-busting economic policy.  In that regard, I don’t envy them. They are certainly going to make a lot of mistakes. It may seem at times that I don’t realize this given the harshness of my critiques, but I do.

Deficit hawks are misguided

However, there are some policies which could work and others which are flat out wrong.  One policy which is flat out wrong is the concept that we need to reduce deficit spending in order to avoid a double dip recession. This flies in the face of basic economics which says that more spending and less taxes equals greater demand and recovery/boom. More taxes and less spending equals less demand and recession/depression.

Now, it’s not as if we didn’t see this line of argument coming. As far back as November 2008, I heard the chatter (see my post here). So you knew this we-have-to-stop-or-we’ll be-bankrupt nonsense was coming. The problem is it’s just not true.  Here are a few data points:

  • Private sector debt (incl. financial firms) was 292% of GDP as of Q2 but public sector debt (incl. state and local municipalities) was 67.2%. Who’s more indebted – the private sector by a factor of 4.
  • Adding unfunded liabilities to any public debt number when talking about spiking treasury rates is inaccurate and artificially inflates the number. A lot of people do this to make the public debt scenario look worse. The issue at hand is whether a supply/demand imbalance in Treasury securities spikes interest rates. Unfunded liabilities have absolutely nothing to do with this.
  • Cash and bonds are fungible. They are both obligations of the federal government to be repaid in full with a specific sum of fiat money. The Treasury could literally stop issuing government debt altogether and just start crediting accounts electronically to ‘fund’ its purchases. There is no operational constraint to government spending. the U.S. government is not going broke involuntarily. See my post here.

The real issue with deficits causing a double-dip has to do with inflation and overheating. If inflation increases because the economy begins to overheat, interest rates spike and the Fed raises rates to choke off inflation. That’s not going to happen any time soon – although it may be a problem down the line.  The issue at hand now is deflation not inflation. At least Morgan Stanley understands this when they take a deficit hawk position.

And as for the Chinese, they are not going to pull the plug on Treasuries unless they want to tank their export boom. The reason they must buy Treasuries is the dollar peg; they must re-invest in U.S.-based assets in order to prevent their currency from appreciating. This has caused a huge rise in their U.S. dollar reserves. If they changed the peg, their currency would almost certainly rise and this would choke off exports.

No more stimulus, just jobs

I have said my piece about the need for stimulus in the past. So I won’t repeat it here. If you are interested, see my December 2008 posts “Confessions of an Austrian economist,” “What does Mises say about trying to stimulate the economy out of recession,” and “A brief philosophical argument about the role of government.”

But, on the whole, I look at long-term deficits in a dubious light. There are practical constraints to deficit spending – and they lead to inflation, currency depreciation and lower standards of living. This is not national bankruptcy but it is default by inflation and it makes you and me less well off.

This, of course, is over the long-run. In the short run, it is the spectre of a deflationary spiral we care about. Stimulus was important to stop this. I said in February that Obama was making a big mistake with his stimulus measures.

My view here is that Obama is forging a middle path that leads to a dead-end. The stimulus is not nearly enough by half to get the job done. The proposed deficit reduction measures for 2013 are outright scary as they risk repeating a mistake from the 1930s. And the banking sector and mortgage plans, both of which I failed to mention, are dubious half-measures as well. One needs to act aggressively and proactively or not at all.

If you are going to deficit spend you need to do it in a big way. You need to stop the deflationary spiral.  That means hitting the reset button by promoting private sector savings and deleveraging and purging all built-up malinvestments. The risk in addressing the situation this way, of course, is replacing the imperfect invisible hand of markets with the imperfect hand of politicians and legislative fiat.

This is a risk I no longer see as worth taking. I have bailout and deficit fatigue just like most Americans. It is abundantly clear that this Administration has absolutely zero intention of purging any malinvestment or promoting any deleveraging. All they want to do is continue business as usual and go back to the asset-based economy that caused this mess. This is why we have seen bailout after bailout coupled with easy money. It makes for record profits on Wall Street but it does nothing for the unemployed.

Moreover, the political process in the U.S. is such that any stimulus money will be diverted to pet projects and used to pay off political constituents. While this may increase aggregate demand, it does so at the risk of serious social unrest as the outrage will certainly spill over into populism.

So I say no to a second (third) stimulus package.  What the President needs to focus on is jobs. The reason Obama’s poll numbers are shrinking is because he now owns this economy.  And people are not benefitting from this fake recovery.  They are angry at the bailouts and distrustful of government – and with good reason.

Cut payroll taxes, subsidize job creation, divert some military spending to direct job creation by ending the foreign wars. But stop the madness.

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward

91 comments

  1. Gary J

    Great post Ed – seems to me your are touching on an entirely new field of economics, one that actually collides with the real world and human nature. Lets called it “Pragnomics” – all successful investors follow this school.

    Marshall is clearly brilliant in his technical assessment, but when it comes to actually spending said required deficits, greedy, evil people start rubbing their hands together. This is where the political process seriously distorts and flaws Marshall’s brilliant work. In other words the execution of plan is as important or even more important than a plan.

    Despite this I still think the political process in America will ensure “muddlenomics” for at least the next 2-3 years – or at least until unemployment passes 12%.

    Keep up the good work.

  2. alex

    Edward Harrison: “Monetary and fiscal stimulus. Full tilt Keynesian. This is the Krugman view. … Fiscal stimulus only. Deficit spending. I have been talking up this view.”

    What makes me question the Krugman view is that the Fed’s effectively 0% rates seem to just make the spread between the rates the banks borrow at and the banks lend at that much greater. Great for the banks, but how much does it do for everyone else? No reasonable person would suggest high Fed rates at this point, but does 0% really help anyone else? And isn’t letting the banks recapitalize on this spread just monetizing the banks’ bad debts? I thought monetizing debt was a big non-no, but if it’s necessary, why shouldn’t the taxpayers get the free ride instead of the banks? Any comment?

    “serious social unrest as the outrage will certainly spill over into populism”

    Populism doesn’t necessarily lead to “social unrest”, certainly not of the violent sort. If anything it’s a necessary democratic outlet. A loud protest is not a riot (much as the Pittsburgh police may not appreciate the distinction). Please don’t misuse populism as a synonym for demagoguery.

  3. Jim in MN

    Reposting this in part to correct spelling but monstly because the thread has moved to the new post. I would like to hear others’ take on this. I believe it cuts in between the ‘yes’ and ‘no’ poles by saying we WILL need stimulus, but the one we already had was badly designed and woefully premature; the first stimulus has in faact badly damaged the prospects for pulling off a proper one when we really need it.

    Repost portion: On deficit spending, my take for a while, starting on Krugman’s blog (although the Nobel laurate didn’t seem to take up the thought) was that all the economists and advisors who bank (ha ha) on their studies of the Great Depression seem to have gotten the basic analysis all wrong. In fact an open-minded read of the history suggests that there were, and probably now are, three distinct phases: Crash, slump and then depression.

    So the depression-fighting policies may not be misguided but they are premature, and as we are seeing have left us weaker than before. Meanwhile we do nothing to deal with the crash (oops too late) and the slump. So when the depression finally gets here–2011 according to my math–we will need a good big stimulus. Bummer about the ammo supply, eh?

    I do have some careful thoughts about the slump–bank lending, small businesses, safety nets etc.–but hey, who cares? The depression is so much more sexy.

    1. alex

      Jim in MN: “an open-minded read of the history suggests that there were, and probably now are, three distinct phases: Crash, slump and then depression”

      It seems like depression is just the slump prolonged, but correct me if I misunderstand you.

      Jim in MN: “depression-fighting policies may not be misguided but they are premature”

      The conventional wisdom (not always right or always wrong) is that early stimulus minimizes the depression. This is supposed to be backed by historical studies, but I can’t cite them chapter and verse. Bottom line: why do you disagree?

      Jim in MN: “Bummer about the ammo supply, eh?”

      I think the biggest waste of ammo has been the tax cut part of the supposed stimulus and the Fed monetizing the banks’ bad debt. The true fiscal stimulus (USG spending) has been helpful, even if inadequate.

      P.S. about the “eh?”. How close to the border are you? That sounds suspiciously Canadian.

      1. Jim in MN

        Alex,

        The slump is the termination of credit and the deflationary cycle, in the 1930s the bank failures, mimiced today by the bank lending strike. It took several years to play this out and then the ‘new normal’ of brutally reduced economic activity and employment just hung around. You can look at, for example, EH.net http://eh.net/encyclopedia/article/parker.depression
        for this typology.

        Point being that the slump and depression are different. Fighting the stimulus battle instead of trying to prevent or mitigate credit collapse and effective bank failure is misguided or at least an incomplete policy response based on an incomplete analysis. By 1934 the authorities had figured this out and developed the Reconstruction Finance Corporation which had the power to replace bank management, rewrite lending memos, and so on. This in response to such events as ‘Shut Michigan’ as reported in Time Magazine:
        http://www.time.com/time/magazine/article/0,9171,745428,00.html
        Indeed many of today’s regional banks describe their founding as the appointment of officers by the RFC. Our problem today being slightly different in that major multinational banks are each the equivalent of thousands of small banks in the 1930s. The lending strike should be broken by the state, as it is far more calamatous than, say, a simple railroad strike. But our politics, and our economists, simply have not read even the basic primary sources (as opposed to theory). Hence we seem doomed to repeat the 3-4 year learning process.

        As for the ammo supply etc. I would not argue that the ARRA stimulus has been a total waste of time, but that it served in terms of political economy as a distraction from the real policy debate warranted by the slump (which admittedly suffers from a gap in historical analysis, so it’s hard, but too bad, sometimes policy debates require original effort on the fly). The bank bailout part has also been illuminated very well in the blogs including here. Effectively there is no choice other than to institute a Japanese ‘lost decade’ but probably much more severe and longer lasting–a ‘lost generation’ if you will. The grim calculation is simple: asset writedowns mean bond haircuts, and that means the pension and insurance industries, both health and life, would be at risk of further systemic/catastrophic failure. This on top of the rather unmanagable risks of sovereign default in Eastern Europe, a derivatives meltdown, state and local government insolvency and the general deleveraging-contraction-unemployment mess.

        So really there can be no haircuts, no quick lancing of the boil, and therefore no big macro/finance sector moves. No large-scale wave of either nationalization or bankruptcy is possible because that would force rapid recognition of bond market losses. That decision has been made and I think the thoughtful bloggeroonies around here reluctantly agree.

        So it’s a Japanese disease on steroids, and stimulus is probably necessary, but failure to analyze and think (!) about policy mechanisms that were already used in the 1930s is making things a lot worse for Main Street.

        1. alex

          Thanks for the reply. I now understand your distinction between slump and depression. I agree with the distinction even if I’m not certain that they necessarily occur in sequence. As far as cleaning up finance and recognizing the losses, I agree that it’s an essential component. However I’m not convinced that we can only afford to do it Japanese style. That depends on the numbers, which are (not always very honest) estimates at best. At heart I’m a “rip the band aid off quickly” type.

  4. Mike K

    “I have bailout and deficit fatigue just like most Americans. It is abundantly clear that this Administration has absolutely zero intention of purging any malinvestment or promoting any deleveraging. All they want to do is continue business as usual and go back to the asset-based economy that caused this mess. This is why we have seen bailout after bailout coupled with easy money. It makes for record profits on Wall Street but it does nothing for the unemployed.”

    Well said, Ed. I agree that the political process tremendously limits choices. A true stimulus coupled with a serious jobs program could work, but I suspect that our political process would never allow the freedom necessary to really do something the right way.

    Ideally, the USG should focus on big ticket programs that create jobs and provide something useful to the country, not just in the immediate term, but have a lasting impact. The problem is that any program will need to be equally spread across all 435 Congressional districts to have any hope of passing.

    As a result, instead of worthy projects being selected, the politically savvy will be favored and this is likely to result in less than useful activities that merely line someone’s pockets with little impact for the rest of the country. Isn’t this what happened with saving AIG? All the talk was of doom and gloom if AIG wasn’t saved, but from the perspective of Main Street, AIG was saved, the rest of the TBTF entities were saved, and the rest of the country continued to suffer.

    When we will realize that “financial” products don’t possess the same diffusion as real “stuff” that people need adn want to buy? We should be focused on moving away from a presumed dependency on economic growth arising out of financial products and focused our time, money, and efforts relearning how to make “stuff” that we and the rest of world need and want.

    Perhaps if the financial industry were made boring again (this can be an output for regulators ;-)), we might encourage our smartest and brightest back into industrial R&D making things, rather than spending their time trying to figure out a way to extract fractions of a penny out of every financial transaction. Maybe we need to treat the TBTF entities like utilities (which is pretty much all they really are anyway). And no, I’m not worried about “losing” financial leadership to someone else. It doesn’t directly contribute to improving our standard of living and why not let someone else struggle with “regulating” out of control TBTF while at the same time, watching their jobs evaporate for their Main Street.

    1. alex

      Mike K: “any program will need to be equally spread across all 435 Congressional districts to have any hope of passing”

      Nah. 218 Congressional districts and 60 states oughta do the trick.

      Mike K: “the politically savvy will be favored and this is likely to result in less than useful activities that merely line someone’s pockets with little impact for the rest of the country. Isn’t this what happened with saving AIG?”

      No, AIG lined the pockets of a small handful of people (*cough* Goldman-Sachs *cough*). Things like infrastructure projects help much larger numbers of people, have at least some long term payback (the Bridge to Nowhere notwithstanding) and can be spread out over many districts. Do contractors, unions, senators and representatives count as politically savvy?

      1. Mike K

        218 may give you a majority, but remember that Obama was striving for bipartisanship in the beginning at least. In addition, once the wheeling and dealing begins in the hallwoed of Congress, everyone will want a piece of the action. This will serve to water down everything. It’s easier to buy someone off by throwing them a bone, than to tell them no.

        In terms of politically savvy, I was referring to the development of infrstructure projects, rather than the bailouts. My point was that political “savviness” will result in things just like you describe, the bridge to nowhere or else lame, bland programs that are applicable to everyone, like fixing potholes.

        Unfortunately, besides the ability to start a war, I seriously doubt the US capability to undertake a big project like landing a man on the moon (which is largely responsible for the creation of the entire microelectronics industry).

        My point is that any future stimulus/jobs program should attempt to start something with the capability to throw out spinoffs that will be the next generation of desirable “stuff” we can sell to the rest of the world. for example, the space program didn’t set out to invent microelectronics, but space travel put on premium on small, lightweight stuff that worked fast.

        Instead, the best that our politcal class can agree on is to extend jobless benefits, and persuade people to go into more debt over autos and houses. I don’t see any vision for next the generation. It’s all attempts to go back to what cause the problems in the first place.

        1. alex

          As an electrical engineer I’m all in favor of any stimulus that involves technology development. Unless we get our trade situation straightened out though we won’t reap the long term benefits. Why has Intel built a fab in China? Hint: it ain’t comparative advantage. Seems like even when we do develop something new and useful the production and continued development (the areas where the real money is) just get off-shored. What’s the point?

          The whole “free trade” thing is subject to two criticisms. First, we don’t have it or anything approaching it. Nor have the trade agreements from NAFTA on really done much to foster it. The elephant in the living room is the Chinese peg to the dollar, but there are lots of other points too. The second is that “free trade” is based on a libertopian fantasy, where government plays no big role in fostering the economy. With the so-called free trade we have now, what’s the point of technology development if most of the benefits get off-shored as fast as possible. Why should American tax dollars pay for it?

          For the sake of historical accuracy I’d like to point out that your statement that “landing a man on the moon (which is largely responsible for the creation of the entire microelectronics industry)” is a gross exaggeration. The IC was invented without a thought to space applications. And, while NASA played some role in being one of the first customers for them in the early 1960′s, the Minuteman ICBM project was actually a far bigger customer. Together though they bought enough $1000 chips to help drive the price down to $25 in a few years. An often overlooked aspects of new technologies is that between invention and mass production you often need a customer that’s willing to buy high priced and/or not fully refined technology to justify the cost of further development.

          Mike K: “Instead, the best that our political class can agree on is to extend jobless benefits, and persuade people to go into more debt over autos and houses. I don’t see any vision for next the generation. It’s all attempts to go back to what cause the problems in the first place.”

          While I agree about the houses, and maybe the autos, I think the extended jobless benefits are essential to help people and they do provide stimulus. As far as wanting to go back to the “good old days” of endless Wall St. and housing bubble profits, I couldn’t agree more. It’s as though the 17th century Dutch tried to bring back tulip mania.

  5. But What do I Know?

    This is well-thought out and a great post. If I understand you correctly, you are arguing for fiscal stimulus without a federal “jobs creation” program. This would be most easily accomplished by simply sending every American $500 ($1.8 trillion per year) per month indefinitely. Alternatively, payroll taxes could be suspended ($900 billion per year.)

    If you give people money in consistent doses they will create jobs–the government will just screw it up because the central planners can’t react quickly enough.

    If the Chinese and Japanese and Saudis don’t like it they can unpeg their currencies (yes, I know the yen isn’t officially pegged.)

    1. Edward Harrison Post author

      Actually I am saying no to another stimulus package. I am saying however that we do need ‘stimulus’ in the form of tax credits for job creation and works programs. It’s abundantly clear that stimulus would be wasted. I said last year we needed MORE (and better targeted) stimulus but that was then. I have never advocated another stimulus round and I am not doing so here either.

      If and when we get a second dip, we can consider another stimulus package that goes above and beyond targeted job creation.

      1. Lazarus

        You don’t need more or less stimulus.

        The USA needs to get it’s head out of it’s…

        and protect itself from slave labour in China and fascist government that rules.

        Unless, of course, you also want fascism for the USA.

        In which case, carry on debasing your currency.

  6. Nick

    But surely the stimulus is just kicking the can down the road, playing shell games with the debt – or does everyone agree with Marshall – the debt just doesn’t matter. Is MMT a perpetual motion machine or am I just stupid?

    1. alex

      I don’t think that stimulus is just kicking the can down the road. That would be true if we were up against productive capacity limits, but that’s hardly the case. As far as debt is concerned the meaningful number is debt/GDP. So without stimulus you’ll have a lower GDP and hence a higher debt/GDP ratio even though you haven’t increased the debt. It’s an all pain and no gain solution.

      1. Nick

        Sure, but what about private debt.

        Governments may be able to do what they like, but even MMT accepts that private citizens have to pay back their borrowings. Right now in the US and UK, good credit risks don’t want to borrow, and banks don’t want to lend to bad credit risks. So nothing happens, because everyone is maxed out. No one wants to take on debt. All this stuff about creating full employment through government fiat renders free enterprise pointless. It is Stalinism in ruby shoes. A command economy with no commander. Bullshit.

        You have to purge the debt somehow. It will hurt. Or we are back to perpetual motion machines and free lunches.

        1. alex

          Nick: “what about private debt”

          Good point. People who are decently employed and not taking on new debt will tend to pay off their debt. Same with businesses. In the case of unavoidable foreclosures or commercial real estate failures, and sale of the collateral for less than the balance, creditors just have to take a loss. Insolvent banks should be dealt with as I’ve mentioned.

          Private sector debt at 292% of GDP has got to shrink by a combination of paying it off and defaulting. Maybe even some debt forgiveness. See Steve Keen for much good discussion on how high debt levels are highly unstable.

          http://www.debtdeflation.com/blogs/

          “All this stuff about creating full employment through government fiat renders free enterprise pointless. It is Stalinism in ruby shoes.”

          Stalinism in ruby shoes [slippers]? In the original story they were silver, even if he wasn’t talking about bimetallism. It’s a clever phrase but that sort of hyperbole doesn’t advance the discussion. Are we going to put gulags in Alaska?

          As for free enterprise having private companies with government contracts is at least free enterprise lite. Nor will the whole economy be that way during our Stalinist period – I bought a sandwich today in a purely private transaction. The government stuff is to make up for underutilized capacity.

          “You have to purge the debt somehow. It will hurt. Or we are back to perpetual motion machines and free lunches.”

          I agree about purging the debt, but fiscal stimulus is not a perpetual motion machine or a free lunch. If anything that describes our debt binge. If the economy is running well below productive capacity then we’re not trying to get something for nothing. Rather the non-trivial question is who pays for this stimulus of unused capacity. The capacity itself is there.

        2. The Rage

          There never was a command economy in Soviet Russia. That is a lie of history(as is the “formation” of the Soviet Union, which was by the capitalists themselves).

          The main difference was that government picked the capitalists and it became known as “state capitalism” and they “competed” to improve product. Very distorted market.

          Purging the debt would lead toward problems you can’t believe Nick. It would probably bolster socialism globally as the economy completely died for awhile. The amount of poverty would be amazing.

          This private sector debt must be handled SLOWLY. Populism=tyranny.

  7. MyLessThanPrimeBeef

    Edward, why must the Chinese re-invested in US-based assets in order to keep the peg?

    Why can’t they buy lot of Chanel #5′s and have the French collapse the dollar?

    Why can’t they buy more cotton to make more cotton T-shirts, among many other ideas.

    Why can’t they buy, like we bought Alaksa, Uzbekistan or Mongolia or Zimbabwe, or lease a few islands from Vietnam, Indonesia or the Phillipines like the British leased Hong Kong and Macao?

    It’s hard for me to imagine the problem of having money and not knowing how to spend it.

    Maybe they need another strategic petroleum reserve, a bigger one.

  8. mmckinl

    We need to reconcile insolvent banks first and foremost. The amount of bad leveraged debt, in the trillions, will forestall any recovery by siphoning off capital from economy.This almost assured as over 50% of deposits are held by, you guessed it, insolvent Wall Street Banks.

    Any talk of stimulus, whatever kind, or no stimulus at all gets sucked into the black hole of bad debt called Wall Street.

    1. alex

      Agreed. Oh so agreed. Let the shareholders of insolvent banks get wiped out and the bondholders take a haircut. The Fed is printing money to bail out their bad bets instead of helping most people.

      1. mmckinl

        Well, bond holders of these big Wall Street Banks are not going to take a haircut, they’ll get their head handed to them. This is a good thing ..

        Once Bond Holders get the idea they won’t be bailed out then they just might give a damn about better regulation in the future … and take Congress to task.

  9. fuguez

    Drop taxes for everyone who is not getting free money from the Fed. Raise the taxes to the roof for those who are – this would get them to realise their losses quicker and re-install mark-to-market. Corporate welfare in lieu of social welfare is madness.

  10. mmckinl

    Well, bond holders of these big Wall Street Banks are not going to take a haircut, they’ll get their head handed to them. This is a good thing ..

    Once Bond Holders get the idea they won’t be bailed out then they just might give a damn about better regulation in the future … and take Congress to task.

  11. Skippy

    Yep..this is becoming the nexus in all my thinking *BONDHOLDERS* globally must take a hair cut, all the way down to the trend line. It seems all efforts to date have been for their benefit, with kick back bonuses for their lackeys in the finance sector.

    Its pretty funny, the war against Stalin-ism was the tool for how many years [?], but in the end we got the same, ha ha ha! Bush II was Nikita Khrushchev and if Obama took up drink we could have our very own funky Mikhail Gorbachev.

    Skippy…Life really is a class affair or is all the history I spent reading for the last 30 years crap.

    http://www.youtube.com/watch?v=iM4sl7WZkcw&feature=related

    http://www.youtube.com/watch?v=UzEEi40tunE&NR=1

    1. bob

      Thanks for the link to the videos, good stuff.

      CA must really be in trouble, they can’t even afford riot gear for the cops. What kind of fascist goes to a riot in a bike helmet?

    2. DownSouth

      Thanks for the videos, Skippy.

      Whenever I talk to people in the states, I hear nothing but anger and despair.

      As the bills start coming due for all the malfeasance perpetrated by America’s overlords, that elitist drag they parade around in will come off, and they will be exposed for what they really are, which is anything but elitist.

      And as the moral and intellectual poverty of America’s upper class becomes more evident, and hardship increasingly bears down upon the working and middle classes, the anger is bound to grow.

      Demonstrations like this are bound to not only increase in size, but in energy and violence as well.

    3. Vinny G.

      What, Skippy?… are you now suggesting America should try a little perestroika and glasnost?… :)

      Vinny

      1. Skippy

        Yeah right, like anyone would engage facts in MSM or the Polly’s, few bloody crackers and they talk *AMAZING*. Better to opine about election horse races or the death care debacle.

        Btw Ed and all, great stuff. Just one question, when are we going to debate the reduction of friction that in the tooth and claw days kept us from raping the world. Hell the speed we are achieving these days, consumption and the after effects, jobs in the historical sense will kill us in the end. Death or diminished by self enrichment for the *few* dressed up as antiquated tradition, what a way to go eh, its all about the soul though!

        Skippy…what was the time frame from each human epoch in duration, what were the effects up to the next leap and will there always be a solid landing for us with each leap, that keeps coming in shorter durations.

  12. Hugh

    The kind of downturn we are now in is the result of 30 years of bad economic and financial policy. We are going to get out of the current mess without a complete restructuring of both our financial system and economy. For the economy, this meand creating jobs and lots of them. The U3 is 15.7 million. The U6 is 27 million. And there are another 3 million or so who have left the job force but might come back. That’s 30 million jobs plus another 120,000 new entrants each month.

    These jobs should be aimed at taking our country somewhere, toward sustainable re-industrialization. We should consider not just quantity but the quality and stability of them. There is simply no way that this many jobs can be created without massive government involvement. Whether you want to call that stimulus or investment is up to you.

    For the financial side, the banks are going to keep sucking life out of the economy until they are taken over and completely recast. Debt repudiation will be a major part of this. We can’t have a recovery with these levels of unemployment just as we can’t have one with these levels of debt. The government’s unique powers are the only way to square this circle.

  13. WPEconomy

    Good post. I think I agree on just about everything you said. Jobs are the issue. The stimulus was too weak. We’re headed to doom. All that stuff. The more I read your blog, the more I agree. Hopefully Democrats can come through on the jobs bill. We’ll see how serious they are about cutting the deficit. Hopefully that’s just a gaffe. It’s early and Obama and his advisors should know: it’s the economy stupid.

  14. Namke von Federlein

    Actually, IMHO there is a fifth option.

    The Namke Debt Consolidation Idea would help to reduce the cost of debt. The reduction in the cost of the debt would provide achieve 2 things at the same time.

    It would rebuild household balance sheets and recapitalise the banks at the same time. It would not add one penny of debt to the total debt of the nation.

    Until a mainstream economist endorses it (like Steve Keen or Paul Krugman) then American households and the American economy will continue to enjoy the combination of tax cuts and QE that will continue to erode the economy of the USA.

    Nice blog post. One thing is certain : the economists who did not see it coming will probably not be the economists who will solve the problem.

    all the best

    Namke von Federlein

  15. Doug Terpstra

    “The risk in addressing the situation this way, of course, is replacing the imperfect invisible hand of markets with the imperfect hand of politicians and legislative fiat.”

    The public hand can be stupid for sure, but in a genuine democracy it has different guidance, goals, and longer term outlook. It can do things in reasearch, education, and infrastructure that private enterprise can never touch.

    The rub here is that now the two hands are one and the same today—no difference at all. Squint just a little when Geithner is speaking and gesturing and you can see the strings moving. Last week a commenter here did a family tree of Government Sachs, Treasury, Fed, SEC, and FDIC, etc, and the inbreeding of incest is indeniable. This is the insurmountable problem; this system must crash before change will be possible.

    “…So I say no to a second (third) stimulus package. What the President needs to focus on is jobs…Cut payroll taxes, subsidize job creation, divert some military spending to direct job creation by ending the foreign wars.” Isn’t this stimulus, just qualitatively better?

    This is exactly the focus Obama promised and then abandoned just when the brass ring was in reach. He has apparently joined the dark side.

    Harrison in 2012! Harrison in 2012!

    1. gordon

      I don’t know about the “dark side”. That strikes me as too well-planned. I occasionally liken Pres. Obama to Jubilation T. Cornpone, but I find that since he is black people often don’t get it. I think it adds an extra layer of irony, but there you are.

  16. Thomas Barton, JD

    Please take the last two sentences of this excellent post and expand on them in a post. Your view on specific proportions for the alternative to the past two years of Washington Beltway Boys and Girls Failure would be most helpful to give The People something to point to and email to the Congress who purports to Represent Us. Thanks.

  17. pebird

    Edward:

    Let me take a slighty different view.

    The first ‘stimulus’ was born during the final days of the Bush administration when Paulson designed a bailout that was barely modified by Congress and did not address the very basic rule-of-law/moral hazard issues.

    This was not a stimulus, it was an attempt to stop a complete halt in velocity – no one knows how to reboot the economy, given how it is structured.

    And the American people – hoping for hope in the election – were submissive enough to allow the government to try to figure it out. They were skeptical but were willing to give the new guy a chance.

    So, a stimulus package was passed – but it has not been completely spent even up to today. The Congress could have passed a 500 trillion USD stimulus, but if it takes 1000 years to get spent, it really doesn’t do much.

    The drop off in private spending is HUGE. It is not coming back anytime soon – despite green shoots (haven’t heard about that in a while), a flattening of housing price decline, and the beginning of deleveraging. The banks WILL not lend unless they see 1) demand picking up, 2) risk going down.

    Since there are so few banks left, and the concentration has increased so much, who is going to take the risk ahead of the others? None of them will, they have to coordinate any action. I cannot see how they will start lending – you just don’t try to catch a falling knife.

    The only way out of this is MASSIVE government spending beyond anything we have seen or fear. The banks have to be hit in the head with a huge 2 x 4 – they can be sit and watch incomes rise so their toxic debt will be paid off, or they can start to participate and take some risks.

    I think we underestimate the amount of money that has been taken out of circulation – there is huge amounts sitting as reserves, but very little velocity. And our population continues to increase while our infrastructure decays.

    It is a unique situation – and there is no magic bullet – but also the problems are not unsolvable. There IS risk involved with a large scale deficit – there will be corruption and misuse of funds – but the majority of spend will reach those that need it, increasing demand, maintaining job skills, and restarting the economy that the banks stopped.

  18. Vinny G.

    Great post, Ed — full of logic and common sense. But I guess common sense is too much to expect from our leader here, so I expect they’ll choose the Goldman Sucks option again.

    Anyway, on a personal note, I was just informed by this second-rate medical school I’ve been teaching at that they’ll cut my courses heavily in the spring (supposedly due to low enrollment). I was a little pissed today, and gave my superior a dose of my “kill them with the irony,” but that’s OK, I can live with that, because I have other irons in the fire. But here’s the truly ridiculous part: because now I am no longer considered a full-time employee, they’ll no longer contribute to my health insurance plan. Can you believe that? And that coming from a fuc*ing medical school. What as*holes!

    Anyway, coming back to the article, given my impending drop in cash-flow, I guess I’ll just have to opt for option 4 here, namely “Fiscal stimulus only.” My only request is that that stimulus take the form of a check from the government in my name. Let’s say, $20,000 or so would do nicely. And would nice if our enlightened leaders would get around to it no later than March, because I really want to start putting in a pool at my house in Greece asap. I am sure Oh’bama would not want me and my family to suffer another torrid summer without a pool…LOL

    I tell ya, I’m coming really close to getting that one-way ticket outta this hellhole.

    Vinny

    1. Namke von Federlein

      Hi Vinny;

      I can’t get you a nice check for $20K but I might be able to get $10K paid off of your outstanding debt by the dear old government.

      Would that help out?

      He’s what they could do. They borrow $10K in your name at current Treasury rates (about 3%). Then they could put the money into your IRS account. Then they could let the banks make claims on that money. If you owe money on your credit card or your car loan or student loan or mortgage then the banks can try and claim it.

      They could look at the amount of interest that you are paying on each of the loans and they could start by paying back the banks where you pay the highest rate of interest.

      If there is still money in your IRS account after all outstanding debts are paid down then they could just leave the rest of the money in your IRS account and use it to reduce your taxes next year. In other words, if you have been a “responsible saver” then you are going to get a full $10K break on your taxes next April.

      Now, of course, since you (and I and everybody else) are the government (taxpayers) then you we still have to pay off that debt (@ 3%) over the next 30 years.

      In the meantime, your household balance sheet has been strengthened and you will be paying 3% (via the government) rather than 20% (personally) on your debt. You will pay a lot less in interest payments (don’t forget the compounding effect of the interest).

      Oh. Since you owe $10K less to the banks then the banks have $10K less in their outstanding loan portfolio. And their cash on hand is up $10K. Multiply that effect by 186,000,000 working age people and you (and I and all other taxpayers) won’t have to worry about bailing out any more banks. A side-effect of all this is recapitalising the banks.

      I almost forgot : and this does not increase the over-all debt of the USA by one penny.

      In other words, 2 trillion that taxpayers owe directly in millions of small loans at high interest rates get transformed into 2 trillion that taxpayers owe through their government at a much lower rate of interest.

      Sound good?

      That’s how the fifth option would work – The Namke Debt Consolidation Idea.

      You might like it. It might be worth a look. Unless you’re happy watching Goldman and the Gang of 5 Big Banks borrow/monetise money in our name (the taxpayers) and then putting it all of that money directly into *their* bank account- even as they raise our credit card rates, etc.

      BTW: Don’t tell the Tax Day Tea Party folks about this. They seem to enjoy seeing people suffer. For instance, they seem to think that prayer (and not professional health care) will protect them from their contagious neighbours, contagious immigrant workers, contagious animals and contagious tourists. May God have mercy on their souls.

      all the best from

      The Fifth Option

      1. Vinny G.

        Yep, that would work. It’s common sense. But I’m not holding my breath for Geithner or Summers to swallow that pill. They’re too much in cahoots with the the banksters.

        Although your option would not cover the costs of installing my swimming pool, it would work wonders for our children, at least.

        Vinny

  19. Sandi Rubinspan

    That was a well written article. Thank you, Ed.

    Every time an American buys a foreign vehicle, they reduce our standard of living. Every time an American shops at Walmart, Target, etc, they reduce our standard of living. Every time an American agrees that we do not need a vibrant manufacturing sector, they reduce our standard of living.

    The real tragedy of the failure of economics, is the failure to understand trade, even in the face of 1000 years of precedence. Mercantilist trade is a trade of war.

    So, drive your foreign cars to Walmart. Fight for the rights of the wealthy plantation capitalists. I won’t try to stop you.

  20. New England Aussie

    Ed, it seems to me you are on the right track – jobs, not bailouts. But I don’t think it is that simple.

    To create jobs, you need customers buying products. The US (like so many Western Economies) has been sending jobs overseas for decades. That made sense from a simple, short-sighted business perspective, but now as the US bears the fruit of it, its’ long-term wisdom ios clearly shown as defective.

    This is just another example of the fact that business MUST be regulated if it is to serve society, and not subjugate society.

    This isn’t some commie rant – I too want the opportunity to be as productive and effective as I can be, and hang on to the value I create.

    But the ideal business is one with a captive supply chain, a captive market, and no regulation. And every business that gets an opportunity to shape its’ environment aims for those very things. We shouldn’t blame business for that, no more than we should blame a tiger for killing a deer for supper. It is in the nature of the animal.

    We HAVE to have regulation to bend the ambitions of business to serve society as a whole – and foster business at the same time.

    Jobs – once upon a time, “Made in USA” meant that you were buying the very best. I think that powerhouse of productivity is still there – but mostly untapped, or abused.

    If you can get US productivity back on its feet, there is a chance of paying off the huge amounts of money the US has borrowed to support the current farce, generating enough tax revenue to redress the deficits.

    And that is what I think job creation has to be about – returning US productivity to being competitive on the world stage. It cannot be about “digging ditches for the dole”.

    That will require exceptional vision and leadership.

    Who is able to lead such a revolution?

    1. Which is worse: bankers or terrorists

      Who is able to lead such a revolution?

      SARAH PALIN!

      LOL. I slay myself sometimes….

      1. New England Aussie

        Mmmm – Sarah – I wonder if the national Health Care costs would go up or down??

        Seriously, there are people out there with a fighting chance of turning this around – Elizabeth Warren for President, Cuomo for V.P., Vinod Khosla for Treasury?

        But one thing is certain – while people complain, but do not act, or support the people who have some chance of making the necessary changes, we are all in very, very deep poo.

  21. Expat

    Very interesting, but the honest truth is that not a single economist has a clue about how these theories pan out in the real world. It is impossible to make the real world conform to the model. Human nature encompasses greed, dishonesty and irrationality, qualities mainly excluded in economics classrooms.

    The solution to our economic woes is collective suicide since we, as humans, are infinitely fallible and corruptable. Attempts to legislate, moderate, and mitigate all fail due our very nature.

    But, hey, why stop a bunch of hot air from circulating, especially when it might speed up global warming and help in the Final Final Solution.

  22. Kevin de Bruxelles

    Although I agree with the principle of no stimulus and more jobs, I think the solution of tax breaks is too weak and will not solve the real problems

    And to me the real problem is clearly not fiscal but is instead trade. More specifically the problem is that the current US economic model of hollowing out the manufacturing sector by means of a supersized financial sector is a one-way street towards a Brazilian societal model. This failing US economic model reached its culmination point in the mid-nineties and all the bubbles and financial gimmicks since then have only served to allow the cancer to grow by superficially treating the symptoms. Perhaps Marshall Auerback is correct and we can just print money ad infinitum, but all this would serve is to pump amphetamines into current unsustainable economic model while allowing the cancer to our manufacturing sector to continue to spread.

    There seem to be two ways to stop the bleeding of jobs; kill the dollar or erect trade barriers towards poor manufacturing countries. To me this is a no-brainer, let’s just enact 40% tariffs on any products coming from poor countries; and sure this tariffs can be progressive so that we reach the 40% mark after three years or so to allow time for domestic manufacturing to restart.

    The goal should not necessarily be to maintain current GDP. A ten percent drop is more than worth it if by accepting this drop a fundamental redirection of the US economy towards manufacturing can occur.

    Next the social healing must take place to stop the steady slide towards the Brazilian model of society. Very quickly:

    There is a huge unproductive underclass in the US that is very expensive to maintain–not to mention the human misery it creates. The fuel for this underclass seems to be government support for the children of underclass women. Historically, in their choice of male mating partners, women had to balance between on the one hand their id that attracted them to the bad boy thugs types who are sexually attractive but will never invest in any offspring and on the other hand their super egos that pushed them to steady provider types who are perhaps less attractive but will invest in the resulting family. For whatever reasons the government has stepped in and displaced the steady providers so poor woman are now free to mate with the bad boy baby daddies while Uncle Sam foots the bill for the resulting kids. This is turn tells poor men that if they want to reproduce (and most humans instinctually do) then they better get out of the program and become bad boy thugs. A humane way has to be found to reverse this dynamic so that women are incentivized to resist the urge to bang thugs and to instead pick good steady men who will invest in children.

    Third world Immigration must immediately be halted. And no this is not because these people are somehow “bad”. It is because they are destroying the working class by undermining the pay scales of many jobs.

    Working class men have to face the reality that working class women are increasingly the ones bringing home the bacon. The health care and education industries are still going relatively strong. Working class men have to adjust to this new reality by taking on more family responsibilities.

    And finally, US households must deleverage from their credit card debt and must resist wasteful over-consumption.

    1. ScottB

      KdB, you write “There is a huge unproductive underclass in the US that is very expensive to maintain–not to mention the human misery it creates. The fuel for this underclass seems to be government support for the children of underclass women.”

      Sorry, but the data doesn’t support you. We have the least expensive social net among developed nations. We’ve cut welfare caseloads in half since 1996, while poverty has increased.

      “Historically, in their choice of male mating partners, women had to balance between on the one hand their id that attracted them to the bad boy thugs types who are sexually attractive but will never invest in any offspring and on the other hand their super egos that pushed them to steady provider types who are perhaps less attractive but will invest in the resulting family. For whatever reasons the government has stepped in and displaced the steady providers so poor woman are now free to mate with the bad boy baby daddies while Uncle Sam foots the bill for the resulting kids. This is turn tells poor men that if they want to reproduce (and most humans instinctually do) then they better get out of the program and become bad boy thugs.”

      You seem to not be aware of the huge amount of racism in our society, how deindustrialization has in particular impacted African-American males and access to decent jobs, and our racist police and court system, which has filled our prisons with African-Americans. Are we the only nation in the world with the crime of “driving while Black”? Maybe not, but we sure lead the way in incarceration.

      1. Kevin de Bruxelles

        ScottB,

        I lived for several years in the ghettoes of East Oakland so I am very aware of racial relations in America.

        You equated my statement about the expense to society of the underclass to the cost of social safety nets. This is wrong. The expense of an underclass is so much more than the costs of welfare. Some of these costs are direct and obvious while others are more theoretical.

        First let’s define the underclass. If one were to look at the people of a society as a CEO looks at divisions of a company; the underclass would be people who are net liabilities over their lifetime. Obviously at any given moment children and elderly are liabilities, but this is normal. Children should be being supported by their parents and the elderly should have contributed enough during their working years to more than meet their cost to society in their later years.

        I would estimate in American that at least 15% of working age Americans are net liabilities and thus the underclass.
        One of the most obvious costs of the underclass is the opportunity cost in terms of economic productivity and unpaid taxes by having so large a number of people not making a positive contribution. Some of the more obvious increased direct costs include the following areas:

        Penitentiaries

        Police forces

        Social services

        Court systems

        Security systems

        Insurance costs

        Health care (including mental health costs)

        Not to mention that all these extra jail guards, police investigators, etc, are also an opportunity cost in that these are potential private sector workers who have to leave productive work and become government workers and therefore are not contributing directly to the productive economy.

        These are some of the costs there are to society for the underclass before you even get to the direct welfare costs of Section 8, food stamps, welfare payments, etc.

        Of course if we ignore the broken window fallacy we could say the underclass is providing desperately needed domestic employment to many people. And given how we are bleeding manufacturing jobs overseas this might not be as ridiculous as it sounds! And who is to say there is no long term growth potential in the sector?

        As for race it is paradoxically because of America’s legacy of racism that a sizable black race still exists at all in America. Just as a drop of food colouring pretty quickly disappears into a larger quantity of clear liquid, if it were not for racism blacks would have long ago been absorbed into the much large white gene pool in America during the 300+ years they have been in America.

        Unfortunately the races were separated and as a result a black culture has come about. Many good things have come from this; with the obvious exception of death metal, just about every new trend in 20th century popular music originates from black America. Unfortunately there a hugely dysfunctional ghetto culture has also arisen, and it distils all the worst traits of America; violence, ignorance, misogyny, materialism, low future time, etc. into a toxic brew of cultural despair. Driving while black is the least of the worries blacks face in the ghetto; this is more of a problem for middle class blacks in traditionally white areas. As for the lack of jobs, most black high school dropouts are not looking for traditional jobs. But if there is any hope for turning the ghettos around we must have good jobs waiting the day they do make the decision to join productive society. And this is just another reason we need to stop losing manufacturing jobs to China. The vast majority of these people are not going to become lawyers or doctors; we need solid blue collar work for them to do, even if that means making T-shirts.

        That said blacks do not make up even the majority of the underclass. There are enough crystal meth heads around to make sure that whites head the underclass table, as you would expect with whites making up 80% of the population while blacks only make up 12%.

        1. Mickey in Akron

          Very well stated and succinctly argued.

          Indeed, the “entrepreneurial talent” in the ‘hood testifies to just how bright and resourceful many individuals in the underclass really are. And I’m not talking about the criminals – pimps, drug dealers, gangbangers, etc – who are stereotyped by the MSM.

          Let’s have the Ivy League students take the mother’s test and see how well they do… In fact, make the faculty take it as a requirement for tenure. LOL [Looting out loud]

          1. kevin de bruxelles

            Thanks Mickey.

            And thanks for what you wrote to Lazarus. I hope DJBrown will reconsider his decision. There is nothing wrong with disagreeing someone but it should be done in a respectful way.

  23. MarcoPolo

    We’ve been over this before. Fiscal stimulus creates jobs & investment – in China. Monetary stimulus feeds a parasitic financial sector which most easily consumes our less protected domestic enterprise thereby exacerbating the imbalance which creates jobs and investment in China.

    No solution thus far addresses the problem tha global demand not rely entirely on he US or will make the investments to produce he future US earnings required to pay down debt. Make work bridges to nowhere doesn’t do it. Pouring yet more money into already liquid capital markets doesn’t do it. Debt is the problem. And one can’t borrow his way out of debt. It’s just that simple. All this nonsense about accounting identities and economic thoery is a waste of words.

    Ich bin osterreichische. May the Mellonites prevail. Toby writes here about resource economy. Not sure what he means nut think it’s worth a look.

  24. Allen C

    I will attempt to be nicer lest my comment be stricken…

    In a global economy, significant income disparities are possible only if high income states possess a durable advantage.

    The US durable advantage is coming to an end. The income disparity is no longer supportable. This is the madness! We continue to pretend that somehow the disparity is maintainable.

  25. Allen C

    To make matters worse, we borrowed heavily for war, granite counter tops, and other non-investments. Money that could have went towards regaining the balance. We blew it.

    This is worse than the ’30s. We could see a 50% decline in real, median income.

  26. Dave of Maryland

    There is the makings of a solution in here someplace. Let’s try.

    First, double or triple the minimum wage. Think of it, not as a wage hike, but as an excess profits tax paid directly to the workers. And isn’t it better that private enterprise takes the lead, rather than the discredited federal government hands out $500 a month to assorted deadbeats? Where’s the government going to get that kind of money?

    Won’t that result in more jobs fleeing the country? Sure will.

    That’s why we must immediately abandon globalism (think of it as a leaky bucket: jobs flow out the bottom, air flows in the top) in favor of high tariffs. Must we start slowly, to give things time to get started? Well, not really. The country is in danger of flying apart. We don’t have the luxury of time. That’s so last year!

    We could immediately impose a 1000% tariff on imported finished clothing. Textiles are the simplest of all manufactured goods. Rent an empty room, get some sewing machines & bolts of cloth & unskilled / semiskilled workers & bang! you got a factory, you got jobs. No reason on God’s Green Earth why unemployed steelworkers in Pittsburgh should be forced to buy imported T’s, when they could easily Make And Buy American. Give ‘em a choice!

    In less time than the government can produce make-work infrastructure jobs, wily entrepreneurs can take us back to the time of the Triangle Shirtwaist Factory, with sweatshops galore. And, with tears in our eyes, wouldn’t we all like to go back to those simpler days of yesteryear?

    Because a bad job can always be made better. But no job, that’s just plain bad. Making jobs for the unemployed, that turns out to be not such a hard thing to do. Getting rid of the accumulated parasites that have long been feeding on our corpse, that’s where the real battle is.

  27. Brian

    Ed,

    You dismiss deficit hawks with three dubious assertions.

    Private debt is 292% of GDP, but private revenues are 80% (approximately) of GDP, while gov’t revenue is about 20% of GDP. In other words, both have debt of about 3.5X to revenue. The difference is that most businesses have positive cash flow and are in a position to repay debt over time in a steady state world. Government, on the other hand, has produced a surplus in two years since I was born (1960) and now shows distinct signs of growing debt faster than any reasonable growth expectation for as far as anyone can forecast.

    Adding unfunded liabilities to public debt is not inaccurate. Is it rational for a buyer of US government credit to ignore these liabilities and pretend they don’t exist? Should they not be factored into the likely demands on tax revenues (which are ultimately finite) and the ability to service debt? Should these factors be ingnored when determining what return is appropriate for the risk that such credit carries? To argue otherwise is folly in my mind. Do they bring us to a tipping point on interest rates today – probably not, but to argue that they won’t at some unknowable point down the road is delusional.

    Finally, the assertion “There is no operational constraint to government spending. the U.S. government is not going broke involuntarily.” is likewise oblivious to the fact that we depend on the kindness of strangers to sustain our current level of consumption. No debtor ever goes broke voluntarily, they go broke when they are cut off by their lenders. All the stimulationists and deficit doves assume there is money available to borrow ad infinitum, while there are clear, unmistakable signs that the rest of the world has begun either seeking alternatives to the dollar or is configuring their dollar assets in a way to mitigate the risks of rapid depreciation in the currency.

    I agree with your reasons for not supporting further stimulus measures, but your dismissal of the deficit hawks ignores some essential realities that seem to be in the process of asserting themselves.

  28. Brick

    The problem with any stimulus is that eventually it must end and this is painful because the economy adapts to the stimulus. Eventually the bill comes due and relying on the pick up in future tax receipts seems like a gamble. I think many here would agree that a good target would be to increase jobs and wages without damaging the long term sustainability of the economy. There are things that could be put in place which would never have to be retracted with the cost not substantially being born by the tax payer.
    Not too far from me is a small firm employing just over 100 workers who have seen their wages cut to just above the minimum wage. This firm has 16 directors some of whom have never been to the firms premises all earning in excess of 1million a year. This is the exception but shows that the excesses of business governance are not being curtailed. It would not be hard to do something about this without interfering with the majority of businesses.
    In my town there is just one builder left out of 20 yet he cannot borrow to expand because he gets a low computer credit score on the basis that he is a builder. Whilst I can understand FICO scores on an individual basis, for me computer credit scores have no place in business. Ban it and make the banks do some banking.
    There is also a small firm that would like to expand but cannot because they cannot convince the bank with their business plan. Now if the bank was to actually sit down with this business and help it to come up with a business plan they would both be making money. I would like to see some tax incentives to get banks involved in helping to prepare business plans.
    Another firm near me cannot get a loan from a local bank because the funding source the local bank uses would rather gamble on currencies and commodities than take a risk on the economy. Surely we can give some tax incentives so that it becomes desirable for these funds to invest in the economy rather than gambling.
    When comparing firms and there impact on workers and their local environment I always think back to a Canadian city where if you did not put 6 percent of your profit into the community whether through scholarships or building local amenities then you had to pay an extra 6 percent tax.
    I don’t know whether these are achievable aims without borrowing, I suspect they would help with wages and jobs and be long term sustainable, but they conflict with the interests of business. It is not just wall street that captured the politicians it is corporate America. Is it unreasonable for the tax payer to ask that taxes are spent wisely and those who currently don’t really contribute to the well being of society should be persuaded otherwise.

    1. sharonsj

      If those 16 directors were taken out (and I don’t necessarily mean fired but fired upon), and their salaries split among those 100 workers, then the employees would be able to pay their bills as well as pay for goods and services that would support hundreds of other workers. Main Street is hoping for the government or for big business to come up with answers. But greed and incompetence gets in the way, and another stimulus would only be temporary anyway. I’m afraid that real change is going to come about by real violence.

  29. Dave of Maryland

    If we can get rid of the parasites (I’m thinking FIRE), I think we can manage the rest.

    Funny how fire is a four-letter word & the letter “G” isn’t among them.

  30. ScottB

    Ed, great post. I do have one question, which was also addresed by New England Aussie and Kevin de Bruxelles: what makes you think that a cut in payroll taxes will do the trick for jobs? And are you talking about a temporary or permanent cut, and if it is at least a longer-term cut, won’t that just blow up Medicare even sooner?

    In our neck of the woods, while certainly a lot of businesses are hurting, there are one who have viable projects but the can’t get a bank loan, because balance sheets at small and large banks are so impaired.

  31. HappyDebtor

    We should not worry about the U.S. public debt.

    Italy has a public debt of 103% of GDP and its economy continues to grow, and everyone is happy.

    The U.S. public debt is only 60% of GDP. There is no reason to worry.

  32. Mickey in Akron

    As usual I have the benefit of the previous comments. From them I would like to add the following:

    1) Ed and and many of us don’t always agree but what emerges from the skirmishes on NAKED CAPITALISM is genuine DIALOGUE. Instead of the shrill debate that so poisons contemporary politics with both sides talking past each other, there is actually “listening” and “learning” going on here. The sophistication and level of discourse reassures me that Americans and other participants worldwide, and not their “leaders”, will find a workable solution to this crisis that comports with our sense of fairness and justice, doing it within the parameters of constitutional government. Both developments are points of light/hope glistening in the seeming darkness that threatens to envelop all of US. This crisis may be our “WWII” – that shared, collective experience – that forces US to put aside some of our differences to find a workable solution.
    Believe me, I have no illusions as to the difficulties ahead and will not easily forget or forgive those elites – academic, religious/secular, political, and economic – who are responsible for the “race to the bottom”, but maybe the green shoots are the very ideas emerging from sites like this, from the bottom up and not the top down, that bring about fundamental, nonviolent lasting change. Perhaps the past 40 years had to be endured as a “learning process” before the American people came to the realization that the elites – democrat and republican alike – are bankrupt – intellectually, morally, politically, and economically. Name one institution capable of reforming itself from within? Just one? Where is that leadership?
    The link between the rulers and the ruled has been broken once and for all. That in itself is PROGRESS – at least to my way of thinking. But it places heavy responsiblity on each and every one of US not to squander this opportunity. Back in the “salad days” of the 60s when it seemed nothing was impossible, it occurred to some of us that after we had burnt everything to the ground, what were we going to put in its place? Chided for such a “pragmatic” bourgeois idea many of us then saw the “revolution” go on to eat its own. In any case, we didn’t have to worry or wait long for an answer as the counterrevolution by these same reactionary elites unfolded. Forty years later make no mistake about it, they will not relinquish power without a struggle. Repression is always an option. But right now it’s of the velvet glove variety and need not lead to the brass knuckles bare fisted variant.
    Moreover, the ruling elites themselves are divided as to which way to go as evidenced by the options listed above. They would have to eat some their own to pursue the no stimulus solution. That’s why it’s not an option! So let’s put this long winding/winded account of this aged worker’s perceptions aside and return to more immediate concerns at hand. Many thanks for indulging me up to this point. But we must learn from our history… I hope I have!

    2) Tax cuts? Across the board tax cuts for businesses are unlikely to have their intended effect. Giving a global corporation and a smaller firm with largely a local, regional market the same tax cut will tend to cancel each other out. It has to be targeted to the smaller firm perhaps on the basis of number of employees, gross sales, or some such combination. Otherwise, global corporations will use the monies to accelerate the offshore stampede or play along until the economy “recovers” and then return to their old habits.
    Such targeting would also symbolize the repudiation of the very policies that have hollowed out the manufacturing sector of the economy. Even many a conservative Republican small business owner acknowledges the need for some preferential treatment in this regard. Bloggers on the WSJ can be differentiated on the basis of this dimension – domestic versus global. Walmart threatens many a small business owner… And it’s the latter who are the engine of employment growth. Additional comments here may help to illuminate the learning/listening process alluded to much earlier.

    3) Financial reform – regulation and the reenactment of Glass-Steagall or something similar. Not doing so will ensure “moral hazard” by the TBTF banks and put the taxpayer on the dime for such chicanery. The black hole of derivatives cannot escape regulation either.
    It might also be determined how best to identify and unwind TBTF companies as their collective weight puts the nation-state at a distinct disadvantage. For they too now can “starve the beast” by relocating to a less hungry one at will. Without some limitation or restraint the neo-fuedal corporate world order manifesting itself will reduce workers and working conditions to the lowest common denominator world-wide.

    4) Technological unemployemnt – serious informed debate must begin on this subject. Simply dismissing it with the “lump of labor fallacy” will doom job creation efforts to a perpetual tail chasing exercise. If the “haves” versus “have nots” becomes reduced to those who have jobs versus those who don’t, beinvenidos al tercer mundo!

    5) Trade – if any area of free market level playing field economics breaks down it is here. It simply doesn’t exist – neither free markets nor level playing field. And a “return” to mercantilism and beggar thy neighbor tariffs doesn’t bode well for any longterm sustainable economic recovery. It may play well on a domestic stage and feed nationalist sentiment, but pitting American workers against Chinese workers is little more than the divide-and-conquer tactics of the ruling elites both here and there. Hopefully, we can see this exactly for what it is and not devolve into some rabid nationalist dog-eat-dog frenzy ending in war. We would all be much poorer off…

    There are probably other pieces that I’ve omitted, touching only on those that seem most obvious to me. Any short run stimulus may ameliorate the worst of the crisis, but it will not resolve any of these issues in the long run. And without their resolution in the long run we’ll need another followed by another followed by another…

    Ed is more than right when he states:

    “We are living through a situation unique in time with few historical precedents.”

    We have no choice but to think outside the box, creating the specifics of an economy that is EQUITABLE, SUSTAINABLE, and PROFITABLE, each of which is subject to interpretation. Let the debate begin.

  33. John Kissinger

    China’s (and others’) currency pegs could be eliminated in a day – simply pass an import tax of 50% on all imports from countries that control their currency either through a peg or by market intervention. Japan has the flexibility to withstand market forces and anyway has the toughness of democracy while China might experience a revolution, but so what? And so what if China buys Airbus, it just leaves them with more dollars to spend elsewhere.

    Why doesn’t somebody campaign on such a platform?

  34. Lazarus

    “This flies in the face of basic economics which says that more spending and less taxes equals greater demand and recovery/boom. More taxes and less spending equals less demand and recession/depression.”

    This is only true, if it is true, of sovereign economies.

    “Basic Economics” continually fails to recognise global reality.

    Someone needs to rewrite “Basic Economics” for the “One World”

    And that “One World” is a world of zero regulation.

    It is Mercantilist, Pirate and War Like.

    The only way for the USA to rebuild is protectionism. Stop importing the things you can make for yourselves and trade for the rest.

  35. Dave of Maryland

    but pitting American workers against Chinese workers is little more than the divide-and-conquer tactics of the ruling elites both here and there.

    But that’s exactly the present situation. Jobs go to China because they’re cheaper. When the day comes that we’re cheaper, jobs will come back. Us vs: Them. The present situation is as ugly as it can get. We can’t do this, we can’t do that, we can’t do anything, because jobs & money might go to China. Or we might screw up & make things worse. What straw men these are! Time for something else.

    Put up a wall & cut off trade in finished goods. Northern China can trade with Southern China. Kansas can trade with Rhode Island. International trade in raw materials is trade enough.

    And what’s this about mercantilism? Currency manipulation (China vs: US, US vs: China) isn’t mercantilism? Japanese exclusion of US products isn’t protectionism? Playing both ends against the middle profits who, exactly? All those factory workers in China, they were all college grads, right? Right?

    The parasites have confused the issue – deliberately, I might add, because when we’re confused, we’re powerless. The problems, and the solutions, are simple. If we cannot control FIRE, we get rid of it. We exclude trade in manufactured goods. Jobs result. Everything else is fearmongering.

    Or we continue to spin our wheels until things are completely out of control & even bad solutions seem like dreams. Sarah Palin is waiting in the wings. Let’s not make her a shoo-in.

  36. Lazurus

    @ Mickey in Akron

    “We have no choice but to think outside the box, creating the specifics of an economy that is EQUITABLE, SUSTAINABLE, and PROFITABLE, each of which is subject to interpretation. Let the debate begin.”

    If you change that to EQUITABLE, SUSTAINABLE, PROFITABLE and SOVEREING you might just be able to save the USA.

    1. Mickey in Akron

      What is at issue is whether the nation-state or the global corporation will be SOVEREIGN.

      As much as the former intruding on the individual is worrisome, I have no illusions as to the latter when it comes to profit maximization versus the individual. The latter are not constrained by the US Constitution. Moreover, watching Microsoft and Cisco kowtow to the Chinese with the excuse that they were acting in compliance with the host government’s law in suppressing internet usage/monitoring ought to concern libertarians and anyone supportive of individual freedom everywhere.

      This is one area where I find Adam Smith, Hayek, and Freidman woefully inadequate. Even the adherents of Ayn Rand might want to consider that her diatribe against the James Taggarts and Wesley Mouches of the world was a critique of the large corporation within the confines/limits of the nation-state. Even if we juxtapose the debate between “producers” and “looters” onto a global stage, then just who are the producers and the looters? Bankers at Goldman Sachs doing the work of God might think of themselves as producers, but the American people probably see them more as looters…

      This where the libertarians and acolytes of Ayn Rand should be invited to weigh in… What entity – the nation-state or corporaton – should/will be SOVEREIGN? That, to me, is integral to this debate. It has to be answered.

      1. Lazarus

        “What is at issue is whether the nation-state or the global corporation will be SOVEREIGN.”

        That is not “at issue”. That is a matter of the future. Neither you nor I now that.

        “Moreover, watching Microsoft and Cisco kowtow to the Chinese with the excuse that they were acting in compliance with the host government’s law..”

        Eh?

        Microsoft and Cisco are the Chinese. The Chinese are Microsoft and Cisco.

        What is it you don’t understand?

        “Even the adherents of Ayn Rand might want to consider that her diatribe against the James Taggarts and Wesley Mouches of the world was a critique of the large corporation within the confines/limits of the nation-state.”

        Haven’t read the woman myself. So I’ll have to take your analysis at face value.

        As far I as understand my life, large corporations and governments are hand in glove. They always have been. Rome? Egypt? Greece? Nazi Germany? Maoist China? Stalinist Russia? The European Union? The United States of America? Whatever?

        The thing that concerns me is the global (not nation-state) evolution of the corporate (fascist) over the nation (sovereign).

        I could be, and I hope I am, wrong……. But I’ve got a really bad felling about this.

        Nation, Democracy, Republic, Freedom are words that will be used to buy government cheese as long as you are prepared to surrender the meaning of each word for another slice of cheese.

        1. Mickey in Akron

          Lazurus,

          Just two things:

          1) Ridiculing and insulting comments to other bloggers or myself is counterproductive. Unless, of course, you have all the answers. But if you really cherish ideas like freedom and democracy, then berating someone into silence by ridiculing/insulting them is hardly consistent with such ideas, right? Or is that your intention? So much for J. S. Mill and the Essay on Liberty… What is it you don’t understand?

          2) From kleptocracy to fascism to corporate to China to GS – so it’s all the same and throughout history. From Egypt to the USA nothing is different and quite a sweeping generalization, don’t you think? But ironically, all of these historical examples cited by you, with the exception the USA, FAILED! Why is that? Did they implode or were they conquered from without? Does it make a difference in trying to thwart what you claim to have a bad feeling about or not? Is resistance futile? Talk about working for the clampdown! And why no mention of the British Empire? Talk about kleptocracy on a global scale… Your rendition of history appears a bit short and overly simplistic.

          Nah, I detect a bit of anarchist utopian ranting coupled with the anger/frustration of the “punks”. Just can’t figure out whether your an anarchist or a punk.. if you get my drift!

          Gonna leave it at that in the hope that your future comments might actually be constructive and contributory to the debate. Wishing you well.

  37. Lazarus

    @ Edward Harrison

    “One policy which is flat out wrong is the concept that we need to reduce deficit spending in order to avoid a double dip recession.”

    If you don’t live within your means you will go bankrupt. Perhaps you expect the entire world to go bankrupt? In which case, keep printing them dollars and buy everything you can.

    “Private sector debt (incl. financial firms) was 292% of GDP as of Q2 but public sector debt (incl. state and local municipalities) was 67.2%. Who’s more indebted – the private sector by a factor of 4.”

    Am I to understand that Private Sector debt at 292% of GDP is a cause for celebration? Where did they borrow the money from?

    “Adding unfunded liabilities to any public debt number when talking about spiking treasury rates is inaccurate and artificially inflates the number. A lot of people do this to make the public debt scenario look worse. The issue at hand is whether a supply/demand imbalance in Treasury securities spikes interest rates. Unfunded liabilities have absolutely nothing to do with this.”

    Unfunded liabilities can only be paid from future economic activity. Like it or not they have to be paid or dishonoured.

    “Cash and bonds are fungible. They are both obligations of the federal government to be repaid in full with a specific sum of fiat money.”

    For God’s sake man. Have you any idea how ridiculous that statement is. Fiat money is not an obligation of Government. It is a direct order (fiat) to use paper as a means of exchange.

    What is the “obligation” of Government under fiat?

    There is none.

    They can destroy value with a printing press, or as you have it “crediting accounts electronically”.

    Cash is fiat money, how the hell can an “obligation” be to repay fiat with fiat.

    That’s just hokum.

  38. DJBrown

    Better post. A no-stimulus approach, and there can be many of them, is not necessarily an approach that lets the chips fall where they lie. As I see it, the financial crisis was a manifestation of a failure to let currency markets clear. Currency manipulation in primarily China, but also in the Middle East, has led to suppressed yields on both U.S. sovereign and private debt. There has been a search for high-yielding debt instruments, and at the same time structural issues involving the dollar – its reserve status and its use to clear the oil trade – has made U.S. debt too cheap. Combine this with a pro-cyclical interest rate and fiscal policy, and we have the makings of a debt-driven recession. In the short-term, we can improve our automatic stabilizers and break up the banks which are gaming the interest rates. The near-tearm solution is to reach a quid pro quo with the Chinese before other countries begin competitive devaluations. Brazil and Russia reserves are almost depleted propping up the dollar. The U.S. should make a credible long-term commitment to lower its sovereign debt. This should include limiting the growth of entitlements (i.e. raising the age of eligibility for social security and scrapping the current health care bills and passing one that will lower costs through marketplace reforms), and flattening and broadening our tax system. Ultimately, we must have market-based policies that encourage savings and investment. Our current income tax system discourages savings and investment. We should either have a VAT or flat income tax. The total tax rate should be cut to the bone, include eliminating payroll taxes at least temporarily. Non-entitlement government expenditures should be cut, maybe not right now, but credible plans must be put forth to do so in the next couple of years. In addition, the Fed should allow the interest rate to gradually rise. The Chinese, in exchange, must commit to a worldwide float based on a basket of currencies. The dollar, much like gold in the 20′s, has outlived its usefulness as a reserve status currency and must be replaced. Once this is done, government expenditures will be cut further in due course.

  39. Lazarus

    @ Dave of Maryland

    “But that’s exactly the present situation. Jobs go to China because they’re cheaper. When the day comes that we’re cheaper, jobs will come back. Us vs: Them. The present situation is as ugly as it can get.”

    “When the day comes that we’re cheaper, jobs will come back. Us vs: Them.”

    Are you insane?

    You want to live on a bowl of rice a day?

    Why would any Citizen of the USA “Want to be Cheap”. Insanity, absolute insanity.

    “The present situation is as ugly as it can get.”

    What? I despair. You think that the “present situation” on selling your nation out is as “ugly as it can get”.

    Insanity, absolute insanity.

    What about the “Bonnie Situation”

    http://www.youtube.com/watch?v=U9ANL8L8RG0

    Can making the wrong decisions get that bad?

    1. DJBrown

      Under a floating exchange rate, with a convertible currency, the Chinese could no longer pay as poorly as they do now. They would be undercut, in any case, by other poor countries with cheaper currencies as the yuan naturally appreciates relative to other currencies. The U.S. is not the primary victim of Chinese beggar-thy-neighbor policies, but has been a willing participant. It’s the other poor countries that have been shut out as China becomes the sweatshop for the world. A Valued Added Tax, consumption tax, or flat income tax, whatever you choose, 40% of the population cannot avoid taxes. Otherwise, we continue paying with debt, as we do now.

      1. Lazarus

        OK,

        I’m going to have to accept that you are insane.

        “Under a floating exchange rate, with a convertible currency”

        Only an insane would suggest that there is a difference between a “floating exchange rate” “with” “a convertible currency”.

        “the Chinese could no longer”

        Sweet Jesus, what? You are going to tell “the Chinese” what to do?

        “They would be undercut, in any case, by other poor countries with cheaper currencies”

        Ha Ha.

        Cheaper currencies like what? The Dollar.

        Wake up fool. Enjoy your bowl of rice.

        “A Valued Added Tax, consumption tax, or flat income tax, whatever you choose, 40% of the population cannot avoid taxes. Otherwise, we continue paying with debt, as we do now.”

        What? Is that it? Is that your solution to the stupidity and greed of your leaders?

        Tax everybody?

        Hey, good look with enterprise and innovation in your brave new world.

        1. DJBrown

          Last comment on this blog, as it has devolved into the absurd. That 1.4 trillion or so in dollar reserves that the Chinese government holds, who is it being taken from? Polemics aside, it is the poor Chinese that are being robbed. If the Chinese government stopped buying our debt and the Yuan were allowed to appreciate, then the Chinese worker could buy more foreign products and improve their lifestyle. In turn, as they consumed more, we would have a market for our own production, instead of conspiring in this theft. We don’t want to work or pay for the entitlements through an efficient tax system. Instead, we are asking the Chinese to pay for our health care, which very few of them have. The U.S. and China have conspired in this robbery. A rational, objective person would recognize this fact. But I’m out.

  40. Lazarus

    @ DJBrown

    “Ultimately, we must have market-based policies that encourage savings and investment.”

    What market DJ?

    The slave market in China that undermines everything you think you believe in?

  41. Lazarus

    @ DJBrown

    “We should either have a VAT…”

    You don’t need Value Added Tax (who put that idea in your head?).

    You need to take your country back from the klepocrats who stole it from you.

        1. Lazarus

          Yup,

          I fell like I wanna be sedated. Nothing makes sense anymore.

          http://www.youtube.com/watch?v=_rxJroWIg1Y

          Enterprise? How does that work when your competition is a fascist government in China working for Wall Street to crush your very thought?

          Labour? Can you compete with the slaves employed by a fascist government in China?

          Land? After your Federal Reserve has wasted all of your reserves the fascist government of China will buy all your land for the paper dollars you gave them and make you slaves.

          Capital? Are you beginning to understand that Goldman Sachs and the Fascist China Government are the same thing?

          http://www.youtube.com/watch?v=_rxJroWIg1Y

      1. Skippy

        The new presenter (Shaun Micallef) was a lawyer that left the profession to follow his Passion for biting comedic sarcasm.

        Skippy…Very funny guy and would have loved to see him in court too.

  42. Robert Dudek

    “Am I to understand that Private Sector debt at 292% of GDP is a cause for celebration? Where did they borrow the money from?”

    Borrowed money is created out of thin air.

    Money is not a thing – it is a concept. Money has precisely those properties that people agree to believe it does.

  43. Nostradoofus

    What if distrust, fueled mainly by opacity, is a much bigger component of a deflationary spiral than is widely recognized?

    FDR did two things in the ’30s: massive stimulus, and massive regulatory effort to restore trust through insurance and forced transparency. It worked.

    Japan did one thing after 1990: massive stimulus, without any regulatory effort to restore trust through insurance and transparency. It didn’t work.

    No matter how much liquidity the US throws around, bondholders will still lack reliable rating agencies; bank clients and stakeholders still won’t know the true exposure of their banks; the derivatives market will still be opaque; bear raids will keep happening.

    Debating the scale of stimulus is legitimate, but less important, I suspect, than restoring transparency.

  44. John

    So this is what it looks like when an Austrian goes over to the dark side. I feel dirty just from reading it. Please don’t call yourself an Austrian anymore; instead, you are a “free luncher”, a Keynesian,a Japanese.

  45. Alex Sebastian

    I have seen the comparison of private-sector debt as a % of GDP to public-sector debt as a % of GDP in a number of blog posts recently. I have a serious beef with this comparison. While this blog is generally very high quality, using this comparison for any argument at all rivals the arguments of much more vacuous minds in terms of speciousness.

    The primary measure of an entity’s long-term solvency is its capability to pay off its obligations with future cash flows. The private sector does and will make profits (admittedly they will be subdued for some time to come), but the public sector is hemmorrhaging red ink and will be for AT LEAST the next 10 years (.5T projected structural deficit for 2019). Where are the funds going to come from to repay this government debt? On this basis alone the private sector justifiaby has higher leverage (when measured relative to the GDP) than the government. Perhaps a more reasonable measurement of leverage would be relative to their respective assets?

    There are more arguments I would like to lay out here, but alas, the CFA textbooks are calling *puke*

  46. Francis from Belgium

    Even if private debt is purged and reaches a more reasonable level within 5 years thanks to a significant increase of private savings, how will you then start to reduce fiscal deficit without restarting the “private debt – credit economy” rationale?

    Edward Harrison suggests that deleveraging private debt and purging malinvestment would allow the resetting and restarting of the machine, but in a globalized economy where developped countries are all playing the game of unit labour cost deflation, how will you then increase aggregated demand in the middle and long term without increasing the household debt/GDP rate?

  47. nancy

    When you complain about the Tea protester check out history, About the
    Boston Tea Party, It was about paying taxes, How the British wanted more
    and more taxes on everything you do, We the people booted them out.
    Now Democratics and some republican are try to pass Healthcare reform,
    cap and trade, Climate change. Items that will tax everyone in one or another.
    We need Capitalism, we need create jobs that make a profit, or those jobs
    will go to other country. If we do not invest in United States of America,
    with jobs that make a profit, NOT non-profit organization relay on government.

    We need capitalism jobs, Need to drill oil here by American co., from another
    state, Need to burn coal but needs to be a American co., We create
    jobs that make money and profit.

    Michigan Housing problem: People buy houses they really can’t afford,
    Housing in Michigan taxes are high, hurts average person,
    Also, alot of people lost there jobs, taxes to high,

    We the people remember our Constitution of United States

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