Today’s Read of the Day: Richard Koo in the FT

Here’s the simplest break-down of our current economic plight that you’ll find around:

We are recovering from a debt bubble that occurred (primarily) thanks to excessive housing speculation.  As the household sector repairs balance sheets (by becoming savers as opposed to spenders) spending in the economy becomes insufficient to sell all the goods and services necessary to employ everyone in the economy.  Ie, aggregate demand is too low so workers get fired as capitalists maximize profits via cost cuts as they protect margins.

There are two choices from a policy perspective in such an environment.  We can either support the de-leveraging by running larger budget deficits through tax cuts or spending.  OR, we can let the private sector implode and “heal itself”.  The former is akin to a man with a case of cancer who goes to the hospital for chemotherapy and suffers through months and even years of recovery and pain (but survives).  The latter is akin to the man suffering from cancer who decides he doesn’t need the aid of modern medicine and decides his body will heal itself (and dies).  The results have been crystal clear in nations that have enacted austerity following their credit busts.  Nations like Spain and Greece are in full-blown depressions while nations like the USA muddle through, but continue to grow.

Richard Koo explained this a bit less succinctly in the FT yesterday.  He is right.  I hope more Americans begin listening to him.

“Japan’s attempt in 1997 to reduce its deficit by 3 per cent of GDP – the same size as the “fiscal cliff” now facing the US – led to a horrendous 3 per cent drop in GDP and a 68 per cent increase in the deficit. At that time, Japan’s private sector was saving 6 per cent of GDP at near zero interest rates, just like the US private sector today. It took Japan 10 years to climb out of the hole.

Average citizens find it hard to understand why the government should not balance its budget when households and businesses must all do so. It is risky for politicians to explain but, until they make it clear that the economy will implode if everybody is saving and nobody is borrowing, public support for the necessary fiscal stimulus is likely to weaken, as seen during the past four years of the Obama administration.

The US economy is already losing forward momentum as the 2009 fiscal stimulus is allowed to expire. There is no time to waste: the government must take up the private sector’s unborrowed savings, to keep the economy from imploding and to provide income for businesses and households so they can repair their balance sheets. Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.”

Read it here.


Got a comment or question about this post? Feel free to use the Ask Cullen section, leave a comment in the forum or send me a message on Twitter.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • SS

    Your argument is very clear and you’ve been right about a lot of stuff, but at what point are we just a drug addict who can’t stop turning to the government every time we have a problem? Isn’t that really what we’ve been doing for the last 30 years?

  • LRM

    Your drug addict comment reminded me of the post from Denninger on the KOO piece
    This is the polar opposite of the MR view and there is no possible way that these 2 different view points could ever compromise.
    Cullen has been more prescient due to his understanding of the current “monetary machine” but these strong opposite opinions are worth looking at as it aids in better understanding the deficit hawks. The make up of the legislators include these sorts of thinkers so if they dominate too much then a move toward austerity could give the Japan experience mentioned in the Koo post.

  • SS

    Denninger is a little crazy. He thinks Koo is an MMT advocate which is wrong. I agree with Denninger that MMT is extreme, but that whole link reads like a crazy man wrote it.

    I also don’t think MR is the opposite of Denninger’s position. MMT might be because they take some extreme policy stances, but MR just describes how the system works. And I think that’s why Cullen’s proven much more prescient than many others.

  • Johnny Evers

    Japan has more debt than any nation on earth without getting out of the doldrums, so it’s always puzzling to read that all would be well if only they had borrowed more money.

  • Cullen Roche

    Net govt debt in Japan only breached 100% in 2009 – almost 20 years after their bubble burst. Their deficits were also much smaller than the USA’s following their bubble bursting. The problem was that Japan never borrowed enough. They didn’t hit a 10% deficit as % of GDP until 9 years after the bubble burst. The USA did it in 6 months. That’s why I say the USA is Japan on fast forward.

  • Jayarava

    I might have read this, since it sounded interesting. However I was put off by the huge *flashing* advert in the middle of the text tempting me to achieve a flat belly that very nearly gave me an epileptic fit instead.

  • Cullen Roche

    Rather than deal with the occasional flashing ad on sites like these, you could also pop over to the FT where they will charge you just to read their content. :-)

    Ads (even bothersome ones) keep the internet free. Embrace them. Or start embracing an internet with pay walls. I will never charge readers to access this website. The downside to that is you have to deal with ads, because, unfortunately, it’s not free for me to run the site and the marginal ad revenue helps make it worth the time and effort….So, it’s either pay walls, ads or no free web sites. Sorry.

  • Johnny Evers

    I understand what you’re saying, but please consider that everything I hear from the perpetual stimulus crowd is that — we didn’t borrow enough, we didn’t borrow at the right time, we borrowed for a while but then stopped, we stopped borrowing and then the economy tanked.
    Fine, but if that’s the answer, just go with that. What irritates me is the postscript from Koo that Fiscal consolidation should come only once the private sector has repaired its finances and returned to profit-maximising mode.” … We know that day will never come because of expanding entitlement programs, and heck, even if did come, Koo would argue that it would be dangerous to stop stimulus.

  • Dennis

    I don’t like this “drug” analogy at all. What happened during the Bush administration was massive money printing by the banks in the form of credit that was exchanged for a claim on assets. It’s like a swimming pool overflowing due to a fire hose dumping water into something that is already full. Then the 2008 crash came and much of the debt dollars (e.g. credit) became instantly worthless along with the assets supposedly backing them. The pool was suddenly half full. Uncle Sam has been adding water via a regular old hose (via deficit spending), but this will take a lot of time and a willingness to create fiat currency at the expense of the rich and to the benefit of those that have no money only debts. In Europe they continue to drain the pool.

    At this rate the world’s amount of fiat currency will never be enough to put it’s people to work. There is so much work that needs to be done yet no fiat currency printing to make that happen or new debt dollars created (e.g. credit). The only worry from deficit spending and bank credit creation is when/if the pool of fiat currency in the world begins to overflow the pool again. (Note-due to currency trading, the USD and all the other fiat currencies in world are in the same stirred pot.) At these low interest rates there is little interest for the banks and little demand from the private sector who are net saving. Only Uncle Sam’s deficit spending can help (the Fed is a downstream process). What Koo says makes perfect sense to me.

  • Bond Vigilante

    There’s another factor that impedes growth: Demographics. From about 1980 up to about 2006/2007 demographic developments supported economic growth in the US, Canada, Europe and Australia. But now demograpic developments are going to be a downward drag on the economies of those countries.

    The current demographic development of people retiring in the US (some 92 people in the coming 15 years) make sure the US economy won’t grow at all. No matter how much stimulus, how large the deficits of the US government are. The US economy is going to shrink.

    We saw the same in the Japan. Demographic developments in Japan made it certain that that economy was bound to shrink from the 1990s onwards. And the japanese debt bubble broke/will break the back of the japanese camel in the near future. No matter how large the japanese deficits are or no matter how much money they “print”.

    Didn’t you read the news about Sharp in the last two weeks ?

  • Aaron

    I get ads for TDAmeritrade in the center of the screen. You usually get ads for stuff you read about regularly… So do you need a flat belly? :)

  • Bond Vigilante

    And an aging population is EXTREMELY deflationary. No matter how much money a government prints.

  • Anonymous

    Koo is treating a symptom and not the root cause. He is trying to fight diabetes without addressing the obesity issue. Once the economy loses the weight we can treat the diabetes more effectively. The problem is Keynesian economics and the generational relics who keep promoting it. It is a failed theory.

    “Keynes contended that by giving the government the responsibility to create the purchasing power necessary to regenerate confidence, we could put our resources back to work sooner than the natural forces in our economy would dictate. By smoothing out the natural economic forces (business cycle) Keynesian policies have created periods of excessive demand or insufficient supplies which have lead to inflation. In stimulating demand the Keynesians have encouraged a huge shift of money and credit from the investment sphere into the support of consumption. Consequently, it becomes more difficult to finance the investments needed to expand production: supplies cannot keep up with demand. As a result, prices rise. Yet, the Keynesians do not let demand respond to the higher prices by falling, as in theory it should. By increasing government spending and cutting taxes in order to prevent a politically unfeasible credit collapse along with a serious rise in unemployment, the Keynesians end up accommodating these inflationary price and wage increases. Thus, Keynesian economics has left us with a structural vulnerability to inflation”. The consumer tapped out. All we are doing now is capitulating.

    The balance sheet recession Koo refers to is the economic equivalent to diabetes. The real issue is Keynesian economics or the obesity issue. We have to lose the weight.

  • Pierce Inverarity

    What weight is that again?

  • Johnny Evers

    I get a blonde with sizable financial assets and a neckline that plunges like the stock market on Black Friday.

  • JB McMunn

    “support the de-leveraging by running larger budget deficits”

    What a unique approach to deleveraging – more debt. But this is special magical government debt that does no harm, right?

  • Cullen Roche

    You have to distinguish between govt debt and private debt. Intermingling the two doesn’t help us understand anything. The govt will not default on its debt because it can create the currency if need be. The pvt sector, however, can default. So, your decision is to create more govt debt with the understanding that the govt won’t default and can help fix pvt sector balance sheets or we can do what some countries in Europe tried and cut spending when the private sector cuts spending and end up in a depression. Your choice. But if you choose door #2 then I hope you have a good argument why we should all agree to become more like Greece or Spain where there is a depression.

  • Geoff

    The Snorg Tee ads are my fave.

  • Johnny Evers

    ‘Greece’ is a scare tactic for both sides. Either we’ll borrow too much and wind up broke like Greece, or we won’t borrow enough and we’ll wind up broke like Greece.
    Greece is a poor country with 11 million people of little global import that has been subsidized by years by Europeans who finally got sick of it.
    Maybe the only lesson is that a country that doesn’t produce, can’t spend.

  • Don Levit

    The economy will implode if everyone is saving and no one is borrowing.
    Is the only alternative to saving that of borrowing?
    What about spending.?
    The economy will implode if everyone is saving and no one is spending.
    People can save 3% of their incomes, as they are now doing, and spend 97% of their incomes. One can save and spend, simultaneously; they are not mutually exclusive.
    Why should people go into debt, just so they consume items they may want, but don’t need – just so people can have jobs?
    Why does savings seem to get a bad rap in comparison to spending?
    Can we agree that it is saving which produces long-term positive results, not spending?
    And, if interest rates were higher, total saving would be higher, and more positive long-term benefits would be the result, including less people being tempted into debt via low interest rates.
    Don Levit

  • Pierce Inverarity

    You got it right. And America produces. What’s the number, 25% of world output? A lot we produce for our own consumption, but that’s not the end of the world.

  • Cullen Roche

    We produce 25% of world output. We export as much as the entire GDP of Russia every year. Comparing us to Greece is ridiculous.

  • rob T

    The problem with blanket statements of that caliber is that they appear axiomatic. They seem so self-evident, and they’re said with such conviction that one is reticent to argue with them. There’s a problem with that notion, however: it assumes that consumption trends decline with age. That assumption appears reasonable on its surface, though it neglects the fact that the decline is consumption is largely offset by a decline in savings rates. The elderly by and large spend every dollar they have going into the grave. The incentive to save for the future is gone, whereas the incentive to consume (albeit not on the trappings of youth) is paramount. While I haven’t provided any numbers with which to support my argument, neither have you, but my argument is at least supported by some reasoning. Why should an aging population prove deflationary? We’re a consuming nation thanks to our reserve currency and balance of trade, so why should a dearth of young “producers” result in deflation, especially in the face of deficits?

    Your Japanese “example” doesn’t really support your assertions either. You’ve identified a corollary, but what does Sharp’s decline have to do with an aging population? Does Hewlett Packard’s decline speak to the danger of an aging population, or is it simply reflective of compressed margins in an extremely competitive industry eroded by decades of accumulated legacy costs?

    The U.S. population is still growing, and while the average age is increasing (also a result of increased life spans), the workforce is growing too, thereby refuting any notion of declining productive potential (energy is probably the greatest constraint on that figure) based upon demographics alone.

    If anything, demographics will play a major role in reshaping our economy, as those with savings liquidate them to support their lifestyles in retirement, thereby increasing demand for those services associated with retired living. People should (and will) adapt accordingly.

  • onepurplesage

    (Apologies in advance, Cullen) What ads? Use a different browser and install an ad blocker plug-in. (I’d tell you which browser & plug-in, but I’m already afraid of banishment…)

  • Mikael Olsson

    What has been happening over the past 30 years with govt deficits + ballooning private debt is because of two things:
    1. Growing population needs more money to keep prices constant
    2. ENORMOUS sums of money disappearing into savings accounts, financial sector, and offshore

    Should we keep going into debt indefinitely? Aust(e)rian economists say we should just let the economy tank and find a new balance. Like in the 1800s. Where recessions were a few years apart and 15%-25% GDP drop from peak to trough. That’s Greece’s reality; ask them how they like it.

    I put together this FRED chart today:

    Notice how the AVERAGE (not median) income tracks with ALLMON/POP.
    Notice how Joe Workers earnings do NOT track with the other 2.
    House prices added to explain a big chunk of where the new money is coming from, and who is paying for it. – Yeah, that’s right. Joe Worker.

  • Mikael Olsson

    “Saving” is the reason why we have to keep going into debt to keep the economy working.

    The savings enabled by profits from our highly-efficient automated/offshored factories do not find their way back into the everyday economy again.

    The alternatives are: ongoing recession, or, as all western politicians opted for: nonstop monetary expansion via debt. But now we are getting close to the zero bound on interest and things are going to get Very Interesting.

  • mike r

    Raise the maximum tax rate back to 70% and put back in all the loopholes and ITC’s…Spend it, invest it or pay the government…Private sector will chose the first two…mr

  • Bond Vigilante

    Household formation is the most powerful force behind consumer spending and therefore earnings of companies. Once a married couple has a house full of stuff (e.g. TVs (Sharp)) they simply won’t spend much money on new stuff (e.g. new TVs). They only spend money on replacing stuff that has broken down. Household formation occurs when people are in their 20s or 30s. Peak Spending occurs at the age of about 45, 50 years. The median age in the US is – guess what – about 45, 50. And Spending drives an economy.

    People liquidating their savings hurts the economy because they withdraw their money, leaving less capital available for the rest of the economy, to support economic growth. And some 92 million people are about to retire in the next 15 to 20 years in the US. A giant deflationary drag on the US economy, going forward.

    Birth rates in Europe and North America peaked around 1960. The birth rate in Japan already peaked in 1950. And that’s why Japan’s economy was bound to tank about 45 to 50 years later, in the 1990s. The japanese credit bubble of the 1980s only made the economic contraction in the 1990s much more worse.

    But now Europe and the US are next in line to suffer under an aging population. Very deflationary, no matter how much the current or next administration (Obama or Romney) spends.

  • Dennis Parmelee

    The housing bubble was a result of easy money after 911. Savvy investors leveraged and flipped houses because hot money always chases the highest and best use.

    The inflationary housing domino bit all the undisciplined howeowners who thought the cycle would never end snd took out equity lines to the hilt.

    It also bit their prudent neighbors as well, despite Alan G’s assertions that only the last buyers would get hurt.

    “Save America, go buy a hunner” sounded patriotic, but actually it was idiotic.

    Between Y2k and that horrific event,Alfred E adopted a “what me worry attitude”, figuring he would never be around to pay it back.

    Keynesian policies are flawed.

    Gold bugs bought, and the $5 breakout in Silver was an alarm going off to sophisticated investors.

    Bankruptcy rules were stiffened.

    Escaping from responsibility for student loans was made next to impossible. A recipe for disaster, especially when grads can’t find jobs.

    The market always speaks to us, but most people wont listen.

    Shifting the toxic assets to the taxpayer, then hiring the same jerks who got us in this mess to clean it up was truly a work of art.

    We are still a nation of sheep.

    Freeze the politician’s pay until we get a balanced budget. Give them the same social security benefits as everyone else until we are solvent again. Congress is supposed to work for us, not the other way around.

  • Mikael Olsson

    I have my own personal favorite method of smartening politicians up:

    Set their wages at Median income X constant X % of people ages 25-65 with a job.

    The constant would be in the 3-4-5 area depending on assignment.

  • Mikael Olsson

    Couple of nits:

    1. Liquidating savings has absolutely no bearing on amount of money available for investment. First of all, we have frac reserve banking. (Second of all, the megarich claim their wealth trickles down. Ahahaha)

    2. Many european countries also had birth rates peaking around 1950. I live in one.

  • Dennis

    “Keynesian policies are flawed.” Dennis, I do not understand you at all. From Wikipedia on Keynesian monetary/fiscal policy “Contrary to some critical characterizations of it, Keynesianism does not consist solely of deficit spending. Keynesianism recommends counter-cyclical policies.[13] An example of a counter-cyclical policy is raising taxes to cool the economy and to prevent inflation when there is abundant demand-side growth, and engaging in deficit spending on labour-intensive infrastructure projects to stimulate employment and stabilize wages during economic downturns. Classical economics, on the other hand, argues that one should cut taxes when there are budget surpluses, and cut spending—or, less likely, increase taxes—during economic downturns. Keynesian economists believe that adding to profits and incomes during boom cycles through tax cuts, and removing income and profits from the economy through cuts in spending and/or increased taxes during downturns, tends to exacerbate the negative effects of the business cycle. This effect is especially pronounced when the government controls a large fraction of the economy, and is therefore one reason fiscal conservatives advocate a much smaller government.”

  • Dennis Parmelee

    I can understand how you might feel that way Dennis, and I respect your opinion. Emotional energy gets in the way of rational thought; both yours and mine. (“I do not understand you at all”)

    With all due respect Dennis, I do not defer to wiki as the ultimate reference tool, as you suggest.

    I am “apolitical” by nature, and simply think that Democracy is great but government has gotten out of control.

    Having been a fan of Richard Maybury for almost 20 years, I will let his work more eloquently explain things to those open-minded ehough to see both sides of this issue.

    The government can try and print its way out of this mess, but the rest of us cannot.

    Common sense says that we cannot push on a string indefinitely.

    “I’m from the government and I’m here to help you.”

    Let’s see: AIG, Big Banks, Detroit…

    No thanks.

  • Pierce Inverarity

    I love this

  • Johnny Evers

    You’re making the Greece comparison. You just wrote that if we choose Door No. 2 — ‘austerity’ — then we will wind up as Greece, or Spain.
    That won’t happen. We have the biggest economy in the world, a culture of innovation, great universities, a skilled workforce. We’re not going to plunge into Depression if we choose to balance our budgets.

  • Pierce Inverarity

    What? We would actually plunge into a bad recession, possibly depression if we did balance our budgets. The math on sector balances just works out that way.

  • Cullen Roche

    No, you said we’d end up broke like Greece (which can’t happen because the USA can always procure funds it needs for spending or have the Fed fund the govt in a worst case scenario). I said we’d experience a deep economic contraction if we balance the budget. That might not drive us into a depression, but it will certainly make us MORE like Greece in that regard. Your comparison is totally inapplicable. Plus, where’s your evidence that a balanced budget wouldn’t result in a severe economic decline? Without any borrowing to offset the lack of govt spending it’s almost certain that there would be a recession….

  • http://ghickey g. hickey

    NO. It seems to me that we need to fix social security so that it is there when people need it. Raise the taxes, cut some benefits, but make it dependable.
    And then we need a single payer medical care system that covers everyone. Again, taxes on workers, progressive income taxes, and sin taxes to pay for the medical program. It is a fairly simple actuarial problem. More security.
    After everyone has health care and isn’t tied to their job for it, there can be real labor market flexibility. And then encourage companies to allow workers to work less than full time. So we can share the work. More people working, same payroll.More workers less welfare outlay.
    As folks get older they can work less. And younger workers can work and save in order to have a similar semi-retirement. Incentive to save.
    And cutting back on our income would help us to consume less. This will help the balance of trade.

    Technology change is the reason the jobs aren’t happening. Computers ARE cheaper than humans, productivity is up. We need to share the gains. So we need to change our social structures to take advantage of our progress in production.
    This may sound radical. In time it won’t.

  • Dave

    Dear CR, I’m still waiting for your prove of your “out-of-thin-air-theory” and “govt-can’t-run-out-of-money”.

    As I mentioned several times the world doesn’t has enough trees or cotton to print bills and even the best super computer will run out of digits at some point on the govt deposit…

    Please prove finally your statement.

    And then prove that the govt is some “deus ex machina” since according to you this almighty govt seems not to be connected with the private sector since it has somehow its own currency and this can’t be the $ since the private sector can awfully well run out of money. But if the govt can’t run out of money it must be independent and therefore govt = citizens must be wrong.

  • Cullen Roche


    Don’t take this the wrong way, but that comment is such an incredibly vast misrepresentation of my position that I can only assume that you are not remotely familiar with my actual positions….I have never said the govt is some “deus ex machina” or that the govt has no connection to the pvt sector. And I certainly never said the citizens aren’t the ones in control or “wrong”. In fact, I say exactly the opposite. Monetary Realism is primarily about explaining how we have a private sector based monetary system where the private sector is in control and the govt serves only a facilitating role. You might be confusing my positions with MMT which builds a govt centric view of the world. That is not my view or what I believe is an accurate description of the monetary system.

    You might want to read my paper on the monetary system again….

  • The Undergrad

    Incredible how you always remain polite and courteous individuals who are not.

  • Anon

    Actually Dave, considering you clearly think the opposite, I’d like to you present the scenario whereby the USA government DOES run out of money!

    (And please, please, please don’t change the subject to inflation like everyone seems to want to do by arguing along the lines that the government will inflate and pay you back in worthless dollars which is supposedly the same as defaulting)

  • PeteST

    I’m continually amazed by Cullen’s demeanor here. He lives up to his pragmatic moniker.

  • DJ

    But, the cancer story does not apply for countries. Cancer patients may die, but countries don’t die. The option isn’t between chemo and death. Its chemo vs lot of short pain but eventually a fundamentally toxic-free recovery, with no remaining side effects.

  • DJ

    The whole tragedy of the crisis is the conflating of the failing of companies and banks with failure of the entire economy. Au contraire, you need failing companies periodically to have a good economy. Why do we care much about companies? Why don’t we care about people as much. A company dies, people go to work for another company. Why is this so hard to understand?

  • Dennis

    I’m trying not to be a jerk, believe me. I thought the brief write up that I found from Wikipedia was a good summary. There actually is a lot of good information there, as well as references.

    As to the increase in fiat currency shown by this chart referenced by Richard Maybury: — If you do the math, this chart says there was a lot of fiat currency added to the economy, but it is a drop in the pool compared to the amount of fiat currency that was destroyed in 2008. The amount of credit (debt dollars created out of whole cloth by the banks), that went up in smoke, so far outstrips the tiny deficit spending by Uncle Sam. We just need to add this up. They say that $30 trillion USD went up in smoke during 2008. We got some of this back thanks to the impact of deficit spending, but not enough was done. This was also not done during Keyne’s time. This was not done during the early 1930s and waited until the start of WWII when truly massive deficit spending was done. This didn’t destroy the value of fiat currency. We are losing about 2% of fiat currency’s value compounded annually. Otherwise, who is going to pay the interest on the bank created debt dollars?

    — you really shouldn’t worry about this like Maybury does. I think “Keynesian policies” are only for times like these. It shouldn’t be needed most of the time. I’m hoping you can explain why Mr Maybury is sooo afraid of deficit spending when the lack of fiat currency is the problem these days in the world.

    I never suggested you rely on Wikipedia, the opposite. I don’t reject Wikipedia. I think it’s a pretty good starting point and provides a lot of references:

    “Monetarists and Keynesians are in agreement over the fact that issues such as business cycles, unemployment, inflation need to be addressed, but have fundamentally different perspectives on the capacity of the economy to find its own equilibrium and as a consequence the degree of government intervention that is required to create equilibrium. Keynesians advocate that when the economy is experiencing a decline in confidence that governments should borrow under-employed savings from the economy and spend it on infrastructure [note this is just what is happening today, the Economist has an article about this this week] , while monetarists argue that governments should balance their budgets and regulate the supply of money through interest rates.
    [and the same Economist Newspaper said this is why the EU continues to go down hill.]
    Keynesian policies fell out of favour in the 1970’s when it was realised that government spending was leading to inflation rather than create the economic stimulation that was required. Monetarism then became the dominant economic school and as a consequence, inflation rates fell across most developed countries and since the 1980’s have remained significantly lower than they were in the 1970’s. The Global Financial Crisis, however, has highlighted the need for Keynesian type government intervention through spending as governments found it impossible to stimulate economies through monetary policy alone.”

  • The Dork of Cork.

    “We export as much as the entire GDP of Russia every year.”
    What !!!

    What a funny statement.
    It a sort of economic gibberish ……….a wild crazy factoid plucked from some stat tree somewhere.

    Greece as been running a current account surplus for 2 months so as to pay out on a foregin currency.

    When last did the US run a current account surplus for even 2 months ?

    The US is the Finance sectors base of operations and Greece is one of its many colonies.
    The US is a Imperium.

  • GreenAB

    so true. additionally perpetual deficits are constrained by simple math – service on interest.

    two points i´d like to add:

    -comparing Greece/Spain to the US doesn´t make sense, since those countries are trapped in a currency that doesn´t allow them to devalue against their main (european) competitors. capital is leaving because of permanent uncertainty if they stay in the euro or not.
    so their main problem isn´t austerity or the lack of a printing CB. in a “normal” cycle they would have been cut off bond markets, introduce austerity, balance the budget, go through economic pain, but recover eventually when costs (labour+currency) make ém competitive again.

    -which brings me to the second point. the permanent stimulus crowd always argues that a deeper recession would mean the end of the world (cancer-death). there have been major crisis/bankruptcies in big economies like Russia, Brasil, Mexico, Argentina… yet every single country has come back after they failed. and they did it with far less productive assets. many now with stronger balances than the US, Japan, UK.

    as the latest example Argentina saw it´s GDP contract 15% over two years. yet they recovered quickly after the currency peg was gone: (i´m not aKrugman guy. link is for the chart only)

  • Johnny Evers

    While I agree that Cullen is always polite, it’s not accurate to say that MMR only describes the system. He persistently advocates deficit spending without seriously addressing the potentials consequences of that spending. And neither does he come to terms for how big that spending would be — even on the current path, the deficit will be $5 trillion annually in 10 years.
    It’s very easy to convince people that the U.S. cannot run out of money. You just have to show them the printing press, or, describe the primary dealer system in which the dealers are compelled to buy, and so long as there is one primary dealer willing to buy, the Fed can then turn around the take the debt off their hands.
    But to convince skeptics, you have to show why running that printing press full-time is a good idea.

  • Mikael Olsson

    It’s interesting how Krugman is sneered at by many here. Sure I get that about half of the people do not agree with his political stand – that’s fine. But speaking strict economics I only see him making lots of sense for the duration of this recession.. ?

  • Mikael Olsson

    Granted I don’t live & vote in the US so maybe it’s easier for me to ignore the politics and just look at the economics…

  • Mikael Olsson

    Show the outflows of USD from the economy. Explain that there needs to be a balance or the economy contracts.

  • freemarketeer

    A US default is on a different level than a BRIC country. None of those countries maintained the reserve currency.

  • HyperCynic

    The Chemo example has it exactly backwards. Continued stimulus and ever greater deficits to support private sector deleveraging is simply a placebo to make the patient think they are making progress while the disease continues to matastisize. Further, owing to political conflicts and inefficiencies, stimulus never gets to where it needs to go and/or would have the most marginal impact. As a result, the systemic disease compounds even further and in unanticipated ways. As has been noted, this approach treats the symptoms and does not get to the causes to effect a cure. To actually take the chemo/radiation is to allow the market to liquidate the malinvestment from the bubble period and set the stage for renewed organic growth from a lower level of economic equilibrium. And yes, this will be extremely painful economically, politically and socially. Regardless, I simply can not muster the faith that politicians can steer a course of financial repression through this storm and deliver us somehow to some new promised land. We will simply continue to blow new bubbles leading to new busts and owing to the power of compounding they will get progressively more severe. JMHO!

  • Cullen Roche

    The interest on the national debt is 2% of GDP. I am continually confused by people who say that’s “unsustainable”.

  • Cullen Roche

    No, MR (not MMR the disease) explains a set of understandings and truths. I use those understandings to discuss policy. You understand MR and describe completely different policies. Lots of people here understand MR and prescribe different fixes. None them represent MR views. MR has no political views. It’s just an explanation. You can understand MR and prescribe whatever you think is optimal.

  • GreenAB

    does it make sense to take GDP as a measure? i don´t know.

    in 2011 net interest was roughly 10% of all federal revenues.

    if debt keeps growing faster than gdp the this percentage increases exponentially.

    and i´m not talking about higher rates yet. there´s no guarantuee that the us will enjoy Japan like deflation that keeps long term rates low forever.

    but the bigger question is: how effective is it to spend a growing pie of the budget on interest? you have to borrow money or raise taxes. in both instances capital will be channeled towards an unproductive asset (interest).

  • Cullen Roche

    The same people who complain about the federal debt and potential insolvency are the same ones who complain about the lack of interest being paid on savings. But the interest on savings is a function of the budget deficit since interest expenses add to the Federal debt. So all these people who complain about the debt AND the lack of interest are contradicting themselves. You are worried about the rate of interest, but you’re also worried about the debt.

    Besides, the avg rate on the USA’s debt is well below the rate of inflation and RGDP. And has been for about 15 years now. That’s why the interest on the national debt as a % of GDP has declined for 15 years straight.

    And lastly, if you don’t like GDP (even though the debt fearmongers always use % of GDP) then just use the nominal figure. There’s absolutely nothing “exponential” about this data set. It’s been flat to down for 15 years now….The exponential growth story is sexy sounding, but it’s wrong and has been for well over a decade now.

  • GreenAB

    Cullen, you know exactly why interest as a % of GDP has declined. because interest rates have been cut all the way down to zero. how much more can they fall? maybe another percentage point to end up in the 0.80ies like Japan. but thats all. so that is backward looking.

    it shakes me that to don´t seem to worry one single bit about that issue.

    PLEASE have a look at these self explaining charts of Japan:

    i see a trend that makes me believe that there will come a point when

    here is what would happen if rates rise:

    i know your argument that rising interest rates would imply significant GDP growth that takes care of the deficit. but that remains to be ssen.

    my point is seen in chart1. if there is no dramatic change in growth then interest service as percentage of revenue rises exponentially.

    again – my point is NOT that there is near term danger. it can go on for many years to come. but the recipe of endless deficits that are higher than gdp growth will end when service on interest consumes most of the budget.

  • Cullen Roche

    “how much more can they fall?”

    They could fall all the way to 0% and your worries would be entirely gone as there would be no interest on the national debt. :-)

    We agree that deficit spending cannot perpetually outpace GDP growth. But that’s only because it could deteriorate living standards. It has nothing to do with being affordable.

  • Johnny Evers

    What does a world with 0 percent interest rates on government debt look like?
    Does MMR have a model to show what the results would be?

  • Cullen Roche

    JE, it’s MR. We haven’t called it MMR since the very earliest days. We’ve been calling it MR for almost a year now….

    The model for 0% rates. Sure, just look at Japan….

  • GreenAB

    “We agree that deficit spending cannot perpetually outpace GDP growth.”

    and here is the issue. our economic system is getting used very quickly to those deficits. a 7.3 deficit spurs just 2.25% of gdp growth in 2012. cutting back spending will hurt growth (as everybody is whing about the fiscal cliff). so growth has to pick up to get us out of this imbalance. how? realistically there´s only one way – to extend credit to people who have been cut off since the start of the financial crisis. but then again – borrowing by people who cannot repay is what got us here in the first place.

    imo it doesn´t matter who runs the deficits – households or the government – in the end the system works to concentrate capital in the hand of fewer people who don´t use it as effectively as it would be when spread wider across the population. the share of corporate profits and private wages as % of gdp has to turn around and readjust to pre 70s levels.

    charts see:

  • hangemhi

    another statement that keynesian doesn’t work that completely ignores that nothing works if you don’t know how to use it. stating that Gov spending can keep us from an economic collapse is NOT saying all gov spending is good, or is equal. Wars and ever larger tax breaks for the uber wealthy are far less productive than a myriad of infrastructure projects that NY/NJ now wishes they had done – and will still need for the next hurricane. Employ people now, save money later. Green energy – spend money now, save money later. And any Gov money that actually gets used, rather than padding the accounts of the already wealthy, is like rain on the mountain top vs. rain directly into the ocean. They both end up in the ocean, but the former feeds plants, animals and an entire ecosystem.

  • hangemhi

    I’m still trying to figure out how a super computer can run out of numbers :)

  • Dennis

    We should be considering this data on the fiat currency supply:

  • Dennis P

    I appreciate your ability to articulate your point, and will consider your thoughts.

    Although I am not an economist,I do remember seeing signs for gas at 25 cents and buying my first home for 21,900 in 1971.

    Somehow we have strayed from the idea that we wanted to be free and decided to meddle in everyone else’s affairs. That has come at a price. There are many other cultures in the world who can work as cheap labor, in addition to the tech advances that have eliminated jobs.

    Basic premise of this article is “Should we keep giving a heroin addict his fix?”

    Old school here, I say no.

    We still need to convince the Chinese and whoever wants to loan us money that we are a good risk.

    Then convince the younger generation to work to support the social security and medicare payments etc for seniors with no promise made for them.

    Servicing the increasingly burdening interest on debts becomes harder, and the classic literature says be the banker, not the borrower unless you pay for an under valued asset and pay it off promptly.

    We are doing neither of that by reckless spending is my thought. Socialist policies were meant to help people in need, not subsidize six generations or so of handouts to people who drive a lexus and have iphones.

    The most distressing part of Maybury’s thinking is the takeaway that economies boom in wartime. Hard to disagree with that.

    This post in particular opened my eyes to what I believe is a valid argument against Keynesianism.

    Pendulum is another great read by Roy H Williams… not an economist, but a profiler of history. Insights about crowd psychology.

    Best to you.


  • Bond Vigilante

    No savings/deposits means no banking system.

  • hangemhi

    After 1 minute on Maybury’s site he sounds like another Peter Schiff. He clearly doesn’t understand QE, for example. Being right about a couple of things, but for the wrong reasons means you’re eventually going to be catastrophically wrong. Be thankful, if you invested on his thesis, that it worked out. Now get out before you become Kyle Bass betting the farm on Japan’s collapse.

  • hangemhi

    You think a household’s debt, and the Gov debt are the same. You’re wrong, therefore your entire post is wrong. I’d explain, but your post has eaten up the character limit.

  • Dennis P

    Thanks hangemhi,

    I was not aware of Peter Shiff or his views, but google gave me a big aha. I remember his father and his attempt to win the battle against big government. Not a smart idea, needless to say.

    The 20 year cycle was off by a few years in the precious metals, but my guess is the surge of easy money altered it.

    KB made a nice bet in subprime stumbling, and timing is everything.

    I’ll take the fast nickel and keep focused on risk management.

    I still prefer real estate, but that game has been much harder last few years.

    I found guys like Maybury more useful than CNBC and all the hype.

    Thanks for the ideas.

  • beowulf

    “Your argument is very clear and you’ve been right about a lot of stuff, but at what point are we just a drug addict who can’t stop turning to the government every time we have a problem?”

    Is scurvy really a disease or just an excuse for our Vitamin C addiction?

  • Mikael Olsson

    Except that’s just flat out wrong in today’s world.

  • Mikael Olsson

    I think you will find that the reason MOST of the younger generation isn’t working is NOT because they don’t feel like it. Rather, it’s because their labour is not in demand.

    Automation and offshoring will do that. Only substantially increased demand for products and services will create demand for more labor. Or possibly slashing the hours of existing labor to create room for more. But then the profiteers would complain. And it gets pretty funny for manual labor sectors.

  • Mikael Olsson

    We are at the point where robots are building robots and have been for a while. And those robots are flexible enough that they can be put to work almost anywhere on an assembly line.

    Check these guys out:

    No assembly line wages.
    No wages for building the robots.

    Oops. I think I see where this is headed.

  • Jason H

    exactly.. there’s a official chart showing how production & production per capita has increased hugely in the US (to keep US #1 nation that has & still produces/manufactures the most)

    the difference is that fewere workers/labor is needed

    and there’s not enough spending/demand to buy all that businesses can produce so businesses just layoff to lower production, which keeps prices up by reducing supply since there is not enough demand(spending) & cuts labor costs

    BTW, the biggest myth is that we’re borrowing from China when China owns only about 8% US gov debt (which is really nothing more than savings accounts at the Fed).. and it’ll be repaid by just creating more money just like it always has been since WW2, –NO need for higher taxes

    US bond holders just get paid back in more fiat dollars,–they can’t demand higher taxes, real estate foreclosures, or attaching wages, LOL

  • Jason H

    or the gov can make up for the ‘demand-leakage’ by just ‘deficit spending’ (aka gov money creation instead of private bank money creation/loans/debt) to give workers more tax cuts/jobs/income

    and that money creation/deficit spending is best spent on productive things like these gov inventions that took decades of gov deficit spending & funding/subsidies:
    nuclear power
    MRI machines

    and even computers & lasers were comissioned/gov funded by gov for census & computing artillery ballistics tables

    Norman Borlaug was the Nobel Prize gov scientist that was responsible for the 30x to 50x increase in crop production from decades of research in plant genetics for increasing crop yields in the 1950s-70s that made the US the #1 producer of crops/grain exports –and he share his findings with everyone & the private sector for free (and he himself was educated in botany on FDR’s New Deal programs before there was finacl aid programs) –he really averted global food shortages.. and more amazingly, his gov research was given to/shared with everyone for free.

  • Mikael Olsson

    Considering that a 64-bit number is enough to count all grains of sand in the world… yeah, me too. The universe will be gone long before a NES (yes the 8 bit one) runs out of bits in memory.

  • Mikael Olsson

    All I can say is.. thank for people that do things without immediate promises of extravagant riches. We would still be running around clubbing each other in the head with rocks if it weren’t for them. Forget clubs, they would have been patented and not given to non-toadies.

  • Mikael Olsson

    “thank [insert deity or expletive]” except i did it with > < and the system didn’t like it.

  • Mikael Olsson

    Except in many cases people really don’t go to work for another company. Importers just import more.