Former BIS Chief Economist Warns of Massive Debt Defaults, Need for Debt Jubilee; Fingers Europe as First in Line

When you hear an orthodox economist, particularly one who was early to warn of the dangers of real estate bubbles around the world, speaking of a debt jubilee as the best of bad option, you know a crunch is coming. Here is the key quote from William White, former chief economist of the Bank of International Settlements, in an exclusive interview with Ambrose Evans-Pritchard of the Telegraph:

The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly. Debt jubilees have been going on for 5,000 years, as far back as the Sumerians.

White gives a dire set of underlying causes, and one of them is what economists would call a lack of policy space, which in layspeak means “no remedies available to treat the disease.” Yet even though White is almost certainly correct as to the endgame, which is that many people who hold financial assets will find that they are worth a lot less than they believe, one of the reasons is that even people like White, as he exhibits in this interview, subscribe to economic beliefs that are part of the problem. In other words, there are treatments that would work, even now, but mainstream economist reject them and thus look as if they will have to relearn the lessons of the Great Depression.

Mind you, White is largely correct, most of all in his pointing out that debts need to be written down, and if they aren’t in a formal manner, they will be forcibly written down, via default. But where he errs is in deeming debt always and ever bad, and in further not acknowledging (or recognizing) that for a fiat currency issuer like the United States, using debt to finance government spending is a political requirement, not an economic one. The federal government could simply deficit spend, but our funding procedures are a holdover from the gold standard era. Thus some of the lack of policy space he complains about is due to self-imposed constraints, like the perverse and self-destructive fear of running deficits in economies that are tipping into deflation and have plenty of underutilized resources.

Let’s parse the interview.

What White Gets Right

Losses are baked in; the question is when and how loss recognition takes place. From the article:

The next task awaiting the global authorities is how to manage debt write-offs – and therefore a massive reordering of winners and losers in society – without setting off a political storm.

Yves here. This passage reveals the real problem: the upheaval, specifically the recognition of losses by lenders and investors, which is mistakenly perceived as a transfer to borrowers, as opposed to a coming to terms of creditor bad decisions and/or bad luck, is what the political classes have been desperately trying to avoid. It not only will end the delusion among the wealthy that the ZIRP-inflated value of their financial assets was real. It will also create a crisis among retirees who have been forced by policy to rely less on government-run retirement programs and into private retirement programs, where studies have shown that the viability of those accounts is determined almost entirely by investment results in the decade prior to retirement. In other words, unless we see serious intervention, expect the neoliberal “Die sooner” prescription to be in operation in a bigger way than ever.

Europe is likely to be where the storm hits first. Again from the article:

Mr White said Europe’s creditors are likely to face some of the biggest haircuts. European banks have already admitted to $1 trillion of non-performing loans: they are heavily exposed to emerging markets and are almost certainly rolling over further bad debts that have never been disclosed.

The European banking system may have to be recapitalized on a scale yet unimagined, and new “bail-in” rules mean that any deposit holder above the guarantee of €100,000 will have to help pay for it.

A Chinese devaluation would be destabilizing. Not news, but important to keep in the mix:

A Chinese devaluation clearly has the potential to metastasize. “Every major country is engaged in currency wars even though they insist that QE has nothing to do with competitive depreciation. They have all been playing the game except for China – so far – and it is a zero-sum game. China could really up the ante.”

What White Gets Wrong

White depicts debt as always bad. This is a crock and here is why:

Government accounting, unlike business accounting, fails to distinguish between spending (income statement) and investment (balance sheet). The next bombing run to Iraq, which does zip to enhance the productive capacity of the US, is treated exactly the same as investing in infrastructure or R&D like basic research (and yes we fund a ton).

A fiat currency issuer can never go bankrupt. It can only create too much inflation

Government borrowing does not burden future generations. This is one of the most confused ideas of the debt discussion. As James Montier of GMO pointed out:

At some point in the future, everyone alive today will be dead. At that point in time the bonds that make up the government’s debt will be held entirely by our children and grandchildren. That debt will, of course, be an asset for those who own the bonds (just as it is today). There may well be distributional issues if all of those bonds are owned by, say, the grandchildren of Bill Gates, but these will be intragenerational issues, not intergenerational ones.

Thought of another way, let’s imagine that for some strange reason a future generation decides to repay the national debt. Who will they repay it to? Themselves, of course; once again showing that government debt simply can’t be an intergenerational issue.

What does hurt future generations is lousy management of society and the economy, and for that blame should be assigned to the leadership classes that created and implemented bad policies. Operating in an “apres moi, le deluge” manner, such as the rampant short-termism in the business and political elites, is producing bad outcomes for the young, in the form of high unemployment, unstable job tenures, and head in the sand attitude towards management of the environment, both resource scarcity and climate change. But it’s also a category error to frame this as a generational issue, even if the young are taking it in the chin. So too are middle aged people. I have, for instance, a colleague who is a top professional in his field, who has just turned 60, who is terrified of losing his job because he will have no way to support himself, and even at his income, has not been able to save enough (having to live in high cost NYC) to retire at all well. He regularly says he does not want to live long beyond 70. I suspect there are many who in his age cohort who are managing to block out what their future looks like once they no longer have a steady income.

This decay has much more to do with the financializaton of the economy and how that has created a new self-referential super elite (Davos Man is its most visible symbol) and distorted their perspective even more than it would otherwise be.

Now with that caveat, there are plenty of parties who ought to be careful about borrowing. For instance, household debt levels are negatively correlated with GDP growth. State governments like New Jersey and countries that don’t control their currency (like member states of the Eurozone or countries that run currency pegs) do have to be mindful of their borrowing levels. But even that idea puts the shoe on the wrong foot. It’s lenders who are supposed to not make stupid loans since they are the ones at risk. Borrowers are too often overly optimistic or even crooked. The “blame the deadbeat” meme of the post crisis era shifts blame away from reckless or incompetent lenders and crooked securitizers who were confident they could dump their crappy credits on unsophisticated investors.

But White’s aversion to borrowing of any sort is tantamount to ruling our more fiscal spending, when that is precisely what the economy will need more of, particularly as credit losses are realized, voluntarily or not. We’ve said since the crisis that the medicine that was needed was debt restructuring coupled with aggressive deficit spending to counter the economic downdraft. This formula is not magic but the same bad orthodox thinking that helped produce the crisis rules it out as a policy option.

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  1. ArkansasAngie

    “like the perverse and self-destructive fear of running deficits in economies that are tipping into deflation and have plenty of underutilized resources.”

    Well … let’s skip building ghost towns. I’m not sure the “to the moon, Alice” option is all that realistic.

    1. Yves Smith Post author

      Straw man. You actually put the quote about slack resources up and then misrepresent it. The US has bridges in such bad need of repair that they were flagged as safety risks on a widespread basis IIRC as of 2012, world-lagging broadband (to the point that Silicon Valley sees it as a problem but not enough to get them to abandon their libertarian fixation. There’s a long list from there. The US is not China, which has had investment running at 50% of GDP in the last few years (yes no typo) and has been investing in unproductive manufacturing as well as empty cities (which astonishingly until recently apparently had investors willing to warehouse real estate).

      1. susan the other

        I wondered about those conflicting claims (ghost cities v. people are buying China’s real estate).

      2. steelhead23

        I very much wish to avoid misconstruing either William White, or Yves Smith. I’ll start from White’s premise that the losses (credit defaults) are “baked in” and that those losses will hurt middle class retirees as well as the elite. Hence the crazy behavior of our policy elite to prevent those losses from being realized. What if, instead of ZIRP and the outright purchase of balmy paper, the policy had been to minimize the life-style effects of default? That is, to offer a broader social safety/health net, and allow greater tax deductions for capital loss. Sure, the neolibs would argue that such actions would cause inflation and devaluation of the currency. Show me. I don’t see inflation as a threat until the labor market gets tight – and that outcome is nowhere in sight. And I think the post-Keynsian thinkers would aver that controlling inflation is the true purpose in federal taxation. I am not an expert in MMT, so please correct me if I am wrong. What I find surprising in ArkansasAngie’s snarky comment is the total buy-in to the neolib frame. With crumbling infrastructure, particularly in the rust belt, the U.S. has copious opportunity to wisely deficit spend to prevent our cities from becoming ghost towns. Sheesh. And oh yes, it is never too late to exchange a bad policy for a good one.

        1. Yves Smith Post author

          QE only bought very high quality assets, Treasuries and government guaranteed mortgage backed securities. It was about goosing asset prices to help the confidence fairy and trying to stimulate lending.

          1. Tinky

            You have made that point on a number of occasions, Yves. But does it not rest on the questionable assumption that the Fed has been, and is being transparent about the quality of their assets?

            1. Yves Smith Post author

              1. The Fed is audited (not the way Audit the Fed wants it audited, but on these narrow parameters).

              2. The Fed gives very detailed reports on its balance sheet and every one of its trading operations

              3. It would be all over Wall Street if the Fed were buying junk. You’d have tons of media reports.

              4, Bernanke is an orthodox monetary economist. He believed QE as set forth would work. Buying MBS was to narrow mortgage spread, as in make mortgage lending cheaper. There has been just about no non-government guaranteed mortgage market post crisis.

              1. Tinky

                Thank you, but given the recent history of rating agencies, I wonder about the quality of securities that are not, technically, considered to be junk. And if such grey-area securities are widely held, would it not be in Wall Streets great interest to pretend that it’s all good?

                I would also like to hear more about how it is audited, and how the audit differs from what critics seek.


          2. steelhead23

            My error. I jumped to the conclusion because it appeared those MBS were pretty illiquid suggesting they were impaired (high delinquency). Still, the policy did nothing for the quality of the credit while goosing the economy would have.

        2. Ian Ollmann

          > I don’t see inflation as a threat until the labor market gets tight – and that outcome is nowhere in sight.

          In fact, if you look at unemployment trends since 1/2014, we should be at 2007 minimum unemployment levels in 6 months or so. For example:

          Varying by state, we are only a point or two off of unemployment lows since Jimmy Carter took office. The productive part of the economy is actually doing just fine. It is just the discussion about non-producing segments that has grown shrill.

    2. IDG

      Or maybe, just maybe stop more Flints and New Orleans happening?

      Once you realize that now you live in a collapsed society rules by feudal lords it will be too late to increase public spending on the commons to prevent exactly that.

      Good grief.

      1. Synoia

        It goes in cycles. Read Cannibals and Kings, it explains the process well. Focus on the “River Valley Culture” theory of cyclic civilizations.

    3. susan the other

      To the moon, Alice has always been our preferred policy option. Via the military. Under the rationalization that there’s plenty of pork to go around and the money is spent protecting us and blahblahblah. However, when that money enters a bookkeeping singularity without accounting we don’t know how it is spent or even if it is spent and nobody has given us a clear figure on just how much this has devalued the dollar, aka inflated prices. Maybe we assume the dollar will always be strong because we fund the military so lavishly. It’s a scam, but then no currency is as strong as ours to date, regardless of how we have misspent our way thru the 20th C. That accounting should be changed, no question. And given the idiocy of world war, using our right to fiat should be used to maintain society, no question. It pays its own way. It’s not just us either, shit happens all the time. The Saudi royals just got caught giving Malaysia almost 1Bn$ “as a gift”. Did they learn that from us?

      1. James Levy

        I think it was Minsky who pointed out that the multiplier effect (remember that term!) for military spending was about as low as you could get while still spending the money. And I second Yves point: we have a “target rich environment” of things that need fixing in this country. My wife and I have sent our kids to, and worked in, public schools that are a joke–ugly, dilapidated makeshift structures built in the 1950s with the expectation that they would be replaced in 25 years, but are still around festering. A whole generation of post-WWII public buildings are a disgrace. And forget about water, sewage, and electrical systems. They are ramshackle and borderline Third World. And we are actually closing hospitals as out population expands and ages. No, there is no dearth of places to spend money in this society.

        1. steelhead23

          Amen. The perception that federal deficit spending would yield “ghost towns” is blind to this reality. There are plenty of places where spending money would be productive and economical. The moon indeed.

      2. Crazy Horse

        Upon election to the Presidency of the USA on the People’s Party ticket, I will sponsor the following 10 point program.

        1- Close all foreign military bases and torture sites.
        2- Cut the military budget by 75% and rebuild it as a defensive organization instead of an Imperial Army.
        3- Tax all wealth over a million dollars— not income but wealth— at a rate of 20% progressing to 50%.
        4- Fund a ten year program to halve the energy consumption of the nation’s housing through energy efficiency. Result— millions of (hammer ready) working class jobs to begin the rebuilding of lower and middle class economic security.
        5- Build electric recharging stations instead of roads & bridges.
        6- Incentivize conversion to electric autos as a transitional bridge to more rationally designed cities served by electric mass transit.
        6- Initiate a national Manhattan project to commercialize the Liquid Flouride Thorium Reactor and manufacture them at scale to replace all coal burning and the majority of gas turbine electrical generation within two decades.
        7- Decommission all light water nuclear power plants and use LFTR reactors to burn the existing radioactive wastes.
        8- Nationalize the Federal Reserve private banking system and replace the Federal Reserve Note with the US Dollar as required by the Constitution.
        9- Replace the private bankster cartel with state public banks and small scale credit unions modeled on the North Dakota system.
        10- Replace the US medical extortion system with public funded universal health care. Eliminate the FDA drug monopoly cartel and fund all drug development through publicly owned scientific research laboratories.

  2. visitor

    the medicine that was needed was debt restructuring coupled with aggressive deficit spending to counter the economic downdraft.

    What I have not yet been able to figure out from everything that is published (at NC and elsewhere) about the on-going crisis, is whether that medicine is still what is required — albeit at a much higher a dose.

    The massive slump in China, oil woes and increasingly disturbing discussions about the sheer impact of automation/robotization and climate change make me think that this old medicine must be supplemented with some new treatment to be effective at the current, advanced stage of socio-economic deterioration.

    1. IDG

      Efficient public policy (not as cost-saving efficient, but investing in what is needed to advance social transformation and well-being, which is inherently cost-efficient, even if not in the short term) and reforming the labor-capitalist relationship through a JG or BIG is also necessary.

      1. Gio Bruno

        Exactly. Spending on appropriate infrastructure is essential to a productive and safe living environment for the next generation. ( And it has a higher multiplier effect than invading Iraq.) Whether that infrastructure is roadway, bridges, water/ sewer plants, or park lands they provide for economic vitality.

        It must be smart spending however. Spending money on expanding the freeway system in California is flat-out wasteful. Other modes of travel need to be funded/emphasized in the transportation mix. Expanding an out-dated electrical grid is wasteful. Alternative energy (solar/wind) sources close to the user (rooftops) is a smarter investment. ( And we need to recognize why freeways are so expensive: they need to carry heavy trucks that are 3,000 times (no typo) more destructive of the roadway surface than personal autos.)

  3. craazyman

    I’m not sure he’s saying “debt is always bad”

    The tail end of the article says:
    “But Mr White said it would be a good start for governments to stop depending on central banks to do their dirty work. They should return to fiscal primacy – call it Keynesian, if you wish – and launch an investment blitz on infrastructure that pays for itself through higher growth.”

    It could be that he’s saying a jubilee for bad debt might make new productive debt more feasible.

    1. craazyboy

      Wonder how a “debt jubilee” on Treasuries would go? Tell the bondholders, pension funds and central banks they have to write off all their treasuries? ‘Course gubmint could just print up the money and pay them off…but that would take all the fun outta debt jubilees.

      Be easier to screw muni dudes at state and local level. Could have them pay into a national fund for national projects (say, airport upgrades)

      Then there are corp junk bonds, but oftentimes they are junk for a reason – nobody needs them for anything.

      1. craazyman

        You’re either a concept person or a detail person.

        “Big Thinkers” are concept people!

        The details get delegated to the little guys. It’s up to them to figure it out, it’s not up to us.

        Just don’t give me a haircut dude. That’s my only advice to the little people.

      2. craazyman

        Maybe they could give all white people a haircut. That could solve the debt issue and reparations issue in one fell swoop. It also could be huge business for tanning salons and beach vacations! Who knows but that might spark an economic boom, although there may not be very many white people left to give haircuts too when it came time to pay. So, even though it’s a brilliant idea, it might not work as well as you’d think it would. A lot of things are like that, actually, when it comes to economics.

        1. Synoia

          Reparation as you describe them are nonsense. I suggest you do the research and find out who captured thr Balck in Africa and sold them.

          Also research Slavery on the East Coast of Africa (not many white buyers on that side of the continent).

          While you are at it. read “Ladder of Bones” especially the section on Madam Tinabu.

          1. craazyman

            It’ll never happen. I’m too lazy for that much work. Also, as a white guy,I’ll be heading for the beach to get the tan and probably will be reading light escapist stuff while I drink beach drinks like Margaritas. If you have a tan, you may be able to keep your money when haircut time comes, since you’re not white anymore.

            1. craazyman

              wow. Yves would be in trouble since she’s very white and blonde and lives in a ritzy part of New Yawk. The question would be her capacity for tanning — does she tan or just get red. If she has a low pigment activation capacity, better find a place to dig a hole in central park and bury the silver. Just in case.

          2. Legendary Bigfoot

            Are we trying to absolve the end users here or ensure that everyone is brought down to their level?

            “once the rockets are up who cares where they come down? That’s not my department. said Werner von Braun”

          3. Plenue

            What Africans did in Africa was their business. Europeans are the ones who came along and put the slave trade into overdrive, transporting millions across thousands of miles of ocean to keep as pets. And I suggest you do a lot more reading, since a lot of what was going on in Africa was actually debt bondage; temporary slavery in order to pay off an obligation. And other even more nuanced systems besides. David Graeber has written at length about how once Europeans came along and started offering big incentives the native systems of debt management were gradually perverted into merely being excuses to put people in chains to sell to outsiders for profit.

            Do you have any idea how dishonest, not to mentions utterly disgusting, your line of argument is? It boils down to “well there were assholes in Africa too, so let’s just call it all a wash”.

            1. vlade

              I’m sorry, but the warlords of both east and west coast were raiding villages solely so they could get people into debt? Slavery was a big part of East Africa, especially that that had trade links with Arab world, which was a massive importer of slaves from all over the world until 18th century when Carribean and NA overtook it.

              This whole argument is dumb, since it requires apologising and making amends for something that you were not responsible for, could not affect. It’s the collective guilt argument in the other direction, so let’s rephrase it – if you believe in collective guilt unto nth generation, then the forced moves of German population across much of europe immediately post WW2 (with its millions of dead and countless rapes) were right? After all, Germans supported, even voted in, one of the most criminal regimes ever, and most of them who did that were even alive by then?

              1. Plenue

                Considering the descendents of those taken as slaves to this day continue to face hardship and bigotry that is the direct result of the arguments and thought-processes that justified the slave trade, yes, we today are culpable and should make reparations payments. It doesn’t have to be in the form of a literal check, we could start by not treating them like third-class citizens and trying to quarantine them off in ghettos.

          4. Ian Ollmann

            We make fun of reparations in my house. The whole issue is circular-firing-squad-mad. No amount of money is enough. Yet there are few precedents in law for owing a debt based on the sins of your fathers.

            To its credit, the idea does promise some moments of pure comedy. For example, we eagerly await the sight of President Obama apologizing to the black people of this country for slavery. He is my favorite recent President, but the irony is too much to be missed. Another delight is the prospect of forcing the former Confederate states to pay for it. (Are they even the same legal entities?) Money is fungible. The reparations payments will just come out of social programs and infrastructure — spending that will hit poor people disproportionately. The ultimate dividend will be that the entire region of embittered foot-draggers and luddites will never agree to anything again. Best to just let them secede now and continue their inevitable sink into ever deepening irrelevance and corruption so that the rest of us can move forward. We should cast them off, even if there are no reparations.

            As a descendent of Vikings, I expect this nation’s Scotsmen to send me a bill. The Angles and Saxons should start drafting their demands to Norman legal council. The Native Americans should simply just reclaim ALL the land and send the rest of us, Black, White and in-between to rapid convergent evolution with the world’s cetaceans. Maybe Native Americans could just become the new rentiers. I’m not sure which tribe owns Manhattan, but they should be well off indeed! …Assuming of course someone doesn’t manage to resurrect the wooly mammoths in a lab somewhere. I’m sure extinction has its dividends too.

            When my (white) 8 year old son believes that MLK is his personal hero and rescued him from a lifetime of suffering under the bigotry of others, I think we will have made progress. You may be surprised to learn that at least in a recent writing assignment, he indicates he does.

        2. ambrit

          The answer to your query lies in how ‘Haircuts’ are handled in the real capillotomy world. As ones’ wealth increases, so does the quality, and cost, of tonsorial services. So, as ones’ wealth increases, “haircuts” should proportionally increase in ‘value’ extracted. Of course, this is a ‘class’ based concept, and so will be rejected.

          1. craazyman

            that makes me think of the old Warren Beaty movie ‘Shampoo’.

            he grew up in my hometown and I read recently in a men’s fashion magazine that he had sex with more than 30,000 women. I briefly did the math and found that number to be implausibly high. 1000 per year for 30 years would be 2-3 per day for 30 years. That does not seem reasonable, even for Warren Beaty. i would think maybe 5,000 would be reasonable.

            1. craazyboy

              There was the Wilt Chamberlin 10,000 Club. Don’t know if he ever got the club fully enrolled, but I used to see him at my gym when I lived in the San Fernando Valley in the 80s. He was pumping iron hard.

            2. ambrit

              Ah ha! The old “under the table deal,” eh?
              As for that figure, Georges Simenon, Belgian author, famous for the Commissioner Maigret books, claimed to have had sex with 10,000 women between the ages of 13 and 61. If, as has been claimed, America, and by association, Americans are Exceptional, the Beatty claim must be true. Any other response to the claim would be un-American!

          2. Plenue

            Maybe we should extend the ‘haircut’ further down the body, say to about neck level. At least for some people.

    2. vlade

      that’s how I read it. the problem with debt jubilee is that our society has an in-baked ‘in the sweat of thy face’ assumption, so there would be a massive call about ‘freeriders etc.’ even though it’s very much false. even if it was, it’s a question whether cutting everyones throat to prevent is the best strategy to cope, or whether we have a better alterntive.

      1. James Levy

        It reminds me of the way people get the vapors about “socialized medicine” leading to “rationing”, when in fact EVERYTHING in a capitalist system is rationed via price. The question is never, who needs this?, it is always, who can pay for this?

        I will never understand why allowing rich people to gobble up so much of the valuable goods and services of society while millions live in want is just great but instituting a system where some have less but all have something is tantamount to slavery.

        1. hunkerdown

          Because Platonic societies demand a noble class to lord over them, and to a certain type of personality, the role of abuse container is better than not belonging at all?

        2. ekstase

          I really believe, as Alice Miller has written, that the roots of this are in childhood, when a lot of folks make a terrible deal with the devil to devalue themselves, and thus, all others. Then they “grow up,” to be participants in meanness.

        3. jrs

          But then a lot of those making the argument are those who think they can afford to pay the price (for whatever thing) and thus you have your answer.

    3. Yves Smith Post author

      That’s fair, but earlier in the piece, and I’ve seen White do just the same thing at conferences, he talks about debt to GDP ratio as being elevated and hammering on that, as he continues to do. That is a dog whistle to the deficit hysterics and works against running deficits. Moreover, the odds favor his approval of deficits being limited to “investments” and not things that would get people to work and be welfare-enhancing, but not infrastructure-related, like free day care.

  4. Keith

    When bound by the constraints of the new economics there is no cure.

    Four decades of supply side economics has created a world of massive over-supply.

    Supply never did create its own demand.

    Who’d have thought it?
    The old economics.

    40 years ago most economists and almost everyone else believed the economy was demand driven and the system naturally trickled up.

    Now most economists and almost everyone else believes the economy is supply driven and the system naturally trickles down.

    Economics has been turned upside down in the last 40 years.

    All the Central Bank stimulus programs have been Neo-Keynesian, in line with the new economics. The money is pushed into the top of the economic pyramid, the banks, and according to the new economics it should trickle down.

    What we have seen is that the money stays at the top inflating asset bubbles in stocks, fine art, classic cars and top end property.

    The old economics looks as though it was right all along.

    Keynes and the old economics suggested spending on infra-structure projects to create jobs and wages which will be spent into the economy and trickle up.

    When the Western consumer went on life support in 2008, China used Keynesian stimulus to keep its economy going through infra-structure spending and job creation. Unfortunately, it has reached max. debt before the Western consumer has recovered.

    The West has done totally the wrong thing in the intervening eight years and just blown asset bubbles rather than helping its consumer base recover.

    After Keynesian stimulus you have new infra-structure that you can hopefully use in the future.

    After Neo-Keynesian stimulus the asset bubbles burst and you have a deflation problem on your hands.

    Keynesian stimulus creates jobs, wages and demand.

    The new economics offers no answers.

    1. Keith

      If you are using upside-down economics, you have rendered yourself incapable of finding a solution that works.

      What can we do to fix Greece?

      Job cuts in the public sector; wage cuts in the public sector; reducing pensions and other austerity measures.

      Put it though the lens of the old economics and you can see you are reducing demand in the economy.

      The old economics would suggest raising taxes on those that can consume no more to balance the budget.

      Upside-down economics at work:

      When South America was in trouble the World Bank stepped in and offered loans as long as they reformed their economies with less public spending, austerity and privatising previously public companies.

      It was a disaster.

      In the Asian Crisis in 1998 the IMF stepped in and offered loans as long as they reformed their economies with less public spending, austerity and privatising previously public companies.

      It was a disaster.

      When Greece got into trouble recently the IMF stepped in and offered loans as long as they reformed their economies with less public spending, austerity and privatising previously public companies.

      It was a disaster.

      The EU has applied the same prescription to Spain, Italy and Portugal.

      It didn’t work.

      Upside-down economics gives all the wrong answers.

      1. David

        “It didn’t work.” well that depends on context.

        If your objective is to reduce the local free cash flow to the point of marginal subsistence and then down from there – which I call – Murder by Neglect – then it is working for Them – lowering or creating disqualifications for earning: Wages, H-1b, SS, Medicare and then privatizing public services to create monopoly Rentiers globally – for everything – Bridges, Roads, Taxi Apps etc etc

        grinds away at the sustainable free cash flow, so 7 Billion is reduced to 2 Billion worldwide and in the US to 40-60 million.

        It will go faster now since the perception of continuity of cash flow is gone for young and old – young are not having children or much much later.

        Chaos is an objective – eliminate stability long enough – few people in Libya – in ten years you can pick it up for a song with a gang of guys and then……..everywhere

        debts can be purchased for 10 -15 cents and used to buy whatever for New World Order and people are all gone

        1. James Levy

          Do you really think the Dimons and the Blankfeins and the Bernankes of this world are really thinking that cleverly? I don’t. I think they are greedy, short-sighted, and outside of their areas of expertise, rather ignorant and stupid. Other than the desire of the rich to claw back their pre-New Deal positions of status and wealth, I see no plan at all.

          1. hobbyhorse1

            Quite . They move by chauffeur driven car from place to place , private jet from country to country and so all is just fine in their world , no broken down highways, bridges etc. But somewhere down the line reality cuts in unexpectedly, the mechanic fails to show up for work because he can’t get there because the bridge he has to cross just fell down and their private jet can’t take off . Only then will they get the message. But so long as their backyard is swept clean all is well.

  5. cnchal

    The next task awaiting the global authorities is how to manage debt write-offs – and therefore a massive reordering of winners and losers in society – without setting off a political storm.

    Spare me the “global authorities”. These are the useless eaters that have been running things for so long that they are the cause of the problems. No way will anything be managed properly by them.

    The ultimate salary man, making one stupid decision after another and being rewarded for it.

    Bring on The Donald, where he tells them “your fired”. That would be a reward for services rendered.

    1. James Levy

      You really imagine Donald Trump wants to “fire” the Ownership Class? You think he’s going to move against the people who run this planet, and has the wherewithal to do it? This is a man who told us that the minimum wage in the USA was “too high”.

  6. Clive

    I wish I had a pound for each time I heard an asset holder (it is usually someone discussing a retirement fund but you can easily find a similar response from someone exposed to residential real estate) defending some perfectly idiotic policy response on the basis that it would “help their pension”. I wish it, because if I had, I’d probably have enough to bail out the entire system.

    It cannot be stated often enough (please everyone, tell your friends as often as they’ll put up with it): All pensions are residual claims on future prosperity. Wrecking the present, such as:

    * by degrading the installed asset base in areas like transport, power or potable water supply and distribution
    * by neglecting health and social care services
    * by crapifying education
    * by tolerating unemployment, especially youth unemployment

    … is lowering the baseline for prosperity in the present which means a lower base to draw on in the future. These are not potential, theoretical problems which might emerge in the future; they are happening today. They represent legitimate areas where state intervention is perfectly justified.

    I am not a disinterested party here. I am long on both financial asset and residential real estate exposure. These are judged by the people who manage my fund the least-worst asset classes for long-term investment — I have limited (virtually zero) influence over their strategies for investment. I fully expect these assets to be subject to write downs with the knock-on effect to the returns I have been promised in retirement. Not exactly a prospect that thrills me, especially as I have limited options to reduce my exposure. But the alternative to the current approach — which is being pursued by every government and central bank out there — and writing down unsustainable valuations is as the piece points out The Great Depression II.

    While deficit terrorism precludes state action which would limit the damage, the persistence of policies which make a sudden stop (disorderly defaults and massive dislocations) far more likely is enabled. In short, it gets worse the longer it goes on for.

    I continue to wait for sanity to arrive, but I’m not exactly holding my breath.

      1. Clive

        Or “deficit scaremongering” might be a better way of putting it. If the Republicans find a semi-sellable to the electorate way to implicate Islamic State in causing governments to run deficits, then my original phrase may end up coming true!

      2. hunkerdown

        It’s not terrorism if the ruling class does it. Note the word “unlawful” in all legal definitions of the term allowing the government and its owners to terrorize as they please.

    1. armchair

      A policy response would have to address the 70 year old people living off of 401k’s. It would be impossible to come up with an entirely fair response, but some added social security benefits and perhaps, a program to make retirees whole on mortgages. Also, maybe more construction of senior housing, available at affordable rates. Figure out ways to maintain quality of life, stability in housing and medical care. I know, it sounds blunt, but these are the kind of things that would need to be thought about to engineer a humane debt jubilee.

      1. Clive

        Yes, a proper state pension would be about the only alternative to “oh, just hurry up and die faster” that I can see for those in that position (living off a 401k which has tanked and with no prospect of working their way out of their predicament).

          1. Clive

            Hey, they might not all be needing to use Zimmer frames! Surely some of them could pull themselves up…

  7. Lou

    I’m not an economist, but it seems to me that debt is not only an intragenerational issue but also an international issue.

    American debt (T Bonds) or french debt (OAT) will be owned by chinese middle class, Qatar Investment Authority etc. more than by Bill Gates grandchildren.
    Of course there are some exceptions (Japan for instance, debt is mostly owned by Japanese).
    Maybe someone could tell me if I’m wrong here ?

    Another point : James Montier means that it’s only a political issue that future generations will have to solve. Well, political issues are as tough to resolve as economical ones. Why not solve this issue “now” ?

    1. IDG

      What is the big deal? If they cash in the USD will have to be spent on USD assets/goods anyway.

      Is not a real problem, is a manufactured problem (in reality is not even a problem). Forbid the government of issuing new securities and the whole “problem” is over, if you believe it’s a problem. Offer deposits from CB’s directly and saving instruments to nationals and no problem.

      Public debt is not a real problem, is a political choice. Allowing foreigners to hold USD assets (which are in the dollar monetary zone because they cannot go anywhere else, lol, they are USD assets) just strengthens the value of the dollar.

      The real impact (losing some jobs) could be mitigated with the right policies, and that has much more to do with costs of labour than over who is holding securities, so is not a problem that is going away just because Chinese don’t hold US treasuries anymore.

      I fail to see the big issue with this.

      1. tegnost

        I agree, a reasonable expectation of a return of capital without the negative interest rate of a rotting banana is not in itself a bad thing, it’s the hijinks that turn reasonable return into guaranteed profit generation by the CB’s that I view as the problem.

      2. Fiver

        ‘Forbid the government of issuing new securities and the whole “problem” is over, if you believe it’s a problem. Offer deposits from CB’s directly and saving instruments to nationals and no problem.’

        But just a second – poster ‘Lou’ rightly pointed out that the dual, domestic/global roles of the US $ involve very large holdings of US dollars held elsewhere, which could be problematic. As that is precisely what we’ve got now, i.e., a very, very big problem involving US QE, US dollars, Japan’s US-induced permaflu, China, oil, oil producers, etc., a problem of global scale, I’m not sure his point is pointless. Not for nothing are China and others beavering away at an independent currency/trade/settlement platform.

    2. diptherio

      This is a couple years old, but probably still in the ballpark (someone correct me if I’m wrong – I’m not finding data for any year after 2013):

      The largest portion of the total debt — about 40 percent — was held by federal government accounts plus the Federal Reserve banks. Since 2009, the Federal Reserve banks have been sharply increasing their holdings of Treasury securities to stimulate the economy, and as of March 31, they held just under $2 trillion of the national debt, or about 12 percent. The federal government accounts include the two Social Security trust funds, which together hold 16 percent of the total federal debt. Other federal government accounts include the federal civil service retirement and disability fund (5 percent of total debt), the military retirement fund (3 percent), the Medicare hospital insurance fund (1 percent), and several other smaller funds.

      Another 34 percent of total federal debt is owed to foreigners, including China (which owned nearly $1.3 trillion of the total debt, or about 8 percent), closely followed by Japan, which owned $1.1 trillion, or 7 percent. Previously, Japan had been the top foreign owner of U.S. debt, but China surpassed Japan in September 2008. Other major foreign lenders are various Caribbean banking centers including the Cayman Islands (2 percent altogether), various oil-exporting nations including Saudi Arabia (2 percent altogether) and Brazil (2 percent).

      The remainder of the total federal debt is spread among mostly private, domestic investors, including 6 percent owned through mutual funds, such as money-market funds. Another 3 percent is owned by state and local governments. The remaining 17 percent is spread among banks and other depository institutions (2 percent), owners of U.S. savings bonds (1 percent), private pension funds (3 percent), state and local pension funds (1 percent), and insurance companies (2 percent), with the remaining 9 percent held by various “individuals, Government-sponsored enterprises, brokers and dealers, bank personal trusts and estates, corporate and non-corporate businesses, and other investors,” according to the Treasury.

      1. alex morfesis

        The global banking us treasuries standard. Nixon (god rest his evil soul) did one good thing…forced the world to formally accept the obvious by closing down the “magic gold window”…forcing everyone to decide which countries treasuries they would hold as capital for banking purposes…even with a haircut ustreez are more stable and much more liquid a market then has ever existed in any govt/lead backed fiat debt instrument…and the myth of creating a commodities backed currency is easily crucified by the current disruption in global trade…

        Humans sadly tend to keep falling off the edge like happy little lemmings…while working on building up an undersea exploration firm here for someone in tarpon springs a few years back (how’d that work out for you alex…grrrrrrr…) it seemed odd how ships could collide on a regular basis far out at sea…turns out everyone was using the same exact shortest routes…the orthodoxy caused the crashes…humans…bah humbug…

        Making adjustments to instruments to balance off on capital cash flow realities always happens. It used to cost much less to buy a home in the early 1960’s in the USA when compared to wages. Today those numbers in many parts of this country are way off kilter…but during let ups on speculative purchases of homes, the typical not too bright real estate marketing industry watches the market collapse back to the income basis side of payment capacity and valuations tied to those incomes…

        But for the foreseeable future, ustreez will continue to be purchased by global financial institutes to allow growth and to conform to increased capital requirements of the dreaded
        Basel (faulty) 3…

    3. susan the other

      Here’s one resolution: redefine money. Money is only as valuable as the thing(s) it is spent on. So exchange rates will be forced to reflect reality instead of inflation/deflation and “interest”. Gonna have to rewrite the dictionary because we have evolved beyond it.

      1. MaroonBulldog

        Redefine money again? When we’ve long forgotten what money was for in the first place? Money was invented to buy people out of trouble, not to facilitate the exchange of goods or services.

        Money started out as compensation the state forced a plaintiff to accept in settlement of a lawsuit. Lawsuits were not invented to settle disputes about money. Money was invented to settle lawsuits and so resolve disputes about other things–damage and destruction of life and property, mostly. Before the invention of Lydian stamped coinage, way back in Rome, 2700 years ago.

        Njal’s Saga puts it all in perspective. One of its most interesting features was a bag of silver coins that changed hands after every manslaughter. It’s only societal purpose was to serve as wergeld, compensation to survivors of victims that bought release to the manslaughterer. As far as the saga new, coinage served no other purpose in the 10th century Icelandic economy.

    4. Synoia

      American debt (T Bonds)

      The US could retire all T Bills tomorrow, by “buying them all back.”

      Thus: Tbills are fungible, and are money.

      Money in circulation is a “debt” of the Federal Government – and is readily accepted by the Federal Government to pay taxes.

  8. DanB

    From the money quote cited above, “The only question is whether we are able to look reality in the eye and face what is coming in an orderly fashion, or whether it will be disorderly.” Well, one the one hand, it all depends upon the definitions of “we” and “orderly”. But this formulation implies ruling elites -who have power but no wisdom and commonweal values- are capable of acting in the public interest to avert implosion. The elites are a lost and caustic cause; and the people are presently unable to create a new world. I know many people -almost all members of the middle class- whose main question is, “How long do we have?” And the subtext of this question is, “Can business as usual continue until I die?” The people do have the ultimate power but right now “the people” still believe in the system that is devouring them. Eventually the financial, economic, ecological and political clocks begin to strike midnight and make orderly change impossible.

    1. Fiver

      Yes. It’s very strange there is no economic deflator of some sort that registers in the now in terms of our economic projections the facts re how affected most people already are with regard to confidence in our collective future. – or how a policy aimed at providing unlimited credit for perpetual ‘growth’ is going to fit in it.

  9. Rhondda

    I wonder if the insane levels of corporate stock buybacks (using borrowed money & still ongoing) are an indicator that the .01% are actually planning for and expecting a debt jubilee.

    Like a small biz owner I knew (some years back before the “bankruptcy reform”) who was well aware his biz was going bankrupt in a month or two and so just before “the end” he maxed out all his credit cards and took extravagant vacations…running up the debt without a care because he knew he’d be declaring bankruptcy.

  10. Edward J Max

    The Ruling Class is a danger to us all. We are teetering on a thin blue line with a potential deflation looking squarely at us. If the deflation occurs, woe to you who are debtors…you are screwed.

  11. Steven

    “… for a fiat currency issuer like the United States, using debt to finance government spending is a political requirement, not an economic one.”

    I would change this to “the purposes for which government debt – in addition to the need to use it at all – are the product of political not economic considerations.

    To this point, further down you write “The next bombing run to Iraq, which does zip to enhance the productive capacity of the US, is treated exactly the same as investing in infrastructure or R&D like basic research.” I submit that it is more than just a question of whether or not debt adds to ‘productivity’ – or as the last half-century of ‘financialization’ of what once were called ‘the industrial democracies’ (or longer depending on how you count) ‘profits’.

    Maybe before we encourage adding yet more productive capacity we should step back and ask ‘productive of what?’ To me productivity implies the most efficient, sustainable but, most of all, NEEDED use of resources. There certainly are lots of serious needs going unaddressed, needs which could be addressed by some combination of government debt and / or taxation of the vast sums of money currently ‘invested’ in the casino economy.

    150 years ago the English social critic wrote something to the effect of “…a logical definition of wealth is absolutely needed for the basis of economics if it is to be a science.” Frederick Soddy, “Wealth, Virtual Wealth and Debt”, 2nd edition, p. 102. We may never be able to define the wealth in a Beethoven symphony. But for most of us what matters most is the efficient, productive use of the wealth we use to sustain ourselves.

    The essence of that kind of wealth has been clear for a long time – the combination of the use of machinery powered from inanimate energy and advances in scientific and technical knowledge.

    Until we have “a logical definition of wealth” in accord with the laws that actually govern the physical world as opposed to those passed by bought and paid for “leadership classes”, those ‘leaders’ will continue to use what Michael Hudson calls “junk economics” to justify their “apres moi, le deluge” ‘leadership’ (obviously, SIC)

  12. Jim Haygood

    ‘the recognition of losses by lenders and investors … is mistakenly perceived as a transfer to borrowers.’

    It isn’t merely perceived as a transfer. It’s defined as such in the tax code.

    Settle with a creditor for less than the original principal, and the creditor will notify the IRS of the amount of debt forgiveness, upon which you will be taxed.

      1. Jim Haygood

        Sure. But it means that a low-income debtor who manages to get $100,000 in student loans forgiven gets hit with a $30,000 tax bill, due and payable in full on April 15th.

        Debt forgiveness — you can’t afford it!

  13. John

    A fiat issuing government can never go bankrupt, it can only create too much inflation. (Taxing too little/spending too much)
    No, the switch has three positions:

    Money drains from the economy with trade deficit, savings and taxes, is created with net bank loan expansion and deficit spending.

    So gov can always create deflation by taxing too much/spending too little, which drains money from the economy, as we see today.

    The third and middle position, adjusting gov spending purposely to counter the business cycle and unemployment, was accepted by both parties as recently as early seventies, (nixon’s we’re all Keynesianism now), but massive oil inflation/stagnation combined with new distrust of gov on account of the Vietnam war brought back gold standard economics.

  14. Jesper

    Asset holders get to keep their assets while their debts are written off?
    Am guessing the ones who benefit the most from cheap borrowing to buy assets – that would be the rich in any society – would benefit the most from such a policy.

    As for the credibility of a ‘central bank veteran’….

    The problem is about resource allocation, a debt jubilee does nothing about the problem with wasteful resource allocation.

  15. TheCatSaid

    Wise advice contained in the closing paragraph of a recent post, “FDR, Stalin and an Icarian Crash” from David E. Martin’s Inverted Alchemy blog:

    To weather the coming economic storm and achieve more of a dive than a cataclysmic fall into the watery abyss, we need to bring ourselves into closer proximity to each other and we need to expand our informed engagement! That requires a commitment to learn, stretch our awareness, and lessen our dependence on paternalistic systems that were built not to care for us but to disintermediate our care for our neighbor. As we enter 2016, make a commitment to share your wealth, compassion, and industry with someone you didn’t include in your circle in 2015. And, with any luck, we’ll find a more reliable way to fly.

  16. Chauncey Gardiner

    Late in the show, and the repertoire of hat tricks must surely be nearing exhaustion. But I wonder if in a macro context this temporary illusion of cheap and abundant oil won’t be sufficient to reboot economic growth and enable a sufficient number of debtors to pay a sufficient portion of the interest on all that debt to again defer the day of reckoning.

  17. Roland

    I agree that gov’t debt issues are about intra-generational distribution.

    But there is also a question of inter-national distribution, and this too raises a question of justice.

    Suppose a country depletes one of its natural resources in exchange for another country’s currency. Suppose the latter country goes all-out for domestic stimulus and says to the former, “It’s our currency we’ll make as much of it as we want, so it’s just too bad about your non-renewable resource–lol.” That would be unjust.

    The issuer of a reserve currency should give explicit and early notice to the world about its intention to go all-out for domestic stimulus. That which has world status, must be made to answer to the world.

    I can anticipate the “trickledown” theory applied to the international ramifications of MMT. i.e. “If our economy is at full employment the whole world will be better off in the long run.” Those who benefit from inequality often resort to the trickledown defense. There’s always an excuse why we should get ours most and first.

    I can also anticipate the argument that these factors should all be priced into the market already. Again, those who benefit from inequality often claim that the inequality is justified by the natural efficiency of the market.

  18. Roland

    Re: “retirees who have been forced by policy to rely less on government-run retirement programs and into private retirement programs.”

    Lots of us are being forced to self-fund our own old age while lacking the control of means of future production which would make it rationally possible to do so.

    For my part, I don’t do much retirement planning. Going forward, it’s going to be more about death planning. Luckily, here in Canada the parliaments and courts are already moving rapidly to establish a socio-legal structure for suicide choice.

    In the future, I anticipate that assisted death will not only be merely tolerated, but encouraged and incentivized, throughout the developed world. A generation ago, it became common to offer severance packages to get rid of surplus workers. In the future, authorities will pay to get rid of surplus lives. This will be easy since so many old sick people in the develped world won’t have large or close families, and since a large proportion of the younger demographic will be made up of relatively recent arrivals from abroad, who will not necessarily feel much of a close social or cultural bond to the elders living in the same territory.

    In other words, I guess what I’m saying that socialism is not just about a battle for justice. It might well prove to be a battle for life itself, for humanity itself, and for a world in which humanity can live. But do we have a strong enough sense of duty to face such battle?

    1. Charles 2

      Historically, retirement was always about death planning. It was only the short period of time (a few years) where the bad health that forced you out of work was totally correlated with low remaining life expectancy. It would last 10 to 20% of career duration and would therefore be validly funded by 10 to 20% of saving during working time with conservative real interest rate at zero.
      It is only after WW2 that it became a “everyone deserves to be a rentier toward the end of his life” ideology, funded on absolutely insane expectations of real interest rates around 5 or 6%. Keynes rightfully identified the rentier as the enemy of all other classes in the economy, and the enemy of economy itself, so we shouldn’t be surprised that the economy is faltering.
      Now, East Asians actually save amounts commensurate (35 to 50% of income) with the requirements of long retirement periods and realistic real interest rates, but even those “realistic” rates (I.e. Close to zero) require smart investment on the future ( such as not soiling its own environment and NOT funding consumption of western countries) that clearly didn’t happen.
      So pain and days of reckoning are for everyone I fear….

  19. Roland

    @ Charles 2,

    You probably won’t see this since it’s been a few days, but I think your reply was excellent, esp. the part, “after WWII everyone deserves to be a rentier in late life,” i.e. a notion of a prosperous old age for Everyperson, founded on assumptions of real long-term economic growth rates (and hence long-run real interest rates) which proved to be unrealizable.

    In other words, demographics heavily weighted with non-working elderly imply austerity (“pain and days of reckoning”).

    As I’ve often said, it’s not the austerity that’s bad–it’s the distribution of the austerity.

    I remember back in my historical demographics class back in the mid-90’s, I spent one seminar arguing that we’d have to “bite the bullet.”

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