billy blog Wed 2010-09-29 10:15 EDT

Budget deficits do not cause higher interest rates

Bill Mitchell

...An often-cited paper outlining the ways in which budget deficits allegedly push up interest rates is -- Government Debt -- by Elmendorf and Mankiw (1998 -- subsequently published in a book in 1999). This paper was somewhat influential in perpetuating the mainstream myths about government debt and interest rates...Their depiction of...Ricardian equivalence...alleges that: ``the choice between debt and tax finance of government expenditure is irrelevant...[because]...a budget deficit today...[requires]...higher taxes in the future...'' ...I have dealt with this view extensively...Ignoring the fact that the description of a government raising taxes to pay back a deficit is nonsensical when applied to a fiat currency issuing government, the Ricardian Equivalence models rest [on] several key and extreme assumptions about behaviour and knowledge. Should any of these assumptions fail to hold (at any point in time), then the predictions of the models are meaningless. The other point is that the models have failed badly to predict or explain key policy changes in the past. That is no surprise given the assumptions they make about human behaviour. There are no Ricardian economies. It was always an intellectual ploy without any credibility to bolster the anti-government case that was being fought then (late 1970s, early 1980s) just as hard as it is being fought now...So where do the mainstream economists go wrong? At the heart of this conception is the [pre-Keynesian] theory of loanable funds...where perfectly flexible prices delivered self-adjusting, market-clearing aggregate markets at all times...Mankiw claims that this ``market works much like other markets in the economy''...[assuming] that savings are finite and the government spending is financially constrained which means it has to seek ``funding'' in order to progress their fiscal plans. The result competition for the ``finite'' saving pool drives interest rates up and damages private spending. This is what is taught under the heading ``financial crowding out''...Virtually none of the assumptions that underpin the key mainstream models relating to the conduct of government and the monetary system hold in the real world...When confronted with increasing empirical failures, the mainstream economists introduce these ad hoc amendments to the specifications to make them more realistic...The Australian Treasury Paper [used advanced econometric analysis to find that] domestic budget deficits do not drive up interest rates. The long-run effect...is virtually zero. The short-run effect is zero!...toss out your Mankiw textbooks...

Billy Blog; budgets deficit; caused higher Interest rate.

zero hedge - on a long enough timeline, the survival rate for everyone drops to zero Sat 2010-09-25 09:47 EDT

Chris Whalen On The Upcoming "Worst Economic Contraction Since WWI (Forget WWII)"

Chris Whalen at Institutional Risk Analytics

The erosion of the profitability of the U.S. banking industry over the past two years under the glorious Summers-Geithner-Bernanke rescue scheme is the proverbial fly in the ointment for both major political parties. Democrats and republicans alike are going to be fed into the meat grinder over the next several years as the banking sector deals with literally hundreds of billions of dollars in direct and indirect expenses from the deflation of the mortgage bubble. For the economy, this slow process of muddle along championed by Summers and Geithner will ensure that Barack Obama becomes the Herbert Hoover of the Democratic Party. The economic carnage that will causes these losses, as we described in a recent post in Reuters, "Double Dip or Global Deflation?," is going to represent the worst economic contraction since WWI. Forget WWII. Think "shrinkage" to use the Gilded Age description for economic deflation. And frankly nothing that either the Fed or Treasury does in the near-term can change this basic economic fact of restructuring...the economic situation at BAC and among all of the legacy zombie banks continues to worsen. No amount of bullshit from Washington changes the fundamental economic situation inside the largest U.S. lenders.

Chris Whalen; dropped; Forget WWII; long; survival rate; Timeline; upcoming; worst economic contraction; WWI; zero; Zero Hedge.

Jesse's Café Américain Wed 2009-12-02 18:58 EST

The 38 Year Cycle in US Monetary History

Jesse

..the longer cycle of 38 years and some others, is that they involve what people call 'generational memory.' People as a group essentially forget the lessons of the past, and human nature being what it is, events based on bad judgement and reckless behaviour seem to recur at these intervals. If there was any 'tell' for the current crisis, it was the general overturning of the safeguards for the financial system that had been put in place in the aftermath of the financial panic of 1929 and the Great Depression that followed, culminating in the eventual overturn of Glass-Steagall and the ascendancy of extreme leverage using exotic, unregulated instruments. This is why we call this a generational change. This is no slump, no recession. And it is far from over. We are experiencing some major changes that are easily lost when one only looks at the day to day moves, listens to the description of events on the mainstream media, and of course, have a lack of memory, a knowledge of history, of things that have happened to their grandfathers and great grandfathers. The arrogant ignorance of so many still in place is a sure sign of greater chastisement to come, until the lessons of history are learned again, and the system is brought back into a sustainable balance.

38 Year Cycle; Jesse's Café Américain; monetary History.

Jesse's Café Américain Mon 2009-10-26 09:52 EDT

The US Power Elite: An Alliance of Convenience or a Ménage à Trois?

Jesse

"I submit that our spendthrift government, the Federal Reserve System and the TBTF banks together now comprise the paramount political tendency in America today. This tripartite "Alliance of Convenience," let's not call it a conspiracy, fits beautifully into the corporatist mold that seems to be America in the 21st Century - but only viewed by the elites in cities like New York and Washington. Many Americans of all political descriptions oppose this corrupt and unaccountable political formulation." Chris Whalen, Institutional Risk Analytics

alliance; convenience; Jesse's Café Américain; Ménage à Trois; power elites.

Mon 2008-12-15 00:00 EST

Bagehot: Lombard Street | Library of Economics and Liberty

Walter Bagehot, Lombard Street: A Description of the Money Market (1873) | Library of Economics and Liberty

Bagehot; economic; liberties; libraries; Lombard Street.