Winner of the New Statesman SPERI Prize in Political Economy 2016

Sunday, 1 March 2015

Eurozone fiscal policy - still not getting it

The impact of fiscal austerity on the Eurozone as a whole has been immense. In my recent Vox piece, I did a back of the envelope calculation which said that GDP in 2013 might be around 4% lower as a result of cuts in government consumption and investment alone. This seemed to accord with some model based exercises of the impact of austerity as a whole, but others gave larger numbers.

We now have another estimate, which can be thought of as a rather more thorough attempt to do what I did in the Vox article. This paper by Sebastian Gechert, Andrew Hughes Hallett and Ansgar Rannenberg uses multipliers and applies them to the fiscal changes that have occurred in the Eurozone from 2011. Apart from the later start date, the first difference compared to my back of the envelope calculation is that they include all fiscal changes, and not just government consumption and investment. As a large part of the fiscal consolidation in the Eurozone has involved reducing fiscal transfers, this is important.

The second, and more interesting, difference is that rather than pluck a multiplier out of the air, as I did, they use a meta analysis of other studies. I have previously mentioned this meta analysis by Gechert: this paper is based on a follow up by Gechert and Rannenberg. [Correction from original post.] The studies on which these meta analyses are based are not ideal from my personal point of view (more on this later), but what this second paper shows is that fiscal multipliers are larger in depressed economies. Applying these ‘meta multipliers’ to the Eurozone fiscal consolidation implies that GDP was 7.7% lower by 2013 as a result. These numbers are more in the ballpark of the Rannenberg et al paper that I have discussed before.

All these estimates point to huge losses, which monetary policy has neither been willing or able to counteract. Yet the speed at which those in charge of the Eurozone begin to realise the mistake that they have made is painfully slow. Take this recent Vox piece by Marco Buti and Nicolas Carnot. Thankfully they ignore all the Eurozone’s tortuous and sometimes contradictory rules, and just look at two numbers: a measure of ‘economic conditions’ (like the output gap), and a measure of the fiscal gap, which is the difference between the actual primary balance and what it needs to be to get debt falling gradually.

They argue that policy needs to balance the need to reduce both gaps. Looking at these two numbers, they conclude that Germany is overachieving on fiscal adjustment and has a need to increase activity, but although France and Spain also need to increase demand they have a long way to go to eliminate the fiscal gap, so this should dominate. The conclusion is that Germany should go for fiscal stimulus, but “moderate consolidation appears warranted in both France and Spain”. Overall “the Eurozone should conduct a close-to-neutral fiscal stance”.

Let’s deal with that last conclusion first. The mistake there is simple. When monetary policy is stuck at the Zero Lower Bound, it is crazy to balance the output gap with what is your main instrument for correcting that gap, which is fiscal policy. Getting the fiscal gap right is important in the longer term, but in the short term it is the means by which you get the output gap to zero. As the studies mentioned at the beginning of this post show, the current recession is the result of trying to correct the fiscal gap at completely the wrong time. The right policy is to get the output gap to zero, so interest rates can rise above the ZLB, and then you deal with the deficit. Readers of this blog and the blogs of others must be sick and tired of seeing us make this same point over and over again, but the logic has yet to get through to where it matters.

The same principles apply to countries within the Eurozone, except with an additional complication of within Eurozone competitiveness. If a country is too competitive relative to the rest of the Eurozone, it needs to run a positive output gap for a time to generate the inflation that will correct that position, and vice versa. For that reason Germany needs a large positive output gap at the moment (compared to an estimated actual negative gap), and therefore a much more expansionary fiscal policy - not because it is overachieving on debt adjustment. France and Spain now look roughly OK in terms of competitiveness relative to the average (see chart below, and assuming that entry rates in 2000 were appropriate), so there we need fiscal expansion to close the output gap.

So at both the aggregate and individual country level, the inappropriate bias towards fiscal contraction that caused huge losses in the Eurozone in the past continues to operate. Which means, unfortunately, that the needless waste of resources caused by austerity continues to get larger by the day.

Relative Unit Labour Costs, 2010=100, from OECD Economic Outlook

44 comments:

  1. I agree austerity was a massive mistake/crime. But isn't another way of looking at it that the ECB tight monetary policy was a massive policy failure as well. The two combined to wreck havoc.

    http://macromarketmusings blogspot com/2015/02/the-eurozone-counterfactual.html

    "Imagine the ECB had not raised its interest rate target in 2008 and 2011, but had lowered it. Also imagine the ECB began its open-ended QE program back in 2009. Would there now be a brighter future for the Eurozone? If the answer is yes, then the Eurozone economic debacle is at its core a monetary policy crisis.

    There are compelling reasons to believe the answer to this counterfactual question is, in fact, yes. A comparison of total money spending growth in the United States and Eurozone is one of them. Unlike the ECB, the Fed did cut its target policy interest rate quickly and implement QE programs. Though these programs were flawed, the Fed was able to promote a stable growth path for total money spending because of them. And it did so despite a tightening of U.S. fiscal policy beginning in 2010. This suggest the ECB could have done the same for the Eurozone economy. Instead, it did not and the growth of Eurozone nominal GDP growth faltered.
    ..."

    Currently the Fed is contemplating normalizing interest rates (although I believe growth rates are overstated as Q4 was revised back down to 2.2 percent) while the ECB is embarking on its first trillion euro QE and Sweden, Denmark and Switzerland are experimenting with negative interest rates.

    And give the austerity in the UK, I imagine things would be much worse if not for the Bank of England.

    I do believe QE has effects on inequality as asset owners benefit disproportionately, which is why a helicopter drop would be better and why the halting of austerity or government spending and investment spending are better still.

    The obvious point to me is that the output gap is a waste of resources. It also worsens the budget and debt positions of a govenrment ultimately. Conservatives and the ordoliberalists don't see this for some reason.

    When the output gap is closed is the time to cut the budget and pay down the debt. As you write "The right policy is to get the output gap to zero, so interest rates can rise above the ZLB, and then you deal with the deficit."

    With the ECB running a monetary policy which is too tight, it's causing growth to slow which just worsens the budget picture of member states. And so they have do more austerity. Hopefully Greece is the beginning of a revolt against this policy which seems to me to be aimed at cutting the welfare state down.

    In the U.S. which has much less of a welfare state, the rightwing harps on government deficits no matter the size of the output gap in order to cut social spending. Once the output gap closes, they switch and push through tax cuts for the rich. In order to boost growth, which it doesn't do.

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    1. I agree that ECB policy could have done much more to offset these austerity effects. Raising rates in 2011 was a major mistake. Waiting until now to do QE was a huge mistake. Suggesting the ZLB was higher than it has actually turned out to be is another mistake. I have written posts saying this many times.

      There is one difference though. Although the ECB have never acknowledged their past mistakes, at least they have finally got to where the Bank of England and the Fed were five years ago, and are not obviously doing the wrong thing now. As the paper I comment on makes clear, fiscal policy makers in contrast still have not realised their mistake.

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    2. Do you think QE works even once treasury rates are zero/negative? How is the effect of QE transmitted once that is the case?

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    3. QE will do nothing in the Eurozone other than reduce the "fiscal stimulus", that is, the interest payments, that are currently going to the holders of those Bonds. Taking €1,100 billion worth of Bonds out of circulation, is a hell of a lot spending power the Eurozone private sector is no longer going to get. Greece will probably not be in QE; and, may be the only place you can buy a bond that pays interest in the Eurozone.

      The one thing that is missing in the Eurozone is spending power! The causality is:- No spending power means, no aggregate demand. No "demand side" action means no customers for the factories. No customers means no "supply side" investment. Banks only lend investment funds to "supply siders" with loads of customers, they think can pay them back.

      Stop getting hung up on this ZLB thing. There are good reasons to keep the overnight rate at ZERO % as policy for the next couple of years at least. The ECB can shift out of ZLB any-time it wants by paying increased interest rates on "reserve" deposits. Negative interest rates have done nothing to increase credit issuing rates in the Eurozone. Even the Danes, who peg the Krone to the Euro said nothing changed. Going into cash and sticking it under a mattress to avoid negative deposit rates, is a bigger negative interest rate than the Danish central bank had imposed.

      " ... it is crazy to balance the output gap with what is your main instrument for correcting that gap, which is fiscal policy. Getting the fiscal gap right is important in the longer term, but in the short term it is the means by which you get the output gap to zero." Utter, complete and total nonsense.

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    4. I really like that your reply the most important point in the post is an utterly nonsensical offering with not even an argument- let alone evidence. Between that and your suggestion that the overnight rate is equivalent to the ZLB means you can be safely ignored.

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  2. Yes it has sadly wasted human resources.
    However there is an irony that austerity may have by reducing consumption of goods below otherwise, have unintentionally reduced below otherwise the carbon emissions and the wastage and destruction of those natural resources that are finite and are over-consumed or destroyed. Though I'm not implying that austerity is justifiable on those grounds (or on any grounds!), even though the aims in those grounds are very important, and also more so than the dubious aim of increasing GDP when the latter includes so many big negative externalities and is unsustainable in the long term unless re-defined. A conundrum!
    On an aside: Much better than austerity would be stimulus helicopter money for insulating millions of buildings from heat-loss and associated carbon emissions - would be a big gain for providing jobs and for a better global future.

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    1. I doubt there is much of an effect on carbon emissions, after all, the world is bigger than Europe. Any waste would have been concentrated in those parts of the services sector that barely use natural resources.

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  3. Perhaps the key mistake is to simply think of the size of the deficit rather than focusing on the types of tax and spending. If the deficit was reduced by wealth or asset taxes (levied on citizens' assets where ever they were held so as to avoid capital flight) then that would reduce aggregate demand much less than VAT. Similarly spending increases aggregate demand to very different extents depending on who gets the money.


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  4. Germany needs inflation like hole in the head. That SWL is not tired to maintain the contrary indicates something about his head.

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  5. I wonder why such concoction is needed in order to fight stupidity of austerity. And just as above Anon said, it sounds like nonsense.

    Fiscal gap is simptom not a disease, or a signal not a cause.
    Since output gap is calculated using signals instead of real world problems it is also wrong number. Real output gap should be measured as output presently unemployed would produce if employed.
    Austerity is acting upon a signal, not upon the problem, or trying to cure simptoms not the disease. By acting and changing the signal it will hide it from giving important information about state of the economy and necessary future action to achieve optimal results.
    As, i believe, Keynes said: Take care of unemployment and fiscal and output gap will take care of itself.

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    1. "Take care of unemployment and fiscal and output gap will take care of itself."

      This is very much true, but how should we interpret it?

      My interpretation is that we should focus on maintaining a reasonable level of employment in an environment of falling output and falling aggregate debt levels, and focus less on the purely hypothetical output gap.

      Trying to fill the hypothetical output gap leads only to more of the same, i.e. increasing aggregate debt levels. And this makes our long-term situation only worse. We need to see liquidation -- and we need to take care, by private and public action (a new social contract), that the unemployment won't rise above 15 %. Something like 15 % is still fine if we can maintain people's trust in it being temporary --> a better day will come once the total debt level is much lower. If the government can carry, for a decade, debt worth 100-200 % of GDP it's fine by me -- as long as private debt is significantly reduced.

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  6. Peter repeats the popular claim that interest rates should at some point be “normalised”. And Simon suggests similar when he says “The right policy is to get the output gap to zero, so interest rates can rise above the ZLB..”

    Will someone explain the merit in the currency issuer issuing so much currency that it then has to borrow some of it back with a view to curtailing demand? Milton Friedman advocated a permanent zero rate. I suspect he was right.

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    1. Ralph,

      To me, issuance of bonds to cover a fiscal deficit is mostly about reducing “maturity mismatch". It’s more transparent that way. There are historical reasons for this, too. It’s not hard to imagine people distrusting a government which doesn’t set any timetable for creating demand (in form of taxes or bond issuance) for the IOUs it issues in course of its spending throughout the year. A government which chooses not to cover its budget deficit through bond issuance has throughout history been, more often than not, a government in trouble.

      Milton Friedman did not understand “money”. He was a monetarist. We should not listen to him on this matter – on many other matters, we should.

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  7. Are we talking pure service sector here? If not then talking about wasting human potential is a bit dramatic and it would be more correct to speak of shifting human potential from Europe to the third world and the US. Perhaps a strategic* sin but not an ethical one.

    On a global scale it might even be positive for the German bloc countries.

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  8. Dear Simon,

    I know our respective views are rather incompatible, but regarding the fiscal deficits, and connected to your previous article on "helicopter money", could you comment on the following:

    "Related to this, I'd like to hear from Wren-Lewis, or any other expert, what is the difference between financing the deficit, on one hand, through bond issuance, and via OMF on the other, in a world where 2-5-year bond yields are negative while cash yields zero?"
    http://clumsystatements.blogspot.com/2015/03/inflation-cannot-be-micromanaged-or.html

    In that particular post, I also go to show how increased output, which would most certainly follow (ceteris paribus...) larger fiscal deficit, might not be what we want. But again, I don't expect you to follow my thought, as it seems to me you cannot see much bad in total credit growth as long as it's not accompanied by accelerating inflation.

    Overall, I agree that the time for fiscal surplus is not really now. This is a bad time for a government to save. Perhaps the time for surpluses was in 2003-2007. We blew it. But due to our mistake back then, we cannot expect to be able to continue running fiscal deficits as we like now when they really are needed. Today, fiscal deficits OK -- trying to increase or even retain total output instead of just softening its fall *not* OK.

    Households will never "de-lever" if the economy and wages are growing. They will only add to household debt. This is the world we live in today. We have seen how this works during the last 30 years. For instance, Norway is one of the richest countries in the world, and wages have been increasing by 3-4 % p.a. there for 10 years. At the same time, household debt has been growing at 6-8 % p.a. If people feel richer and more secure, they take on more debt.

    It's a fallacy to think that households cannot pay back debt due to the stagnant wage growth. This is true for poorer households, but it has always been so. The middle classes which drive our economies have been taking on more and more debt since the 1980s for totally other reasons than stagnant wage growth. Those reasons have to do with credit -- having not only been available but -- being pushed to these households.

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    1. Peter,

      My answer to the question in your 2nd para is: “very little difference”. £X in the form of bonds is obviously a BIT LESS liquid that £X in cash. But if interest on the bonds is zero, then there’s not much difference.

      And if you want the view of a real “expert”, here is Matin Wolf on the subject: “Central-bank money can also be thought of as non-interest-bearing, irredeemable government debt. But 10-year Japanese Government Bonds yield less than 0.5 per cent. So the difference between the two forms of government “debt” is tiny…”

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    2. It depends if you are a currency issuer or a currency user. A currency issuer does not have to issue bonds, it creates its own new money, by its Treasury / Central Bank, spending it into existence. A currency user has to issue bonds because it is using a foreign currency which it can't create itself.

      The UK and the US are sovereign currency issuers, the Pound and the Dollar. They can never run out their own currency; there is no bill they can't pay in their own currency. They never have to borrow their currency from anyone and there is nothing they can't afford to buy, that is for sale in their own currency.

      Greece on the other hand, is a currency user (just like a private sector Household or Firm). It uses the Euro which is a foreign currency to all 19 Eurozone member states; even the Germans. The Greek Treasury and its Central Bank are not allowed to spend "new" Euro into existence, they have to issue Greek Bonds to get some Euro that are already in issue in the markets. Basically, the Greek government spends Euro IOUs, not Euro base money, which makes them vulnerable to market interest.

      Keep in mind that "the markets" can only do what sovereign currency central banks allow them to do. Markets are only ever parasitic secondary players, as they found out when the ECB threatened them with OMT in 2012. (Acorn).

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    3. Ralph,

      I agree with you. But I don't see how "central-bank money" would be irredeemable. The "money" (an IOU) itself is not important, but how it came to being and how demand for these IOUs is expected to behave in the future. The IOUs we now talk about are created by government spending. My view is on this matter is very chartalist. Future demand for these newly-created IOUs can come from the following sources:

      1. New government bond issuance which will more or less cover any fiscal deficit. Non-interest bearing IOUs are switched to government bonds -- which today bear no interest either. This usually happens during the same year as the spending takes place, but it is possible to stretch it to later years too. (This is the default option.)

      2. Higher taxation. Either during the same year, or -- in the case of a fiscal deficit not covered by bond issuance -- during the following X years. (This is "helicopter money"; and I'm talking about agents' expectations of the likely outcome now.)

      As I said, in today's world the interest cost is fairly irrelevant, as bonds yield zero in many countries. Now, if I have understood correctly, many are suggesting that we should use "helicopter money" and let agents believe, or worry, that it won't be later covered by bond issuance or increased taxes. This would give it "an air of permanency", although agents would be right in not trusting it fully.

      My critique is this: This whole matter ("helicopter money") is so vaguely understood, and there are so many misunderstandings around it, that this alone would make any inflation that might follow very unpredictable. There would be so much room for competing stories and human psychology driving the outcome that we have no chance to micromanage it. After all, the truth is that our monetary authorities would really be telling people that they should be afraid of the currency losing its value and so they should spend. Only someone who looks at the economy as a machine would be blind to the hazards involved in this attempt.

      Is there someone who can follow my thought?

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    4. Anonymous,

      You come up, mostly, with relevant points. But I'm more interested in the currency-issuing countries right now, as a matter of theory. And the reason for that is this kind of opinions which lead to many misunderstandings:

      "They never have to borrow their currency from anyone and there is nothing they can't afford to buy, that is for sale in their own currency."

      In my blog (only 11 posts so far) I'm going through this stuff and trying to show that we should not think that currency-issuers "can afford to buy" anything that is for sale in their own currency. We know it's not true. Of course a trusted agent (an individual or a a government) can issue a bunch of IOUs after IOUs and, for a while, buy what they want. But this doesn't mean that they can't overspend and end up in trouble as the trust in their IOUs starts to erode. And human trust is something totally non-linear: it takes a long time to earn it and it can be lost in a blink of an eye. Do you agree?

      But as long as you believe in the existence of this mysterious "money", you are probably able to follow my thought only so far. Through my blog, I'm trying to help others forget, or unlearn, "money". Why? Because forgetting, unlearning it has helped me to understand in a much clearer way our monetary system and how the economy works. It gave me something that looks more and more like a new general theory.

      It might go wrong somewhere, but at least it's original. I must give it a shot, and I hope someone else will too!

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    5. About me as a person:

      I see how I must come on as an impudent, perhaps even a megalomaniac writer :-) But I'm actually a decent guy, in my mid-thirties, who is not after wealth or fame, but just wants to do (independent) science, to understand the economy better, in the best possible way. My own reasoning, combined with hard work, has led me to believe what I state above about a new general theory, etc. That's how I see it, and I don't want to hide it. I just want to get some attention so I could really test my theory on intelligent and experienced people, like you guys here. After all, it's not easy to go around and think that you're some kind of "new Keynes" without anyone being able to prove your theory wrong, or to accept it ;-)

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    6. Peter at 06:08.
      Currency issuing governments do not issue IOUs to finance their operations; every time it spends, it spends new money; not recycled money (called taxes). The UK Treasury does not have to issue bonds. The fact that it does, is a throw back to when we were on the Gold Standard and Fiat currency was pegged to Gold. Issuing "gilts" to match Pound for Pound the government's deficit, is a voluntary imposition. The Treasury could equally leave all its "net expenditure" (deficit) as "reserves" at its personal bank, the BoE. It would not have to pay out £40 billion a year of free money to the holders of those Gilts.

      The government's net expenditure this year, will add to all the other net expenditures (the national debt) but don't worry about it because it is all being "saved" by the private sector in bank accounts; building societies; pension funds and in my case, bookmakers. Eventually, it will get spent; the government will tax it every time it gets spent and reduce it to a fraction of a penny.

      The government gets all its spending back that way. The more the private sector holds on to it, the longer it takes the government to get it back. BUT, the government doesn't give a toss, because it didn't cost the government anything to issue those Pounds in the first place, and it mugged the private sector into supplying the government with Hospitals; Schools; Motorways and more public assets than you can shake a stick at.

      You need to clear your thinking a little and understand that there are two types of money, vertical (government sovereign currency) and horizontal money (commercial bank credit). The second is convertible into the first; the first can't be converted into anything except more of itself. The first sums to nothing; the second sums to zero. All the best Acorn.

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    7. Acorn,

      You don't need to lecture me. I've read my Bagehot and MMT. I understand very well what you mean, and I thought like you thought only around 12 months ago. I was wrong back then.

      "Currency issuing governments do not issue IOUs to finance their operations; every time it spends, it spends new money; not recycled money (called taxes)."

      And this "new money" is not a new IOU?

      My theory starts with accepting "money" as an IOU -- a credit. Then it answers the question "How does credit really work in our economy?". To answer this, we need to study the individual agent, accept the subjectivity of this matter. There's a lot about human psychology in this. How we anticipate, discount, the future.

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    8. Maybe you are not developing a new economic thinking, maybe you are starting to fully grasp Keynes's writings. I would bet it is that since Keyness in his writings covered and used both sides of the arguments trying to explain different situations in economy. So he covered all but his writing is jumpy and hard to comrehend so some things are hidden from obvious understanding.

      Let me be more direct.
      Your statement "Households will never "de-lever" if the economy and wages are growing." Deleveraging can be purely mathematical term, it doesn't have to mean 'reduction of debt' it can mean only that relationship between total debt and income changed. Total debt stays the same and income grew => deleveraging.
      Another term is 'inflate debt away' for the same thing.

      If inflation is taken as wage push price growth then all is fine because such inflation reduces the debt burden.

      Another point of incresed debts and wage growth at the same time is the level of interest rates. If interest rates are falling then with the same income you can have higher debt since what matters for calculation of loan approval is level of monthly payments on wich interest rate has huge role.
      I used to be a loan officer and two conditions for loan size aproval are monthly payments for the loan of 33% and all debts monthly payments of 41% of pretax income.

      So if interest rates trends are falling or rising will cause increased or decreased debt availability. And also if state is forcing private sector to leverage up so it could avoid rise in public investment (deficit) during economic stagnation and for external reasons like for purpose of entering EU or EZ, then it will increase private debt while wages are rising. And you can call that that 'credit being pushed onto households'.

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    9. And this "new money" is not a new IOU?

      No it isn't Peter, it is a "tax credit". The government would call it a "you owe me". All FIAT currencies have to have some attribute that gives them value. In every fiat currency economy I can think of, it is the requirement for residents to pay their taxes in the sovereign currency, that gives that currency value.

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    10. Peter
      I would want to point out to you importance of inflating debt away to capitalist economy as the only source of growth. It is not important as total level of debt, but as a burden on income / spending power of debtors.
      Governments used to give huge efforts on reducing the burden of debt on consumers. Financial sector was doing part of inflating debts away over time, now less so. Loans with fixed rates are the crucial for inflating debts away/ reducing burden of debts.
      Inflation (only from wage growth price push) coupled with fixed rate loans, with interest tax deduction grately reduce burden of debts over time. This is very important to enable everincreasing debt levels which is the only source of economic growth (in normal times when deficits are lower). Some whom even that is not enough due to job loss or illness or divorce can enjoy bankrupcy which will relieve them of debt burden and start over again.

      In economic linque; Savers can enjoy positive real interest rates while at the same time borrowers enjoy negative real interest rates. If borrowers enjoy incresed wages, interest tax deduction and fixed debt rate then debt is being eaten away by inflation hence negative real interest rate.

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    12. To Jure Jordan:

      I see what you mean.

      What you say about Keynes's and my thinking... There might be something to it, as I agree with Minsky. Actually, I view my theory as a final proof that Minsky was right about the credit boom/bust cycle and stability leading to unstability.

      Sorry for not being precise enough. When I say that households won't de-lever, I don't talk in nominal terms. I live in a real world. What I'm interested in is debt/GDP (or, income).

      When you talk about the households' ability to take on more debt when interest rates are lower, you are in a micro world. (My theory is a macro theory.) On macro level, it doesn't work like that. Lower interest rates don't give us any *good reason* to increase the aggregate debt -- they only give us a *chance* to increase it, say, if we want to create more aggregate demand. And to increase credit spending to create more aggregate demand is the easy -- but not sustainable -- way to do it. Another way to do it would be through new, productive jobs for people.

      When it comes to inflating debts away. Sure. But then you should understand that it will lead to depression, just like not inflating them away. The real world doesn't work the way you think it works. You need to study more closely how credit works in the economy.

      Ever-increasing debt levels have been seen as the only source of economic growth since 1982 (although more importantly, since 2001). In the spiral we are in, it is probably true. But it is not sustainable. We need to tolerate negative growth in the future, and this is *because* of the debt levels we have built.

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    17. Acorn wrote: "No it isn't Peter, it is a "tax credit". The government would call it a "you owe me". All FIAT currencies have to have some attribute that gives them value. In every fiat currency economy I can think of, it is the requirement for residents to pay their taxes in the sovereign currency, that gives that currency value."

      And who is the government if not we -- the taxpayers? We are talking about an IOU, issued by the taxpayers. For the person or a business who receives it as a consequence of government spending (government buys something, or it's a transfer payment) it is a "you owe me". And the "you" is the taxpayer. Which taxpayer, depends on how this person or a business will use the IOU and, thus, who will end up using it to get rid of his/her/its tax obligation. (These IOUs are not "ear-marked", so we cannot follow them through the system. But the logic holds on macro level.)

      This is a very basic (chartalist, I assume) explanation. And when we are talking about "helicopter money" and the possibility for financing fiscal deficits with it, we are talking about partly breaking this "debt through taxation" logic which ultimately gives the government IOUs their value. Governments have "tinkered" with it throughout the ages, but it hasn't usually ended well. This is not about "a little bit of inflation when we need it", but about playing with agents' *non-linear* trust in the currency.

      As I say in my post "Money Pays For Nothing":

      "We could think of this ultimate logic -- which goes unnoticed by most of us -- behind the value of "money" as a law of nature. We could compare it, say, to gravity. Thanks to the gravitational pull of Earth, people have been able to run fast for thousands of years without knowing that these gravitational forces existed. If we somehow managed to substantially lessen Earth's gravitational pull, we couldn't possibly expect people to run, and all kinds of machines to work, just as before. This much we know now, but we have not always known it. Way back in time, when we understood much less, we could have well imagined life to proceed as before even if the mass of Earth was greatly reduced.

      To me, the Chicago Plan is about breaking the supporting law, or logic, behind "money". It's about removing its link to debt -- a link which ultimately gives it its value -- and hoping that people's mistaken beliefs about "money" remain intact."

      http://clumsystatements.blogspot.no/2015/02/money-pays-for-nothing.html

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    18. Keep taking the pills Peter, you will get better, I promise.

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    19. Peter, this money thing is not that complicated. Politicians and Spiv City of London sponsors (the 1%), would like you to think it is, so they can keep the Big Casino skimming off the top of the little people's income.

      Go back and read http://heteconomist.com/mmt-in-simple-parables/ . Statements like "talking about "helicopter money" and the possibility for financing fiscal deficits with it" is putting the Cart before the Horse. Best regards Acorn.

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    20. Acorn,

      I'm a pragmatist. I have no political leanings whatsoever (unlike you?). I'm against The Big Casino -- what has been going on with "financialization" since 1980s is a terrible mistake. Bankers don't deserve their big paychecks, as they work in a government utility type of industry. I'm for the "little man", because I think that only by taking care of the "bottom half" we can take care of our society. I would also call myself a humanist.

      What I say here comes from the positive, not normative, science I'm trying to do.

      The mistakes we have made are due to our common ignorance of the logic behind debt/credit. We are all to blame. Not just the "bankers" or the "rich and powerful", but the academic economists, central bankers, politicians -- you and me.

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  9. Maybe Germany should offer each working German €1000 holiday voucher to go on vacation in Greece or Portugal in 2015. It will give those hard working Germans a much needed sun-filled holiday; German taxes (fiscal spending) is spent on German taxpayers (not bailing out the Greeks/Portuguese); it will result in massive increase in Greece/Portugal (tourism) exports to Germany, etc. This could provide a €40bn to €100bn injection (depending on the respective multipliers) into the Greek/Portugal economy in 2015, not funded by Greek/Portuguese governments.

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    1. Not a bad idea really...

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  10. Peter Golovatscheff
    Oh, i am Minskyite too, but also Keynesian, Fisherite, Marxist, Shumpeter, MMTer, Philipsite Krugmanite... but also Friedmanite, Ricardian, Smitheran...
    They all have different topics and different time horizon but all of them have something important to say that can be used to trully fully understand economy. Sometimes one side is aplicable, sometimes other side applys, depending in what condition economy is in and what particular topic is about.

    Macro is what gives the full picture and what conditions are signaling to agregate, but micro is what matters to people, how people live and what needs to be done to help them when suffering is present. So it is important to include people and their experiences because that is why macro and micro is created - to help people live better lives. Otherwise economic theory is useless.

    State is also created to help people so state accounting should be used with such goal in mind.
    You say that we have to live in negative growth economy because too much private debt. No, we do not have to, we just accept theories that says that due to powerfull propaganda, but we could use different theories that say opposite (if we could force government to do it). If state is not helping people then it is doing wrong and should change its policies. All state rules were accepted through social conventions and democratic rules, so we can change them to start helping all people, cause we can.
    So, debts could be forgiven and there is no more "need" to have negative growth. Tomorow we could start growing at 10% rate if we forgive debts as through mass bankrupcies. So that we can grow debts again as we did for last 80 years. So, today i am Keenanite the most or Yanis Varufakisite.

    First, after debt jubilee, increase minimum wage to the inflation corrected 70' level and also raise top marginal taxes to post WWII level and we will go back to growth right away.
    Solution to GFC is same as the solution to Great Deppression, cause the causes are same. We can go Hitler's way and employ everyone within 2 years or FDR way and do same in 5 years. Hitler just printed alternative money as needed and FDR created banks that did the same. We should not follow military way as they did, of course.

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    1. Jure,

      I whole-heartedly agree with you on the following (=you're writing my thoughts out):

      "Oh, i am Minskyite too, but also Keynesian, Fisherite, Marxist, Shumpeter, MMTer, Philipsite Krugmanite... but also Friedmanite, Ricardian, Smitheran...
      They all have different topics and different time horizon but all of them have something important to say that can be used to trully fully understand economy. Sometimes one side is aplicable, sometimes other side applys, depending in what condition economy is in and what particular topic is about.

      Macro is what gives the full picture and what conditions are signaling to agregate, but micro is what matters to people, how people live and what needs to be done to help them when suffering is present. So it is important to include people and their experiences because that is why macro and micro is created - to help people live better lives. Otherwise economic theory is useless.

      State is also created to help people so state accounting should be used with such goal in mind.

      [...]

      If state is not helping people then it is doing wrong and should change its policies. All state rules were accepted through social conventions and democratic rules, so we can change them to start helping all people, cause we can."


      I really do. Think about this for a moment. On some "moral" or "value" continuum, I'm fully on your side. That's why I'm here, trying to argue *about scientific matters* with people who more or less share my goals/opinions/beliefs when it comes to the *normative* side of economics.

      I'm no Minskyite. Neither am I Keenanite. There is no school of economic thought where you could fit me. And instead of trying to start my own school, I'm trying to form a synthesis. Sounds ambitious? Hell, yes. But what can I do if my reason says it must be possible -- if I have a fairly simple credit theory which seems to have a massive explanatory power? All I can do is proceed.

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    2. I have my synthesis formed, for sovereign and non sovereign countries for capitalist system and for communist system. That would be four synthesys.

      All synthesys comes down to a form of debt forgivness, without it can not function. It is a crucial point that enables and represents solidarity and cooperation of societies that are slowly solving its problems. Money is what motivates society to cooperate and implement familly values onto whole country, cooperating toghether to work on finding solutions toward better life.

      Money growth is esential part of any economy. It is instituted through banks issuing credit and public debt as a mean to return savings back into economic activity.
      So, net credit creation have to be positive and also public debt have to keep growing in order to keep liquidity growing. Net credit inflow is neccessary to keep old debts repayable and public debt is to keep liquidity from leaking due to negative trade- not to allow money leave the country.
      Imagine those countries with negative trade balance for decades allowing the money to leak out of the country. In few decades such country would have no money left for domestic economy. That is why Greece accumulated such debts and is in trouble when they ask for that money to leave the country to pay off debts even tough sellers to them got their money.

      Rules for healthy economy is evergrowing debt enabled by wage push inflation and no country can ever reduce its debt unless there is economic war going on and power empires want to destroy such country then such country must repudiate all its debts.

      Debt forgivness is implemented through wage pushed inflation that reduces burden of debt over time and it is a measure for masses. For those with less luck there must be a bankrupcy intsitution that allows them to start over.

      If only there could be that those with low income get to have better credit score and those with high income lower score then inequality would be reduced. There is a great benefit to having a credit, but present credit scoring is a way to make poor poorer and rich richer. Credit score is what makes credit really expensive to poor people while cheap for already rich.
      To prevent powerfull buying political power over time and remove such policies that enable growth there should be high marginal tax on wealthy and corporations in the level of 90%. This high marginal tax have multiple ways to keep machine well oiled and economy humming. Not to fund government but to prevent looting of corporations and more equal sharing of profits to lower employees.

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    3. I'm also for debt forgiveness. It needs to happen, because many debtors will not be able to pay their debts back. And because the little people should not be squeezed. It's going to be very hard in practice to find out whose debts need to be forgiven. Everyone needs to suffer, both debtor and creditor, but no one more than he -- and ultimately, the society -- can take.

      But this doesn't change the fact that you're wrong about "money". What you describe is a utopia. There is no easy way out from this debt overhang. You have misunderstood the logic behind "money", as we all have. If you go and read Schumpeter (for instance, "Theory of Economic Development") and other economists from his days and earlier, you might understand how the total amount of "money" is not what ultimately drives economic growth and a higher standard of living. Economic growth is attainable even with a declining total amount of "money".

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    4. That is not utopia, that is what capitalism is when economy grows. When this process stops it causes recession and if it was severe enough to start deleveraging process ( destruction of money) then it causes depression.

      How can I be wrong about money when money can be many things and type of money differs in diffferent countries? I mostly described fiat money there when it is used properly to the gratest benefit to society.

      Total amount of money is not the sole reason for economic growth, there is velocity that is dependent on amount of money growth acceleration. You are talking about base money, while i am talking about all types of money used in economy.

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    5. I'm not talking about base money. I'm talking about cash, deposits, bonds -- anything that is viewed as "money" in today's system. And I say there is no money -- only different kinds of IOUs.

      As you are unable to "unlearn" money, I'll pose the following question:

      Has, or has not, the velocity of "money" slowed down markedly in most if not all of the advanced economies between 1982 and 2014?

      And if it has, I would like you to prove wrong my hypothesis:

      Had the velocity of "money" remained stable between 1982 and 2014, we would have seen substantially smaller growth in the quantity of "money" (and thus, quantity of debt) than we have and still we would have achieved the same economic growth we have.

      I don't believe in the quantity theory of money. It's badly flawed. But I try to argue in the terms you use.

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