It’s become common to rubbish Serious Economists, and given their track record, it’s not hard to see why. Among other reasons, the ones that have a better grasp on how the provisioning of society actually works are usually relegated to the heterodox wilderness. That is because they lost the plot. The purpose of mainstream economics is to defend the proposition that “free enterprise” systems will (or can be organized to, with the help of said right-thinking economists) to beat command and control systems, as in evil Commies. This was a legitimate concern since both Russia and China industrialized in a generation, accomplishments that gave capitalists pause.
The top editors at the Financial Times, such as Gillian Tett and its chief economics editor, Martin Wolf, are particularly subject to orthodoxy pressures despite having exhibited some independence of mind in the past. Wolf’s latest piece, The old global economic order is dead, makes two important observations despite getting wrapped around the axel in some other ways.1 I’ll simply focus on the good bits after an intro of the constraints under which someone like Wolf operates.
I have some sympathy for Wolf because in the runup to the crisis, he (based on the work of then capital markets editor Gillian Tett and the readings of John Authers) was early to be worried about the direction of travel and the lack of good information. After the crisis, Wolf was also pumping for serious reforms, promoting the campaign by Mervyn King, Paul Tucker, and Andrew Haldane at the Bank of England. One of their big agenda items amounted to a modern version of Glass Steagall, of separating capital markets trading from traditional banking. They lost after a hard fight to Treasury, which ‘natch was all in for the banksters.
However, Wolf is also hostage to his status at the pink paper’s de facto ambassador to the Serious Economist community. He always goes to Jackson Hole. He regularly moderates Big Deal economics panels or has one on one discussions. So he winds up not arguing with Ben Bernake’s ridiculous and self-serving savings glut thesis because he needs to get on with Bernanke. I’ve also seen Wolf interview Larry Summers at a conference (although “interview” does not give quite the right image of the dynamic. Before Summers I never saw someone fill a very large room with his ego). So some cognitive capture is inevitable.
Now to the two tidbits from Wolf’s latest. The first is on sectoral balances, something we discussed extensively here back in the day. From a 2010 post, fittingly with Martin Wolf’s name in the headline:
Martin Wolf, in today’s Financial Times, uses modern monetary theory (!), also known as the fiscal balances approach, to explain why calls for fiscal belt tightening are premature.
Let’s provide a little background, courtesy Rob Parenteau of the Levy Institute:
…if we divide the economy into three sectors – the domestic private (households and firms), government, and foreign sectors, the following identity must hold true:
Domestic Private Sector Financial Balance + Fiscal Balance + Foreign Financial Balance = 0
Note that it is impossible for all three sectors to net save – that is, to run a financial surplus – at the same time. All three sectors could run a financial balance, but they cannot all accomplish a financial surplus and accumulate financial assets at the same time – some sector has to be issuing liabilities [borrowing].
Since foreigners earn a surplus by selling more exports to their trading partners than they buy in imports, the last term can be replaced by the inverse of the trade or current account balance. This reveals the cunning core of the Asian neo-mercantilist strategy. If a current account surplus can be sustained, then both the private sector and the government can maintain a financial surplus as well. Domestic debt burdens, be they public or private, need not build up over time on household, business, or government balance sheets.
Domestic Private Sector Financial Balance + Fiscal Balance – Current Account Balance = 0
Again, keep in mind this is an accounting identity, not a theory. If it is wrong, then five centuries of double entry book keeping must also be wrong.
Yves here. Many readers reject the message here instinctively. You cannot have the private sector save in aggregate AND have government run a surplus UNLESS you run a trade surplus. And the problem we have is:
1. The private sector in pretty much every advanced economy is deleveraging, as in saving. Most people, yours truly included, think that’s a good idea.
2. If those economies want to run government surpluses too, then they need to run pretty big trade surpluses
3. It is impossible for all countries to run trade surpluses at the same time.
4. Moreover, some countries that have been running large trade surpluses for quite a while (in particular China and Germany) are not willing to change course, at least not in the near future.
5. So if all these new hairshirt-wearers want to shirk public and private debt at the same time, some countries will need to run correspondingly large trade deficits (which also means they will experience rising private or public sector debt levels). There appears to be a dearth of candidates for this role.
Wolf in his current post has a wee chart which shows (although Wolf does not call this point out) how the US managed to make this conundrum worse.
The understanding many have of the economy (based on the incorrect premise that investment comes out of pre-existing savings, as opposed to loan proceeds that banks can create from thin air) is that household savings fund business investment. That’s a big reason for the disquiet over government deficits…aren’t they crowding out business? No, because first, businesses set their return targets too high, so they will just about never invest enough to generate full employment. In fact, they WANT unemployment so as to keep wages down and be able to discipline labor. Second, our terrible government accounting system feeds the prejudice against government spending, since it does not create an income statement and balance sheet, which would differentiate spending from government investment.
But third, as we pointed out in a Conference Board Review article in 2005, The Incredible Shrinking Corporation, US companies in aggregate were not just under-investing but net saving, as in slowly liquidating. This tendency has gotten even worse via stock buybacks.
Wolf, having (per our 2010 post) having once-upon-a-time tried to argue against austerity, skips over the key issue:
Sectoral savings and investment balances are revealing indicators of this last challenge. Foreigners have been running a substantial savings surplus with the US for decades. US businesses have also been in balance or surplus since the early 2000s, while US households have been in surplus since 2008. Since these sectoral balances have to add to zero, the domestic counterpart of US current account deficits has been chronic fiscal deficits.
What you see, if you squint a bit, is consistent with the “Shrinking Corporation” article: companies had been borrowing to invest in growth. In aggregate, around 2003, they started engaging in the highly unnatural and ultimately destructive behavior of giving up on capitalists by investing in their companies and instead, for the most part, became obsessed with cost-cutting. You see government borrowing picking up the slack.
The related point, again not often enough made, is what “investments” are made matters. Household borrowing has been found to be economically unproductive. For governments, it matters over time whether investments are productive (clean water, good roads and bridges, cheap broadband, for starters) or are exercises in big-ticket pork, like our military.
The second useful point Wolf makes is on China’s unbalanced economy. The Manichean thinking cognitive bias among many readers is staggering. Just because the US has made a complete mess of its once-formidable advantages does not mean that China isn’t a source of instability too. From Wolf:
Michael Pettis is, in my view, correct that the world economy cannot easily accommodate a huge economy in which household consumption is 39 per cent of GDP and savings (and so investment) correspondingly huge. What is also clear is that the latter has also helped drive what the Rhodium Group judges a successful Made in China 2025 policy.
Many explicitly reject the idea that there is such a thing as overinvestment. Huh? Are you old enough to remember the dot-com era? The US produced a shit-ton of Internet businesses, as in way way more than the market would support, so most died. The US had another overproduction crisis in the railroad boom of the later 1800s, when promoters were able to launch rail lines, irrespective of the actual commercial potential, because they could make a killing on the stock trading. Some were even built duplicating barely successful or money-losing lines between the same city pairs.
Wolf points out that China has a large enough potential internal market to solve this problem. But the Chinese continue to save at very high rates. He notes:
China has the option of expanding domestic demand and so offsetting lost US demand. Matthew Klein responds, in his excellent Substack The Overshoot, that China has long had this option but has failed to use it. My answer is that China must now do so and thus will indeed choose to expand demand rather than accept a huge domestic slump. We shall see.
The reason Chinese save so much is the lack of social safety nets and worker protections, such as a minimum wage. And yes, China could readily solve this problem but Xi is hostile to it. As we wrote in 2023, incorporating a comment by PlutoniumKun (who follows the Chinese press as well as development literature):
China seems not just to be having what would be expected difficulty in changing from an investment/export led growth model to one with domestic consumption being far more important. China also appears to have an ideological, or one might say political problem in making this shift. Higher consumption would require lower savings rates. Not only do Chinese consumers not feel secure enough to do that (too much history of crises in China and its neighbors) but China under Xi is unwilling to implement the social safety nets that would encourage more spending.
I don’t want to take up too much time with this intro, but some relevant recent sightings. Note that Setser among other things is the man on dollar holdings and flows outside the US:
I suspected that parts of China’s top leadership objected to a household focused stimulus. Turns out the epicenter of opposition is Xi himself: “Xi sees such growth as wasteful and at odds with his goal of making China a world-leading industrial and technological powerhouse”
2/
— Brad Setser (@Brad_Setser) August 27, 2023
Beijing’s mind seems made up — but Chinese policy makers have this backwards.
Using the central government’s clean balance sheet to support household demand would actually make it easier for households, property developers and local governments to delever.
— Brad Setser (@Brad_Setser) August 27, 2023
A hypothesis: there can be no durably stable Chinese and global economy so long China’s national savings rate stays around 45% of GDP …
(note that, contrary to the IMF’s forecasts, savings has been rising since 2020 …)
— Brad Setser (@Brad_Setser) August 28, 2023
China’s shoppers hesitate to spend big in face of deflation via @FT
🇨🇳
”Excess savings in China have increased in the first half of the year compared with the same period last year, and there is still a gap between pre-pandemic and current consumption” https://t.co/dvQvhP1lrU— Iikka Korhonen (@IikkaKorhonen) August 29, 2023
And now extracts from the points made by PlutoniumKun
But the reality is that a crisis is inevitable for any country pursuing an unbalanced growth model – i.e. by focusing on investment and exports over domestic/consumer led growth. This is baked into the standard model – and the Chinese are fully aware of this, and have been since at least the 1980’s and 1990’s when I started following (from afar) the Chinese economy from a development economics perspective. Back in the 1990’s the Chinese devoted very significant resources to studying the Japanese late 80s collapse, later the 1990s Asian crisis, and the multiple crashes which foiled numerous countries over the past century or more from crossing the threshold from upper-developing to developed country status. There is a line of thought among some China analysts that Xi was selected and given extraordinary powers specifically to deal with what was foreseen to be a very difficult transition from a the current development model to ‘developed’ status, which has always overtly been the holy grail for the CCP.
I don’t think there is much doubt that the current situation in China is very serious. In my opinion, the housing crisis is a symptom, not the cause of the current problems (in reality, the Chinese economy started showing signs of strain even before Covid). The core problem being several decades of internal debt build up and chronic mal-investment along with an overdependence on rising property values to underpin spending at a local level. But the housing issue alone is gigantic – by any objective measurement it is vastly greater as a proportion of the economy’s size than the Irish and Spanish crashes of 2007-9. When you add in demographic issues and climate induced strains, this is potentially much more than just a cyclical downturn.
It is highly unlikely for there to be a financial crash as the Chinese banking and finance model is very different from in the west…But it is increasingly recognized within China (this is very obvious reading between the lines in various statements from Beijing) that the current model has finally run out of steam and needs fundamental overhauling.
The problem is that this has been pretty obvious for some time, but despite numerous policy statements going back at least 2 decades (the big ‘change’ was supposed to happen after the 2008 Olympics), very little has been done…There has to be a very significant transfer of wealth to ordinary citizens through higher wages and better social welfare provision in order to boost consumer spending (one of the few things orthodox and heterodox economists agree on when looking at China). And as for debt – in theory, this is a simple problem to address (i.e. monetize/forgive it in one form or another), but there appears to be an unwillingness to even discuss this option within high level circles in China.
The irony to me is that having studied the Japanese crash intensively, the Chinese may somehow manage to replicate exactly the mistakes the Japanese made….
While it can be argued that the current property/investment boom is not as bad in China as it was in Japan, in other respects the Chinese economy may be a lot weaker than Japan was at the time – for all its modernity, China is still essentially a poor country – significantly poorer than, for example, Russia or Turkey, and probably not even matching Mexico. What is unique about China is its enormous size, which allows it to mobilize resources and dominate economic sectors in a way small developing countries can’t. But then again, this has never helped India, which also has some very advanced technological sectors.
The other huge problem – ironic given demographic problems – is youth unemployment. This seems to be a characteristic of fast growing export-led economies once they rise above the sweatshop levels of development – both Japan and South Korea have had huge problems in keeping up employment levels even at times when their economies have been seen to be healthy when measured in GNP. In simple terms, I don’t think you can keep up a high level of employment if you insist on suppressing wages and consumer demand. But this is integral to an export/investment model of development…
A few years ago, I would have been fairly confident that the CCP could pull it off, especially with someone as impressive as Xi at the helm. But more recently there are increasing signs of inept leadership, groupthink and poor decision making at higher levels of government in Beijing, going right to the top. There is a lot of rot among our leadership classes everywhere, not just in the west.
So again, a warning against black and white thinking. Just because the US is now terribly led and China has much more competent people in charge, as well as many technological advances of which it can be very proud, does not mean it cannot also be hostage to economic idea and/or social values that are keeping it from executing seemingly obvious solutions to its economic pressures.
____
.sup>1 There is a BIG complicating factor with respect to the data Wolf relied on at the top of his piece, which is also the foundation of the US tariffs policy. Mind you, I am not suggesting with the information below that the US does not have a big balance capital account surplus, but that reliance on multinational accounting data that shifts revenue to tax havens like Ireland overstates it. This is the 50,000 foot version of the argument from hidden wealth/tax evasion maven Gabriel Zucman; he has some more recent papers I need to mine to properly present his findings. The author who made this summary argues Zucman *must* be wrong, hence the need to look at later work (this sort of thing reminds me of other *musts* like US housing prices could never decline on a nation-wide basis). So:
Economist Gabriel Zucman’s paper “The Missing Wealth of Nations” proposes that a substantial part of the large U.S. net debt of the last 15 years is actually accounted for by U.S. tax evaders who have opened accounts in foreign tax havens, and then have reinvested their money in the United States. Such investments would look like foreign investments in the United States, but would actually be U.S. domestic investments. Zucman concludes that as a result, the U.S. capital account surplus must be lower than reported.
Thank you very much for all of this, and specifically for outlining the constraints under which many op-ed columnists function. I was actually quite surprised to read much of this, because Wolf never really struck me as being someone who needed to operate under any constraints. He seemed to exude considerable self-confidence, and have periodically seen him almost enthroned in some of the best seats (stalls circle) in the Royal Opera House. He has been at, or near, the top of the tree at the FT for almost 40 years. What he does seem good at is surfing the successive waves of bien-pensant economic and political fashion, almost to the point of caricature. Perhaps an heir to Paul Einzig or Harold Wincott (though was he in their class?), and comparable in many ways to the younger Walter Lippmann. I have become ever less of a fan, and have gradually shifted from being an ardent disciple (>20 years’ ago) to becoming circumspect and then, over the last decade and a half, frequently relying on him to guide me into believing the precise opposite of whichever idea he has been promoting. My disaffection with him has more or less mapped my disenchantment with The Economist.
Perhaps the millstone of housing debt which weighs upon the political economy of China is preventing it from leading World financial policy. Maybe we’re in the early ‘thirties all over again: of the UK being too weak to exercise effective international leadership, and the US not being strong enough (or, rather, perceiving itself not to be so), with the whole system slipping into the ensuing void, per Kindleberger.
Thank you.
I don’t disagree.
Wolf is a regular on CNN’s Global Public Square (Fareed Zakaria). He has other outlets, so could talk out of turn.
It will be interesting to hear / read what Wolf makes of ring fencing being watered down.
It would be interesting to hear what you think of the roll back of the post-2008 reforms, the feeling in Whitehall that this government, not a year old, feels like the last year of the Brown government and suggestions from some restive Labour MPs that the Treasury be split into two or even three departments.
I’ve just had a comment OKed about the need for a new left wing party one to counter Reform.
I’m maybe gonna be too ill to do much but I’m in contact with the Electoral Commission about setting up such a party.
Watch this space if you’re UK.
I think your timing is excellent, Terry. Assuming Reform takes over at the national level in a few years, your Left (Populist?) party has some time to get organized so that it’s ready to go when people get sick of Reform–and they will.
And I hope your health lets you play the role you’d like with this effort.
I had telephone conversation with London civil servant involved with elections. Being a civil servant he had to be non-partisan. But I’m good at reading between the lines…… everything he said screamed “if your health holds out PLEASE do it”.
They know already that in 2027 in the city elections Reform will cull Labour. Massively.
We desperately need a progressive alternative. The London guy couldn’t say this but I knew he wanted to.
Trouble is though I’d relish the fight, I have dodgy heart.
Thank you, Terry.
You’re welcome. Just had to put that grifter the critical drinker on YT right. I spent 14 years learning how people made and traded preferences. He spouts shite In glaswegian semi drunk persona and believes this makes him god. Eff off. Sick of people getting taken in by his rubbish. Do you value me or a grifter?
I’m willing to go door knocking to get support for progressives who don’t do alphabet stuff but do “work for the worst off” despite knowing my heart could give out.
PS. Pretty sure he’d looked me up. I’m no top psephologist but one of my co-authors on top global consumer preferences textbook was.
I picked up a lot…. the London guy knew a suspiciously large amount what kicked off in Notts seats in recent elections that involved me. Possible tradeoffs etc.
Colour me curious.
https://www.workerspartygb.org/ doesn’t qualify, I suppose?
What about the Workers?
What about the workers indeed!
(h/t Peter Sellers…)
Many thanks, Colonel!
With respect to the roll-back, the whole point of the Cobbold/Bolton cultivation of the eurocurrency markets, which revived the City after 1955/57 was that it would undercut Glass-Steagall (especially Regulation Q). As such, the ‘success’ of the City (though not of Britain) was founded upon regulatory arbitrage. It should therefore be no surprise that, after a period of mimicking Frank/Dodd (presumably to propitiate regulatory departments within US HQs) the British authorities should have quietly relaxed their approach to regulation, and that worries about the diminution of the City should have accelerated that. In other words, undercutting the US is that whole basis of the City.
Splitting the Treasury is an old song. Of course, and as you will recall, there was the conspicuously unsuccessful DEA experiment of 1964-69, which the Treasury went out of its way to sabotage. It did not help its cause that Brown was a sot – useless and sometimes violent after lunch – and Shore was perceived as being Wilson’s golden boy or ‘lapdog’ (though the latter’s sheen was soon tarnished). Naturally, the Treasury went out of its way to subvert the DEA, and Eric Roll had to send officials down the corridors of Great George Street in order to appropriate (i.e., steal) typewriters from the Treasury. IIRC the early work of another FT journalist, Sam Brittan (‘The Treasury Under the Tories’ (published early in 1964) played a not inconsiderable role in Wilson’s determination to cut the Treasury down to size. Although Wilson was much enamoured of French-style indicative planning (viz. Brown’s abortive national plan) he ought to have recalled France’s unhappy experiment will dividing the finance ministry in the Louvre during the provisional government in 1944-45: Mendes France became minister of national economy, and Pleven became minister of finance: the Radical Mendes France wanted a prices and incomes policy in order to suppress the prevailing inflation, whilst the technocrat Pleven wanted to let the market control prices. De Gaulle, anxious about a dirigiste policy (and about giving the PCF, then in office, further suasion over the economy) backed Pleven, leading to Mendes France’s resignation and the merger of his ministry back into the finance ministry. Thus, the laissez-faire interest which dominated the finance ministry trumped state control. Much the same happened in 1966, when Brown’s national plan was effectively crushed by Callaghan’s July Measures. In other words, the management of the exchange rate by the Treasury easily trumped the development of a coherent plan. I suspect that any revolt against Reeves would have a similar result, and it is noteworthy that the section on industrial policy was much the feeblest part of the 2024 manifesto – drafted under the supervision of Ravinder Athwal… erstwhile head of the Treasury’s planning unit.
Thank you. I’m very grateful.
The Labour industrial policy section is rubbish, a napkin doodle. Five (?) buzzword sectors and a lot of hopium. Embarrassing.
I had to sit through a government office for [the Region] roundtable that was just local great and the good saying me, me, me and brown nosing the supercilious Treasury official, who had been made to take one for the team and visit the Provinces and poo-poohed any notion of grants to be given out.
As an aside, the Treasury view of the environment – Nature is fungible, the market will heal all – seems to be winning. See the plans for deregulation, so ancient woodland can be chopped down if you plant enough saplings elsewhere. Farming subsidies are under threat too. And yet Forestry England has stacks of cash to buy “unproductive” farms and plant trees on them (the problem being these are the prettiest and most environmentally unfriendly farms). Prepare for the UK to resemble Iowa in the East and Oregon in the West.
Off-topic in a way, not pure finance, but a real concern that misallocation of government expenditure and of incentives is going to have centuries-long consequences that nobody is really talking about. Another old order – a thousand years of land use in terms of arable vs pastoral vs sylvan – that is being ripped up but to what end is not clear….
Thanks for these fascinating insights. Strong, well functioning administrative systems are vital for nations to prosper, but deeply embedded structures can be almost impossible to reform when they go bad or become an obstacle to necessary change.
Thank you and well said, PK. The rot cascades to the localities.
Many thanks for the responses. I should add a rider to my last comment. The British infatuation with indicative planning was inspired by the supposed success of Monnet’s Commisariat, which was lauded by British cognoscenti in the surge of ‘declinist’ literature which followed Andrew Shonfield’s celebrated ‘British Economic Policy Since the War’ (1958). However, the much later consensus of economic historians is that the Commisariat did far less to stimulate the growth of the French economy than the British commentariat supposed during the late 1950s and early 1960s. French success owed far more to the Rueff/Pinay devaluation and stabilisation plan of 1958, or the transfer of population from agriculture into industry – a process completed in the UK generations earlier. As mentioned, postwar France had a single finance ministry, and one which was every bit as powerful as the British Treasury; arguably only the interior ministry was as influential within the French administrative system. Macmillan had established the NEDC in 1962 (and subsequent ‘little Neddys’) as a pallid and corporatist version of the Commisariat.
However, dedicated followers of intellectual fashion operating in London, Oxford and Cambridge were not generally inspired by the example of West Germany. Ordoliberalism per se had scant appeal to most of the Labour party (with the possible exceptions of Douglas Jay and, on occasion, Tony Crosland). However, West Germany was a country which had divided economic policy since 1917 between a finance ministry and an economics ministry. The ‘success’ of the [highly overrated] Erhard, as economics minister, was very much noted in London, and with the exception of a brief period under Karl Schiller (1971-72) the two ministries have remained separate ever since, with the finance ministry usually being held by the leading party in any coalition, and the economics ministry by the junior party (often the FDP) – the latter acting as a brake on the former.
Therefore, the DEA was Wilson’s and Brown’s gimmick, intended to marry German structures with French ideas. They kept Neddy pretty much as they found it. Naturally, this formula did not work because – as in France – the Treasury (the ‘universal spider’ of the British administrative machine) was far too potent to be cut down to size, with the Treasury-Bank-City nexus always ruling supreme. That nexus would brook no opposition, and so the prioritisation of the exchange rate (the flipside of the trade balance) with effect from day 1 of Wilson’s first term meant that the DEA never stood a chance: it was smothered in its cradle. Wilson had therefore borrowed the form but not the content of the French and German approaches to economic planning, and wound up with little or nothing at all.
I feel fairly confident that the experience of the British state since the gilts strike of 2022 means that a fixation on gilts yields now takes the place of the exchange rate of the Bretton Woods era, meaning that ‘credibility’ within the financial markets is just as important now as then. That, in turn, means medium/long term planning and investment will always take a back seat to short-term management of the day-to-day. Reeves’ advisory council is just a warmed over version of Snowden’s Economic Advisory Council (1930-39) and Neddy. I have a strong suspicion that it will suffer much the same fate, but at least it will do the Treasury’s thinking for it, and it will function as a convenient conduit for blame if (or, rather, when) the Starmer government’s growth strategy [sic.] fails.
Hah, your journey to disenchantment with the Economist and disappointment with Martin Wolf is also my journey, Froghole!
He was OK with Richard Koo’s balance sheet recession and was even sceptical of QE and the Target2 imbalances of the ECB. Yet he always tiptoes up to the diving board of MMT but refuses to take the plunge, even after the GFC.
He cannot bear the political and career and self-worth implications, that there is no free market in money and the City and finance are not the handmaidens of industry but the zero-sum welfare-queens of the real economy. Keynes was too polite.
I met his son (he used to work in VC) and I always had time for him as a thoughtful person – and only realised the family connection long after.
Thank you, Yves.
With regard to Wolf, he sat on the Vickers committee that recommended the “ring fencing” of retail banking from trading, what the quartet felt they could get away with. Three candidates to succeed King, Tucker, Haldane and regulator Adair Turner, wrecked their chances of doing so, by pushing for a modern Glass-Steagall, and paved the way for Carney (who had met Cameron and Osborne at the Oxfordshire estate, Cornbury, owned by the brother in law of Carney’s wife, Lord Rotherwick, where and when the idea was conceived). Ring fencing is likely to be watered down, if not repealed, as Reeves seeks to reboot the British economy.
It’s interesting that you conclude with Zucman. As the Eurozone crisis* erupted, I recall meetings with King, Tucker, Turner and Haldane. The Bank of England trio talked about Greek tax evasion and how much of that was reinvested, via the UK and its dependencies and Cyprus, in Greece. We understood that it was the same here.
*The Bank of England trio were clear that Sterling’s value should not be allowed to rise as investors sought a safe haven from the Eurozone turmoil. Capital controls were under consideration.
Oh, I missed or forgot Wolf was actually ON the Vickers Committee. I also neglected to mention Turner as one of the good guys. Thanks for including that.
Thank you, Yves.
Colonel Smithers,
With this history, what direction do you see Carney taking the Canadian economy under such pressure from the U.S.?
Thank you, Ann.
Carney is having to stand up for Canada due to Trump’s crassness. Otherwise, Carney would sell Canada to Wall Street, like he tried nearly twenty years ago. Please let me explain.
Carney and Ralph Goodale put pressure on regulator Julie Dickson to relax Canada’s banking rules. It’s Dickson, not Carney, who saved Canada from 2008. This does not stop Carney from dining on it. How do I know that? I know some of the officials involved and present at the meetings.
A decade later, Carney, then leading the Bank of England and chairing the Financial Stability Board resisted calls to rein in what are called “shadow banks”, where risks have migrated from banking. Much of Carney’s fortune is tied up with his former employer, Goldman Sachs. GS owns small stakes, kept below thresholds for regulatory reasons / arbitrage, in many of these investment firms / funds considered shadow banks, often founded by GS alumni.
Carney is awkward to work with and has a big ego, even by Bank of England and global banking standards. There were complaints about him at the Bank of England.
From 2012 – 14, I compiled data and commentary from asset managers for the Bank of England’s monetary policy committee and sent them to chief economist Andy Haldane’s team. Haldane was OK with what I sent. One day, one of the officials asked me to water down some comments about the cost of living. Carney said it wasn’t a problem. I was puzzled as Carney’s salary was double that of his predecessor’s and he did not pay tax, even though he worked around the corner from my office and lived in Hampstead, and his wife had complained about how expensive London was.
My message to Canadians: Keep Carney’s feet to the fire and push him left.
Your advice about how we ought to deal with Carney is excellent, Colonel Smithers.
I see one glimmer of hope, which is related to this bit in Yves’ commentary:
“our terrible government accounting system feeds the prejudice against government spending, since it does not create an income statement and balance sheet, which would differentiate spending from government investment.”
Carney is the first Canadian political figure of consequence whom I have EVER heard acknowledge the need for public accounting which explicitly makes the latter distinction between “spending” and “government investment.” Much depends, I think, upon his hammering away at this with a public that has been soaking in neoliberal poison for the best part of 50 years now …
We just had 10 years of the NDP propping up Libs to the left which doubled our national debt to $1.2 trillion. How much further left can we go? I’m no economist but what I see here in central BC is a failing economy everywhere. My kids will never own a home at least not while I’m alive. Most jobs here pay less than survival wages and the young are still living with parents. That’s if they can get a job. Mills are closing yet lumber trucks go by both ways on highways. It’s my belief that at least in the logging industry technology has improved so much that physical labour is no longer needed. Great for owners of said mills and equipment used for logging but we can now log and mill the same amount with maybe 10% of the employees. In the ‘70’s I remember being told technology would reduce our workweek to 20-30 hours with no discernible loss of life style. Didn’t happen. Now many need two or three jobs and work 60 hours a week and a drop in social status. I remember my dad buying house in Toronto in late 70’s for about twice his yearly salary. Almost lost it in the interest rate scare of 81-82. I bought my first house on outskirts of White Rock, beautiful town in 1988, that was for double my income at 10% interest rates. That same house would sell for over 1.5 million today maybe 12-15 times one’s income today. Last election I voted for the local independent as I cannot vote for the foreign policies of major parties. Cons won with almost 2/3 of vote and separation is in the air. We are definitely now in a rural vs urban climate, only need to look at electoral map to see.
Thank you, Colonel
I agree with you, and I think the country will do as you say and keep his feet to the fire. I’m in southern B.C. and I see encouraging signs. New small businesses are popping up and young people are optimistic. Their patriotism has been roused. They see a future. The debt that has been racked up has had the intended consequences.
No one here wants separation and the disgust with Danielle Smith is high. Trading with Mexico and China, for example, is gaining favour in my rural area. No one travels to the U.S. and the grocery stores label Canadian products. I’m hopeful, for a change.
Anne, I’m not sure what you mean by “ The debt that has been racked up has had the intended consequences.” it only took 10 years to add $620 billion to our debt. The consequences are going to keep our young paying the interest for the remainder of their lives…..we’ll be long gone. Unless Carney as he has indicated wants to tax the only tax shelter most of us have, our homes.
https://paherald.sk.ca/canadas-federal-debt-doubles-to-1-2-trillion-under-trudeau/
“The federal government’s debt-to-GDP ratio was 42.1 per cent in the last fiscal year (2023). That’s 11 points higher than it was before the pandemic, but still 24 points lower than it was in the mid-’90s. As a share of the economy, federal debt has returned to where it was in 2002.”
“Instead of a projected deficit of $46.8 billion (equivalent to 1.47 per cent of GDP) in 2025-26, the deficit would be $62.3 billion (1.96 per cent of GDP). Four years from now, the deficit would be $47.8 billion (1.35 per cent of GDP).”
“For the sake of comparison, at the height of its response to the Great Recession, Stephen Harper’s Conservative government ran an annual deficit equivalent to 3.6 per cent of GDP in 2009-10. The following year, the deficit was 2.1 per cent of GDP.”
https://www.cbc.ca/news/politics/mark-carney-lays-out-his-plan-for-the-biggest-crisis-of-our-lifetimes-1.7514504
“The process of leaving Canada would be long, complicated and expensive and would require consent from the federal government as well as extensive negotiations with First Nations, several of which on Thursday said emphatically that they would fight back against any such proposal. In short, it’s a highly implausible scenario.”
https://www.cbc.ca/news/politics/western-secession-economy-1.7524422
I appreciate your points, but a doubling of our debt in 10 years is only going to affect our kids, and is unsustainable. I’m not a separatist but feel that our country is at a crossroads. I was very lucky in my working career, and can look at my wages based on a case of beer. At 18 I started working for the railway and could buy a 24 pack for an hours wage. I retired 6 years ago and could still buy a 24 pack for an hours wage. Neither of my kids make that much per hour. It’s like I said about buying a house, it has become out of the question for just about every millennium today. It is more profitable for a young man to get into the drug business than getting a job. That wasn’t the case when I started working, but I know many that took that path. Today I have a pension and income many of them are now struggling and still trying to survive in the old business. Kids today look to a future of struggle and they don’t see a way out. The lucky ones will get an inheritance if Carney doesn’t try to steal it but many more have parents that may only be a liability. I see that now.
This Debt is not what you think it is Yeti e.g. its not payed by taxes.
Nor is it “a burden on future generations” Skippy. It’s odd to me how this narrative continues despite the obvious fact that balance sheets include both obligations AND assets. Why is it that nobody includes the assets future generations will inherit along with the matching obligations? If anything the issue is distribution of said assets and obligations, NOT their mere existence or the meaninglessness of their nominal sums (after all, they net to zero)
Yeti,
Skippy and eg are correct, government debt is not the problem. Michael Hudson explains this:
https://museum.care/michael-hudson-on-money-debt-and-privatisation/
Thanks to you all for respectful comments, I read both your links Anne and have read MH before. I agree with most concepts of MMT but there are still restraints on government spending which I think have been abused by our government recently. My post above listed beer and housing as an example of where we are headed. In the 70’s when I started my working career both were relatively obtainable. I worked with a public utility and my wages basically followed inflation so beer was still the same relative price compared to my wages. But housing has become simply unattainable for many. MH has a response to that issue but I don’t think Carney is at all on the same page. Maybe someone could send him MH’s books. In closing I agree government debt isn’t what most of us think but that doesn’t mean there are not constraints on spending. I fear under Carney and more so PP that the privatization of our society will continue.
Er, Yeti, the NDP was only “propping up Libs” for about two of the last ten years.
I have little to argue with the rest of your post, however.
Made a couple of comments but don’t seem to have gone through, but yes you are right about the last two years but they had the opportunity to force an election before their agreement but chose not to. I actually voted NDP in 21 thinking they would not allow vaccine mandates. I was wrong and 5hey lost my respect.
The NDP forced the Liberals to create the dental plan and more day care. Now I’m counting on the NDP, the BQ, PQ, and the Greens to force the Liberals to work for Canadians and not Goldman Sachs. Government debt is not what is holding down our youth, as Michael Hudson explains in the link above. The NDP were correct not to force an election until the right time. I’m 77 years old and I’ve seen so much misunderstanding about these things, but real information is beginning to come through for many young people and even some of us oldsters. A lot of it is coming from this very website and these brilliant commenters.
“A few years ago, I would have been fairly confident that the CCP could pull it off…”
I had to start changing my tune as well.
I’ve usually thought of Wolf in the same way as I see Dani Rodrik, Brad Setser or Adam Tooze – economists smart enough to know the orthodoxy is mostly wrong about most of the big questions, but who chose to work within the Overton Window to keep their position at the table. Its a tricky balancing act, and you often have to read between the lines to see what they really think (or possibly I’m being too generous to them).
Many thanks Yves for pointing out that economic recklessness is not solely the preserve of the US and the west in general. Pettis has been pointing out for many years that by definition, massive trade surpluses cannot go on forever, and are likely to become politically unsustainable before they become economically unsustainable. This is exactly what we are seeing now. Trumps attempt to reorder things may be reckless and incompetent (assuming this isn’t just a huge grift opportunity), but its also clear that the surplus countries, namely Germany, China, Taiwan, Japan and ROK, are in a bind and are potentially making huge errors in their response. It needs to be repeated over and over again, that running a manufacturing trade surplus in the long run is not a sign of economic virtue, its an indicator that the industrial sector of a country is stealing money from its workers/consumers. Just as the US economy was hijacked by Wall Street and the UK’s was stolen by the City, those ‘surplus’ countries economies were hijacked by their industrial capitalists and rentiers.
It is indeed troublesome to see the Chinese stubbornly stick to a model which no longer fits the international economic situation as Setser points out.
There’s also the argument that maybe even 20% of Chinese GDP goes uncounted because it’s either “too local” (as in ~10-15% of the transactions go unrecorded) or it’s in the service sector which is both growing fast and mostly outside of the official accounting.
That, and also the fact that half of the savings are not households but private enterprises, so the
trueeducated guess household savings rate of GDP is somewhere around 17-18%. Singapore has even higher savings rate, and it’s mostly due to the private enterprises.Obviously there’s something wrong in how the financing/settlement works in China if enterprises feel the need to keep a lot money in the bank, but I don’t know (yet?) enough how it works in China to comment on that. I just read research papers I have access to. Maybe the 1.1% annual deposit interest rate is good enough in a near zero inflation economy… Who knows?
Devil’s advocate question: What exactly is the problem with China’s domestic situation? The financial economy is still a closed one, the state can just reallocate the losses or fill the gaps with MMT capital. Especially if the household savings rate is potentially overstated (and who is buying all those luxury goods…).
Provided the homes are lived in, what is the problem? Providing cheap housing might help push fertility back up, which strikes me as the bigger problem for a Chinese century and the likely true source of economic malaise. No amount of housing stock is the right number if your population is on track to halve….
Also, the West uses mortgage debt (abd student debt…) to keep its proletarians docile. It is hard to revolt if you have to make payments. Perhaps China has the same idea and domestic indebtedness is a goal?
The West is more stubborn than China in many senses. Why on earth we build homes to be owned by Blackrock and the like and ensure they extract as much as they can in rents? ANother way to keep the proletarians docile.
The obvious answer to China’s problems of finding suitable buyers for its exports would be to encourage the domestic market by raising salaries. I doubt that this is automatically unattractive to the CCP, and while Xi is a powerful figure in the CCP, he isn’t a dictator. There must be some reason why the CCP doesn’t want to rapidly increase domestic spending (it’s worth noting that domestic spending has been doing up, and as the article points out, a major problem is that increased salaries are doing into savings rather than into spending).
I wonder, therefore, if the reason is not that Xi is wedded to an outmoded economic theory, but — as with Western governments which purport to be wedded to outmoded economic theories — that there is some political issue here. Possibly the Party is worried that a very large internal market might improve the bargaining position of Chinese oligarchs and thus undermine Party control. I throw that out as an example of an idea, not as anything informed or realistic.
A general pay rise for all Chinese workers along with a revamp of welfare provision would obviously be highly beneficial. The issue is that when you have an obvious solution to an obvious problem, but nobody is actually implementing that solution, you have to assume there is some sort of ideological/structural reason preventing it from occurring.
I have no particular insights into CCP thinking, but my guess is that the Party has become deeply embedded with the idea of industrial export led growth, and an enormous lobby has built up around this making a radical departure very difficult to engineer. I’ve been following this subject for several decades as a casual outsider observer – the problem has been widely discussed for many, many years, and its been official policy (more or less) to do it since at least 20 years ago – but there is always some ‘reason’ why it should be implemented ‘next year, not this year’.
Could it also be possible that Chinese leadership looks at the USA and sees the downside of a consumer culture? Once you create the “Cookie Monster,” it’s hard to get him to lay off the chocolate chips even if circumstances demand it.
Theoretically, China could just ‘jubilee’ all the debt away, although it’s pretty clear that Xi and the CCP establishment are against this on ideological principle. I’m sure Michael Hudson could provide much more insights on this than I could (Pettis has written quite a bit on this on his blog as well). The problems with China go much deeper – it’s not just a build up of bad debt that needs sweeping away, but a massive misallocation of capital. There is vast over capacity all over the economy – to take car manufacture alone, there are something like 60 car companies now in China, most supported (i.e. indebted) to local governments and tied up in very complex ownership and debt situations, capable collectively of producing far more cards than China needs, and far more than anyone else is willing to import. This is replicated right through the economy at multiple levels.. Clearing the debts won’t clear away this problem (although wiping out a lot of debt would undoubtedly help).
There is also a huge amount of ‘hidden’ consumer debt (as one friend told me ‘in my village, everyone owes money to everyone else), much of it leveraged on other debts (this is extremely common in China – there is no incentive for banks to check on who else their clients have borrowed from).
Beijing has gone all in on solving the problems by trying to make a quantum leap in technology and productivity. Essentially, they are trying to grow their way out of the debt. But for this to work, the rest of the world has to be willing to absorb pretty much endless imports of high value goods (and the destruction of their own industries). It will be, as they say, an interesting experiment to observe.
You miss the forest for the trees due to your optics, western economics of a few hundred years and not all of natural history.
The most important aspect at the moment in this time is social cohesion, something orthodox economics has ignored since the late 1800s and went Newtonian. Orthodox economics is linear and has no distinctions for ethnic or national social tenancies that cause friction in its cause – see endless wars of the last few decades.
China just had the most massive care show eva’ all the car YT etc sorts were banging on about it and put all past West shows to shame. On that note what do you think about he EV Dark Matter motor via Koenigsegg if reports are true.
“Grow your way out of debt” …. sigh …
I love reading up on the latest EV tech, but the problem is that there is so much marketing fluff out there designed to juice share values its very difficult to know what is real, and the technical details are far beyond my pay grade.
I do think that we are facing a number of major breakthroughs in EVs – the big problem in my opinion is that most designers have been essentially sticking batteries into conventional cars/buses/trains/bikes, without thinking deeper about the overall engineering, including the ridiculous amount of metal bloat in a typical vehicle (to be fair, this is often caused by out of date regulatory requirements). Plus of course there is the problem of a vast amount of legacy plant, which makes incorporating radical advances into consumer devices very difficult and expensive.
The big fear in the car industry about EV’s is that key breakthroughs in drivetrains and batteries would effectively ‘commodify’ vehicles like TV’s or white goods, whereby anyone could set up a factory to produce them for local markets by buying in the core standardised parts. This would drive profitability down to minimal levels and probably cause a wipe out of most existing brands.
I am an old front and back house sort of guy, cut my teeth on back house and Mfg and then moved front house. Yet in my years I have seen so much specialization, especially day to day reality, is akin to GDP chat too me.
I made a contrary view point to your preferred economics and how they are now failing on the social level of a pin factory mate. All the rest is window dressing.
Just wanted to say PK that I respect your knowledge/experaince albeit fundamentally disagree with your economic methodology. Its a bit cookie cutter in my opinion, I agree with the olds that thought econometrics was a bad idea because it ignored history/society/human condition.
Economics good and bad is about natural history/political theory. Per se old poster/commenter Pilkington is banging on about society first and then how trade effects it, I don’t agree with him on everything but, respect the methodology. Its akin to how many in the West have for yonks criticized Russia/China and yet been proven wrong time and time again.
I mean RUS is becoming the most advanced and experienced military on the planet, China is years ahead of Western military tech and moving way past all the rest in Mfg/Innovation in real time.
I personally, don’t project the past on the future, more so I firstly note the society, its stability, its ethos, and then how that shapes its economic and political outcomes. Hence why I appreciate the Good Will Hunting pub scene so much.
Ex MBA in Calif during the 80s mate with deep networks … I ran away …
PS. hard to argue against Prof Richard Wolff’s perceptions in my book mate.
there are something like 60 car companies now in China
There are also about 1.5 billion Chinese, which is more than the combined West (including Korea and Japan). In that light, such number doesn’t look particularly big, especially when you keep in mind they are in the pre-consolidation phase.
There are economies of scale in battery-making, which is what these Chinese cars are about. For instance:
https://www.iea.org/commentaries/the-battery-industry-has-entered-a-new-phase
As you can see below, PlutoniumKun understated the number of Chinese car makers. The McKinsey forecast of the industry going to <50 carmakers by 2030 thus does represent significant consolidation:
https://evboosters.com/ev-charging-news/400-chinese-ev-companies-ceased-operations-between-2018-2025-only-a-few-will-dominate-towards-2030/
I think a lot of rentiers blamed overcapacity in the U.S. for the Great Depression. I’m not so sure they were right, and I’m not so sure China will mismanage their problem in the same way we did. The Chinese can require most of these companies to consolidate, the way American car manufacturers did, but they should keep half a dozen or so to provide competition, which the Americans emphatically did not want.
Ahem, shadows of economists assuming a can opener.
Consolidation = losses of jobs, write-downs of excess capacity (the very issue you are trying to deny you effectively concede!) and nearly always, losses to lenders and equity investor. Japan zombified to avoid that, because among other things, egg breaking on that scale is socially disruptive.
Thank you Polar Socialist. Your comment made me rise a question. What level of household savings could be considered sane and who is in the position to state such sanity level? It is the Western system better because our elites are able to extract everything from households and eliminate savings which look like a luxury allowed only to part of the corporate sector?
I think it’s misleading to focus on household savings as a meaningful measure – it’s just an accounting identity, not a ‘real’ figure. By definition, all accounts should settle to ‘zero’ in the end.
A key problem with world economic analysis, as people like Pettis and Setser repeatedly point out, is that most economists don’t actually understand how these things are measured, so they fall back on weak cultural explanations for figures that don’t match their models (‘Asians like to save a lot’). Which is why so much conventional economic analysis is so misleading. Most economists don’t understand what they don’t understand.
Ultimately, the only things that really matter are the productivity of the economy, whether that productivity is in products that people actually want, and how it is internally distributed.
“Ultimately, the only things that really matter are the productivity of the economy, whether that productivity is in products that people actually want, and how it is internally distributed.”
I don’t know about you, PK, but it’s that last bit — the distribution — which gets insufficient attention, especially within the orthodoxy where it is outright taboo, not least because even acknowledging it makes a mockery of their precious “representative agent” models. So they jail any nascent Galileos in order to preserve their well-feathered Ptolemaic nests …
We do “representative agent” because modeling collective behavior of multiple individials, especially consumers or strategically behaving producers, even when they are assumed to be simpletons who behave mathematically (misleadongly labeled “rational.”), is logically impossible. This has been known for decades–everhthing goes back to Arrow in some form.
So, to say anything, we need to come up with a framework that’s kinda stupid, but provides a structure that we can think around. The catch is that, once we have a structure, even if we really know it’s just a convenient starting point, nobody wants to be seen straying too far from it. (Kuhn got this part fundamentally right, I think.)
Gasp – “Ultimately, the only things that really matter are the productivity of the economy, whether that productivity is in products that people actually want, and how it is internally distributed.”
GDP has no distribution vectors for an Ideological reason, because too acknowledge its corrosive social dynamics is abhorrent to those driving the natural order agenda[.]
As such any nation with sufficient population and resources focused firstly on their nation will outlast the ones manically focused on rents for the elites.
The issue of measuring services in GNP was addressed as far back as the 1990’s in China – for what it’s worth, Chinese GNP is now generally measured according to international standards. Chinese GNP was almost certainly far greater than officially measured for the period 1950 to the mid 1990’s. But ultimately, GNP just measures the amount of money circulating, its a very poor measure of ‘real’ wealth, which is ultimately a function of productivity, or more specifically, productivity in products that make peoples lives better. A sure way of knowing someone doesn’t know what they are talking about is when they start throwing around GNP figures to ‘prove’ country X is doing better than country Y (except for very specific purposes). One of the many failures of economics is its inability to come up with meaningful comparative measures of human well-being. Irving Fisher, who developed GNP measurements, warned about this, but he was generally ignored.
We totally agree here. My point, if you will, was to point out that as both numbers in the ratio, the GNP and the amount of household savings, are somewhat questionable, it’s not necessarily smart to try and deduce some insight from it.
As you mention above, economics is hard to model, and I believe Chinese economics is even harder to model. It’s not just of mixed character, it also consists of 34 economically distinct and to a high degree economically autonomous provinces.
And, to my understanding, if you accumulate surplus money in China, it’s not easy to convert it to assets; can’t really buy land or estates for investment purposes, nor is there that many stocks to put your money into. Nor are many banks that reliable, either.
Which may explain, as your Chinese friend says, everybody owns money to everyone, as these “clandestine micro loans” cannot be taken away, confiscated or destroyed like more tangible property could.
See my comment above.
Indeed yes – its such an ubiquitous measure that its very easy to fall into the trap of thinking it means more than it does. I remember being warned as a bored econ undergrad not to overinterpret the figure, and then find that my lecturers would do exactly that in the next class. This was particularly important in Ireland, where GNP/GDP was essentially abandoned because transfer pricing for tax reasons had driven it out of all proportion of reality. Just this morning Brad Setser had a twitter thread pointing out how difficult it is to measure the ‘real’ value of services in international figures.
Of course, the big question with regard to China is ‘what is the real answer as to how developed/wealthy China is now in relation to its peers?’ I’ve been reading arguments about this for 30 years and I still have absolutely no idea.
As for your point about local borrowing – my point about this is that while localised borrowing is very important in many communities worldwide, and it itself a good thing, the problem comes when the borrowings get used as leverage for other loans (official and unofficial). In other words, it becomes a ponzi scheme. The fun starts when these start to unravel, as they always inevitably do. I have no idea about the absolute extent of these in China (I doubt anyone does), but anecdotally, they are very widespread.
So much becomes visible and understandable when a proper analysis is applied to what is happening before our eyes. Not reading mainstream corporate media helps, also Many thanks to Yves, Michael Hudson and others.
Most interesting that Bill Mitchell has just now blogged on the Employment Ice Age in Japan https://billmitchell.org/blog/?p=62542 that China will want to avoid.
30 years ago as the US offshored its manufacturing, I predicted (not tooting my own horn here – this was fairly easy to see coming) that China would benefit, develop its own economy and create a burgeoning middle class, and at some point it would begin selling the goods it produced to its own massive domestic market. So this –
“Wolf points out that China has a large enough potential internal market to solve this problem. But the Chinese continue to save at very high rates.
~snip~
The reason Chinese save so much is the lack of social safety nets and worker protections, such as a minimum wage. And yes, China could readily solve this problem but Xi is hostile to it.”
-explains a lot. Does he feel China is just not ready yet? Setting a minimum wage would surely make exports less competitive. But wouldn’t it also increase the purchasing power of its own citizenry? And if Xi’s opposition is truly ideological, which I can understand – the rampant consumerism by the USian population which is literally trashing the world isn’t something to emulate – can’t something be done to steer the population toward spending on less or non-destructive items? Surely the Chinese could make products built to last instead of the current model which demands that we all repurchase cheap junk once it inevitably breaks. Not all commodities are created equal after all.
>>>Surely the Chinese could make products built to last instead of the current model which demands that we all repurchase cheap junk once it inevitably breaks. Not all commodities are created equal after all.
I can remember when American made white goods, furniture, tools, and clothing, were generally of high quality and long lasting; first the quality of the new stuff went down, then all the used goods that could be found in thrift stores disappeared, and finally all the manufacturing went overseas as the corporations and PE continually searched for higher profits every decade, then year, followed by the quarter, perhaps by the day now. Just as the American economy was destroyed by the greed of ever increasing profits right now even if it did destroy the future existence and profits of businesses, if the Chinese decide to do the same, what would stop them?
WOW! Extremely eye opening article.
I’d suggest Kalecki be awarded a Nobel prize because it seems the elite everywhere can’t fathom the idea that ordinary people deserve more of the pie and are willing to drive their home countries over the cliff to prevent any meaningful increases in sharing – they just don’t deserve it! or so they think of all the peons.
ECB dollar swap needs are declining on an ongoing basis, see todays swaps at the NY Fed. The Fed has just bought $ 20 billion in 3 years and $15 billion in 10 years at lower coupons, It remains to be seen how much of todays 30 years it bought, this is being called SOMA action and not QE lite like it should. Note how bonds blew up as soon as the 30 year auction was over.
US bond market is getting thinner and increasingly the demand is official, they are creating their own reality again.
Kalecki’s profit equation tells us why the deficit spending is so well loved by US corporates.
This was reported on months ago (last year), but apparently it still has some steam:
https://nypost.com/2025/05/06/opinion/chinas-enraged-workers-are-fed-up-with-eating-bitterness/
The pressure cooker of global events isn’t helping the situation.
Chinese save 45% of GDP (approx.50% of their income) and maybe 1/2 of them still have reasonable quality life. Americans save only 20% of GDP and may be 1/2 of them struggle. It should be the other way round, I guess. Is there something wrong with the US system?
Savings as described here is in aggregate, it doesn’t describe a typical household or family or even any business.
And where most people get lost is that it’s all based on accounting of dollars/currency. It does not accurately account for productive capital which is true capital wealth which is what the working people live by.
When the economy went into depression after 1929, the factories stopped not because of need, but cause the accounting orders said produce no more.
The scale of those “produce no more” accounting orders shrank the US economy by 1/3 by 1933. It is a fundamental factor in FDR’s inauguration speech where he says, “…the only thing we have to fear is…fear itself.”
All FDR and his team needed to do was change the accounting. The capital was there to re-deploy productively. Incomes could be restored.
That was all allowed to happen because the alternative for the elite was to allow things to get worse, because their lack of sharing was only feeding the economic decline which they eventually feared would turn into a french revolution type situation. Sadly the elite of today have given little thought to that repeat of history.
It’s articles like this that have taught me real macroeconomics and why I love this site. Thank you Yves for your work. It has an effect on the real world too, esp. in the way I deal with multiple issues in the evil multinational.
Bravo! Excellent article and commentary.
Yes. I’m overwhelmed.
Agreed. Thanks Yves.
Don’t worry everyone, the world’s smartest man, Elon Musk is on the case!!! Once there’s sufficient population in Mars, everyone on Earth can run a surplus selling to suckers in other planets, and once we’ve run out of planets, we’ll sell to beings in other dimensions. #ScienceYouCanBelieveIn
Lots of nonsense written here…look, China’s life expectancy, increasing every year is now at 79 years and has passed that of the US, which drops every year…even Cuba’s life expectancy, 78.5, is higher than that of the US…nothing more need be said…
I believe that all the economic proposals for rebalancing China’s economy toward domestic consumption have been on the table since the 2008 financial crisis (which for a time blocked the continued expansion of exports that the export-led model depends on).
And China knows full well what happened in Japan.
It is neither ignorance nor stupidity nor lack of options that is stopping a rebalancing.
It is a political decision. Part of it may well be that a consumption-oriented economy will be one that concentrates a smaller proportion of consumption and (more importantly) of power in the hands of the current power holders. I would guess that another part is that China’s leaders look at the current exemplars of consumption-led economies and dislike both the economies (deindustrialized) and societies (demoralized, at least from China’s perspective).
To put it another way, an abundance communist society would be truly uncharted territory.