economic situation is dire

[JulieB]

Is it right now to be sceptical of the majority of economists?

Many of them are just sitting around scratching their heads because the model is so corrupted it is slowly ceasing to function.

Apparently apart from "Inside Job" narrated by Matt Damon & "The Warning" made by Frontline... which are just brilliant in understanding what is going wrong with our global economy.

I've been highly recommened to watch "Chasing Madoff"....so intend to.

No doubt it will make me feel nothing but anger and dismay again.

[blandy]

Can someone help me? -it's being said a lot, in some of peter's links and elsewhere that essentially when the government sector runs a deficit, the non-government sector runs a surplus of equivalent size.

But that seems like a basic thing being claimed as fact when it's totally untrue - we have had Government deficits, and private sector debts both increasing concurrently, and for a fair old period like, 8-10 years or more, haven't we? The internet rather seems to say so.

[snowychap]

Can someone help me? -it's being said a lot, in some of peter's links and elsewhere that essentially when the government sector runs a deficit, the non-government sector runs a surplus of equivalent size.

But that seems like a basic thing being claimed as fact when it's totally untrue - we have had Government deficits, and private sector debts both increasing concurrently, and for a fair old period like, 8-10 years or more, haven't we? The internet rather seems to say so.

It isn't untrue, though.

This graph from the ONS (via Martin Wolf at the FT) shows the sectoral balances over the past 12 years or so:

[DeepDish]

When did someone redefined the word austerity as a bad word?

It is rather crazy that the common view now is that it is deadly wrong for a nation to live within its means, i.e. spend less that it takes in i taxes and other revenues.

The idea that austerity is killing Europe is wrong. Here is the graph that shows the economy in the euro zone:

And has the euro members seen austerity?

NO! France has increaed spending from 2010 to 2011 from 1.095 trillion euro to 1.118 trillion euro. Why on earth does Hollande then say "We’re no longer doomed to austerity"?

The spending cuts in Spain has only been 11 billion euro (2.3%). In Italy spending increased with 4.3 billion.

These are numbers from Eurostat and they show that there has not been austerity in the big Euro countries.

The countries that has had austerity are for example Latvia, who now runs with a budget surplus, has high growth again and the unemployment numbers are down. Though has the times been tough for the people. But they are done with the job.

[peterms]

When did someone redefined the word austerity as a bad word?

It is rather crazy that the common view now is that it is deadly wrong for a nation to live within its means, i.e. spend less that it takes in i taxes and other revenues.

The idea that austerity is killing Europe is wrong. Here is the graph that shows the economy in the euro zone:

And has the euro members seen austerity?

NO! France has increased spending from 2010 to 2011 from 1.095 trillion euro to 1.118 trillion euro. Why on earth does Hollande then say "We’re no longer doomed to austerity"?

The spending cuts in Spain has only been 11 billion euro (2.3%). In Italy spending increased with 4.3 billion.

These are numbers from Eurostat and they show that there has not been austerity in the big Euro countries.

The countries that has had austerity are for example Latvia, who now runs with a budget surplus, has high growth again and the unemployment numbers are down. Though has the times been tough for the people. But they are done with the job.

If a household, or a firm, spends less than it takes in income, then it is adding to its real wealth.

If a country spends less than it takes in taxes, then it is usually reducing wealth for households and firms.

It seems really hard for people to understand these things at the same time, because they insist on assuming that governments are just like households and firms. They aren't. They are wholly different, and you can't extrapolate from one to the other.

If households continue to spend more than they earn, they will bankrupt themselves. If governments spend more than they take in taxes, then (if they don't outstrip the unused productive capacity of the economy), they will tend to add to the national wealth. The government is not just one supersized household.

Austerity is just a shorthand term for adopting the traditional approach of foolishly treating an economy like a household, and thinking that if times seem hard, you have to cut back and that will make it better. It might make it better for one household or many, but by definition it can't make it better for all, because total spending falls, therefore total income falls, and we are all worse off on average.

This is called the paradox of thrift.

The graph you show is very odd. The article it comes from purports to show that no reduction in gdp has taken place, but the graph is presented in a very strange and dishonest way, starting at 30 and ending at 40, in order to magnify greatly the slope of the dramatic line it shows. It's a wholly wrong way to represent information, but it also seems to undermine what it is trying to say, ie that there has been essentially no change in gdp. The lack of proper labelling doesn't help - we are left guessing what the numbers might mean.

You will find that part of the reason for the figures you quote is that when countries try to cut spending by stalling the economy, it has a different effect than they imagine. Tax take goes down, welfare spending goes up, as does spending on policing, imprisonment, mental health and so on. So they cut planned government spending, but all that happens is they shrink the economy without making much impression on net government spending.

As for Latvia, Michael Hudson has studied that country in depth over many years. Here is a piece which explains a few of the things going on there, why it is not working, and why it's about the last place we would ever want to copy.

[snowychap]

The countries that has had austerity are for example Latvia, who now runs with a budget surplus, has high growth again and the unemployment numbers are down. Though has the times been tough for the people. But they are done with the job.

What are the Latvian numbers (for example, I saw that the Eurostat numbers had Latvia at about 3rd or 4th in unemployment in the EU, no?)?

In what context are they and how have they been achieved?

The point about the above, your comments about 'austerity' and the implied point about growth (necessarily and in and of itself being a good thing - ignoring how one gets there and what may lie beyond) is to put all of these things in to context.

[DeepDish]

When did someone redefined the word austerity as a bad word?

It is rather crazy that the common view now is that it is deadly wrong for a nation to live within its means, i.e. spend less that it takes in i taxes and other revenues.

The idea that austerity is killing Europe is wrong. Here is the graph that shows the economy in the euro zone:

And has the euro members seen austerity?

NO! France has increased spending from 2010 to 2011 from 1.095 trillion euro to 1.118 trillion euro. Why on earth does Hollande then say "We’re no longer doomed to austerity"?

The spending cuts in Spain has only been 11 billion euro (2.3%). In Italy spending increased with 4.3 billion.

These are numbers from Eurostat and they show that there has not been austerity in the big Euro countries.

The countries that has had austerity are for example Latvia, who now runs with a budget surplus, has high growth again and the unemployment numbers are down. Though has the times been tough for the people. But they are done with the job.

If a household, or a firm, spends less than it takes in income, then it is adding to its real wealth.

If a country spends less than it takes in taxes, then it is usually reducing wealth for households and firms.

It seems really hard for people to understand these things at the same time, because they insist on assuming that governments are just like households and firms. They aren't. They are wholly different, and you can't extrapolate from one to the other.

If households continue to spend more than they earn, they will bankrupt themselves. If governments spend more than they take in taxes, then (if they don't outstrip the unused productive capacity of the economy), they will tend to add to the national wealth. The government is not just one supersized household.

Austerity is just a shorthand term for adopting the traditional approach of foolishly treating an economy like a household, and thinking that if times seem hard, you have to cut back and that will make it better. It might make it better for one household or many, but by definition it can't make it better for all, because total spending falls, therefore total income falls, and we are all worse off on average.

This is called the paradox of thrift.

The graph you show is very odd. The article it comes from purports to show that no reduction in gdp has taken place, but the graph is presented in a very strange and dishonest way, starting at 30 and ending at 40, in order to magnify greatly the slope of the dramatic line it shows. It's a wholly wrong way to represent information, but it also seems to undermine what it is trying to say, ie that there has been essentially no change in gdp. The lack of proper labelling doesn't help - we are left guessing what the numbers might mean.

You will find that part of the reason for the figures you quote is that when countries try to cut spending by stalling the economy, it has a different effect than they imagine. Tax take goes down, welfare spending goes up, as does spending on policing, imprisonment, mental health and so on. So they cut planned government spending, but all that happens is they shrink the economy without making much impression on net government spending.

As for Latvia, Michael Hudson has studied that country in depth over many years. Here is a piece which explains a few of the things going on there, why it is not working, and why it's about the last place we would ever want to copy.

Our wealth is fake. It is based upon debt and increased asset values due to the debt increas in the western world. It is not based upon production.

We (the west) have to reset to a correct level somewehere between now and 1980.

The 20 something years up to 2006 is something we will never see again, regarding asset appreciation, stock returns and house values. But we have just started the long process of a comeback. Japan has struggled 20 years and has not even come closer to a healthy economy. We will have harder times, as we don't have the huge assets in our countries that we can borrow from, like the Japanese have had.

Regarding the nations and debt: We are now at a level where the value of 1 extra dollar spent in a nation yields historical low return. We are at a point where there is no more value in spending more government money. It is time to set debt targets and reduce spending, increase taxes (short term), sell government assets, break up big banks that pose systematic threats, give same rules regarding banks capital ratios for money placed in ECB overnight and in government bonds (now the big banks "have to" own government bonds) and get back to an environment where the government can serve the people again and not a cleptocratic alliance between politicians and big finance (bailouts to failed banks that should die when they have made bad investments).

The economists should move more towards the Austrian school.

And on personal level, everyone should pay down on debt. Every month I pay down extra on my debt, as I try to free myself from the debt slavery.

[Enda]

Hi folks,

I'm new to this thread. I usually only lurk on VT so never really venture to this forum. Great to see intelligent discussion.

Steve Keen mentions in his interview that the neo-classical economics which is taught in most university courses doesn't include in its models things like the role of banks and the finance sector. And so economic theory fails to predict key events to do with the things left out of the model - the 2008 crash being the obvious example.

Steve Keen is a gobshite, peterms. He's embarrassing, and it's essentially no surprise that no economists take him seriously. You linked to a good video of Paul Krugman battling tools, so here's a link of Paul Krugman battling Steve Keen: http://krugman.blogs.nytimes.com/2012/04/02/oh-my-steve-keen-edition/.

You're right that the banking sector is not taught in most university courses. Most economics courses involve a downward line intersecting with an upward sloping line, and calling the intersection "the equilibrium". I teach this stuff to very smart university students and they struggle with that. Introducing banking/financial frictions/whatever would be like trying to teach calculus to four year olds.

It is taught at postgrad level though.

Most of the experts we hear from just reflect the dominant ideology, even though they so plainly failed to predict or explain the crash (as the Queen rather concisely pointed out to them, to their consternation).

The consternation is because (contrary to popular belief) economists generally accept they can't predict anything. If we all knew with strong probability that the stock market would crash in 2013, it would crash tomorrow.

[Enda]

The economists should move more towards the Austrian school.

Austrian economic assumptions are resoundingly rejected by the facts of the data, and their refusal to formalise their arguments (i.e. lay them out using mathematical statements rather than English) regularly lead them to conclusions that are internally inconsistent.

The same problem plagued Keynesian thought. You'd think the Austrians would have jumped on that.

[TheDon]

Regarding the nations and debt: We are now at a level where the value of 1 extra dollar spent in a nation yields historical low return. We are at a point where there is no more value in spending more government money.

Congratulations, you've just described inflation.

Not sure what the point you're trying to make is though?

Other than your conclusion being logically backwards. If the value of spending is decreasing, the argument should be to spend spend spend, because today is the most value you'll ever get out of your money.

[DeepDish]

The countries that has had austerity are for example Latvia, who now runs with a budget surplus, has high growth again and the unemployment numbers are down. Though has the times been tough for the people. But they are done with the job.

What are the Latvian numbers (for example, I saw that the Eurostat numbers had Latvia at about 3rd or 4th in unemployment in the EU, no?)?

In what context are they and how have they been achieved?

The point about the above, your comments about 'austerity' and the implied point about growth (necessarily and in and of itself being a good thing - ignoring how one gets there and what may lie beyond) is to put all of these things in to context.

The development in Latvia

Some other numbers

There are reasons to move your company to Latvia, as they have improved the competitiveness dramatically vs the European neighbors

GDP up 6.9% in first quarter

Latvia, Estonia and Lithuania the fastest growth in EU

Salaries increases next in line

[DeepDish]

Regarding the nations and debt: We are now at a level where the value of 1 extra dollar spent in a nation yields historical low return. We are at a point where there is no more value in spending more government money.

Congratulations, you've just described inflation.

Not sure what the point you're trying to make is though?

Other than your conclusion being logically backwards. If the value of spending is decreasing, the argument should be to spend spend spend, because today is the most value you'll ever get out of your money.

If you spend, spend, spend, you are stealing from savers (when money printing gives inflation) and future generations (when borrowing).

It is morally wrong to punish smart savers with inflation due to printing money to pay for our fuckups in economic life and policy.

It is morally wrong to **** up the future for unborn people to pay our latest fuckups with more borrowed money.

[snowychap]

Our wealth is fake. It is based upon debt and increased asset values due to the debt increas in the western world. It is not based upon production.

When was it ever not so?

We (the west) have to reset to a correct level somewehere between now and 1980.

Why 1980? Why don't we reset to zero?

Regarding the nations and debt: We are now at a level where the value of 1 extra dollar spent in a nation yields historical low return. We are at a point where there is no more value in spending more government money.

Why just 'government' money?

Are we not at a situation where there is little value in investing overall (that doesn't preclude returns on investments in certain arenaa or certain economies)?

The economists should move more towards the Austrian school.

Why?

And on personal level, everyone should pay down on debt. Every month I pay down extra on my debt, as I try to free myself from the debt slavery.

Firstly, what would happen to all economies if everyone paid down on debt?

Secondly, how on earth do you think you (or the other 8.9 billion people in the world and beyond that you and them collectively) are going to 'free' yourself (themselves) from debt slavery?

[TheDon]

Regarding the nations and debt: We are now at a level where the value of 1 extra dollar spent in a nation yields historical low return. We are at a point where there is no more value in spending more government money.

Congratulations, you've just described inflation.

Not sure what the point you're trying to make is though?

Other than your conclusion being logically backwards. If the value of spending is decreasing, the argument should be to spend spend spend, because today is the most value you'll ever get out of your money.

If you spend, spend, spend, you are stealing from savers (when money printing gives inflation) and future generations (when borrowing).

It is morally wrong to punish smart savers with inflation due to printing money to pay for our fuckups in economic life and policy.

It is morally wrong to **** up the future for unborn people to pay our latest fuckups with more borrowed money.

Public sector deficit

Private sector deficit

Household deficit.

Pick one.

[Xann]

Why 1980? Why don't we reset to zero?

What do you think this is, a democracy?

[snowychap]

The countries that has had austerity are for example Latvia, who now runs with a budget surplus, has high growth again and the unemployment numbers are down. Though has the times been tough for the people. But they are done with the job.

What are the Latvian numbers (for example, I saw that the Eurostat numbers had Latvia at about 3rd or 4th in unemployment in the EU, no?)?

In what context are they and how have they been achieved?

The point about the above, your comments about 'austerity' and the implied point about growth (necessarily and in and of itself being a good thing - ignoring how one gets there and what may lie beyond) is to put all of these things in to context.

The development in Latvia

Some other numbers

There are reasons to move your company to Latvia, as they have improved the competitiveness dramatically vs the European neighbors

GDP up 6.9% in first quarter

Latvia, Estonia and Lithuania the fastest growth in EU

Salaries increases next in line

So they began from a point of over 20% unemplyment rate and have reduced it to about 14% or so.

Apparently they have done this by reducing labour costs (for which read reduced pay for workers and probably more).

So, that's not too surprising really - just basic maths. If they paid them virtually nothing, I guess their unemployment rate might be close to zero (though that would require their demand from abroad to compensate for the collapse in domestic demand, wouldn't it?).

I asked you for some context as to figures and you supply articles that talk about figures now, :?

[DeepDish]

Our wealth is fake. It is based upon debt and increased asset values due to the debt increas in the western world. It is not based upon production.

When was it ever not so?

In the last 100 years, I would say it was not based on production in the years leading to WW2, but in the timeframe 1950 to mid 1980 it was very much based on production. Then all western countries liberalised the debt markets, and the economies started growing fast due to people and companies taking on more debt and thereby increasing asset prices.

We (the west) have to reset to a correct level somewehere between now and 1980.

Why 1980? Why don't we reset to zero?

That was when the debt markets changed.

It should not have created the bubbles, but in combination with the ending of the Glass Steagall Act, rescue of LTCM and the low interest rate policy everytime the economy should have adjusted itself instead of being bailed out by Greenspan, had disastrous consequenses that we now have seen the start of.

Regarding the nations and debt: We are now at a level where the value of 1 extra dollar spent in a nation yields historical low return. We are at a point where there is no more value in spending more government money.

Why just 'government' money?

Are we not at a situation where there is little value in investing overall (that doesn't preclude returns on investments in certain arenaa or certain economies)?

There are possible to make good investments. The yield have to be good enough. Lots of companies can find good productive investments.

Some nations that invest in infrastructure to increas competiveness will also do good, but putting money into insolvent banks, as seems to be the preferred solutions for lots of EU countries are not one of the good investments.

The economists should move more towards the Austrian school.

Why?

Because the Austrian school of economics is opposed to the fractional reserve banking system, which increases the risk of boom and bust economies. It is also wrong that the banks should be the ones who decide the money supply through their stanards of giving out loans.

And on personal level, everyone should pay down on debt. Every month I pay down extra on my debt, as I try to free myself from the debt slavery.

Firstly, what would happen to all economies if everyone paid down on debt?

Secondly, how on earth do you think you (or the other 8.9 billion people in the world and beyond that you and them collectively) are going to 'free' yourself (themselves) from debt slavery?

I should have been more presice: When I say everyone, I do not mean everyone in the world. I actually meant people in the western world, and mainly middle class people who are not debt free.

[TheDon]

I should have been more presice: When I say everyone, I do not mean everyone in the world. I actually meant people in the western world, and mainly middle class people who are not debt free.

So seeing as you're against government debt, and against personal debt, can I therefore draw the conclusion that you think it's best that the private sector is in deficit?

[DeepDish]

The countries that has had austerity are for example Latvia, who now runs with a budget surplus, has high growth again and the unemployment numbers are down. Though has the times been tough for the people. But they are done with the job.

What are the Latvian numbers (for example, I saw that the Eurostat numbers had Latvia at about 3rd or 4th in unemployment in the EU, no?)?

In what context are they and how have they been achieved?

The point about the above, your comments about 'austerity' and the implied point about growth (necessarily and in and of itself being a good thing - ignoring how one gets there and what may lie beyond) is to put all of these things in to context.

The development in Latvia

Some other numbers

There are reasons to move your company to Latvia, as they have improved the competitiveness dramatically vs the European neighbors

GDP up 6.9% in first quarter

Latvia, Estonia and Lithuania the fastest growth in EU

Salaries increases next in line

So they began from a point of over 20% unemplyment rate and have reduced it to about 14% or so.

Apparently they have done this by reducing labour costs (for which read reduced pay for workers and probably more).

So, that's not too surprising really - just basic maths. If they paid them virtually nothing, I guess their unemployment rate might be close to zero (though that would require their demand from abroad to compensate for the collapse in domestic demand, wouldn't it?).

I asked you for some context as to figures and you supply articles that talk about figures now, :?

Well, I think your premise is a bit off, as the wages have not had a terrible development when you look at the numbers the last years.

DS02. AVERAGE MONTHLY WAGES AND SALARIES OF EMPLOYEES BY QUARTER

1st quarter 2nd quarter 3rd quarter 4th quarter

Gross TOTAL Lats 2001 149 156 163 169

2002 161 171 174 185

2003 177 191 195 206

2004 195 208 211 230

2005 226 240 248 269

2006 269 291 304 344

2007 354 386 404 446

2008 453 477 487 500

2009 470 474 456 440

2010 432 444 448 455

2011 450 463 467 475

2012 467 - - -

Link, where you can see the numbers

Ok, it looks harsh to go from 500 to a low at 432, but they did actually only go back a bit over a year in wages during these "terrible austerity times".

I don't think the Greece or Spanish people would be too unhappy with a situation like this, as opposed to the terrible situation they are in now.

[snowychap]

In the last 100 years, I would say it was not based on production in the years leading to WW2, but in the timeframe 1950 to mid 1980 it was very much based on production. Then all western countries liberalised the debt markets, and the economies started growing fast due to people and companies taking on more debt and thereby increasing asset prices.

So, even in your narrow timeframe (the last 100 years), it has not been so for about 30 of them.

Not so sure of that 30 years even, btw.

We (the west) have to reset to a correct level somewehere between now and 1980.

Why 1980? Why don't we reset to zero?

That was when the debt markets changed.

Actually, doesn't answer the question why not to zero?

Unless you believe that it was itself reset in the 1950s?

Regarding the nations and debt: We are now at a level where the value of 1 extra dollar spent in a nation yields historical low return. We are at a point where there is no more value in spending more government money.

Why just 'government' money?

Are we not at a situation where there is little value in investing overall (that doesn't preclude returns on investments in certain arenaa or certain economies)?

There are possible to make good investments. The yield have to be good enough. Lots of companies can find good productive investments.

It's not good enough to provide as an answer the riders which I provide in the question posed.

What is the state of private sector investment in the last few decades?

Some nations that invest in infrastructure to increas competiveness will also do good, but putting money into insolvent banks, as seems to be the preferred solutions for lots of EU countries are not one of the good investments.

That's not an investment. Why would you think I suggest that as an investment?

If you predicate your anti 'government money' argument on that kind of thing then I think you're really missing the point by miles.

And on personal level, everyone should pay down on debt. Every month I pay down extra on my debt, as I try to free myself from the debt slavery.

Firstly, what would happen to all economies if everyone paid down on debt?

Secondly, how on earth do you think you (or the other 8.9 billion people in the world and beyond that you and them collectively) are going to 'free' yourself (themselves) from debt slavery?

I should have been more presice: When I say everyone, I do not mean everyone in the world. I actually meant people in the western world, and mainly middle class people who are not debt free.

So you don't mean everyone but just people in the west and then not them but only people who are not in debt (happy that you implicitly accept that some people have debt but are not in debt, btw)?

So, what do we do to my question? Reduce the numbers from x billion to y billion (why is it not a problem for people in the east to be in debt? It may be a false observation but I was under the impression that debt was very much a part of the eastern economies)? Still how do you get out of your debt slavery? By not owing money? By not being able to pay the money you owe back? By not taking a mortgage on a home? By not borrowing so that you can start a business? By not borrowing so that you can grow a business?

Where and when does the debt monkey become bad?