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Martin Wolf on the Dangers of Austerity

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Martin Wolf, the Financial Times’ influential economics editor, takes issue with the austerity fad that is sweeping governments in advanced economies. From his comment:

Against this background, what would a big tightening of fiscal policy deliver? In the absence of effective monetary policy offsets, one would expect aggregate demand to weaken, possibly sharply. Some economists do believe in “Ricardian equivalence” – the notion that private spending would automatically offset fiscal tightening. But, as Mr Posen argues of Japan, “there is no good evidence . . . of strong Ricardian offsets to fiscal policy.” In developed countries today, fiscal deficits are surely a consequence of post-crisis private retrenchment, not the other way round.

This is all very well, many will respond, but what about the risks of a Greek-style meltdown? A year ago, I argued – in response to a vigorous public debate between the Harvard historian, Niall Ferguson, and the Nobel-laureate economist, Paul Krugman – that the rapid rise in US long-term interest rates was no more than a return to normal, after the panic. Subsequent developments strongly support this argument.

US government 10-year bond rates are a mere 3.2 per cent, down from 3.9 per cent on June 10 2009, Germany’s are 2.6 per cent, France’s 3 per cent and even the UK’s only 3.4 per cent. German rates are now where Japan’s were in early 1997, during the long slide from 7.9 per cent in 1990 to just above 1 per cent today. What about default risk? Markets seem to view that as close to zero: interest rates on index-linked bonds in the France, Germany, the UK and US are about 1 per cent. What, for that matter, does the spread between conventional and index-linked bonds tell us about inflation expectations? We can say that these are, happily, still well anchored, at about 2 per cent in the US, Germany and France. In the UK, they are somewhat higher.

The question is whether such confidence will last. My guess – there is no certainty here – is that the US is more likely to be able to borrow for a long time, like Japan, than to be shut out of markets, like Greece, with the UK in-between.

As borrowers, the US and UK have advantages: first, their private sector surpluses cover some three-quarters and 90 per cent, respectively, of their fiscal deficits; second, many private-sector investors need assets that match liabilities in their domestic currency; third, because these countries have active central banks, bondholders suffer no significant liquidity risk; fourth, they have floating exchange rates, which take some of the strain of changes in confidence; fifth, they have policy autonomy, which gives a reasonable prospect of near-term economic growth; and, finally, the US offers the world’s most credible reserve asset. That gives the US government the position vis-a-vis the world that the Japanese government possesses vis-a-vis Japanese savers.

Critics could argue that these arguments downplay the risks of a “sudden stop” in financial markets. But risks arise on both sides. When Japan – or Canada or Sweden – tightened in the 1990s, a buoyant world economy could absorb excess domestic supply. There is no world economy big enough to offset renewed contraction in Europe and the US. Concerted fiscal tightening could, in current circumstances, fail: larger cyclical deficits, as economies weaken, could offset attempts at structural fiscal tightening. For countries in southern Europe, this is already a danger. Much of the world could end up in a beggar-my-neighbour position towards an increasingly fiscally stretched US…

Premature fiscal tightening is, warns experience, as big a danger as delayed tightening would be. There are no certainties here. The world economy – or at least that of the advanced countries – remains disturbingly fragile. Only those who believe the economy is a morality play, in which those they deem wicked should suffer punishment, would enjoy that painful result.

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  1. a

    “Critics could argue that these arguments downplay the risks of a “sudden stop” in financial markets.”

    Exactly. There’s seems great confidence in “the markets”, as if whatever “the markets” seem to think now is God’s truth writ in marble. But this time last year, “the markets” thought lending to Greece was just fine. And then suddenly – boom – “the markets” suddenly decided differently.

    “But risks arise on both sides.” Always will be. There is a risk of crossing a busy road while blindfolded, and on the other side there’s a risk that if you stay you get hit by a meteorite. OK, that’s a bit silly, but I think what we need from Wolf and his fellow Keynesians is an idea of *when you stop*. At what point do they think that it’s unwise to borrow more? 120% of GDP? 150%? Never? If his answer is that its only unwise when interest rates start going up, then he has lost me. When those rates start going up, it will be too late.

    And we also need from them why raising taxes *now* on the rich, to cut the deficit as much as possible, is a bad idea. Wolf and his fellow Keynesians are effectively shills for the wealthy, postponing increases in their taxes in the hopes that the wealthy will help us by spending. This strikes me as just another version of trickle-down economics. They’ll talk about helping the unemployed and so on, but they are just shills for the rich.

    1. Yves Smith Post author

      With all due respect, you do have it backwards.

      Deflation leads to high unemployment. Who suffers proportionately more? Yeah, the rich might see their portfolios take a whack if they are positioned wrong, but the poor and middle class face severe dislocations.

      You’ve managed to be persuaded that the bond vigilantes are on the side of the middle class. Remarkable.

      1. a

        Who said anything about the bond vigilantes? Who said anything about deflation?

        I’d prefer to tax the rich rather than borrow money from them. I guess you don’t.

        1. Diego Méndez

          I’d also prefer to tax the rich. The problem is: the rich are untaxable: if you hike taxes for the rich, they just send more money into tax havens.

          Unless the world unites and creates specific taxes for the rich and terminates the abusive policies in dozens of small tax havens around the world (which is a 0-probability event), the rich will keep on being untaxable.

      2. BigBadBank

        Exactly Yves; Keynesians hate unemployment – plus no one outside the US really has a problem with taxing the rich a bit more in times like these (eg the new UK government is keeping the 50% rate on earnings over £150,000).

        1. a

          “a bit more” won’t do it, unless you cut services like the UK conservatives plan to.

          You need *a lot more*. Rates at 85% or higher.

          1. Dan Duncan

            Put the rich in a “Brewster’s Millions” Bracket.

            For context refer to that old Richard Pryor flick.

            Richard Pryor, as Montgomery Brewster, suddenly finds that his recently deceased long-lost great-uncle was an eccentric multi-millionaire who was also his only living relative. The great-uncle includes Brewster in his will.

            Under the terms of the will, however, Brewster is challenged to spend $30 million within 30 days in order to inherit a much larger sum.

            ***But there are some important conditions attached***

            At the end of the 30 days, he may NOT own any assets that are not already his, and he must get value for the services of anyone he hires. Furthermore, he may donate only 5% to charity and lose another 5% by gambling, and he may not waste the money by buying expensive goods and then destroying them or giving them away. Finally, he is not allowed to tell anyone about the nature of this challenge.

            So…the Brewster’s Bracket would work like this:

            Above a $500,000 income, the wealthy person is charged to spend ALL of it without acquiring new assets. If he doesn’t spend it all, he pays a 90% tax. No restrictions on charity. The rich can revel in decadence and/or altruism…or they can stroke a check to the pigs in our government. Either way the money gets circulating.

          2. alex

            “You need *a lot more*. Rates at 85% or higher.”

            How do you arrive at that number? I basically agree with you, but at what income do those rates kick in? And are you talking nominal or effective rates? IIRC we had something like a 90% top rate in 1950s(?), but that was a nominal rate. Domestic tax shelters were a big business – nobody paid those rates in practice.

            The biggest injustice in our tax system is capital gains rates, which disproportionately favor the wealthy. Top rate of 15% when labor income tops out at over twice that. WTF? Nor does the excuse that low capital gains rates encourage investment hold water. Empirical studies have shown that capital gains rates do very little to nothing to encourage investment.

            Step 1 is to eliminate capital gains rates – tax all income the same.

    2. MacroStrategy Edge


      You ask two questions. I will not pretend to speak for “them”, and I should also clarify, from what I know of “them”, many would take exception with the notion they are Keynesians, at least in the conventional use of that label, since it would appear most Keynesians never read Keynes in the original, but that is a separate matter.

      Your first question is:

      “At what point do they think that it’s unwise to borrow more?”

      The fiscal balance should be run up to the point at which full employment of productive resources is accomplished with price stability. And contrary to conventional views, countries with sovereign currencies need not borrow in order to deficit spend. In fact, they cannot: the governments and their central banks must first create the money through deficit spending and central bank balance sheet expansion before the private sector has the money to spend on taxes or purchases of government bonds. Households cannot print money. Nonbank businesses cannot print money. Both of these actions are deemed counterfeiting. Think about it: the money the government collects in taxes and bond sale proceeds ultimately comes from…the government.

      Your premise that large and rising budget deficits always and everywhere, or even most of the time, end up in high and rising nominal interest rates needs to be re-examined. Surely that was one of the points of Wolf’s article, and while Japan is probably the extreme case, you would probably want to try to explain that one under your (conventional) view. You may find your view needs some adjustment to the fact of experience.

      Your second question is:

      “And we also need from them why raising taxes *now* on the rich, to cut the deficit as much as possible, is a bad idea”

      Look at the answer to the first question. Your premise appears wrong. “They”, and certainly not Wolf, are not arguing in favor of cutting fiscal deficits at a time when double digit unemployment is apparent in many nations, and private debt structures are still quite wobbly, to put it diplomatically.

      However, if “they” were to conclude now is the time to slash fiscal deficits, I am sure they would take the ax to all kinds of levels of wasteful bureaucracy, military adventurism, etc. on the expenditure side first, had they the political position to at even propose such changes. See Jamie Galbraith’s book, Predator State, for the rationale behind such moves. Then I would not be surprised if transaction taxes, like the Tobin tax, on financial markets came under discussion, especially as a way to inhibit flash trading – you know the machine based trades that nearly crashed the US equity market a few weeks back, for example. Then a look at marginal tax rates for high income or high net worth households would probably be on the agenda.

      But for the most part, you would find “they” tend to notice economic growth bolsters tax revenues, and higher tax revenues have a way of cyclically increasing fiscal balances, which is why the what is called the primary (pre-interest expense), cyclically adjusted fiscal balances are generally in small deficit positions…which no one seems to notice.



  2. dearieme

    Economists, in particular macroeconomists, overwhelmingly failed to predict the Great Financial Crisis. Their advice may be about as much use as that of a civil engineer who uses Aristotle’s physics rather than Newton’s. Lord knows where politicians should turn to for economic advice; hasn’t James Galbraith described economics as a “disgraced profession”?

    I, by contrast, did predict the Great Financial Crisis, and my economic advice to politicians is a firm “Search me”.

    1. Yves Smith Post author

      Since many, perhaps most, economists are lined up against Wolf, it isn’t clear to me what your general comment has to do with his piece.

      In March 2007, Wolf deemed equities around the world to be considerably overvalued:

      While he didn’t predict a crisis, he did warn that the good times could not last in April 2007:

      1. dearieme

        I’ve got a lot of time for Wolf: an article if his in 1996 told me that the governments of the advanced economies would all have to default on their debt “in a decade or two”, probably by inflation. Naturally, however, he uses the tools of economists of his kidney – but what if it’s all rubbish? Like Aristotle’s physics – beautifully worked out, rationally argued, completely convincing to those immersed in it, but utterly wrong? Or unlike Aristotle’s physics, in that it can’t be shown conclusively to be in error by a few controlled experiments? What if economists essentially have nothing useful to teach us at all? Or, more precisely, what if it is essentially impossible to decide which of the many lessons that they urge on us have any merit? What if Economics, in other words, isn’t a science like Newton’s physics – open to improvement in extreme cases like high speed and proximity of dense mass – or like Aristotle’s – easily falsified – but instead it’s a highly wrought superstition subject to the appearance of rationality but based on hopelessly inadequate axioms? Then what do we do, Yves?

        1. Lucio

          It should be never forgotten that the subject of economists’ studies is continuously evolving because of the actions taken by the participants (some countertrending, others on the contrary cause negative self-fulfillment); this is a fact that EVERY economist seems to ignore, just as if the situation they are examining would be frozen in eternity…

        2. tinbox

          ECONned is pretty effective in arguing this point about economics and economists–it just isn’t science. Krugman, DeLong and Thoma have a belief in huge gov’t deficits to combat unemployment in the current situation, and let’s assume it is an entirely sincere belief, but there is no reason to believe that their “solution” will be effective on the basis of their models. Their models just aren’t good enough for any sort of solid predictions.
          So, as commenter “a” notes, the best course of action on the economy is really a political judgment. If the problem was a credit bubble, isn’t the workout going to involve some pain? Those who advocate borrowing more now and hoping that a recovery will mitigate or eliminate pain later, do not seem to have a realistic working model of politics.

          1. rickstersherpa

            I would note that Paul Krugman, Joe Stiglitz, Mark Thoma, Tim Duy, Brad DeLong, Steve Waldman, Robert Waldman, Dean Baker, Marshall Auerback, etc. are all economists who accept the role of Fiscal stimulus when you facing interest rates at the zero-bound, another way of saying that you are in a potential Fisher-Minsky debt deflationary trap. And unlike the proposers of pain and austeririty, who seem to ignore need for data, and model for relevance of that data, these folks all offer empirical evidence to support actual models that abstract elements of the current circumstance.

            The current elite though grew up and came of age in a period where inflation was the great trauma. And they have insulated themselves from unemployment and its pain. Also, since the upper 5% of income earners and wealth holders have received almost all of the benefits of economic growth the last 30 years, they have so separated themselves from the every day concerns of the rest of the population that they may as well live on a different planet. And for the rest of the population, they are so divided by class, race, and region that they usually focus their animosity on “the other” and those lower down on the economic ladder, “the undserving.”

            I will note that people who were once earners become non-earners, usually through no fault of their own. They get sick or severely injured and can’t work (think of the maimed soldiers who attended the Memorial Day concert) or just old. They go from being “earners” to those morally contemptible “non-earners” in a blink of an eye. Meanwhile, most who are rich owe far more to good fortune and the structure of a society that enabled that fortune then their own talents and hard work. And its our elite who find the idea of higher progressive income tax beyond the pale, that eveng the allowing the lapsing of the Bush-Cheney tax cuts is the first act of the communist revolution.

            One has to careful when quoting founders, since they would write one thing in one particular context and another in a different context. But I have always found this statement of Franklin in a letter of Robert Morris, written in late 1783 when he was exasperated by Americans refusing to tax themselves to pay for the debts of the revolution, rather convincing.

            “The Remissness of our People in Paying Taxes is highly blameable; the Unwillingness to pay them is still more so. I see, in some Resolutions of Town Meetings, a Remonstrance against giving Congress a Power to take, as they call it, the People’s Money out of their Pockets, tho’ only to pay the Interest and Principal of Debts duly contracted. They seem to mistake the Point. Money, justly due from the People, is their Creditors’ Money, and no longer the Money of the People, who, if they withold it, should be compell’d to pay by some Law.

            All Property, indeed, except the Savage’s temporary Cabin, his Bow, his Matchcoat, and other little Acquisitions, absolutely necessary for his Subsistence, seems to me to be the Creature of public Convention. Hence the Public has the Right of Regulating Descents, and all other Conveyances of Property, and even of limiting the Quantity and the Uses of it. All the Property that is necessary to a Man, for the Conservation of the Individual and the Propagation of the Species, is his natural Right, which none can justly deprive him of: But all Property superfluous to such purposes is the Property of the Publick, who, by their Laws, have created it, and who may therefore by other Laws dispose of it, whenever the Welfare of the Publick shall demand such Disposition. He that does not like civil Society on these Terms, let him retire and live among Savages. He can have no right to the benefits of Society, who will not pay his Club towards the Support of it.”

    2. Tao Jonesing

      “I, by contrast, did predict the Great Financial Crisis”

      A lot of people “predicted” that something bad was going to happen, including me. Nobody predicted that it would happen the way it did. All anybody saw was the visible part of the bubble, they didn’t see the systemic rot underlying it. If they had, there wouldn’t be so many books with so many different explanations of what happened.

      1. sid_finster

        A lot of people and housecats predicted the crisis. As did I, for what it was worth.

        During the bubble, I was troubled by the fact that it seemed like the only other people who sensed something was not right, that the world economy was anything less than rosy, were the certified nutbars, the paranoid fringe. Conspiracy theorists and con-artists peddling scam “investments.” (I now know that this was perception was not true; plenty of others were aware.)

        The people engaged in ostensibly legitimate financial services, people who were paid astronomical sums for their expertise on money, insisted that the Emperor was wearing a Zegna suit, of a conservative stripe.

        The rot underlying the financial industry and its governmental subsidiaries today explains why so many experts failed to detect what should have been obvious; not out of conspiracy or conscious fraud but because their salaries and bonuses (or future jobs, in the case of regulators) depended on their not seeing a problem, or at least keeping any misgivings to themselves.

        Say something unseemly like “but I can count the pimples dotting the Imperial Backside!” and you will get shushed and kicked out of court. You won’t get invited to the banquet.

        With that in mind, what amazes me to this day is not that the system is rotten (it was incentivized to be rotten, so it could not have been any other way) but that it has not fallen further or faster, or that it could have held together for as long as it did.

        Especially after the collapse of the dot-com bubble, it amazed me how fast investors were to rush into a newer, bigger bubble, one with arguably even fewer rational underpinnings.

  3. Brick

    Austerity comes in two flavours in my opinion. Firstly you have austerity which targets structural stimulus, and by that I mean government funded endeavours which don’t give a long term benefit to the economy. Here I am thinking about perhaps replacing the same piece of road over and over again without regard to whether it is worn out. In effect this is removing stimulus which was given during the good times, which probably never should have been in place. This does effect consumption, but can be mitigated to some extent by increasing consumption through increasing tax relief to low income earners.
    Secondly you have austerity aimed purely at balancing the deficit, and here governments will try to target future consumption and company profits. Here I am thinking of pension reform and taxes. This again will affect consumption, but may have some delays in it taking effect.
    The trick is to manage your employment level, currency value and gradually implement austerity measures without spooking the market. All of this is deflationary, not good for the general population short term, and depends on currency devaluation to prevent deflation taking hold. Something I think the Swiss are failing to manage with their currency interventions.
    The end game and Martin is right to worry is to take advantage of the US having a reserve currency to shift unemployment to the US and move consumption slowly away from the US. The US could then be left with some difficult choices, like a further big stimulus, its own austerity measures, massive currency intervention, or trade wars. I can see a situation where either the US deficit will have to rise so much that it will become a problem, or stagflation takes off, or the US becomes isolated by trade barriers. Maybe the European austerity measures are an attempt to get the house in order in preparation for when the US eventually gets into difficulty. My take would be to look to what happens in Switzerland for a taster of what will be coming to the US.
    I also think Martin is being a little disingenuous with what he says about government bond rates in that despite low rates in Europe at the minute, some bond sales are sailing close to auction failure. Yes the rates are low but the bid on them is pretty low outside of national banks. The ECB has created a dangerous feedback mechanism between government bonds and nation banks which could go horribly wrong if a bank gets into difficulty. In effect the ECB has lined up the dominoes.

  4. anon

    I don’t see why 1) raising the top marginal tax rates and 2)borrowing for the sake of, say, a new WPA (i.e. employing many more people to do jobs that need to be done like repairing infrastructure), are mutually-exclusive options.

    1. a

      Say you need x to finance a WPA. You borrow that instead of raising taxes.

      Next year you need the same x to finance it. On top of that you have to pay y on the debt you’ve accumulated (interest due, as well as the amount that has come due and which you now need to roll over). But no one will lend it because now you’re a bad risk. So, instead of raising x in taxes, you now need to raise x+y. At first view anyway, you’re in a worse position.

      Deficits should be minimized and taxes should be maximized. The Keynesians are trying to stake out the position that they’re the ones battling for the unemployed – successfully, perhaps, given the competition. But they are looking out for the wealthy as well, by borrowing from them rather than taxing them, and hoping that it trickles down.

          1. MacroStratedge


            No, Wolf clearly works with the financial balance approach, which is the only coherent, consistent macroeconomics available at the moment.

            Krugman occassionally glimpses the financial balance approach, and since I have personally handed him my papers to him, the ones applying the approach to the eurozone and building off of his Krugman’s cross diagram of nearly a year ago in the NYT, he can not quite plead ignorance, though he frequently feigns it.

            DeLong and Thoma are quite resistant to the financial balance approach – which basically means they deny 500 years of double entry book keeping…which of course is their right.

            There are still some who believe the sun revolves around the earth, after all.

            But really, they should face the facts, or step down, as anything else constitutes malpractice and fraud, I would think.



      1. alex


        A simple and effective argument for your approach is that stimulus multipliers for tax cuts on the well off are 0.3-0.4. Stimulus multiplier estimates for government spending (including things like unemployment benefits and food stamps) can vary widely, but are in the range of 1.0 to 2.5. There are no responsible estimates that put tax cut multipliers anywhere near spending. Therefore increasing spending and increasing high end taxes by the same amount will have a stimulative effect without increasing the deficit.

        Anyone who opposes this approach is not genuinely concerned about the deficit – they just want lower taxes on the well off. To them I say “cry me a river”. If you made $100M last year and had to pay half of it in taxes, you can afford the world’s smallest violin. I hope you can also afford to feed your kids.

        1. Mark Amerman


          I don’t think what you’re saying is true. In fact I don’t see how it could possibly be true.

          Imagine that it were true, that as you claim, stimulus multiplier effects of government spending are in the range of 1.0 to 2.5. If that were true in general then we would see a completely different world around us than the one we actually view.

          Prosperity would be easy. All you need to do is have the government spend money. Even in the worst case, with a minimum multiplier of 1.0, nothing would be lost. So you would just spend more money in the hope of hitting a multiplier higher than 1.

          There wouldn’t be any human barrier. After all this is exactly what almost every politician and for that matter almost every civil servant wants to do: spend money on their pet ideas.

          If your belief were accurate, every government around the world would be spending money just as fast as it possibly could. And since more money would be made as a consequence, everyone would just get richer and richer.

          But this isn’t the world we live in. And that simple observation proves that the typical government multiplier has to be less than 1, and in fact probably considerably less than 1.

          I don’t doubt your opinion that many people believe that government spending has a multiplier higher than 1.0. It’s common place for people to believe ridiculus things. But I doubt your assertion that no one thinks otherwise.

          Now it could be that you don’t mean to assert that in general government spending has a multiplier greater than one. That instead there is something very special about current circumstances that makes government spending a no possible loss proposition. If so, if that’s what you
          meant to say, would you mind explaining?

          1. alex

            “Imagine that it were true, that as you claim, stimulus multiplier effects of government spending are in the range of 1.0 to 2.5. If that were true in general …”

            It’s not true in general. It only works when the economy is demand constrained (i.e. producing well below capacity). In other words when we’re in a recession. Even then there are good arguments for loose monetary policy as a first resort, but since we’ve already gone as far as we can with that (basically 0%) we need the fiscal stimulus as well.

            Try fiscal stimulus when the economy isn’t demand constrained and that extra government spending will just crowd out private spending, and possibly result in inflation too.

            There are downsides to fiscal stimulus too, as it does increase government debt. I don’t think you can increase that endlessly, but in the current circumstances I think it’s the lesser evil. Also, as ‘a’ and I argue, if excessive debt is becoming a serious problem then increasing government spending and high end taxes does result in some stimulus without increasing the deficit.

            “But I doubt your assertion that no one thinks otherwise.”

            There are some economists who don’t think that fiscal stimulus ever works, but their thinking is based on pie-in-the-sky models rather than historical experience. That school of thought is notorious for coming to interesting conclusions like the Great Depression was really the Great Vacation (people chose leisure time over employment). I couldn’t just make that stuff up!

          2. Mark Amerman

            Alex, thanks for your response. This seems the key issue to me. I know that there are a number of quite bright people that believe that fiscal stimulus is the answer to our situation, or for that matter to Europe’s situation. But I’ve noticed that the argument is never made in detail in a positive sense. Or at least, I have failed to find such.

            Usually, the only reasoning actually laid out is why simultaneous policies of fiscal austerity will fail. Why as a logical necessity if everyone cuts back their spending we will all necessarily get poorer.

            I follow that argument and agree with it up to a certain point. What I’m uncertain about it is the implication that fiscal stimulus will be better. It might seem logically necessary that if austerity is bad then stimulus is good. I’m not sure that’s the case. We may be in an environment where either austerity or stimulus will produce high unemployment and falling wealth. The question is which
            path is worse.

            Now if the government spending multiplier really is greater than one at this point in time, then for me at least that pretty much ends the debate. So it’s a key issue.

            Questions that occur to me.

            How do you measure demand constraint?

            Obviously our output is far below what it was two years ago.
            But is that how we define demand constraint? Is it a historical thing? Can you define it without reference to the past? If it is a path-dependent concept, is there a certain point at which our current level of economic activity becomes the new baseline and we can no longer say we are demand constrained?

            Over the last fifteen years a large number of U.S. industries have moved to China. If productive capacity is the limit, then why did they shut down their factories in the United States?

            If we are shutting down large numbers of factories then clearly for at least that period, we were producing below productive capacity. Are you asserting that government expenditures during that the last fifteen years had multipliers greater than 1?

            Isn’t the world in general always demand constrained? I mean there are an awful lot of people in the world that are not gainfully employed. And we just went through a long period where massive amounts of capital were searching for positive returns. Shouldn’t this have been a time when government spending most places had a multiplier greater than 1? Is this what we actually observed?

            Why is the current massive U.S. government stimulus failing?
            I almost don’t want to ask this question. Clearly many people believe the government saved us from disaster and are
            offended by any suggestion to the contrary.

            Perhaps a better question: why did fiscal stimulus in Japan,
            over the last twenty years, produce so little positive result? Is the Japanese experience congruent with a government spending multiplier greater than 1?

            How do you tell when government spending is crowding out private spending? What markers do you look for?

            There are many phenomena where the short versus long-term impacts are different. Is it possible that the immediate impact of government spending is quite different from the long-term effect?

          3. alex

            Mark Amerman: “But I’ve noticed that the argument is never made in detail in a positive sense. Or at least, I have failed to find such.”

            Krugman’s blog sometimes has good posts about it. I know lots of folks are less than thrilled about him (I’ve mixed feelings myself) but the kind of posts I’m talking about are just explanations of standard Keynesian fiscal stimulus thinking and historical examples, rather than anything specific to Krugman. He does do a good job of explaining economics regardless of whether you agree with his politics. There must be some good books too but I can’t think of any off the top of my head.

            “It might seem logically necessary that if austerity is bad then stimulus is good.”

            Personally I’m less interested in the logic than in historical/empirical evidence. A purely logical deductive approach only works when you have a solid theoretical foundation, and I think most economic theories are food for thought rather than eternal truths. Show me if it works!

            “Now if the government spending multiplier really is greater than one at this point in time, then for me at least that pretty much ends the debate. So it’s a key issue.”

            Agreed. I’ll be the first to admit that multiplier estimates vary widely and they’re somewhat dependent on models and very dependent on specific conditions, but it seems that under present circumstances the best estimate (educated guess) is that it’s definitely > 1.

            “Obviously our output is far below what it was two years ago. But is that how we define demand constraint? Is it a historical thing? Can you define it without reference to the past?”

            It’s definitely historical and hence path dependent. The simple approach that our output is lower than two years ago is what it’s based on. Since there have been no major shocks (nationwide natural disasters, major resource constraints, people having half their brains fall out) on the scale of the last two years, reduction in productive output must be a market problem.

            “is there a certain point at which our current level of economic activity becomes the new baseline and we can no longer say we are demand constrained?”

            Sure, but I think that’s over a much longer time scale than two years. Over say twenty years things can deteriorate (factories become obsolete, infrastructure decays, people don’t get training/education because there are no jobs) and your new productive capacity is lower. But I don’t think we’re even close to that.

            “If we are shutting down large numbers of factories then clearly for at least that period, we were producing below productive capacity.”

            Factories aren’t the only source of productive capacity. Until a couple of years ago we had fantastic house production. It wasn’t sustainable and you can’t export them, so we’ll need to switch production. Hopefully to factories – we have a terrible trade deficit and manufactured stuff is a good export. Reducing the trade deficit increases demand without increasing the deficit.

            “Isn’t the world in general always demand constrained?”

            I’m using demand in the sense that economists use it – what quantity will be bought at what price. I’d like a helicopter to shorten my commute, but since I can’t afford one my “demand” is zero. OTOH if I want a new car and can afford it, but choose not to buy it only because I’m worried about the economy, then economists would say it’s demand constrained.

            “Why is the current massive U.S. government stimulus failing?”

            Do you know that it’s failing? That’s a counterfactual and thus very hard to prove. Would the economy be in even worse shape without the stimulus? In such a murky area I think the best thing to do is look at historical examples of stimulus vs. no stimulus and see who fared better. It’s far from perfect but it’s the best we’ve got. BTW many people think the stimulus was far from massive and it was badly designed – 40% was in tax cuts that have a low stimulus multiplier.

            “Perhaps a better question: why did fiscal stimulus in Japan, over the last twenty years, produce so little positive result? Is the Japanese experience congruent with a government spending multiplier greater than 1?”

            Good question. Fiscal stimulus aficionados claim the Japanese stimulus was tepid at any given time and they were prone to withdrawing it before it really took hold (the same happened when the US cut spending in 1937 and the economy nose dived again). Keynesians say that applying day-late-and-dollar-short stimulus intermittently over 20 years won’t work, and will just drive up the debt. Japan seems to prove this.

            “There are many phenomena where the short versus long-term impacts are different. Is it possible that the immediate impact of government spending is quite different from the long-term effect?”

            Absolutely. Keynes was clear that he only believed in fiscal stimulus during the downside of the business cycle, and that the resulting debts should be paid off during the upside.

          4. Mark Amerman


            Yes, I’m familiar with Paul Krugman. Actually he’s the guy that got me interested in economics. Back before he got the New York Times column, he had a blog where at irregular intervals he would post essays. I used to eagerly await them. I was pleased when he got the New York Times column but it proved to be a disappointment.

            Although it’s been some time since I’ve read his work, I’m aware that he’s been pushing this idea that government spending has a multiplier greater than 1 and wondered in passing when reading your comment above whether you were one of his readers.

            Someone I’ve been paying a lot of attention to lately is
            Michael Pettis at His most recent essay, about
            the Shanghai stock market, although at first glance it has nothing to do with the U.S. actually may shed some light on why our economy is not picking up.

            He points out the different investor psychology when the government is such a major part of what succeeds and what doesn’t. As uncertainty increases, more and more investments become irrational, till we get the point where the only investors are gamblers with a short-time horizon, because long-term investments, given the unpredictability of the environment don’t make sense.

  5. Jo

    (in a footbal chant stylee)

    What do we want?…..

    When do we want it?….

    1. alex black

      “Lord, give me Chastity, but not quite yet…” – St. Augustine.

      ‘Twas ever thus.

  6. Adam

    Given the situation there is no need to borrow the money at all. The FED should just publically state that it will fund $X for a jobs program (or whatever).

    For those of you chocking on the thoughts of inflation, let me remind you that IF that problem materializes at some point in the FUTURE, we can deal with it then.

  7. leon trotsky

    Capitalism is a sociopathic authoritaritan enterprise whose objective is the accumulation of wealth and power by its ruling class.From its invention in England with the enclosure movement, which displaced peasants to create a class of people who then had to rent their existence to capital to survive,to Klein’s Shock Doctrine,capital either creates and/or exploits crisis situations in the furtherance of accumulation.The recent bailout was a prime example,whereby the entire fiscal apparatus of the US was highjacked by Wall St.,with the exception of funding for endless war and repression at home,which is part and parcel of the overall process of crisis mongering.The raw extortion was breathtaking even by capital’s sordid standard’s-either you hand over the money,or we induce unemployment of say 50% and institute martial law.Paulson actually suggested martial law as a possibility in the Fall of 2008.An apt analogy is as follows-A criminal waits by the side of a darkened road.As a car approaches,he triggers a flashbulb at the car’s windshield.After the crash,he rapes the traumatized victim.
    Thus,forewarning that austerity will create further suffering among the masses is naivete at its height.That is precisely what capital is looking to achieve.Given a totally militarized society with its advanced means of repression both physically and ideologicaly,capital is secure in the knowledge it has nothing to fear,as the test drive of 2008 went swimmingly.
    Humankind is at a tipping point,either it kills capitalism,or capitalism kills it.Let’s all go swimming in the Gulf.

    1. MacroStrategy Edge

      And so Leon, you would just have the citizens of Austeria, formally the eurozone, bend over the barrel and let finanzkapital rape them with austerity policies, because a) it is inevitable that it be so given Marxist dialectics of historical materialism, and b) it will heighten the contradictions?

      Come on Leon, pull the ice pick out of your brain.

      Ask yourself: is your formulaic agitprop really working to reduce unnecessary human suffering and to mitigate the pillaging of the planet?

      Reality test time, I agree, but you may be too wrapped up in chapter and verse of old Karl and his wannabes to make even a dent in these problems at hand.

      Life’s short – best to chose effective methods perhaps.

    2. alex

      leon trotsky: “Capitalism is a sociopathic authoritaritan enterprise whose objective is the accumulation of wealth and power by its ruling class.”

      Capitalism is when man oppresses man. In communism it’s the other way around.

  8. leon trotsky

    Thanks for the ad hominem rant.
    And your ” effective methods” are which?
    Street Protests?Worked terrific in the run up to the Iraq War-probably a ratio of twenty protestors for every dead Iraqi,no?And boy did those riots and strikes in Greece prove effective!

    1. Derek

      What do you propose? Ship off all the capitalists to the gulag? Send them to do hard labor? Feed them nothing but bread? With luck, most of them will die from exhaustion and exposure, and we can pretend that we’re somehow morally better because we didn’t gas them or shoot them in the head.

      1. NOTaREALmerican

        When you’ve lots of dumbasses and a few smart amoral scumbags the results will be the same regardless of what name is assigned to the “economic system”. There’s only one system. We’re living in it, as have humans for the last 10000 years. You can’t choose to be born a smart amoral scumbag (or be lucky enough to be born into a family of them) but you can choose to be a dumbass (or not).

    2. MacroStratedge

      I’ll pass on an ideology of defeatism, thanks, Leon, but if you suits you, please, partake.

      And you should see my real ad hominem attacks, cuz that wasn’t even a warm up. I thought I dealt with the substance of your message, rather than the personality behind it, but if you are going to call yourself Trotsky, you best grow a thicker skin and skull, lest the ice picks feel too pointed?

  9. Expat

    The debate over the size and timing of simulus is pointless since it merely a subterfuge to draw attention away from the larger socio-economic issue of criminal mismanagement of the economy. Stimulus is given and debt increased during bad times. Simulus is lessened but not withdrawn or reversed in good times.

    Surely Keynes did not intend for ongoing, massive government stimulus, unless his comment about all of being dead in the long term was a wink at political reality. Beggar they neighbor, beggar they grandchildren, but get re-elected or buy that LCD tv.

    Our capitalistic system has produced the highest standard of living for the largest number of people in history. Kudos for that. But, oh boy, what a price we will pay tomorrow!

  10. debra

    I like the last phrase in the post best.
    Is it at the last to get our attention ?
    As an afterthought ?
    “Only those who believe the economy is a morality play where those who are deemed wicked get their deserved punishment would want things to play out that way”. (an approximate quote, but I got tired of scrolling up, and have not betrayed the author…)
    That is EXACTLY what is going on.
    Any psychological take on the economic situation would reveal that… austerity is for austerity, and all the reasons given are simple rationalizations.
    We have been “bad”, and now we must be punished, or somebody must punish us…
    Never underestimate guilt as a powerful motivation for human behavior. One of the most powerful motivations, moreover…
    It’s unbelievable how economic thinkers totally discount the psychological factors involved in human behavior, at an individual or collective level.
    Unbelievable… does it mean that they “think” that… if they ignore it, it will go away ??
    Oops… I said “think” above. I shouldn’t have…

    1. NOTaREALmerican

      Re: It’s unbelievable how economic thinkers totally discount the psychological factors involved in human behavior, at an individual or collective level.

      Yes, and the ONLY thing that matters is the psychology of the teaming masses of peasants and how they react. Economics is intellectuals arguing with each other. The same as theoretical religion: intellectuals arguing about how many deities can dance on a yoga mat and real applied religion: how many dumbasses does it take to physically stone the fornicating harlots.

  11. A. Gouveia

    On the subject of Germany, this time I agree with Marin/Yves that this retrenchment is probably premature uncessary.

    But I would like also to be recognized that for the PIGS, austerity (with or without default) is exactly what the doctor ordered, since it can bring:
    - end of wasteful public spending
    - reign in irrealistic pension promises
    - labour market reform
    - etc., etc.
    Besides, unlike the US, Germany or Japan, being dependent on foreign money means there is really no choice.

  12. Eric

    In the United States I would say that a significant fraction of so-called deficit hawks are more motivated by what they fear increased spending could be used for than by the resulting absolute deficits. Specifically they fear a permanent expansion of the public sector enacted initially as a temporary stimulus package. Projects such as high-speed rail send shivers up the spine of lots of folks: tens of billions of stimulus imply hundreds of billions of continuing investment, probably over decades. There is no confidence that such capital can ever be raised privately, or at least without significant government debt guarantees. Come up with stimulus proposals that truly seem temporary and are not viewed as direct electoral paybacks to Democratic constituencies and resistance will diminish.

    1. alex

      “Come up with stimulus proposals that truly seem temporary and are not viewed as direct electoral paybacks to Democratic constituencies and resistance will diminish.”

      I wish you were right, but I doubt that you are. Not that your point isn’t valid, and not that there aren’t those who sincerely share your concern (even this “liberal” may be one of them), but I doubt that that’s where most of the opposition comes from.

      Much of the opposition is ideological. Keynes was a socialist! (an odd label for someone who was personally a successful capitalist, and unabashedly said that he wanted to save capitalism from itself rather than see it destroyed).

      Lots of others simply don’t want to pay more taxes. Even if we’re only talking about higher taxes on the well off, there are always lots of fellow travelers who’ll take pity on them. Lower taxes always increase growth! Say something often enough and it becomes the “truth” (or should I write “Truth” with a capital ‘T’?).

      1. Eric

        You might be correct, but if there is little hope of influencing those with deep ideological opposition, and those supporting more stimulus are perhaps just a bit short of having enough support to enact it, the logic is to try to influence those that might support it under certain circumstances. But it is hard to see that happening if the specifics of the stimulus alienate the marginal supported needed to move ahead.

  13. PDC

    Well, let’s see if I have understood.

    1) Governments, through central banks, create money
    2) Government uses the money to pay for schools, hospitals, wars, whatever
    3) Money now has entered the system, and flows as a mean of exchange, keeping the economy in motion
    4) If new money is continually produced, its value is going to drop, so money must be continually destroyed: taxes are used to this purpose
    5) Unfortunately, taxes can be applied only on money owned by common people; when money is owned by rich people, or by consortiums of rich people, it cannot be touched any more
    6) The money accumulated in the hands of the rich does not contribute too much to inflation, it just help inflating some bubbles (e.g. rich people use their money to by a lot of houses they do not really need, so house price goes up)
    7) At this point, Governments must choose on of the following: continue to produce more money than they can destroy (bigger and bigger bubbles) OR borrow money from the rich (creating an bigger and bigger public debt)
    8) When both strategies of point 7) have been tried in full, Governments must reduce money creation (spending) in order to protect the value of the money for the sake of everybody…

    1. NOTaREALmerican

      You had me until: “the sake of everybody”

      You didn’t say what percentage of the cut the smart amoral scumbag get.

  14. Mickey Marzick in Akron, Ohio

    Why any AUSTERITY at all? Reading some of the above comments one is amazed by how austerity is taken as a given, as something necessary to cure US of our past sinfulness. Jesus Christ, are we so well indoctrinated in the ruling ideology of the lenders that we genuflect at their sacrificial altar like lambs? The ascendance of MARKET TOTALITARIANISM is perhaps more advanced than I thought. It’s depressing… Such willing penitents!

    Is austerity even necessary? Scarcity of goods/services is hardly the problem as wringing out “excess capacity” attests. Why would any rational human being want a scarcity of goods and services if they could be produced in profusion? Such irrationality belies a value system predicated on scarcity, selfishness, and greed or as some would portray it in a more positive light, delayed gratification, frugality, and hard work, apportioning the rewards for such behavior by the grace of god – Max Weber’s The Protestant Ethic. But is “scarcity” now man-made and regulated by price in the sacred chamber of commerce? For example, is oil really scarce or scarce because the “market” restricts its availability? With over a TRILLION barrels [CIA 2009] of proven reserves in the ground, convince me that it is scarce in an absolute sense. Likewise in agriculture – wheat, corn, rice, soybeans, peanuts, pork bellies, you name it… and manufacturing – autos, steel, electrical appliances, housing… their production is not the problem. Producing them for profit only is the problem! There is more than enough to around!

    Why is credit suddenly scarce? Because the money lenders in the temple now demand sacrifice and many of you still worshiping at their altar of commerce are willing to do so out of some morbid view of human nature and its sinfulness. Many have been convinced that they must now atone for their past profligacy even if they didn’t participate in it to begin with? The “collective responsibility of the poor” … a perverse alienation from oneself beholden to an invisible hand – a ghostly figment of one’s imagination. That is all this is about.

    We should be celebrating the abundance of goods and services – the elimination of absolute scarcity – as a new threshold for human civilization, but instead many of us want to go backwards to AUSTERITY with an artificially-induced scarcity so as to preserve a value system on which the capitalist mode of production depends. Austerity is the means with which to make the world safe for capitalism. But is it necessary?

    And before you cast me into the pit of eternal damnation, I’ve never been involuntarily unemployed, worked and studied hard for 40 years, saved all my life, am debt-free, and really want for nothing, unwilling to consume for the mere sake of consumption. Yet I’ve come to the conclusion as a so-called “producer” that the socialization of consumption wrought by the private sector banking system has brought us to the threshold of a dream – the existence of the physical productive capacity to eliminate scarcity once and for all. Why are we so willing to go backwards when it isn’t necessary? Is it just possible that the value system that purportedly brought us to this point is now obsolete? This is not an endorsement of the “shop to you drop” crass materialism criticized by left and right alike, but an effort to chart a course between it and the realization that absolute scarcity no longer exists, creating a value system that is equitable, sustainable, and profitable [not only in the pecuniary sense]. The latter will not emerge overnight. But neither did feudalism, capitalism, or what we will choose to call what is coming in its wake. AUSTERITY and the neofeudal corporate world order it would seem to presage are only a possibility, not an absolute certainty. We are FREE TO CHOOSE…

    1. alex

      Philosophically what you say is wonderful, but you need concrete proposals to actually change anything.

      1. Mickey Marzick in Akron, Ohio


        It may seem philosophically wonderful, but my comment’s only intent was and remains to move us beyond the paradigm of scarcity. So long as we remain mired in this paradigm or refuse to consider the possibility that scarcity is artifically-induced more than it is absolute, how will we ever think outside the box of conventional economic theory to formulate viable alternatives? In this sense, it isn’t philosophical but pragmatic.

        We have to go to the root – scarcity – of the paradigm and destroy its credibility before we can get beyond it.

        Is the thesis that absolute scarcity is an illusion valid? If not then any attempt to get beyond scarcity would appear to be wishful thinking, right?

      2. Toby

        Actually Alex, you don’t need a concrete plan. Change is always happening and cannot be stopped, no matter how hard anyone tries. The problem is that status quos are the beneficiaries of a particular paradigm and resist change, thereby making it very painful and disruptive, and we all play along too. Right now we have the most highly skilled propaganda the planet has ever seen, and over a century’s worth of dumbing-us-down education, plus nauseating amounts of ignorant jingoistic fervour.

        The concrete proposals are not the things that produce paradigm change; such proposals are there and have been there for a long time (though you won’t find them in posts on econoblogs, at least not in detail). If you saw them you would reject them — they’re just too strange at first sight. It is when the concrete proposals are accepted, which necessarily follows recognition that the current paradigm is well and truly defunct, that fast change happens. Then you socks will be knocked off when you realize just how easy it is to do things differently.

        We are the only things stopping us. Everything we need to do things completely differently at the socioeconomic level are right in front of us.

        “Turn in the door once and turn once only
        We think of the key, each in his prison
        Thinking of a key, each confirms a prison.”

    2. DownSouth

      Mickey Marzick in Akron, Ohio,

      And when through an ancient and still powerful state there spreads a mood of deep discouragement, when the reaction against recurring ills grows feebler…when leaning languishes, enterprise slackens, and vigour ebbs away, then…then there is present some process of social degeneration, which we must perforce recognize, and which, pending a satisfactory analysis may conveniently be distinguished by the name of “decadence.”
      –Arthur J. Balfour, Lecture on “Decadence” at Newnham College, January 1908

      When we look at the three regimes society has devised to elicit, as Robert Hilbroner put it, “the obedience or acquiescence necessary for the subordination of the individual to the social will,” they have all become dysfunctional. Which one do you trust? Traditional, as in religion? Command, as in government? Market, as in free markets? If you’re like me, you check the box that says ‘none of the above’.

      Probably nowhere does the dysfunction become more evident than in the energy question.

      I disagree with your take on oil. Oil really is getting scarcer and more expensive to produce. Estimates to drill and produce a barrel of oil from deepwater operations are in the range of $40 to $70 per barrel. To produce a barrel of oil from the Canadian oil sands is perhaps even more costly.

      But there’s another story that runs parallel to the cost story, and that’s the one about EROI:

      Energy return on investment (EROI) is the ratio of the energy extracted or delivered by a process to the energy used directly and indirectly in that process. A common related term is energy surplus, which is the gross amount of energy extracted or delivered, minus the energy used directly and indirectly in that process. EROI is a dimensionless number, while energy surplus refers to an actual physical quantity of energy. Suppose an energy delivery system delivers 10 joules of energy, but in the processes consumes 2 joules. The EROI for that process is 5 (10 divided by 2), while the energy surplus delivered is 8 joules (10 minus 2).

      Here are some EROI estimates for different processes:

      Ethanol derived from corn grown in the US: between 0.8 and 1.6
      Oil from Alberta oil sands: between 3 and 5
      Oil from deepwater operations: between 3 and 5
      Solar: between 1.6 and 8
      Oil from onshore US operations: between 11 and 18
      Natural Gas domestic US operations: 10
      Nuclear: 15 to 1
      Wind: between 20 (actual) and 25 (conceptual)

      So, which of the following did the command regime (government) choose to run with? You got it, ethanol derived from corn grown in the US. The US government lavished huge subsidies on this process, mandated the use of ethanol admixes in gasoline, and placed tariffs on imported ethanol from Brazil.

      Which process did the market regime run with? Oil sands, deepwater drilling and domestic oil and natural gas.

      Which process did tradition (religion) run with? As we’re all too painfully aware, the religious right and other conservatives were as fervent as any good oil company executive in chanting “Drill baby drill.”

      And meanwhile, wind languishes. And environmentally speaking, it’s infinitely more benign than any of the alternatives preferred by government, the markets or traditional conservatives and the religious right.

      Why has wind been relegated to backburner status?

      charcad provided a link the other day describing how wind-generated electricity could be converted to a portable energy source in a hydrogen economy. The energy losses to produce portable liquid hydrogen from electricity are in the 40 to 50% range. But even taking this into account, the final EROI is still between 10 and 15 for a portable fuel.

      What are we waiting for? What is the obstruction? Why is the nation paralyzed?

      The abandonment of the Tagus navigation scheme offers a striking local example of a national failure. It is true that the unexpected extent of natural obstacles in the river made the undertaking much more difficult than had originally been expected; but ultimately this was a human, rather than an engineering failure. The project was opposed by mill-owners along the river bank, and hampered by the imposition of tolls and dues on the traffic. But it seems that the decisive reason for the failure of the scheme was the constant opposition of the city of Seville, which saw in a navigable Tagus a serious threat to its own trade both with Toledo and with Lisbon. This was sadly typical of the reaction to any important project for the country’s improvement. In Catalonia, for instance, plans for irrigating the plain of Urgel were sabotaged by merchants who were dependent for their livelihood on the continuation of grain imports from Sicily. Seville itself never built the bridge it so badly needed over the Guadalquivir, and it failed to tackle the increasingly serious problem of the silting up of the river, which was finally to destroy its commercial prosperity. The reasons were similar to those which had wrecked the Tagus navigation scheme: a reluctance to invest money in public works; personal and municipal rivalries; and, ultimately, a deadening inertia, which crippled both the capacity and the desire to act.
      –J.H. Elliott, Imperial Spain: 1469-1716

      1. Toby

        Great stuff DownSouth.

        I’ve seen studies (just the figures) from Denmark and Germany that put wind’s EROI above 40 (the figures were in an article at Also of note are studies going on in Germany to work out a plan for a renewables network composed of wind, solar and biogas, with solar and biogas acting as backup for wind. Storage of excess would be hydro and compressed air. I guess on that front it’s going to come down to how friendly Germany has to stay with Russia. In the UK there seems recently to have been an agreement between the gov and energy giants not to provide more than 30-35% of energy from renewables (have this tidbit from a colleague at work — I work in the energy sector). Not enough money in that abundant clean stuff it seems. Go figure.

        For any interested, check out Greeman3610′ channel at youtube:

        Very interesting and promising stuff. Had we strong politicians with sense and wisdom, and/or a strong, cohesive and properly informed public, getting off fossil fuels would be a snap. We have the tech, only the will is missing! And the correct socioeconomic model of course…

      2. steelhead23

        Why indeed! I’ll take a shot at it. Entrenchment. In many ways, the status quo is annalogous to a black hole – and our hydrocarbon-based economy will be extraordinarily difficult to unseat. I am afraid that much of this discussion is off-topic, but the whole philosophical debate taking place here illustrates how difficult it is to change paradigms, be it an economic paradigm or an energy paradigm. Never forget that in a market-driven system there are winners and losers. The winners then create outcomes that support the status quo, including psychological manipulation of the losers. Thus, getting back to Wolf, we currentlyhave unemployed individuals railing against government spending (e.g. Tea Party) while shouting “Drill Baby Drill” at the tops of their lungs and crying about government failure to explain why the market-driven Deepwater Horizon blew up. I am not convinced that this inertia can be overcome except by force or catastrophe. Hence, I have become a bit of a fatalist, hoping for the day of full-on market failure, if only to change the paradigm.

        Also, given the range of quotes DeepSouth brings us, I have to believe that he/she is either a professor, or (gasp) has a skin on the wall from some excellent liberal arts school. Thank you for your snippets of education.

        1. Toby

          Yes steelhead23, the entrenchment part of the process is the big mother-of-all-blocks block, but I think a new way of organizing society (after collapse has woken us up) could conceivably prevent a control- and scarcity-based, elitist status quo from taking the reigns. An abundance-based paradigm with a very new money (perhaps, Start Trek-wise, even on a path to render money itself redundant), would get us off our debt-fueled, mindless consumption-driven perpetual growth addiction forever (though never say never).

          In the meantime we spread ideas and openly engage in debate and discussion amongst ourselves, as we are doing here, because no one else can do that for us. Not properly anyway!

      3. Mickey Marzick in Akron, Ohio


        As usual HOMBRE I wanted to muse a bit before I responded to your comments. But just a few quick retorts.

        First, GOD, STATE, MARKET have all failed! But each refuses to die! So none of the above would be my obvious choice. But it isn’t that simple. We are both old enough to know that!

        But each variant, when ascendant, has afforded a particular form of hierarchical-patriarchal domination predicated on scarcity. Whether psycho-spiritual, order-security, material-efficiency, and/or a combination of all three, the absence of these various components of the human condition has given to rise to a particular pattern of hierarchical-patriarchal domination with each successive pattern layered over its predecessor. Thus, the residual effects are deeply imbedded. But answer me this: Is domination in its various forms predicated on scarcity, whether relative or absolute? By eliminating the latter, does it follow that the various rationales proffered for domination fall by the wayside? And will a new pattern emerge in their place if scarcity is no longer the dominant paradigm? Of course I’m oversimplifying here for both reasons of time and space… two other scarcities!

        Why are we even still exploring/drilling for oil when there are over one TRILLION barrels of PROVEN [recoverable] reserves already known to exist? At present levels of consumption, these proven reserves would last for more than 30-40 years. Exploration/drilling for oil is a clear indication that the hydrocarbon energy-industrial complex [EIC] has no intention of developing/creating the alternate forms of renewable energy until the last drop of oil is wrung out of the womb of Mother Earth. Meanwhile, both it and its inhabitants will be held hostage by this EIC.

        What if we “enacted” a moratorium on ALL oil exploration in this country, phasing it in over the course of the next 30 years while oil supplies are still sufficient to meet both domestic and global requirements? Such a moratorium would send a clear signal to markets [consumers and producers alike] and governments that alternate forms of renewable energy will be required and, hence, in demand. It would likely foster the invention/innovation of the latter, encouraging new entrants into the field thereby breaking the grip of the EIC on energy once and for all. Governments and societies not already “addicted to oil” would likely seek and/or develop their own alternatives, decentralizing the centralization and concentration of energy supplies and the domination/control that grows out of it. Going one step further, a phased-in moratorium on the importation of oil would also send a clear signal to “markets” that would allow sufficient time for adaptation. The precedent here is slavery. Britain outlawed the slave trade followed by this country’s banning the importation of slaves. The response, of course, was the “breeding” of human chattel in many of the slave states. In this case though, it would be the “breeding” of new forms of energy!

        Hypothetical – of course – and not likely given the present configuration of domination/control exerted by the EIC. But phased-in moratoriums on both the exploration/drilling for oil and its importation would allow time for adaptation and implementation of alternate forms of renewable energy and impart real meaning to “beyond petroleum” …

        Vaya con dios!

    3. RagingDebate

      Nice commentary and I like your positive sentiment. You and the NK blogger Toby should talk.

      Anyways, I disagree that the global citizen currently has choice in the matter at this point. Central Banking is a model.

      It cracks and fails on a regional basis and now that the model has gone global, the failure will be quite painful.

      Physical war follows economic war. The paradigm can be changed afterward but the variables are locked in place for catastrophe. I am HOPING I am wrong but real hope springs eternal for those prepared to deal with the worst case scenario. Solutions for an evolved banking system and monetary model should continue to be presented even if they are not acted on in the short term. I am long the human species.

    4. Debra

      Great job ! I couldn’t have said it any better myself.
      I think I totally agree with you.
      So… WHY are we doing the voluntary servitude bit ?
      WHY are we bowing down to the idol of money, and business as usual ?
      Why have we taken our pants down, and are crying for the whip ? (Particularly in France, my friends, it’s really breathtakingly obnoxious, and frustrating… we are busy destroying the educational system in order to balance the budget. Unbelievable…)
      Because we are… among other things… shitting in our pants with fear at the idea of having to use our neurons to exit voluntary servitude.
      Because since Vaucanson under Louis XV began dismantling the artisan caste, which controlled labor from the beginning to the end of production, in order to create on one side, an undermensch worker class, and an ubermensch class of engineers, well, we have been busy discouraging the use of neurons and imagination on an industrial scale. To produce a homogenous citizenry of the nation state AND an unskilled labor force AT THE SAME TIME… FOR INDUSTRY…
      There is something else you need to understand. There is a world of difference between our PERCEPTION of scarcity, the abstract idea of scarcity we have developed from within our bloated symbolic systems to keep our models running smoothly… and what’s going on in nature.
      WE, unfortunately, really don’t want to know what’s going on in nature, and regularly seem to meet it with denial, because Western civilization at this time has constructed its tower of Babel edifice AGAINST nature. To OPPOSE nature…
      Bad plan.
      We can be incredibly dumb animals, even with extraordinarily sophisticated models.
      We can also.. NOT be dumb animals, when we want to.
      But… the creation of the masses (which is a complex process accelerated by industrialisation, it can NOT be attributed solely to that “evil” thing, capitalism…) does not foster our intelligence. Unfortunately, it fosters exactly the opposite.

      1. Mickey Marzick in Akron, Ohio


        “There is something else you need to understand. There is a world of difference between our PERCEPTION of scarcity, the abstract idea of scarcity we have developed from within our bloated symbolic systems to keep our models running smoothly… and what’s going on in nature.
        WE, unfortunately, really don’t want to know what’s going on in nature, and regularly seem to meet it with denial, because Western civilization at this time has constructed its tower of Babel edifice AGAINST nature. To OPPOSE nature…
        Bad plan.”

        But is the perception of scarcity the reason we have sought to dominate NATURE rather than work with it? And is the “environment” becoming the new scarcity whereby billions will be denied a humane existence because we in the WEST refuse to move beyond the paradigm of scarcity? Are reactionary elites manipulating environmentalism to artifically-induce scarcity so as to preserve the status quo – their wealth and power?

        Bonne chance et merci beaucoup.

        1. Debra

          Mickey, I have gotten into trouble on different blogs for daring to challenge some pretty pervasive orthodoxy around these questions…
          First off… I maintain that our ideas, and particularly our THEORIES about the nature of man, what he is capable of, what he is not capable of, WHO HE IS, are the horse, NOT THE CART… and that if we want our economic system to evolve, WE HAVE TO CHANGE OUR IDEAS ABOUT WHO/WHAT MAN IS.
          You work on the horse BEFORE, or at least at the same time you are tinkering with the cart.
          Behind the current economic models, and IDEAS about the economy there is an entire edifice of a theory about man which is taking us down.
          This theory emerged slowly, and in conjunction with the perversion of 17th century scientific method to apply it any and everywhere with no questions asked about the VALIDITY of the PROCESS of applying the method, and the “scientific objects” that emerged from this application of the scientific method.
          But it is rather natural that WE, right now, are smack dab in the middle of all this, and that the underlying theory of man is not immediately apparent to us. And IT is what keeps us from… questioning our most basic assumptions about what is going on.
          The scarcity idea… is basically.. a REACTION against our previous religious tradition and ITS TEACHINGS about man.
          Our Christian religious tradition does NOT prone scarcity at all.
          It is all about… sharing, and abundance.
          But… when you are frustrated, and no longer believe in your tradition, what your fathers believed in, or when you just want to be different from those fathers, well, you go in the opposite direction…
          Like an adolescent going through puberty…
          If you look at the problem of the world’s resources as a kind of function, it IS possible to imagine that… we can ALL make do with less, and it would not be the end of the world.
          I am NOT being utopic here, but… I am reasoning with a different kind of pragmatism.
          When people feel that they are ALL sharing in hardship, and that this hardship (diminishing resources, which are a reality, NOT austerity which is solely indexed on our PERCEPTION of reality, and symbolic systems…) then we can rally round each other to create a new sense of community.
          THAT is what.. the loaves and the fishes is all about, Mickey.
          And.. it IS possible.
          I know… I’ve seen it, and experienced it…
          But… you gotta have a little bit of faith for it to work.
          And.. a POSITIVE vision of man, and what he is capable of, at least.. AS WELL as the negative one…

          1. Mickey Marzick in Akron, Ohio


            As for taking controversial views on this blog, I wouldn’t worry. Yves has indulged us all in allowing discussion to go where it does so long as it remains civil and refrains from insults and the like. Yesterday was a prime example. But it wasn’t the first and probably won’t be the last. We all have something to learn from one another and that’s what makes Naked Capitalism what it is – a forum for the free exchange of ideas on a wide array of topics.

            I was raised Roman Catholic. Stopped going when I was 18 or so after I had asked a priest what, if after allowing for the purported atheism of Karl Marx, was the difference between communism and the teachings/practices of early Christianity? The man sighed and said “very little”. [A true story]. Never looked back!

            My Marxist underpinnings are more than obvious but have been tempered by two other forces: the environment and gender. The latter two will probably exert more influence on this planet than Marxism ever will as time goes on. But my heart is with working people and always will be.

            I’m guided by one simple precept: “Give just a little bit more, and take a little bit less.” It’s from a love song, Never Comes The Day, by The Moody Blues [1970]. Perhaps I’ve expanded its scope a bit but its practical application on a day to day basis isn’t much different than the message of the “loaves and the fishes” is it?

      2. Toby

        Absolutely Debra!

        It is the presumption of scarcity, extremely well explained by Buckminster-Fuller in “Utopia or Oblivion”, that is doing the damage. There is of course scarcity and there will always be scarcity of many things, but many others are in abundance, or could be if we were not so hooked on financial profit at all costs. With society and its infrastructure organised properly there would be enough clean water, healthy soil, food, transport, energy, shelter, health care and good education for everyone on the planet. Sadly, because making a buck and beggaring thy neighbour is more important than a sustainable socioeconomic model, our childish, selfish gene, greedy human nature, competition-inspired paradigm is going to cause untold amounts of unnecessary damage before we at last realise we don’t actually have to be debt-slaves, or any other kind of slave, and indeed have the natural courage to be free, system permitting.

        It’s all there for the taking! We just have to want it…

    5. anon

      I say hell yes! You’ve given spirit to where we can and should go. The theory and practical details of how to get there can emerge from there.

  15. S

    The entire debate boils down to who takes the loss. Period. This was the case for TARP and this is the case for the Eurozone TARP 2.0. It is also the case for fiscal priming (an effective bailout of the rediculous and unattainable promised made to pensioners via absurd return assumptions predicated of course on the very fiscal/monetary pumping that “they” worship. In the dBBC debate between Sachs and Hugh Hendry =, Sachs encapsulated this entire debat when questioned about greece ability to repay its debt under the best of assumptions. he said: ” they don’t every have to pay it back, they just have to be able to roll it.” Of course such ceterus paribus assumtpions are the hallmark of the ivory tower. Look no further than that comment for what “they” think.

    Everything else is obfuscation. Wolf makes the establishment argument for fiscal priming as the path to least pain. Of course priming (read reflation) benefits those who see the money first – ie incumbant forces (like those who own the debt (banks) that fueled the binge). One can agree with Wolf that austerity is not a workable force either as the perceived benfits are illusury when considering the contraction associated. So that leaves default – the antichrist of finance.

    Why then is there absolutely no discussion of the debt default? The hokus pocus equivilance arguments and money creation arguments are right up there with the US has no debt (or the intragov’t debt isn’t really debt at all).

    1. NOTaREALmerican

      Yes. The priest class arguing for the preservation of the nobility. The priests of the priest class got to their positions by advocating the importance of the nobility in the greater glory of the society. The peasant’s brains – of course – demanded such a story from the priest, otherwise they wouldn’t BE the priests.

      Same clowns difference circus; for the last 10000 years.

      1. Debra

        …. I’ve been observing the way you “react” to my comments for example…
        I’ve already written elsewhere that probably the greatest illusion fostered by our terminal case of individual and collective cynicism, is that there is a way out of illusion, and that we will be able to get along without it.
        And I’ve resurfaced from several melancolic episodes in the course of my life, thank God…
        YOU would do best recognizing that you too, are looking for something to believe in…
        You would be a lot happier…

    2. Anonymous Jones

      I generally agree that we should talk upfront about who gets the pain and when. At the same time, it is also possible to diminish the overall pain inflicted. We need to focus on both questions at the same time. Yes, holding these two concepts in focus simultaneously is a bit much for the members of our species, but still.

      I know a lot of Los Angeles residents who hate Los Angeles. I’m sure there are lots of policies that might be offered up to “fix” the place. I’ve even heard some people suggest that we should detonate a nuclear bomb downtown. My point is that while every suggestion has a different relative pain matrix (of who gets how much of it and when), some suggestions are so utterly stupid as to be disregarded immediately regardless of the relative pain matrix (because of the absolute pain involved).

      We can’t focus on just one question to the exclusion of the other.

  16. Siggy

    What the government spends must be funded by borrowing and either or both of taxes and debasement of the currency.

    Social safety net programs are typically funded by taxes on income earners that are redistributed to non-earners.

    Stimulus programs are typically funded by new taxes and or debasement of the currency with debasement being more prevalent.

    As the carry of debt increases relative to earnings, the probability of default increases exponentially. Default is executed by either not paying the debt, or by the further debasement of the currency.

    Ultimately there is no danger in austerity, only the pain of bringing to a manageable level the amount of debt that is to be serviced.

    In that there is this nagging little problem of purchasing power. If there is pernicious inflation, say 2%; the taxes required to service a constant level of social benefits will perforce increase by that amount. Viewed another way the cost of everything will double in a generation’s time.

    If you want develop a program that will bring to solvency the problem that Greece finds itself in, not only do you have enforce austerity, you have to reestablish the purchasing power of the currency. That little consideration will lead you straightaway to the US Dollar and the fact that over the past 70 odd years it has been losing purchaing power at an average annual rate of 3.25%.

    The problem is not about austerity in any particular degree and what the assumption of austerity programs might entail, it is about stabilizing the purchasing power of the currency and in that exercise recognizing that there will be draconian adjustments to living standards. These adjustments will have serious effect on political stability.

    Thus; this problem is how to begin to fix it now while there is some hope of a solution, or to defer the final solution to say two or three generations hence.

    You can take it as a matter of fact that the EU and the US will defer the resolution of the problem. In similar but slightly differing ways the US and the EU have political constituencies that presume entitlements.

    It is a curious thing about these entitlements in that they are a usurpation of that which might have otherwise been a personal reponsibility.

    1. alex

      “As the carry of debt increases relative to earnings, the probability of default increases exponentially.”

      Wow, exponentially, huh? So

      P{default} = A*exp(B*debt/GDP)

      Could you fill in the values of A and B for me?

      “If there is pernicious inflation, say 2%; the taxes required to service a constant level of social benefits will perforce increase by that amount. Viewed another way the cost of everything will double in a generation’s time.”

      So if in 35 years (1.02^35 = 2) my salary in nominal dollars has to double to keep the same purchasing power and I have to pay twice the taxes in nominal dollars I’ll be in bad shape, huh?

      “That little consideration will lead you straightaway to the US Dollar and the fact that over the past 70 odd years it has been losing purchaing power at an average annual rate of 3.25%.”

      So that $5 bill my father forget about in the bottom of his sock drawer is worth a lot less than it was in 1940? Wow, he should have made a better investment.

      On the bright side, per capita wealth and income (measured in real dollars) has increased substantially since then. But it’s a shame about that $5 bill.

      “Social safety net programs are typically funded by taxes on income earners that are redistributed to non-earners.”

      I’ll go tell Joe the (retired) Janitor that those Social Security checks he gets every month are just a transfer from this earner to that (now) non-earner. And about those Social Security taxes you paid for 45 years Joe, well tough. Just cause you got ripped off doesn’t mean I should.

      “It is a curious thing about these entitlements in that they are a usurpation of that which might have otherwise been a personal reponsibility.”

      I’ll tell Joe the (retired) Janitor to go stand on his own two feet, just like Lloyd Blankfein and Jamie Dimon.

      1. Siggy

        Over the past 35 years, has your salary doubled?

        When you retire and no longer have a salary, will you have enough money and assets to maintain your living standard. If you retire at age 65 or 70, how much will your food and shelter cost? No matter how you measure it, in real or nominal dollars you will not have enough to maintain your purchasing power unless your investments have provided a return greater than 3.25% compounded annually. With the advent of the MEW, our national savings rate has been near zero to negative.

        I have a great deal of sympathy for your Joe-The Janitor. In the main he didn’t understand how and why he was losing purchasing power. As a society we made a contract with him in the form of social security. We must honor that contract. What is occuring around the world is the realization that most governments are incapable of honoring their social safety net contracts. The reason for the incapacity is that entitlements are increasing in terms of coverage and thru the loss of purchasing power. Cost of living adjustments look back and as a consequence they lag the trend of prices.

        Austerity will come, and when it does it will be very painful.

        1. Toby

          No, the reason is the addiction to a defunct paradigm and a refusal/inability to properly, openly and deeply consider alternatives. For example:

          Why must all money be created as debt?

          Can we have a money that does not concentrate to itself over time, that does not cause entrenched and harmful rich-poor divides?

          Does the inbuilt presumption of scarcity the current system sports promote greed?

          Is competition and winner-takes-all efficient? What of redundancy and diversity?

          Can there be such a thing as a free market?

          Why were humans non-hierarchical for the vast majority of their existence? Why are humans so concerned with fairness?

          Is it wise to have an economics that cannot assign a value to air, or to anything that exists in abundance? Is the knee-jerk correlation of scarcity with value sensible?

        2. alex

          Over the last 35 years the country’s real (inflation adjusted) per capita income and wealth have greatly increased. Mild inflation (1980 on, not the 1970′s stuff) hasn’t stopped that. If Joe the Janitor’s and (his more well off but still middle class) cousin’s real income and wealth haven’t increased in proportion then it’s a distributional effect. Unless you can provide an good argument that inflation has a worse effect on lower and middle class incomes and wealth than on upper class ones, then inflation is not the devil in this. BTW, when offering such an argument bear in mind that it’s usually the wealthy who suffer more from inflation as they’re the big bond holders. Historically the politics have shown this too (it’s the wealthy who are bigger inflation hawks). When William Jennings Bryan gave his “cross of gold” speech he was complaining about the _deflation_ that was hurting the poor and middle class but beloved of the wealthy and their gold standard.

  17. ray l love

    Coming out of the Great Depression deficit spending was effective because aggregate demand was genuinely strong to the extreme. WW2 and decades of lean times left populations in the most capable nations in need. Now… the capable nations have too many houses, autos, etc., and saturated economies can not likely be restored by productivity in the same way that they have been in the past. But… there is no shortage of people on this planet who have needs (aggregate demand). These people need loans too and the recent crisis was caused at least in part by excessive capital flows.

    ‘Austerity’ is necessary in the developed nations to allow the poor nations to catch-up. Deficit spending to restore what existed before the recent downturn is a return to an imbalanced utilization of the planet’s resources (including capital utilization). Global wealth redistribution should be the goal with more emphasis on using our technological advances to increase productivity to new heights… but that can only occur, (if justified morally and environmentally), if global aggregate demand comes from those who have needs.

    The global economy needs something similar to the New Deal/GI Bill on a massive scale, paid for with a new global currency created out of ‘thin-air’. But advocating Keynesian stimulus, or something with even less concern for the implications of debt(MMT), without consideration of from whom, and from where, the demand is to come from (without waste), is short of a comprehensive understanding of the historical circumstances and the current circumstances.

    1. alex

      “Coming out of the Great Depression deficit spending was effective because aggregate demand was genuinely strong to the extreme.”

      Before the Great Recession demand was plenty strong. In fact the problem was that our demand was greater than our supply (current account deficit and increasing private sector indebtedness). Now we have the opposite problem, and no we shouldn’t overshoot to get to where we were before. But there’s no doubt that there’s plenty of potential demand, it’s just that people need the money to spend. 10% unemployment (and fearful employment for most of the rest) kills demand.

      “Global wealth redistribution should be the goal with more emphasis on using our technological advances to increase productivity to new heights… but that can only occur, (if justified morally and environmentally), if global aggregate demand comes from those who have needs.”

      There’s plenty of aggregate demand in the LDC’s (less developed countries). What they need is money. One way to get that is by selling stuff to us. While I’m very critical of the trade deficit (and Chinese style mercantilism) there’s nothing wrong with LDC’s selling stuff to us and us selling stuff to them. It’s a great idea as long as the trade stays balanced. The lack of demand in the developed world hurts the LDC’s.

      1. ray l love


        Unfortunately I must go to work and so I do not have time to argue right now but I disagree with your assertion that demand was strong before the Great Recession. Much of what existed then was wasteful and damaging to the environment… and much of that was paid for with artificial gains. I agree though that the problem has to do with LDCs not having enough money but I addressed that in my first comment. I gotta scat.

  18. Tao Jonesing

    Yves (and anybody else who’d like to answer),

    Who is really behind the emerging consensus for austerity? These things don’t happen in a vacuum, but given the lack of data and models that support pushing for austerity right now, a vacuum is what we seem to have.

    Who benefits and how?


    1. NOTaREALmerican

      My 2 cents (adjusted for inflation).

      There’s a theological battle taking place. (queue appropriate music…)

      The old religion – called Keynesianism – is dieing. The fundamental believe in this religion is that humans are rational and the very smartest humans – called economist – can influence the choices/directions that society takes. This is done by enlightened spending by the very smart politicians elected by the rational humans.

      The new religion – call Austrianism – is rising. The fundamental belief in this religion is that humans are rational and the very smartest humans – called libertarians – will use the righteous sword of libertarian justice to slay socialists and use their righteous capital to make profitable investments which will turn society into a Puritan Utopia. Libertarians also believe that Austerity is a ritual of the self flogging purity that all rational humans desire to go through.

      As the old religion dies, more and more people are starting to see that only with Austerity can they be saved.

      1. Tao Jonesing

        I don’t buy that explanation, in part because Keynesianism has not held sway in the U.S. for thirty years, unless you count Milton Friedman, one of the founders of libertarianism, as a Keynesian. I don’t, and neither does Steve Keen. Moreover, what was known as “Keynesianism” is not what Keynes himself advocated but a bastardization of it (aka, the neoclassical synthesis).

        Also, if Keyensianism held sway even a year ago, we would have seen a lot bigger stimulus package. We didn’t because supply side economics a la the Chicago School is the current religion.

        Further, most of the most prominent economists demanding austerity are Chicago School adherents, not Austrian School adherents.

        And it’s not as if the Chicago Boys are against bailing out the banks. Bernanke worshipped Uncle Miltie and is gladly following in his footsteps.

        It’s true that both libertarian schools of economics are pretty dead set against demand-side stimulus, but that does not explain the timing for pushing for anti-stimulus, which history shows will lead us to deflation. The timing is especially suspect when Obama has signalled that he is not going to seek more stimulus. That means those pushing austerity measures are bargaining for austerity and not against stimulus. Why? And why now? The number of people calling for austerity and their associations indicates a coordinated public relations campaign, not a spontaneous outpouring of concern for society, particularly when many of these people believe that there is no society (it’s part of the libertarian worldview).

        My own theory starts with the fact that the Fed is Wall Street. The Fed exists to give people a quasi-governmental scapegoat other than Wall Street itself, but it is pretty clear to me that Wall Street dictates what the Fed does.

        So, why would Wall Street want worldwide austerity measures, which history has shown us can lead to deflation, particularly given that the short term concern is deflation?

        The best answer that I can come up with is that Wall Street wants deflation. Why? Won’t that lead to an actual depression, which could crash the equity markets? Or does Wall Street believe that the equity markets are now so decoupled from the real economy that the equity markets won’t be affected by an outright depression? How will Wall Street benefit from deflation, particularly when a bad economy will give rise to more defaults?

        Or is all this just theater to help push through Obama’s goal of gutting Social Security?

        1. Anonymous Jones

          I have a feeling you are correct that Wall Street thinks it wants a deflation.

          Wall Street probably doesn’t care too much about the size of the worldwide economy (within reasonable boundaries). Wall Street cares what its percentage of the economy is. I’d bet Wall Street would be fine with mild deflation if at the end of such deflation, Wall Street controlled a larger portion of the economy. At the levels of wealth in play, it is hard to imagine that relative consumption is not much, much more important than absolute consumption.

          1. NOTaREALmerican

            Wouldn’t the nobility want moderate inflation? The quietly isolated world of the modern nobility (eg. private jet with supporting servants) would seem to require ever slowly increasing rent payments. No?

            Hasn’t the Fed – the financial instrument of the nobility – purposely maintain ~3% inflation for the last ~70 years for this reason?

            Unless the nobility is truly a small cabal of evil-doing families, deflation would only be useful if they could collude to gobble-up assets at deflated prices (perhaps, after a glorious war between the dumbass peasants – or something). This sounds too unlikely to me.

            If I were the nobility I’d want a nice slow inflation, ownership of the government, and – of course – just enough bread and circus for the dumbasses.

        2. NOTaREALmerican

          Re: Moreover, what was known as “Keynesianism” is not what Keynes himself advocated but a bastardization of it

          Sounds like a theological argument; you know – which is the true branch of “the church of Keynes”.

          Re: Or is all this just theater

          It’s all just the smartest amoral scumbags stealing loot from the less-smart amoral scumbags and – ultimately – the peasants. Why does everything have to be so made so complex? Economics is a religion. What is religion for? To confuse the dumbasses. The smart AMORAL scumbags don’t follow the religion, they USE the religion.

          1. Tao Jonesing

            Saying that Keynesianism is not what Keynes actually advocated is not being theological at all. You just have to compare what Keynes advocated to what became known as Keynesianism, which merely grafts some of Keynes’ demand-side ideas onto classical economics (aka the neoclassical synthesis). His General Theory is a hard slog, though . . .

            I’m more of an institutionalist myself (e.g., Gunnar Myrdal).

        3. alex

          “The best answer that I can come up with is that Wall Street wants deflation. Why?”

          Never look for a complex explanation when a simple one will do – they’re shortsighted idiots.

          Seriously. This is the same crew that, for the most part, failed to anticipate the collapse of the Great Bubble. Most Wall Streeters thinks short term, because that’s where the rewards for them are. These people are not great long term strategic thinkers.

          Keynes was personally a very successful capitalist, but unlike so many others he realized that the monkey with its fist in the cookie jar doesn’t get to eat any cookies. He unabashedly said that he wanted to save capitalism from itself. Such great minds are, unfortunately, the exception.

          1. NOTaREALmerican

            Good point. And we shouldn’t confuse Wall Street interests with the nobility families either. Wall Street is many things: the banks (including the Fed), the various casinos, and the media sycophants.

          2. Tao Jonesing

            Bankers aren’t idiots, they just have different motivations than the real capitalists (i.e., their customers).

            That’s one of the things that puzzles me. If Wall Street is advocating deflation, and this crashes the stock market, Wall Street will be harming their own shareholders and the “investors” (they’re really speculators) who trade with them. I can’t imagine Wall Street would do this unless they believed it was otherwise inevitable . . .

          3. alex

            Tao Jonesing: “Bankers aren’t idiots”

            Actually I called them shortsighted idiots, but something like idiotically shortsighted would have made the point better. No they’re not idiots in general, but can be very shortsighted. Don’t assume they’re all knowing or all seeing. They’re as fallible as anyone else. And it could just be that they have a different opinion from you and me. There are a lot of people on Wall Street who are very smart in their own shortsighted egocentric way, but don’t assume they agree with our view that more stimulus is needed to avoid worse economic problems. After all, most of these people managed to miss an $8T housing bubble.

    2. Jamisia

      Please go back to Rob Parenteau’s post on Spain, where he explained the sectoral balance.
      Let’s just agree that money is created by the state / government. Let’s also agree ( for the sake of this answer) that the US does not face a solvency risk and doesn’t need to borrow from China.
      I’m sure you’ve noticed everyone’s obsession with government. Perhaps this is natural. In the naive version: we elect a few to make the rules for everybody.
      To me most participants in the present debate are more, like, dancing around government finances – as if it were a new golden calf.
      You may remember Rob Parenteau’s posts on Spain, where he used & explained a particular equation. The ‘sectoral balance’ he called it. In this balance it takes three to tango. The government sector will not touch the foreign sector (everyone must export himself out of the crisis), but the point of view of the equation: there is a total disregard for the private sector!
      With this patched up/big strides-evidence, entirely circumstancial, I’d say the winners are proponents and adherents to a political filosofy. I just think it’s neither Keynesianism nor Austranism.

  19. Simon

    The arguments above are classic keynesian versus Chartalism ( also known as MMT ).

    Chartalism offers a very pragmatic view of how modern economies actually work in terms of governmentprivate sector interactions. Some of the issues seem to be that the general populous have no real understanding of how money works in the modern economy and therefore fall into all sorts of “mind traps” because their own interaction with money bears very little resemblance to that of a sovereign government, who has unlimited access to it.

    In modern economies money is basically a tool used by the sovereign government to extract services from the populous. Chartalism requires a paradigm shift in the way people think about money which seems to cause them all sorts of horrible reactions when they first encounter it.

    Anyway for an abstract view of this have a look at:

    for those more interested study:

  20. wes mantooth

    Wall Street wants deflation because it will make the currencies they hold much more powerful. The particular currency doesn’t matter since they’ll all benefit due to the unending margin calls. Will some of the banks fall on the sword of bankruptcy ala Lehman? Yes, but that’s when they find out they were never part of the inner circle to begin with. At the end of a deflationary crash those with the printing press rule supreme. Much more so than during inflationary periods. The one’s left standing will be gods…or they’ll think they are anyway.

    1. Piero

      They already manage to make a profit in equities 91 out of 91 days in a quarter. They’re already hearing norse sagas and epic poems about themselves in their own minds.

  21. Piero

    Does anyone actually believe the CPI figures for the U.S. in the graph that accompanied this piece?

    It’s tremendously frustrating that our government plays with the numbers and doesn’t give us reliable basic figures. If I were receiving social security payments purported to be indexed to inflation which were not going up as much as they should, I would be livid.

    1. Tao Jonesing

      The question is “who needs to suffer the austerity?”

      When such rampant fraud was involved on the part of the creditors, why is it that the debtors and bystanders (i.e., the truly innocent victims) who have to suffer?

      These guys on Wall Street failed. They weren’t too big to fail. They actually failed. Then they got bailed out and gave themselves bonuses for their failure. And to keep on giving themselves bonuses while they remain insolvent, they expect everybody else to be austere until Wall Street is no longer insolvent.

      When we get done writing off the bad debt, if there’s anything left over, the rest of us can be austere.

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