Rising Global Imbalances Likely to Precipitate New Crises

It is not a sign of intelligence to repeat a course of action and expect different results. Yet our officialdom is doing pretty much just that on the economic front. Treasury and the Fed in particular seem quite pleased with their success in patching up the financial system with duct tape and baling wire and prodding it into a semblance of operation via massive support, most notably via super low interest rates. Even so, the mortgage market is on life support, with government guaranteed mortgages accounting for over 95% of the market in first quarter 2010, versus roughly 40% pre-crisis. Banks are still not lending much, and have reined in particularly hard with small businesses who are the engine of hiring. Financial firms seem to be deriving their real cash earnings primarily from yield curve arbitrage (borrowing at near zero and parking the proceeds in longer-dated Treasuries or other low risk assets) and trading. While these may rebuild their balance sheets, the banks have yet to write down and restructure bad debts sufficiently (while the banks do appear to have taken some hits on impaired assets, a fair bit of anecdotal evidence suggests the markdowns are not deep enough).

The failure to change the structure, operation, or leadership of major financial firms means they are just about certain to repeat the same behavior that led to mind-numbing bonuses in 2007 and 2009.

The same inability to move away from a broken paradigm exists on a macro level as well. Even though Carmen Reinhart and Kenneth Rogoff’s book This Time is Different demonstrates how high international capital flows are inextricably linked with frequent, severe financial crises, none of the influential G20 players seems willing or able to take action to reduce global imbalance (but they do give the idea lip service). To a large degree, the problem is political; countries, even more so that companies, find it hard to change strategies, particularly since the beneficiaries nearly always are have become powerful players. In addition, policymakers who have grown up with a system that appeared to comport itself well for a long period of time find it difficult to abandon it.

Fred Bergsten describes the coming train wreck probable consequences in the Financial Times. He argues that imbalances are certain to become more pronounced, with disastrous consequences:

Global imbalances are about to jump again…

No one would accuse the eurozone of competitive devaluation. However, there is considerable satisfaction throughout Europe with the weak currency.. Whatever the intent, these European developments will have effects similar to the overt steps taken by other major countries to enhance their trade competitiveness. The most extreme case is the massive intervention by China and surrounding countries to keep their currencies severely undervalued. Other emerging markets are likewise seeking to expand further their war chests of foreign exchange by running large external surpluses. Switzerland has intervened substantially to hold its currency down. The eurozone has joined this “new mercantilism” and the result will be a sharp rise in global imbalances.

The counterpart increases in deficits will again accumulate mainly in the US as no other country could attract the requisite financing….Investor proclivities to buy Treasury securities and dollars could finance the American deficits for a while. The US would provide the global collective good, as in the past, by accepting increased dollar overvaluation and further increases in its external debt and deficits.

There are three glaring problems with this vision, however, all centred on the US. First, the sharp escalation of its own domestic and international imbalances would intensify the risk of future market attacks on the dollar and US financial assets. As soon as Europe and other alternatives regain their acceptability to investors, the unsustainability of the US situation would return to centre stage at even more dangerous levels.

Second, the higher imbalances themselves could sow the seeds of a new financial crisis just as they helped sow the seeds of the last crisis. Such huge inflows of foreign capital would keep US financial markets excessively liquid, hold interest rates down, promote underpricing of risk and thus again generate irresponsible lending and borrowing.

Third, a renewed explosion of the US trade deficit could well trigger the outbreak of protectionist trade policies that has been largely avoided to date. With unemployment remaining very high, job losses to the “new mercantilism” abroad are likely to incite strong political reactions. The virtual absence of a positive trade policy under President Barack Obama has created a dangerous vacuum in which new import restrictions, especially aimed against “unfair exchange rates,” could readily prevail.

At its upcoming summits in Toronto and Seoul, the G20 must adapt its rebalancing strategy to prevent this new threat to continued recovery and lasting global stability. Surplus Germany, along with China and Japan, must stimulate domestic demand. China must let the renminbi strengthen substantially. Joint intervention in exchange markets should prevent or reverse any significant further fall in the euro. Additional allocations of Special Drawing Rights would enable countries to build reserves without running trade surpluses.

Most importantly, the US must convince the world it is unwilling again to become the consumer and borrower of last resort…But it will also have to end the chronic dollar overvaluations of the last 30 years, and euro depreciation along with continued renminbi manipulation will inevitably push currency issues back to the top of the global agenda.

Yves here. I beg to differ with the first item on his list. The US, like any country that issues its own currency, does not have to “fund” its own deficit spending. Its constraint on “printing” is inflation, and with labor having pretty much no bargaining power, that risk seems remote. In addition, any country that was to assume the reserve currency role would have to be willing to run trade deficits, and none of the candidates-in-waiting seem keen about the idea.

But recall that the notion among many policy-makers is that the US needs a resumption of consumer spending. The risk is we see a continuation of consumers using debt to help support spending, and continued capital inflows are likely to support rising indebtedness of various forms. Thus imprudent lending and heightened protectionism, both likely outcomes in the not-at-all distant future seem more than enough to lead to a renewal of 2007-2008 type financial upheaval.

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54 comments

  1. alex

    Yves: “any country that was to assume the reserve currency role would have to be willing to run trade deficits”

    In other words to assume the Golden Noose and suffer permanent Dutch disease. Unsurprising that no other country is dumb enough to volunteer, especially at this time.

    But why does any country’s currency have to be the world’s reserve? Keynes’ Bancor proposal would have eliminated the need for that by making the Bancor (a “currency” that could only be held and exchanged by central banks) the world’s reserve currency. The Bancor proposal also included extensive provisions for balancing trade by increasing/decreasing exchange rates for any country that had an excessive trade surplus/deficit. The old master would have easily recognized the problems we have today, as they’re not all that different from those in the Great Depression.

    Moving towards the Bancor is a big step, but so were Bretton Woods and Bretton Woods II. Maybe we need to look at just as big a change today.

    1. NOTaREALmerican

      Not sure that would be in America’s interests. Assuming that real-life – on all levels (including the international nobility) – is really just a frat-boy pissing contest, then all the leading frat-boys should want their country (frat house) to have the reserve currency (biggest dick).

      So, a battle for the reserve currency would be THE goal of any country in the world. I don’t think the US frat-boys will giving of their claim to the hottest females any time soon.

  2. Bates

    Yves, there is a contradition in your two conclusive paragraphs…or, it seems so to me.

    ‘Labor has no bargaining power’

    …and…

    ‘The risk is we see a continuation of consumers using debt to help support spending’

    Inflation adjusted wages in the US have not increased for a long time although productivity has. The excess profits from productivity have been dispursed to the small group at the top of corporations after the FIRE sector has taken it’s large slice of the enlarged/leveraged pie.

    Your first statement was correct…’Labor has no bargaining power’.

    …any discussion of an economic recovery in the US that will improve the standard of living of the average American worker is simply hot air. Labor sans bargaining power equals surfdom. What financial system is going to offer credit to a surf? Oh wait, I forgot Pay Day Loans!

    Globalization was intended to level the world playing field for labor and it is succeeding. Welcome to the new normal.

    1. Zephyrum

      Bates wrote:
      > What financial system is going to offer credit to a surf?

      Surfs manage to accumulate a few coins here and there. The FIRE corporations compete with each other to extract these monies. Credit is a useful tool for this purpose and will thus continue in some form. When recovery gets thin creditors have the law changed to further impoverish the surfs–for their own benefit of course. “The right to incur debt is the right to be free!”

  3. purple

    Income inequality is part of ‘imbalances’ picture. Part of the reason the US middle class consumer is in such debt is because they have not had a decent share of the productivity gains over the last 30 years. It’s mostly gone to a very small group , which does not result in strong organic consumer growth.

  4. Bill Smith

    “No one would accuse the eurozone of competitive devaluation.”

    Actually there are a number of people making that exact accusation. And there are a number of other countries trying that at the same time. Which limits it’s chances of working…

    1. a

      Since the euro is still a tad strong at 1.20, the Europeans can’t (yet) be accused of competitive devaluation. The Americans have tried it, when they sent their currency to 1.5 or 1.6 (vs the euro), but they have now failed, for the time being. As usual they are now crying into their milk about the Europeans, but they are just getting their own come-uppance.

      1. Dave L

        “The Americans have tried it, when they sent their currency to 1.5 or 1.6 (vs the euro), but they have now failed, for the time being.”

        The US runs a wide external deficit. In normal circumstances, its currency SHOULD depreciate, not as a result of deliberate policy but simply as a consequence of that imbalance. This is how adjustment takes place.

        But because of the dollar’s reserve currency status, foreign official buying has kept the exchange rate artificially high and interest rates artificially low. Both outcomes result in a current account deficit that never adjusts. Bergsten’s whole point is that Europe is now joining Asia in pursuing policies that will keep this state of affairs going.

          1. sherparick1

            Yes, it may have because one party in that zone, China, has kept its currency artificially pegged low against the dollar, and for reasons of elite interst the other party, the U.S., has tolerated it for ten years. For imperial reasons (since it allows us to fight our wars on cheap borrowed money rather than raising taxes on those who have income and wealth), the U.S. wants to maintain the dollar’s status as a reserve currency. The elite, who hold most of their wealth in dollar denominated assets, also benefit when the dollar is artificially high (as he is so many ways Larry Kudlow’s gives great insight into elite opinion since his happy v. unhappy meter is so pegged to the whether the dollar is appreciating or depreciating.

            Now the problem is that with near 10% unemployment and still declining house prices, I don’t see the lower four income quintiles going on any big consumer binge and without collateral, I don’t see banks lending to them. Consumer credit contracted in April and mortgage applications are falling through the floor.

            The equaminity of Bernanke and so many of the economic elite that a devalued Euro will not significantly affect the U.S. economy betrays a belief in “magical” thinking among U.S. neo-classical economists. The U.S. trade deficit is rising, which by the definition of the National Account identity means U.S. growth will be slower. U.S. government, Federal and State, is moving from deficit stimulus to austerity contractionary, so the “G” part of the National Account Identity will shrink, or at least grow at a slower rate. Apparently these guys and gals think that there must be some sort of “Ricardian equivalence” investment boom in the offiing to offset the declines in “G,” “C,” and the increase in the current account deficit. Right!!, real estate? empty houses and apartments sitting across the country. Commericial real estate? empty offices and strip malls and declining rents across the country. Industrial and R&D? what return will one get in the U.S. competing with an overvalued dollar and labor costs still to high when compared to the talent pools in India, China, and SE Asia.

            What I see is not a “dollar crisis” (at least in the near future), but I do see a strong risk of both Europe and U.S. going back into recession this autumn, with unemployment increasing, and heighened political turmoil as result. (Republican-Tea Party controlled House impeaching Obama-Biden in 2011? A Palin-Cheney ticket elected to the Presidency in 2012?

  5. purple

    I also don’t see SDR or Bancor working for an extended period because it means mercantilist countries lose control of their currency valuation. I can’t see China giving the IMF power over value of the yuan. Especially since the U.S. has de facto veto power in the IMF.

    1. Timmy

      Yeah, bancor is just “global” version of Euro. And we know how Euro ends up. Any schmo can bring it down and make loads of money doing it.

      1. alex

        The bancor is nothing like an international euro. The bancor would be a reserve currency that could only be held and exchanged by central banks. Countries would still have their currencies and the exchange rate between that currency and the bancor would be adjusted to avoid excessive current account surplus/deficit for each country. In that respect it’s the opposite of the euro and it would avoid the now all too obvious problems of the euro.

        1. Timmy

          ok. so can a country still purchase other country’s courency? If so, what prevent a “huge country” like china to start playing with bancor vs. a country’s currency? (suppose china buy all australian dollar and upping their bancor holding under the matress 10-20%? ….then they go buying asset in australia using the artificially high australian dollar. (or manipulate the reverse, crash australian dollar, buy asset, than pump it up)

          or oppositely, arbitrage the speed of bancor movement between central bank vs. the regular currency. The two parallel currency system couldn’t possibly has perfect exchange rate. there bound to be inefficient exchange mechanism one can arbitrage… people are definitely going to short/swap the two.

          do it big enough using pile of moneys, we are back to problem of uneven flow and unstable exchange.

          1. alex

            Timmy: “ok. so can a country still purchase other country’s courency?”

            No, the bancor approach would have prevented that. A country’s “forex” reserves could only be in bancors, and bancors could only be held/used by central banks. And there would have been limits placed on those reserves. Excessive bancor reserves (resulting from large current account surpluses) would result in a country’s currency being revalued. If that still didn’t work then their bancor reserves would be taxed. Keynes was very much aware, based on historical example, of the importance of keeping trade reasonable balanced, and how panics and excessive international capital flows could be destabilizing. There’s really nothing new about this stuff.

    2. alex

      “I also don’t see SDR or Bancor working for an extended period because it means mercantilist countries lose control of their currency valuation.”

      If persuasion doesn’t work try coercion. Sure we can’t force a sovereign country like China to join the bancor group, but you also can’t stop a sovereign country like the US from imposing serious tariffs on China if it doesn’t.

      “I can’t see China giving the IMF power over value of the yuan. Especially since the U.S. has de facto veto power in the IMF.”

      I agree that the current structure of the IMF is intolerable for a bancor group.

      1. purple

        Re; Tariffs. I think that will happen.

        In my opinion China is structurally incapable of integrating into the world economy like the US and Europe envision. Too big, too much deep poverty, geographic geo-politcal weakness, a centralized and autocratic government. All this pretty much guarantees the type of trade policies they pursue.

  6. a

    “The US, like any country that issues its own currency, does not have to “fund” its own deficit spending.”

    It doesn’t “have” to, but funding it by printing money is usually not a wise idea, because doing so excludes funding by the normal method of issuing bonds for some time to come (who wants to own a bond by a country that has shown it is willing to print money?). Thus, choosing to print money means that a nation can only fund its deficit spending by printing money, and that’s a game that quickly ends.

      1. Dave L

        No, it isn’t. Under normal circumstances, Treasury issues a bond by selling it to the financial markets. They use their own funds to buy; no money is created.

        On the other hand, when the Fed buys directly from Treasury, it IS creating money — which is why this is ordinarily frowned on.

        1. Burt

          It is printing money. Because the so called “selling” is merely a book keeping trick. Primary dealer/household/mysterious buyers… aka. US gov is the one covering the whole.

          Under normal time, your claim is correct. But at the moment, it’s all Ben’s printing creating those money to buy the bond.

          1. psychohistorian

            When the bailouts started happening it became obvious that the next long term bubble would be the US dollar.

            While we may have most of the nukes I really don’t believe that the rest of the world will respond kindly to threats of their use to maintain our inflated and unsustainable way of life. But given the manufactured ignorance of much of the American public the ruling elite will have more public backing for their threats and maybe fascism with an American face really does have a future.

    1. Jeff65

      a said:

      “Thus, choosing to print money means that a nation can only fund its deficit spending by printing money, and that’s a game that quickly ends.”

      The “game” need not end quickly or at all. Governments also have the power to extinguish the money they have printed.

  7. Debra

    But… do we repeat a course of action while anticipating different results ?
    One of the ways we define our identity is through repeating actions.
    We repeat in spite of all logic.
    The process of redefining identity is slow, cumbersome, incredibly painful, for the most part, and often achieved over an individual’s a society’s ? almost dead body.
    It is helpful to understand the role of repetition in identity, I think.
    AND to understand that it is not logical in any Cartesian sense.
    It is essential to understand also that knowing who we are… is much more important to us than.. being happy, being rich, etc. MUCH more important. Contrary to what we’ve been led to believe…
    I’m sure that it’s already been said here that this crisis concerns the future of the nation state, its legitimacy, at the same time as it concerns our globalized economy.
    AND the ideas (or lack of them) that are behind our current disenchantment with the nation state, by the way.
    The political crisis in representation, even.
    Perhaps it would be a good thing if we stopped compartimentalizing knowledge to the extent that we have been doing for quite some time.
    So that we could look at politics, philosophy AND the economy as aspects of human life that are tied together, and interdependant.
    Exit the expert culture, in other words..

    1. Toby

      Here here!

      From “Web of Life” by Fritjof Capra:

      “The origin of our dilemma lies in our tendency to create the abstractions of separate objects, including a separate self, and then to believe that they belong to an objective, independently existing reality. To overcome our Cartesian anxiety, we need to think systemically, shifting our conceptual focus from objects to relationships. Only then can we realize that identity, individuality, and autonomy do not imply separateness and independence. As Lynn Margulis and Dorion Sagan remind us, “Independence is a political, not a scientific term.””

      We cannot emerge from this impasse while keeping everything in its old box. Time is very high to think outside it.

    2. Tom Crowl

      @Debra

      Your comment does a great job of cutting to the heart of things!

      I’m convinced we amateurs are where the future lies (if there is one at all).

      The reluctance of ‘elites’ to confront false assumptions which have served them well is a recurring problem in civilization… Ultimately its their own self-delusion that will destroy them.

      The trick is to avoid dragging the whole civilization down too. Unfortunately, advanced civilizations may suffer from a problem of increased vulnerability by their failure to understand the requirements for sustainability.

      Personal Democracy: Disruption as an Enlightenment Essential
      http://culturalengineer.blogspot.com/2010/06/personal-democracy-disruption-as.html

      On the Birth of the Global Social Organism
      http://culturalengineer.blogspot.com/2009/05/on-birth-of-global-social-organism.html

      The Problem in Scaling Altruism: Where’s the Intelligent Life?
      http://culturalengineer.blogspot.com/2010/04/problem-in-scaling-altruism-wheres.html

      P.S. Kudos also to Attempter who clearly also understands the need for taking a new look at the mechanisms of group decision… (see his post on the need for a new Constitutional Convention).

      1. NOTaREALmerican

        Totally disagree.

        There’s got to a priest class (expert class). This isn’t because the nobility wants it, it’s because the nobility knows the peasants demand it. The priests provide a calming story for the dumbasses. This allows the dumbasses to watch more of American Idle, which make the happier.

        Intellectuals often get the cause and effect of life backwards. It’s because they seldom hang with the peasants, it causes bad conclusions to be formed.

        1. Toby

          We don’t need dumbasses. We can’t afford as a species to manufacture dumbasses. Education is one the first things that desperately needs to be revolutionized.

  8. attempter

    The new package of full frontal austerity assaults with creeping mercantilism, best exemplified by recent developments in the European Disunion, is a signal that the Bailout is running out of room, politically and especially in terms of sustaining its own ponzi weight.

    For the elites to continue to prop up their power and continue their rent extractions, they’ll have to start deglobalizing and throwing one another overboard, even as they all turn form indirectly robbing their own peoples (the Bailout) to directly robbing them (“austerity”).

    Meanwhile Geithner’s demented contortions trying to figure out how Bailout America can resume exponential debt consumption while also balancing its trade while also continuing the Bailout while also completely liquidating the workers, remain as absurd as ever.

    Yes, as the post says, everyone seems intent on replicating the crash of 07-08, bigger and better than ever, and sooner rather than later.

    Here’s a longer comment on the subject:

    http://attempter.wordpress.com/2010/06/10/eurozone-lethal-zone/

  9. Francois T

    “Yes, as the post says, everyone seems intent on replicating the crash of 07-08”

    When it comes to the higher ups, I always remember the favorite line of Agent Scofield in The Matarese Circle: “The bastards never learn.”

    That is, until the pain is so high that change is inevitable. Since the 07-08 crash didn’t produce enough pain among the asshats inhabiting the corner office and immediate surroundings, chances are something more, robust and hard-hitting shall be needed.

    Trouble is, we of the hoi polloi, will suffer too. Like we needed that, right?

  10. i on the ball patriot

    Yves said; “The failure to change the structure, operation, or leadership of major financial firms means they are just about certain to repeat the same behavior that led to mind-numbing bonuses in 2007 and 2009.”

    Its not just financial firms, its the structure and elite arrogance in all major corporations and the macro linkage of financial crisis impact is the same.

    Look at what BP and its machinations — no we are not talking accident here — have set in motion. Arrogant BP creates an environmental nightmare. Snowbama then threatens Justice to suspend their dividend (about 9 billion, a lot of which is in Brit pension funds), demands that laid off oil workers be paid by BP, BP stock tanks, no one is big enough or suitable enough to buy them (BP), and the environmental crisis in the gulf now becomes a severe political crisis.

    Well now, won’t the Brits, and other European nations want to sue JP Morgan, Goldman, etc., for bubble and derivative drilling in their economies and creating a gusher of deflation?

    Of course, and they will be justified! Pray the scam court systems can contain all of the anger.

    Corporations with budgets so large that they dwarf the budgets of nation nation states, and impact the planet in proportion to their wealth, have to be put under global citizen control.

    Deception is the strongest political force on the planet.

  11. mike dayton

    Having followed your blog the last two years, and just finished your book a few thoughts occur. With trepedation I advance the thought that Germany, like in the story the Masque of the Red Death, is walling itself off from the EU and will suffer contageon and diminishment as their markets are depleted. China is remaking itself into a modernstate in the only way that it can: through the support of national “champion” industries and doing anything short of piracy to get trade monies.

    In the US the situation is different since we haev now a sort of de facto aristocracy with about 20 million dependents. They do not want to part with their accumulation even on the chance it would lead to an increase, because their interests diverge so sharply from the majority of citizens. Since the essence of finance is the control of assets through leverage, and leverage is determined by cash flow that is sustainable we have hit the end game of our modus operandi. We somply can pay no more thus: I NEED A RAISE !

    OK well that aint gonna happen BUT how about a thirty sic month window to allow individuals to pay off cc debt at say 4% on balances over 25,00.00? Then reset cc limits to no more than 18.7%, which is still usury.

    Additionally, one way to somewhat reinflate housing prices is to allow judges to negotiate outstanding mortgage balances. This would lead to buyers not only owning their homes but actually MAINTAINING THEM.Still, in the end we are all poorer for a long time and had better get used to it.

  12. Siggy

    Is the unfolding turmoil of sovereign imbalances a new crisis; or, is it merely a continuation of the one at hand?

    Reinhart & Rogoff make a powerful argument as to the folly of attempting to borrow one’s way to propserity.

    There is a political choice to be made. Liquidate unserviceable debt; or, debase the currency; or, do both.

    Looking to the core of the Transaction. A medium of exchange that has no inherent value other than the imprimater of the sovereign is only worth what it will buy. If there is too much of the medium there will be rising prices in recognition of reduced purchasing power.

    The mercantilism we are confronted with is based on the differential between labor wage rates and living standards. If wages and living standards are not brought into balance, there will be no balance of economic activity between sovereigns.

    Effectively, we are at war. In that light, what do we chose? A stable currency, or continued debasement of the fiat currencies whose legitmacy is founded in sovereign fiat.

  13. Vangel

    …The US, like any country that issues its own currency, does not have to “fund” its own deficit spending. Its constraint on “printing” is inflation, and with labor having pretty much no bargaining power, that risk seems remote. In addition, any country that was to assume the reserve currency role would have to be willing to run trade deficits, and none of the candidates-in-waiting seem keen about the idea.

    I have a problem with this argument. It isn’t labour that the US has to worry about but how its creditors look at the currency that it continues to devalue via the printing presses. It is quite clear that the Chinese are worried about the status of the USD as a reserve currency and want to hedge their exposure. One one to do that is to use their ample reserves to buy access to commodities, build needed infrastructure, and purchase companies abroad, preferably companies that have a great deal of debt on their balance sheets. It is not too difficult to imagine a run on USTs and the USD some time in the future that could end with a major devaluation. While that would hurt the USD based treasuries held by China the damage would be offset by the real decline in the long term debt that was used by Chinese companies to fund their investments. Such a move would also increase the ability of Chinese consumers to bid for scarce resources even as Americans are forced to cut back on their use of energy, food, etc.

    I find it interesting to speculate on what happens if the USD loses its position as the globes premiere reserve currency, much as the UK did when the Pound Sterling took a dive. The Chinese will still have all of their brand new bridges, buildings, roads, factories, electrical generation plants, train stations, airports, etc., for use by consumers and residents. On the other hand, the US, which has little in the way of savings, will find it difficult to get funding for an upgrade on its aging infrastructure and will have a hard time paying for their massive foreign policy commitments. It is hard to run an empire on a fiat money system when others refuse to lend to you and all you really have is access to the printing press.

    1. NOTaREALmerican

      Re: It is hard to run an empire on a fiat money system when others refuse to lend to you and all you really have is access to the printing press.

      Yes, but the myth of America is what keeps the rest of the world “investing” in our dollar. Why are we a save haven?

      (Queue patriot music…)
      Because America, the shining light on the hill – the most honest country in the entire universe (the country with the Green torch lady)

      (queue slow motion eagle…)
      – will forever be a bedrock of safety in a world full of risk..

      (queue slow motion flag…)

      See, it’s not only our dumbass peasants that believe this stuff, everybody does.

  14. tyaresun

    Yves,

    I find your comments on this post inconsistent with your comments in favor of a new fiscal stimulus in the USA. I believe that a fiscal stimulus now without any other action would mostly leak outside without significantly lowering the unemployment rate in the USA.

    Please enlighten.

    Tyaresun.

  15. Cathryn Mataga

    So maybe there is an upside to the Greek
    debt problems? If the EU can keep the
    weaker economies in a permanent state of
    crises, that drives down the value of the
    EURO and makes the export economies of
    Northern Europe more competitive?

    Ooh, I love these weird, non-intuitive kind
    of things. Maybe everybody is reading this
    whole situation completely the wrong way…

    1. Debra

      Um… more competitive TO SELL WHAT ??
      Financial derivatives, for example ??
      I’m not sure how well the industrialized global economy is doing (outside of China, perhaps…) at this stage of the game.
      Deserting the real economy for the phantom one of finance leads eventually to everyone waking up to the fact that… there IS no real economy any more, and we are sitting there.. in our gold, our fiat currencies, our silver, whatever, WITH NOTHING TO EXCHANGE FOR THEM…
      Even the ancient Greeks knew this. In a world less sophisticated in certain respects than ours, more in others…

  16. steelhead23

    So, if we are to continue to down the same road that got us here following a Sept 2008 that scared Hank Paulson paler than usual, exactly how bad does it have to get before there is a more global awareness that default, bankruptcy, and attendant horrors must occur before a sustainable economy emerges? Debt that cannot be repaid, won’t be. Following the course the U.S. is currently on will inevitably lead to further impoverishment of the proletariat which could lead to debtor’s prisons and other forms of coercion. BTW – the word for servitude is serfdom or serfs, not surfs which is waves.

    1. ArmchairRevolutionary

      The goal is not for the debts to be re-paid, but to be serviceable. If the debtor can pay the interest, but no more; then the lender has essentially subjugated the debtor to slave.

      1. NOTaREALmerican

        There are three peasants I work with that a proving this is exactly what peasants need too.

        All three are heavily in debt (two are constantly harassed by debt collectors) and all are still spending every dime they they have on new toys – and in one case even borrowing more money (the one not yet harassed by a debt collector). You just HAVE to have the latest iPhone, right?

        Unfortunately, sometimes the nobility gives the peasants the slavery they so desperately want.

  17. Ed

    “The US, like any country that issues its own currency, does not have to “fund” its own deficit spending. Its constraint on “printing” is inflation, and with labor having pretty much no bargaining power, that risk seems remote. ”

    I keep seeing this argument made. Could someone elaborate on it? The implication is that money for the U.S. government is literally free. The U.S. government could borrow ten times its GDP to build a footbridge to the moon, and there would be no implications.

    I find this hard to believe, but I am sure there is something I am missing here.

    1. steelhead23

      Actually Ed, I believe Yves was referring to monetizing the debt without the fear of inflation. The basic argument is that unless labor was able to demand higher wages, monetizing the debt (and quantitative easing) are relatively cheap policy choices.

      The U.S. supports deficit spending by selling debt instruments – Treasury bonds. Some fear that this is creating a debt burden that could explode if there was a bond market crack up and interest rates rose making it hard for the U.S. to meet its cash-flow obligations. Monetizing the debt would involve simply printing money (or jiggering electronic balance sheets). That has not happened, but could. The Fed’s quantitative easing process in which the Federal Reserve purchased, either directly or indirectly, large sums of T-bills is a bit of a hybrid in that U.S. debt is created but the market for that debt is manipulated by the Fed, increasing demand and keeping interest rates low. The bottom line is that financing such huge debt while the economy is shrinking should result in investors requiring a debt premium (higher interest rates) but due to the relative weakness of other sovereigns and market volatility, the U.S. enjoys high demand for its debt and resulting low interest rates. Thus, while things are bad for the U.S., they are worse for the rest of the G20 so party on. That there are enormous risks in following this path should be obvious.

    2. NOTaREALmerican

      I think it means that if I were a country – and issued my own currency – and I borrowed money from you, and you agreed to take my money (you sucker) then I could not default.

      Doesn’t mean you’d loan me more loot next time. But, of course you would… Because, I’m the most honest and noble country in the entire universe. Have I ever NOT paid on time? Beside, My rich and powerful friend – when your peasants are revolting OUR peasants will be worshiping at the alter of free-enterprise, making my great nation the one true safe haven for the scumbag rich people (queue: slow motion eagle).

      (

  18. Hugh

    Great comments. We have criminally stupid, not to mention simply criminal, looting elites, in the US and around the world. They didn’t prevent bubbles and the meltdown from happening the last time. They are doing nothing to avoid them now. So yes, of course, there will be more meltdowns and bubble bursts in our future. I know I am a broken record on this but this is why depression is inevitable.

    The American consumer is maxed out. So how can there be a worldwide recovery based on American consumer spending? Not going to happen. I say that if we are to get out of this there must be real leadership from the US to overcome these “sauve qui peut”, every man for himself national approaches. But the key word here and in many of the comments is “must”. “Must” used in conjunction with our world’s elites means it ain’t going to happen. They only think short term and only about themselves.

  19. Matt Franko

    WRT Reinhart/Rogoff and their 90% threshold. I think what they have documented, is the level to which Govts that rely on external funding can go before the sources of the external funding cuts them off, ie this 90% debt to gdp level or so.

    Any country that would set up a system that relies on external funding then, either through govt debt denominated in a foreign currency or through a “peg” or convertable currency, should not expect to exceed this 90% level of debt to GDP based on history. Their economic policy makers should realize this before they set that kind of system up in the first place.

    Its a good thing we dont operate that way here in the US, or in the UK, or Japan or other similar jurisdictions. This way we dont have to worry about this 90% external funding limitation.

    Thanks Reinhart and Rogoff, you have stumbled upon the true fiscal contraints of the scoundrel nations!
    Resp,

    1. alex

      The 90% threshold has nothing to do with whether the funding is external (foreign) or internal (domestic). Nor did R&R suggest that it was a tipping point that automatically leads to crisis. Rather they said that > 90%/GDP debt slowed future growth. However there are a number of outstanding exceptions. For example, the US had federal debt of 125%/GDP after WW2, yet was entering a period of outstanding growth. Therefore even fans of R&R’s work question whether such a simple rule is broadly applicable.

  20. Doug Terpstra

    Let’s review. Banks can borrow money for nothing and earn guaranteed interest at no risk by lending it directly to the taxpayers who are using it to buy their toxic defaulted loans and foreclosed junk assets. Do I have that right? And this is not a racket, but perfectly legal?

    Ah, the elegance of the “free” market is breathtaking. Chartering a bank is even better than a ScAmway pyramid scheme.

    1. NOTaREALmerican

      Not only a racket, but the best part is the peasants still think “those people” are ripping them off more than the banksters.

      It’s “those people on welfare that ruined this great and glorious nation, I tell ya!! And day hate da troops too!”.

    2. alex

      Doug Terpstra: “And this is not a racket, but perfectly legal?”

      Why do you assume ‘racket’ and ‘legal’ are mutually exclusive?

  21. Ed

    Thanks for the responses to my earlier question.

    I don’t think its as easy as being able to inflate away your debt, but keep wages low, so there is no actual inflation (though actually the French did exactly this in the eighteenth century). The inflation would show up in goods demanded by the wealthy, who aren’t hurt by low wages, such as real estate and college education! And this has happened, with just as damaging an effect on the overall economy.

    If the idea is that our elites can be economically irresponsible because elites in other countries are being even more irresponsible, to risks with that strategy are so obvious I doubt its being consciously pursued. Besides, there is only one planet. A world where every elite in every country is irresponsible at the same time eventually won’t have much in the way of investment markets.

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