Auerback/Parenteau: Jackson Hole will be a Black Hole for Those Hoping for QE3

By Marshall Auerback, a portfolio strategist, hedge fund manager, and Roosevelt Institute Fellow, and Rob Parenteau, CFA, sole proprietor of MacroStrategy Edge, editor of The Richebacher Letter, and a research associate of The Levy Economics Institute. Cross posted from New Economic Perspectives

Those leading the charge for “fiscal consolidation” now seem positively shocked by the violent gyrations in the stock market, as expectations rapidly seem to be shifting toward an “L” shaped recovery or worse – a possible global recession. To those of us on this blog who have consistently downplayed the prospects of global recovery in the midst of widespread private sector AND public sector retrenchment, none of this sadly comes as a surprise. We are, as Bill Mitchell noted recently, experiencing a “self-inflicted catastrophe”, largely because of dangerously destructive myths in regard to the efficacy (or lack of it) in regard to fiscal policy. But in spite of the shrill rhetoric of the fiscal austerian brigades, the markets are beginning to intuit that a nation cannot have a fiscal contraction expansion when all other spending is flat or going backwards and yet that remains the general trajectory of policy.

To reiterate, today’s growing economic malaise is unsurprising to those of us who viewed the upturn in the global economy in the aftermath of the Lehman bankruptcy largely as a consequence of the coordinated fiscal expansion that was undertaken at that time, NOT the embrace of “quantitative easing” or other forms of monetary policy ‘stimulus’. By the same token, it is equally easy to see the current accelerating downturn as a product of the premature withdrawal of said stimulus.

No less than the new IMF head, Christine Lagarde, has recently counseled against letting fiscal brakes stall global recovery, even though the IMF has hitherto consistently been at the forefront of calling for more “fiscal consolidation.” Indeed, it is manifestly clear that the governments which have drunk from this particularly glass of Kool-Aid most enthusiastically – Ireland, Greece, Latvia, Spain – are now seeing depression-like economic data.

Given prevailing political paralysis and the obstinate desire of politicians to make things worse as unemployment grows and riots continue to multiply on the streets (see the UK as Exhibit A), a number of commentators and policy makers have shifted focus back to monetary policy. One picks up this kind of chatter on Wall Street, where there exists a residual hope that somehow Big Ben will use this weekend’s Jackson Hole gathering to ring the bell for a form of QE3.

It’s hard to see why this should work out any better than QE2 or other variants of quantitative easing tried before. (See here, here and here for fuller explanations.) As Randy Wray has pointed out several times, “quantitative easing” is a slogan, not a policy. During the entire period in which it was implemented, US GDP grew at a sluggish 1-1.5% (or thereabouts) and unemployment actually rose.

Notwithstanding the evidence, hope still springs eternal in the financial markets, where there remains the perennial hope that the Fed will “do something.” And, as market practioners we hear this sort of guff every single day. There appears little doubt that Mr. Bernanke will try to throw more spaghetti at the wall, regardless of internal discord at the Fed or the external political heat. But we are at a loss as to which strand of spaghetti will actually stick in terms of a) capturing the imagination and confidence of investors enough to put the risk on trade back on for say another 4-6 quarters (or even 4-6 months), and/or b) driving US real GDP growth above trend for 2-3 years. Which makes us think unless there is some nuclear option we believe he is prepared to launch – like pegging S&P futures for 10%+ annual appreciation or something really out of the box like that – there is not much to be gained by trying to anticipate his next flinch.

We are at the point of watching the trout thrash around at the bottom of the boat, and I think part of the higher required risk premium we are in seeing in asset markets today is that the Fed Chairman is now understood to be no more powerful than the Wizard of Oz. And this is a very, very big safety blanket that is being ripped out of the hands of a whole generation of institutional investors (especially the long only guys). Part of the severity of the recent corrections has to do with the growing recognition that the prior fiscal and monetary policy approaches have been either exhausted or politically blocked, and so now it is up to the private marketplace and the invisible hand to do its magic.

Maybe an announcement of pegging the 10 year at 1% until real GDP has grown for above 3% for 1-2 years would do it – but we are already near 2%, and people seem to realize the interest rate sensitivity of economies is lower after balance sheet recessions. Maybe an open ended QE with a similar real GDP criteria would do it; but investors must be wondering why QE2 failed to keep equity prices on a permanently higher trajectory.

Furthermore, they may have noticed that the ensuing commodity price inflation tends to trip up consumers who face slow job growth, low wage growth, and credit contraction. If anything, QE2’s impact was antithetical to growth prospects to the extent that it encouraged additional speculative activity in the commodities complex, helping to generate additional price pressures in food and oil at a time when stressed consumers could ill-afford such rises. More recently, thanks to investment, speculative and manipulative demands for oil, the Brent oil price has held up recently as the stock market has swooned. So there is a risk that the introduction of a third round of quantitative easing could well re-establish these trends.

There is something of a precedent: the first half of 2008. The global recession and credit crisis was underway. Stock prices were falling. Commodity prices including the price of oil should have fallen. Instead, thanks to the above financial market demands, the oil price soared. Without doubt that deepened the Great Recession. In the event that a new form of QE3 was introduced this weekend, that would represent is the worst of all possible worlds in terms of global growth prospects moving forward. At the very least, if the recent incipient perverse divergence in the Brent oil price and stock prices continues, the risk of a recession in the U.S. rises.

Maybe the announcement that the Fed disagrees with the Treasury about the wisdom of an ever strengthening dollar, and will henceforth unilaterally intervene to produce a steady 10-20% depreciation per year until the real GDP criteria is hit, is enough to capture investor imaginations, but we suspect they would then begin to wonder about where beggar thy neighbor policies lead.

The fact that the markets are now calling for more monetary stimulus (even as most quail against any additional fiscal stimulus on the misguided grounds of “national insolvency” ) simply reflects the intellectual cul de sac at the heart of most mainstream economics, with its manifestation of the neo-liberal bias towards monetary policy over fiscal policy. What will motivate consumers to borrow if they are scared of losing their jobs? Why would a company borrow if they expect their sales to be depressed? The problem is a failure of demand which has to be addressed via demand measures – that is, fiscal policy.

We think investors are realizing that is a null set, and so whatever Mr. Bernanke announces will have a very short half life, a la pegging the 2 year. Now perhaps in regard to sentiment, technicals, and the extreme gyrations of recent weeks, we might well get some recovery in the equity markets. But given the prevailing trajectory of policy, where we are debating tax rises versus government cuts (as opposed to the more economically productive debate of government spending versus tax CUTS), it’s hard to feel optimistic about global growth going forward. The recent turbulence witnessed in the capital markets might be a foretaste of what Main Street is about to experience again.

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    1. Tao Jonesing

      I agree Adam. At the same time, I don’t think Bernanke et al. want a QE3 at this time.

      What the Fed is attempting is what I call “managed deflation.” This requires plausibly creating market up-cycles and down-cycles at will. We’re beyond politics now and into basic trust in markets. If that basic trust is lost, so is the Fed’s power to drive the so-called natural business cycle. Bernanke et al. need to let the field lie fallow so they can point to the “disasterous” consequences in the stock market (and the fallout in the real economy) to remind everybody that Milton Freidman and Anna Schwarz were right back in 1961: the Great Depression was the Fed’s fault. (This is, of course, utter bullshit.)

      I look forward to seeing what happens on Friday. I’m all in cash.

  1. gs_runsthiscountry

    No more monetization coming, even as the country sits on the edge of their seats.

    And right now there are 535 + POTUS with their popcorn ready for Friday, truly sickening!

    In any event, this is all that matters:

    Then and only then can we get FP1.0 rolling (aka Fiscal Policy 1.0).


  2. avgJohn

    No more fiscal stimulus, no more money printing. Time for shared pain. Throwing 20 – 50 % of the population under the bus to maintain the staus quo isn’t an acceptable solution.

    We are living a gigantic lie! More extend and pretend isn’t acceptable.

    Kill the beast and start over!

    1. NOTaREALmerican

      Nonsense! There is only ONE solution.

      The Global Anti-Space Alien Defense Program.

      We must borrow more money,
      To pull forward demand,
      Which will create more jobs,
      Causing unlimited prosperity,
      So we can pay off our debts.

      (The Keynesian prayer.)

        1. Sid Finster

          please no more brilliant tongue-in-cheek ideas please.

          someone might take them seriously.

        2. Tiercelet

          Government built an awful lot at that time too. Even more than it burned.

          The secret is you have to have (1) clearly defined goals and (2) a level of public participation that makes profiteering obvious and attaches to it seriously negative consequences. And you have to insist on (3) honest accounting even more than on meeting an urgent target. The USSR screwed (2), the Great Leap Forward screwed up (3).

      1. Binky the Bear

        WW I with the US Railway Administration and other efforts to nationalize, standardize, and upgrade production of war materiel and supplies?
        Seriously, government has done so many things so well we have become spoiled and ignorant as a people. It is the same phenomena as social security and medicare recipients joining the Tea Party: Magnum, foot, Boom, Winning!?

  3. burnside

    If the object is to visit inflation on the Chinese, to break the peg, to begin suppressing the long bond rate, then we may have something announced or hinted at.

    Not every policy is formulated to prop equity markets or to assist GDP directly or immediately. If such a move fails to advance your chosen metrics – and rather than to conclude the implementers are foolish or misguided – consider the goal or goals may not be obvious, or not the ones you’re watching.

  4. mannfm11

    We are far from austure. Somehow Auerbach, Krugman and others merely believe that the world is going to trade their resources for our toilet paper. This is banker economics and a clear trip to third world status in a matter of a decade for so for the US. You guys look down the nose of Austrian economists, as if they live in the stone age while weaving your debt bubbles and fraudulent government finance while men like Ludwig Von Mises warned what those programs do. Spending by the US government is a trillion a year over normal and it stopped nothing. The thinking is like the proverbial ant on the log in the river thinking he is running the river.

    1. Vinz Klortho


      If you disagree with MMT, then dispute the premises of MMT that you believe (and maybe can prove) are false.

      Otherwise, stop throwing up irrelevant strawmen.

      I’ve been to your blog site, and read your articles. MMT is quite a bit more logical and well thought out than anything you or Hypertiger have ever written.

      And writers like Auerbach are actually comprehensible, unlike your statements such as “all the money is all the money”. WTF does THAT mean?


    2. Marshall Auerback

      MannFM11, We don’t look down our noses at anybody, although we prefer to keep the argument on rational plane and devoid of the sarcasm and personal vituperation which characterizes responses such as yours. All of the prevailing evidence shows that firms are constrained by lack of spending at present and that the private sector is in a vicious cycle of spending paralysis. It suggests that the only way ahead is for the government to increase aggregate demand (via fiscal policy) but that the ideological obsession of the elected politicians is blocking the only growth option currently available. We are in a state where our politicians are deliberately stopping the economy from growing.
      As I’ve said before, nothing wrong with PUBLIC deficits and debt. It’s PRIVATE that’s the problem. The spending arose because tax revenues collapsed as the economy collapsed and the automatic stabilisers came into effect. Yes, there was also the stimulus, but this probably added to GDP.

      I’ve said this before, but I’ll repeat it for your benefit: We hear politicians and the media arguing that the current federal budget deficit is unsustainable. I have heard numerous politicians refer to their own household situation: if my household continually spent more than its income year after year, it would go bankrupt. Hence, the federal government is on a path to insolvency, and by implication, the budget deficit is bankrupting the nation.

      That is another type of fallacy of composition. It ignores the impact that the budget deficit has on other sectors of the economy. Let me go through this in some detail, as it is more complicated than the other examples.

      We can divide the economy into 3 sectors. Let’s keep this as simple as possible: there is a private sector that includes both households and firms. There is a government sector that includes both the federal government as well as all levels of state and local governments. And there is a foreign sector that includes imports and exports; (in the simplest model, we can summarize that as net exports—the difference between imports and exports—although to be entirely accurate, we use the current account balance as the measure of the impact of the foreign sector on the balance of income and spending).

      At the aggregate level, the dollar spending of all three sectors combined must equal the income received by the three sectors combined. Aggregate spending equals aggregate income. But there is no reason why any one sector must spend an amount exactly equal to its income. One sector can run a surplus (spend less than its income) so long as another runs a deficit (spends more than its income).

      Historically the US private sector spends less than its income—that is it runs a surplus. Another way of saying that is that the private sector saves. In the past, on average the private sector spent about 97 cents for every dollar of income.

      Historically, the US on average ran a balanced current account—our imports were just about equal to our exports. (As discussed below, that has changed in recent years, so that today the US runs a huge current account deficit.)

      Now, if the foreign sector is balanced and the private sector runs a surplus, this means by identity that the government sector runs a deficit. And, in fact, historically the government sector taken as a whole averaged a deficit: it spent about $1.03 for every dollar of national income.

      Note that that budget deficit exactly offsets the private sector’s surplus—which was about 3 cents of every dollar of income. In fact, if we have a balanced foreign sector, there is no way for the private sector as a whole to save unless the government runs a deficit. Without a government deficit, there would be no private saving. Sure, one individual can spend less than her income, but another would have to spend more than his income.

      While it is commonly believed that continual budget deficits will bankrupt the nation, in reality, those budget deficits are the only way that our private sector can save and accumulate net financial wealth.

      Budget deficits represent private sector savings. Or another way of putting it: every time the government runs a deficit and issues a bond, adding to the financial wealth of the private sector. (Technically, the sum of the private sector surpluses equal the sum of the government sector deficits, which equals the outstanding government debt—so long as the foreign sector is balanced.)

      Of course, the opposite would also be true. Assume we have a balanced foreign sector and that the government runs a surplus—meaning its tax revenues are greater than government spending. By identity this means the private sector is spending more than its income, in other words, it is deficit spending. The deficit spending means it is going into debt, and at the aggregate level it is reducing its net financial wealth.

      At the same time, the government budget surplus means the government is reducing its debt. Effectively what happens is that the private sector returns government bonds to the government for retirement—the reduction of private sector wealth equals the government reduction of debt.

      Now let us return to the Clinton years when the federal government was running the biggest budget surpluses the government has ever run. Everyone thought this was great because it meant that the government’s outstanding debt was being reduced. Clinton even went on TV and predicted that the budget surpluses would last for at least 15 years and that every dollar of government debt would be retired.

      Everyone celebrated this accomplishment, and claimed the budget surplus was great for the economy.

      In the middle of 2000, I wrote a contrary opinion for the Levy Institute. I made several arguments. First, I pointed out that the budget surplus meant by identity that the private sector was running a deficit. Households and firms were going ever farther into debt, and they were losing their net wealth of government bonds.

      Second, I argued that this would eventually cause a recession because the private sector would become too indebted and thus would cut back spending. In fact, the economy went into recession within half a year.

      Third, I argued that the budget surpluses would not last 15 years, as Clinton claimed. Indeed, I expected they would not last more than a couple of years. In fact, the budget turned around to large and growing deficits almost immediately as soon as the economy went into recession.

      And of course we still have large budget deficits. No one talks any more about achieving budget surpluses this decade; almost everyone agrees that we will not see budget surpluses again in our lifetimes—if ever.

      The question is whether the US government can run deficits forever. The answer is emphatically “yes”. If you look back to 1776, the federal budget has run a continuous deficit except for 7 short periods. The first 6 of those were followed by depressions—the last time was in 1929 which was followed by the Great Depression. The one exception was the Clinton budget surplus, which was followed (so far) only by a recession.

      Why is that? By identity, budget surpluses suck income and wealth out of the private sector. This causes private spending to fall, leading to downsizing and unemployment. The only way around that is to run a trade or current account surplus.

      The problem is that it is hard to see how the US can do that—in fact, our current account deficit is now around 4% of GDP. All things equal, that means our budget deficit has to be even larger to allow our private sector to save.

      I don’t want to give the impression that government deficits are always good, or that the bigger the deficit, the better. The point I am making is that we have to recognize the macro relations among the sectors.

      If we say that a government deficit is burdening our future children with debt, we are ignoring the fact that this is offset by their saving and accumulation of financial wealth in the form of government debt. It is hard to see why households would be better off if they did not have that wealth.

      If we say that the government can run budget surpluses for 15 years, what we are ignoring is that this means the private sector will have to run deficits for 15 years—going into debt that totals trillions of dollars in order to allow the government to retire its debt. Again it is hard to see why households would be better off if they owed more debt, just so that the government would owe them less.

      There are other differences between the federal government and an individual household. The government is the issuer of our currency, while households are users of the currency. That makes a big difference, and one explored in many other CFEPS publications. However, the purpose of this particular note is to explain why we cannot aggregate up from the individual household situation to the economy as a whole. The US government’s situation is not in any way similar to that of a household because its deficit spending is exactly offset by private sector surpluses; its debt creates equivalent net financial wealth for the private sector. Straight accounting 101.
      No need to respond to this with yet more personal insults.

      1. bold'un

        But why is it so difficult to reduce the foreign deficit? It may be difficult to export more, but apart from some energy, the US is potentially self-sufficient and should be able to import less.

      2. Greg

        I have to agree with Mannfm on this matter. I may not a trained economist but I am a trained engineer and this education leads one to have to deal with the reality of taking things from concept to practicality. I have been also been fanatically devoted to understanding economics for many years although without formal education.

        I think Marshall’s MMT response is technically correct for the most part. The problem I see is that MMT describes pieces of the puzzle quite accurately, but fails to see the big picture consequences.

        Of the top of my head, I see the following weaknesses. First, there is a lot of financial pain that has occurred for most people because of the inflationary effect of governments printing money. I really don’t think MMT takes into account the unfair distribution of pain that occurs here. I also think it leads people to feel like financial wealth of the private sector is increasing when in reality it is an illusionary effect of inflation. Remember that the official inflation numbers are likely under representing reality.

        Second, the MMT hypothesis may hold fairly well when government debt is maintained below a critical level (difficult to define precisely). When the debt starts spiralling away from the real economy however, like it has for the last decade, unintended consequences especially bad investment decisions, and black swan events start popping up all over. MMT is not well-enough developed to account for these factors and from what I have read, I don’t think MMT even considers negative consequences as a possibility using the current environment as baseline.
        Third, why is history full of failures when governemnts try to print their way out of trouble? I know MMT trys to account for how those governments made mistakes and that if they stayed true to the MMT philosophy they might have avoided failure. But I would bet that this is an example of MMT having the puzzle pieces individually defined but not being able to see the complete picture after assembly.

        1. Vinz Klortho


          I’m an engineer as well, and pretty comfortable with math and simulation.

          MMT specifically states that the OVERRIDING limitation on the govt’s ability to spend money is INFLATION. Period.

          MMT also posits that the issuance of debt by the govt. is a choice, and not really necessary from any practical point of view. Borrowing controls interest rates, and is not required for govt spending.

          If the govt tries to spend in excess of the resources available in the economy, inflation will result, unless they raise taxes.


        2. Tiercelet

          Prices rise because of an increase in demand for a particular good, in excess of the elasticity of supply. This affects the whole economy, and becomes “inflation” rather than an increase in the price of eggs, when the good is a necessary input for all/most other goods — i.e. when it’s labor or energy — or when entire sectors are affected at the same time. Inflation doesn’t happen because the government prints money; it happens because the government gets in bidding wars with the private sector over goods (or when labor is too scarce to support government purchases). (Or even private ones — like after the Black Death in Europe…)

          What finally made me understand this was thinking about Medicare. Some people have voiced a concern that when the Baby Boomers retire, if the government tries to print money to provide medical care for them, this will cause inflation. Then I thought about it: how would the picture be different if we’d been diligently saving up all along for the Boomer retirement? It wouldn’t be — both are demand-driven, increased bids for a scarce resource. If anything, we’d be worse off with the “pay it out of Medicare’s vault of t-bills” scenario, because the reduction in aggregate demand while we saved up the money would have meant years of slower economic growth, and thus a lower GDP at the point where the expenditure occurs — so the expenditure would be relatively larger.

          MMT deals with inflation by remaining relentlessly focused on the real economy and its potential output.

          “Second, the MMT hypothesis may hold fairly well when government debt is maintained below a critical level (difficult to define precisely).”
          It’s defined very precisely. Government can create and spend money in a non-inflating way so long as the total public and private sector demand does not exceed the productive capacity of the real economy. Taxes, threatened taxes (sales taxes) or other means can be used to reduce private-sector demand and give the government headroom to spend. That’s why we had rationing in World War II — so that the government could satisfy national-priority spending by restricting realized private-sector demand for steel, beef, nylon, etc. rather than by driving up the price for certain commodities through paying more for them (which would’ve required wage increases and thus spread inflation across the economy).

          “When the debt starts spiralling away from the real economy however… unintended consequences especially bad investment decisions [happen]”
          I’d argue (on my own) that this is due to distributional issues rather than quantity-of-money issues. Basically rich people (and institutions) have too much money, so it goes chasing too few returns, and does things like creating bubbles in the commodities markets.

          “Third, why is history full of failures when governemnts try to print their way out of trouble?”
          Depends on the example which we’d have to discuss elsewhere. Weimar Germany was a special case because of the foreign debts, some of them payable in real goods (as I understand it!). I suspect Zimbabwe’s hyperinflation is due as much to the fact that its real economy has collapsed as anything else — excessive seigniorage being basically just a regressive form of back-door taxation.

        3. Kraken

          MMT is not wrong. It’s just that the deficit spending has gone to the zombie banks and not the real ecomomy. In other words it’s been funnelled into unproductive financial products instead of concrete jobs programs which would help regular people. Socialism for the very rich, and austerity for the common folk.

      3. Tim

        Perhaps you are missing the long term picture of the Austrian point of view. The Austrian says growth tomorrow should NOT be a policy objective.

        Clearing the system of the problems (debt) first AT ALL COST is the objective.

        That means expect and implement contraction now and get through it. Businesses get destroyed, jobs get lost. Debt (most important of all gets erased (as I’ve mentioned before Debt is merely an expectation of future productivity if the productivity never materializes then the debt goes back to what it was: nothing).

        Then rebuild with a doable balance sheet.

        Just so it’s said as well, infinite growth (i.e. compounding growth) is IMPOSSIBLE. Period. The planet is physically finite. So why should growth beyond the rate of population growth (for which the planet will inevitably be a limiter) be a fiscal or monetary policy of a long time frame?

        Finally, what in the world does the acronym MMT stand for?

        1. Tiercelet

          Perhaps you are misunderstanding the point of everything above.

          Marshall Auerback is talking about an accounting identity. This says that so long as the government backs its spending with debt — so long as it issues a dollar of debt for every dollar it spends above taxation — it is impossible for both the private sector and the public sector to have a surplus.

          You could have both in surplus if you have a constant foreign exchange surplus (i.e. you are Germany) but it is obviously impossible for every country to be a net exporter. You cannot create a Germany without creating a Greece.

          So if Austrian economics views debt as a problem, of which the system must be cleared at all costs, then Austrian economics is fundamentally incoherent. Or it expects no sector to be indebted ever — which prescription would be fatal to the growth of business. Or it’s advocating that the government spend without backing its spending with debt issue (i.e. create new money) — which of course it can do, and very easily, and without affecting inflation much, if you’re not stupid about it — but somehow the idea of just printing money seems to drive Austrians into mouth-foaming rage, so I’m guessing that’s not their policy proposal.

          Your point about the ultimate hard limits on economic growth is well-taken, but sadly unrecognized by any major school of economics.

      4. solo

        @M. Auerbach: Thank you for illustrating the fallaciousness of Modern Monetary “Theory” (MMT). Where Y = total income/output, B = business sector, H = household sector, G = government sector, X = net exports, you define Y = (B + H) + G + X. Then, holding Y fixed, your governing tautology: “Now, if the foreign sector [X] is balanced and the private sector [B + H] runs a surplus, this means by identity [i.e., by definition] that the government sector [G] runs a deficit.” –This, please note, is a tautology, and a tautology is not a “theory” in any scientifically respectable sense.
        Then comes your featured non sequitur, an empirical claim (i.e., not a tautology): “. . . [government, G] budget deficits are the only way that our private sector [B + H] can save and accumulate net financial wealth.” This is empirically false, as demonstrated by innumerable instances of positive private net investment leading to increased total income/output (the Y that your tautology must hold fixed), with no change in the government sector (G). (This is what economists used to characterize as “expanded reproduction.”)
        In sum: Mr. Auerbach has no theory, only a tautology plus an empirically false claim. In fact Mr. Auerbach offers only a pseudoeconomic rationale for governmental deficit spending; another variant of the Keynesian contribution to the ideology of bourgeois reformism. (The government is the philanthropist that will save us from the evils of capitalism while conveniently . . . preserving the capitalist system.) The only remarkable thing about MMT is the gullibility of its swallowers, who evince a remarkable economic ignorance even as they display utter unawareness of the ideological content of their political proclamations. (“The poverty of spirit is no better revealed than by the little that satisfies it.” –G.W.F. Hegel.)

  5. Bill G

    1 The US can default.

    2 The US can inflate.

    3 The US can tighten its belt, cut all levels of gvt by 1/2, and start living freely and frugally.

    4 The Fed can try to blow another bubble like stocks maybe, gold maybe, and pray the wealth effect is enough to get the debt orgy started again.

    I pray for 3 but we’ll probably get 2 and a failure on 4.

  6. bold'un

    I agree that monetary and fiscal policy have no more to give. I wonder whether exchange rate policy does not need to do some more heavy lifting. I would advocate ‘cap and trade’ of the whole US import bill, where the government fixes the total import bill as “projected exports plus X” and then arranges a market in import licenses. This is not protectionism, since no industry or foreign country is aimed at, but would give space for some import substitution and domestic wage inflation. It is not a tariff either, because private exporters receive a better exchange rate while importers pay a worse one. Financial transactions stay at the usual mid-rate.
    In the end, if the US needs both greater private saving and smaller government deficits, the only way forward is to reduce the trade deficit. It is not ‘beggar thy neighbor’ to ensure that the import bill is linked to the export bill.

  7. /L

    Well this quote is from the 90s but just as timely:

    “But who cares about the economy today? … there is no discussion of the economy, only of the finances. Short- and long-term interest rates, budget deficits, equity quotes and whatnot are discussed, but not the economy.

    The “economy” is not the same thing as the “finances”. The economy is human activities, the way we create value by using our knowledge and talents. Today’s waste of human resources has no place in the cynical world of finance. “
    P G Berglund economist

    There is really only one important thing to put people at work to create value by using their knowledge and talents. As Keynes said look after the unemployment and the budget will take care of itself.

    But politicians and pundits in media is totally lost in the artificial fiction of monetary finances and have since long lost sight of the real economy.

    1. YankeeFrank

      Yep, what we really need is true vision — the vision to recreate a green energy, high tech manufacturing economy to lead the world into the future. We need a new deal which pumps $10 trillion into programs to forward these goals just like the original new deal, at the same time cleaning house on the criminals who have destroyed the legitimacy of the nation – the torturers and malefactors of great wealth — the fraudster banksters must be given life sentences to show that you cannot target the national economy without committing treason.

      This will happen when hell freezes over, so I’m off to places where vision still exists.

      1. Danb

        I agree with the stipulation that the world is reaching the limits to growth; and if we’re able to build a sustainable society it will treat resources with reverence and we’ll live less complex but probably more satisfying lives. But getting there is going to be hell. At my age, I feel like Moses.

      2. monday1929

        Two or three years in jail and clawbacks of all their bonuses would probably suffice.
        And they need to be called Failed Men.

  8. Ignacio

    Regarding this assertion:

    “Indeed, it is manifestly clear that the governments which have drunk from this particularly glass of Kool-Aid most enthusiastically – Ireland, Greece, Latvia, Spain – are now seeing depression-like economic data”

    I should mention that in Spain, regional and local governments have, al least in the first four months of 2011, engaged in very expansive policies more than offsetting state savings. Overall, public administrations have been still expansive for most of the first two quarters this year. By the way this will make it difficult for Spain to comply with the announced fiscal deficit consolidation unless cosmetics are widely applied.

    Thus, I would say that Spain has rhetorically, rather that enthusiastically, endorsed austerity so far.

  9. barkingtribe

    QE3 will happen, but not yet. The pausiblity is opaque, the wording a caterwaul. He’ll hope various intrepretations will cancel out the meaningful effects. The Ben Bernanke will move to the dinner table without elegance but gracefully pragmatic so as to keep the banker’s abilty to exhale at ease.

  10. Robert Asher

    Bring back….the New Deal. 1.HOLC (which valued houses at their depression assessments, forcing banks to take haircuts 1a)Psychotherapy for bankers afraid of scissors 2. Makework programs (WPA) and infrastructure programs (CWA) administered by people with integrity (could this be a problem if they are regular operatives of the Democratic Party? If so, hire unemployed engineers.)3. Glass Steagall. Note: Defense spending now involves so much co-production overseas that only government funded personal services jobs and road and bridge repair jobs will create a maximum number of jobs in the USA. Look. I know this is a politically unfeasible proposal but it is economically feasible. Lets not pretend that there are not real solutions to our stagnation.

  11. joebhed

    While the authors are correct that the debt-based money system is incapable of any successful ‘monetary’ maneuvers that would get real money activated at the M1 level of the economy, resort to fiscal stimulus is limited by the reality of the government’s budgeting constraint.
    While this may be seen as an ignorant, self-imposed limitation, it remains the truth.
    Why aren’t we talking about the alternatives of either what it would take to implement MMT in the future, and also the Dennis Kucinich proposal to end the debt-based money system?


  12. jct

    maybe we don’t care whether QE does anything for the economy, we just want higher financial markets.

  13. RueTheDay

    If the market expects QE3 (AKA another $500 billion or so in bond purchases) to be announced tomorrow, they’re nuts. It may (and likely will) happen eventually, but not tomorrow and not at Jackson Hole.

    AT BEST we’ll get an announcement that the Fed will hold its current portfolio of bond for another 2 years (like the recent interest rate announcement), maybe increasing the average maturity as their existing bonds mature, and maybe a cut in the interest rate the Fed pays banks on reserves. Or maybe there will be no announced change in policy at all tomorrow. But it won’t be QE3.

  14. Hugh

    Quantitative easing was never meant to repair anything. QE1 was a big siphon of wealth to the rich with the Fed expanding its balance sheet by paying full value for dreck. QE2 was flim-flam. I don’t think it added anything to the financial system. It’s primary effect was psychological. The real money keeping the casino going came from the ZIRP. This time around the shock is external coming from Europe. I don’t know what a further round of QE would contribute at this point to the Ponzi. Bernanke might say he would do it if needed. Europe is calmer this week than last so Bernanke might do no more. If they had stayed bad, he might have suggested re-initiating the dollar swaps to take pressure off the Euroklepts.

    For now though I expect Bernanke to take a wait and see approach. His “big” announcement is the one he already made about keeping the funds rate low for the next few years, and even that wasn’t new but just a continuation of current policy.

    If you look at how Bernanke has acted in the past, especially the period between the housing bubble burst and the meltdown, he has only reacted to specific events. He has not been pro-active. In the absence of any specific triggers now, I expect him not to do much more than what he is doing now.

  15. gaw

    “I don’t want to give the impression that government deficits are always good, or that the bigger the deficit, the better.”

    Funny, every time I read one of your tiresome Blog posts, you always seem to be arguing for Bigger/Wider/Larger “STIMulus” – which is what I would just call “more crack for crackheads”

    And where exactly is the “austerity” you seem to fear so much. Has the Budget shrunk in Washington? Have any Gov give-aways been cut back?

    Give me a big break. Austerity, in the real world, would mean the Budget gets cut NOW, and next year etc, in real numbers, not in mythical % ‘future slower increases’ of still rising deficits. Federal Gov employees would be laid off en masse, Depts and Programs axed entirely or severely cut back.

    None of which are evident. Your arguments are mostly hogwash, IMHO.

    The ‘system” is fundamentally broken and systemically corrupt, from top to bottom. Bernanke is obviously only interested in bailing out fellow Banksters, all else is unimportant (to him) to the ‘elites’, aka the financial terrorist scum who rule. The looting will continue until morale improves.

    1. Goldcap

      Nice “Ad Hominem” and not really based in either reasoned judgements or evidence, as far as I can tell. So while I do think the system is corrupt and broken, and can understand your frustration, you seem to be arguing (emphasis on SEEM) for “Budget … cuts NOW”. Are you? Are you arguing for anything?

      While I’m not really a specific doctrinaire economist, the Keynsian-Hicks model as been almost complete success in terms of predictive ability.

      Marshall is likewise running a high batting average on predictive ability. So why should we listen to your angry missives over his reasoned explanations? Better question, why am I responding to your post…


        1. Goldcap

          Well, sure, if you want to be all Australian and junk. Seriously, tho, Keen is remarkable in that he seems to point in a direction that most American economists refuse to look. I should put “economists” in air quotes.

          I think however Keen follows Keynes-Hicks pretty closely (closer than Krugman Thoma and DeLong might at times…)

  16. monday1929

    I stopped reading at “the upturn in the economy after the Lehman collapse”- there was no upturn in the economy. We are in a Great Depression. Get used to it.
    Enjoy the Crash.

    1. KnotRP

      So bankers exchanging assets amongst themselves didn’t con you that the economy had returned to normal?

      (What if the only economy we have left is bankers trading assets amongst themselves… what? LOL)

  17. solo

    Puzzling article, for a number of reasons. Equivocation, for example: On the one hand, we are told that the Fed has shot its bolt; and now is seen as “no more powerful than the Wizard of Oz.” On the other hand, we are told that perhaps more magic words from Helicopter Ben Bernanke–such as “pegging the 10 year at 1%”–will revive the markets. Which is it, Messrs. Auerback and Parenteau? Or are you fellows thinking of a career change to academe or Public Relations, where such hemming and hawing is a valued skill?

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