Interesting take on economy from Paul Krugman (1 Viewer)

the-commish

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Krugman: Yes, We Have To Fix The Deficit Eventually

so, dont cut spending just yet? Continue business as usual in Congress?

I know there are some here with an ability to explain what this means and how this would actually help....cuz i cant see it.

I think the point he was trying to make (whether anyone agrees with it or not) is that cutting too much actually has the opposite effect on the economy and the deficit. For instance, the U.K. is in this mode right now (austerity-get out the hatchet and just chop programs). How is that working out? They have 25% unemployment (that's one in every four British workers without a job); a renewed recession and, if the government doesn't intervene to stimulate their economy, the country is headed for a depression. Now, let's take the opposite end of the spectrum-- Japan. The Japanese have been spending mucho yen for years to stimulate their lagging economy and, it hasn't worked.

So, what's the answer here? A combination of spending cuts (but not so much as to drag the economy back to a recession) and revenue enhancements, which can be done by closing tax loopholes for wealthy individuals and corporations, without raising anyone's tax rates.

What does this mean for the U.S.? It means that spending must be cut (but not so deeply as to cause a recession), and the government must take in more revenue. The ONLY way out of this mess is AN IMPROVED ECONOMY, where everyone is working and paying into the treasury.
 

dapperdan

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I think the point he was trying to make (whether anyone agrees with it or not) is that cutting too much actually has the opposite effect on the economy and the deficit. For instance, the U.K. is in this mode right now (austerity-get out the hatchet and just chop programs). How is that working out? They have 25% unemployment (that's one in every four British workers without a job); a renewed recession and, if the government doesn't intervene to stimulate their economy, the country is headed for a depression. Now, let's take the opposite end of the spectrum-- Japan. The Japanese have been spending mucho yen for years to stimulate their lagging economy and, it hasn't worked.

So, what's the answer here? A combination of spending cuts (but not so much as to drag the economy back to a recession) and revenue enhancements, which can be done by closing tax loopholes for wealthy individuals and corporations, without raising anyone's tax rates.

What does this mean for the U.S.? It means that spending must be cut (but not so deeply as to cause a recession), and the government must take in more revenue. The ONLY way out of this mess is AN IMPROVED ECONOMY, where everyone is working and paying into the treasury.

I think the Brits, Greeks, Spaniards, Italians, and Irish should all go out and find idiots dumb enough to lend them the money to allow them stimulate their economy...There are only so many fools in the world available to lend money to spendthrift nations...Jon Corzine is still out of jail, maybe he could round up some capital to lend to Italy, because that worked out so well last time.

Let's face it, France has been raising taxes like it's nobody's business, and the capital flight from France has been breathtaking. France, according to its Labor Minister, is "totally bankrupt""
"Michel Sapin made the gaffe in a radio interview, which left French President Francois Hollande battling to undo the potential reputational damage."There is a state but it is a totally bankrupt state,” Mr Sapin said. “That is why we had to put a deficit reduction plan in place, and nothing should make us turn away from that objective." It appears that once one wipes out the propaganda and the smooth politico talk, things are bad and getting worse at Europe's core. "Data from Banque de France showed earlier this month that a flight of capital has already left the country amid concerns that France’s Socialist leader intends to soak the rich and businesses. The actor Gérard Depardieu has renounced his French citizenship and decamped to Russia in protest, while David Cameron said Britain will “roll out the red carpet” to attract wealthy individuals. Pierre Moscovici, the finance minister, said the comments by Mr Sapin were “inappropriate”."

Krugman really makes one laugh because he lays out the situation as if there are endless choices. Which is precisely the point: we are running out of choices. I should correct this: We have already run out of choices. We are now running on the fumes provided by the Federal Reserve's QE programs. The old model, from 5 years ago, was that we'd allow China to manufacture goods, sell them in this country, and then they'd purchase our government debt with their excess trade balances. It worked for a while. But like all good things, the Chinese figured out they were playing a fools game, and it came to an end. And since there are no other nations stepping to the plate to purchase our debt, we're now monetizing our debt, to the tune of $85 billion per month (between Treasuries and MBS purchases), or $1.2 Trillion per year. This too shall end. And then what?

So when does this shell game end? I would submit, 2014, which is the year that unrealized gains at the Fed become unrealized losses in the Fed's current interest rate scenario (see chart below). (You really have to click on the link to follow the logic of the argument, the column doesn't lend itself to cut-and-paste too well).

To the Fed - Defer This! - Bruce Krasting

The Federal Reserve makes a ton of money on its $3T horde of government bonds. In 2012 the Fed earned a tidy $90B by borrowing short and lending long. That income number is the difference between interest income and expense. The P/L does not reflect the fact that the Fed as a huge unrealized gain in its portfolio (The Fed takes capital gains and losses only when securities are sold). According to a recent Fed report, the Fed is sitting on unrealized gains that are in the neighborhood of $200B.

This chart shows how big the Fed’s contributions to Treasury have been over the past few years. The Fed’s net income has cut 10% off of the annual deficit. (attachment 1 below)

The question that hangs in the air is what happens if interest rates were allowed to “normalize”. Fortunately, there is an answer to this question. The source of this information is interesting, it comes from the Federal Reserve. FRB: FEDS Abstract 2013-01

This is a technical report and covers many “what ifs”. One critical variable is what will the Fed do in 2013. That has been answered, the Fed has done QE#4 and will grow its balance sheet at the rate of $85B per month. This result is reflected in the red-dotted lines in the following charts.

First a look at the interest rate assumptions that drive the results at the Fed: (reflected in the 10 Yr Treasury chart attached below).

On the assumption that those rates will be the reality, this is what would happen to the Fed’s income statement:

Just so we're clear, the Federal Reserve, per their most recent weekly h.4.1 release, has $54.73 Billion in net capital. These losses, if realized (an obviously they will not be realized), would wipe out the entire capital base of the Federal Reserve in about two months worth of time.
http://www.federalreserve.gov/releases/h41/current/
 

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dapperdan

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Whoa...this tidbit from the article:

Nobel Prize-winning economist Paul Krugman has argued clearly and consistently over the past five years that U.S. government spending is critical to our economic recovery and that cutting spending now to reduce the deficit would be a disastrous mistake.

For taking this position, Krugman has been castigated by those who blame the depression on fiscal irresponsibility and runaway government spending. The way to fix the economy, those folks argue, is to immediately slash government spending, reduce the deficit, and restore "confidence" among the country's business leaders.

Interesting that Henry Blodget, the defrocked Internet analyst from the dot.com boom who was the author for this article, refers to our current economic situation as a depression.
 

JimEverett

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How are we running out of choices?
Krugman is correct - interest rates are low. There is no problem selling our debt.
If our borrowing right now was such a catastrophic mistake - why is the market not correcting it?

I have heard for years now that interest rates were going to go through the roof and that inflation would spiral out of control - yet here were are. At some point you need to realize that your sources are wrong and listen to someone else.
 

dajmno

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Don't know if this is the same piece - but Krugman ripped Jindal a new one on one of his recent op-eds.
 

JimEverett

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Krugman is completely wrong, and he knows it. Either he's an idiot (which he's not), or he's a sophisticated liar (Bingo).

No problem selling the debt? To whom?...Not the Chinese, they aren't buyers anymore, they're net sellers. Same thing with the Japanese. These were our two biggest foreign holders of treasuries.

So who's buying? The Federal Reserve is sopping up the lack of demand. Why do you think the Fed has to continue to announce Quantitative Easing programs three and a half years into a recovery? Because of the lack of demand for our debt.

JE, the Fed's own forecasts, in the attachment above, forecasts a move to 5% 10 Yr Note Rates by the end of 2016. The problem is, all of the financial markets are currently levered to 0% short term rates. A move to say, 1.5%, maybe 1.75% on the short rates, would precipitate a financial collapse at this point, as positions will have to be unwound.

[edit] And not only are the Chinese net-sellers, but tensions are mounting with the Chinese.
China tells U.S. to slow money printing presses | Reuters

How do you figure no one is purchasing our debt?
The Fed is purchasing $45 billion a month? It seems like we are issuing almost twice that.
Plus - as best I can tell, China is still purchasing U.S. Treasuries China increases holdings of US debt |Economy |chinadaily.com.cn
 

dapperdan

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How do you figure no one is purchasing our debt?
The Fed is purchasing $45 billion a month? It seems like we are issuing almost twice that.
Plus - as best I can tell, China is still purchasing U.S. Treasuries China increases holdings of US debt |Economy |chinadaily.com.cn

You are correct, which is why I deleted my post. I was wrong. Several months ago I had read an article describing the Chinese and Japanese as cutting back on their treasury holdings as part of a permanent strategy of scaling back their investments in U.S. Treasuries. Then, after I wrote the above, I went back to double-check and saw that they've reversed their treasury purchases, hence my reason for deleting the post as it was inaccurate.

At the same time, there is still the same gap that I described above which is necessitating the Fed's QE purchases. So when someone says that there is no problem with demand for treasuries, I would ask: why the need for the Fed to take such drastic actions, unprecedented actions, not during a deep recession, but 3 1/2 years after a recovery.

And yes, I was guilty of a bit of hyperbole, with the ZIRP policies in place, sovereign countries like China as they are (I believe) now recognized as a primary dealer, can borrower short at 0% and purchase treasuries long and capture that spread. So we can extend the game a little longer.

It's not that no-one is buying our debt (you are correct, I engaged in hyperbole), it's that there is a supply imbalance that the Fed has to fill, of roughly $40-45B a month, hence the need for QE4.
 

blackadder

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Krugman: Yes, We Have To Fix The Deficit Eventually

so, dont cut spending just yet? Continue business as usual in Congress?

I know there are some here with an ability to explain what this means and how this would actually help....cuz i cant see it.
Lol.

Been hearing this for decades. "Eventually" never comes, and won't come until the market enforces it's own discipline on this unsustainable mess.

The courage to face reality does not exist among the charlatans and bureaucrats who gravitate to Washington DC. They are incapable of facing up to reality.
 

blackadder

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You are correct, which is why I deleted my post. I was wrong. Several months ago I had read an article describing the Chinese and Japanese as cutting back on their treasury holdings as part of a permanent strategy of scaling back their investments in U.S. Treasuries. Then, after I wrote the above, I went back to double-check and saw that they've reversed their treasury purchases, hence my reason for deleting the post as it was inaccurate.

At the same time, there is still the same gap that I described above which is necessitating the Fed's QE purchases. So when someone says that there is no problem with demand for treasuries, I would ask: why the need for the Fed to take such drastic actions, unprecedented actions, not during a deep recession, but 3 1/2 years after a recovery.

And yes, I was guilty of a bit of hyperbole, with the ZIRP policies in place, sovereign countries like China as they are (I believe) now recognized as a primary dealer, can borrower short at 0% and purchase treasuries long and capture that spread. So we can extend the game a little longer.

It's not that no-one is buying our debt (you are correct, I engaged in hyperbole), it's that there is a supply imbalance that the Fed has to fill, of roughly $40-45B a month, hence the need for QE4.
Sooner or later the Chinese are going to tire of getting screwed by buying debt denominated in a deliberately depreciating currency:

China tells U.S. to slow money printing presses | Reuters

They are forced to buy to support the current system but at some point the cost benefit calculation will get out of whack. It will be a losing proposition to but debt that will be paid pack with dollars that have lower purchasing power given the flood of magic money conjured up by the Ben Bernank.
 

blackadder

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I think the point he was trying to make (whether anyone agrees with it or not) is that cutting too much actually has the opposite effect on the economy and the deficit. For instance, the U.K. is in this mode right now (austerity-get out the hatchet and just chop programs). How is that working out? They have 25% unemployment (that's one in every four British workers without a job); a renewed recession and, if the government doesn't intervene to stimulate their economy, the country is headed for a depression. Now, let's take the opposite end of the spectrum-- Japan. The Japanese have been spending mucho yen for years to stimulate their lagging economy and, it hasn't worked.

So, what's the answer here? A combination of spending cuts (but not so much as to drag the economy back to a recession) and revenue enhancements, which can be done by closing tax loopholes for wealthy individuals and corporations, without raising anyone's tax rates.

What does this mean for the U.S.? It means that spending must be cut (but not so deeply as to cause a recession), and the government must take in more revenue. The ONLY way out of this mess is AN IMPROVED ECONOMY, where everyone is working and paying into the treasury.
The answer is a Jubilee -- all debts forgiven.

Going forward we phase in a balanced budget amendment, outlaw money in politics and remove the money supply from the hands of a privately owned profit motivated central bank and hope that buys us time to reboot an education system that will produce people capable of generating wealth by producing superior goods and services.
 

dtc

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Lol.

Been hearing this for decades. "Eventually" never comes, and won't come until the market enforces it's own discipline on this unsustainable mess.

The courage to face reality does not exist among the charlatans and bureaucrats who gravitate to Washington DC. They are incapable of facing up to reality.

Sooner or later the Chinese are going to tire of getting screwed by buying debt denominated in a deliberately depreciating currency:

China tells U.S. to slow money printing presses | Reuters

They are forced to buy to support the current system but at some point the cost benefit calculation will get out of whack. It will be a losing proposition to but debt that will be paid pack with dollars that have lower purchasing power given the flood of magic money conjured up by the Ben Bernank.

The answer is a Jubilee -- all debts forgiven.

Going forward we phase in a balanced budget amendment, outlaw money in politics and remove the money supply from the hands of a privately owned profit motivated central bank and hope that buys us time to reboot an education system that will produce people capable of generating wealth by producing superior goods and services.

Always love and appreciate your thoughts and right or wrong they're valid.

The solution - if one is actually possible - is, however, exactly as Krugman explains.

Spend until the economy is moving forward and then reign in the items that lead to the unsustainable.

As you say, nobody has dropped a set low enough to actually do it and until they do we're screwed.
 

blackadder

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Will never happen.



Quite possible in the long term, however.
I know it will never happen -- just like to work in the Old Testameny program.

But, really, if push comes to shove why not simply write off a portion of public debt held by American banks? The bankers can keep all their hard assests and the piles of cash they currently have.

A reset is going to be needed eventually.
 

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