Disqus - Latest Comments for hbl

Re: New Economic Perspectives: Budget Deficits and Saving: Responses to Comments on Blog 21

hbl — Fri, 28 Oct 2011 18:56:53 -0000

"I have been leaving out detailed accounting for two reasons..."

If you decide it is too much work to add accounting details to a post, perhaps some readers would benefit from a footnote reference to http://econviz.com/balance-... ? It has graphics showing the accounting effects of government spending and other related topics.

Re: Chart of the Day: Japanese Money Stock – M3

hbl — Tue, 03 May 2011 20:58:49 -0000

Understood.

I made my comment because I think it's a very under-appreciated point in the blogosphere -- even prominent MMT authors don't mention it (whether or not they are aware of it, I'm not certain). Most people have only heard the endogeneity of the money supply explained with respect to the amount of bank lending, not this other dynamic. If true, as the evidence suggests is likely, it casts a whole different light on many QE-related arguments.

Re: Chart of the Day: Japanese Money Stock – M3

hbl — Tue, 03 May 2011 17:40:27 -0000

It's not just deleveraging that's the cause. The private sector has the power to determine its own broad money supply [mostly] independently from the level of private debt!

That means if the central bank conducts QE and pumps in more money (zero duration assets) than the private sector wants, the private sector essentially gets rid of that extra money [over time] without having to deleverage more than it would otherwise.

The way it does this is to substitute non-bank lending for bank lending, changing the composition of private debt (via refinancing bank borrowing to non-bank borrowing or equity, securitizing loans, changing the relative propensities for bank vs non-bank sources for new borrowing, etc). The key difference is that bank lending increases broad money supply, and non-bank lending doesn't, so adjusting the mix lets the private sector satisfy its liquidity preference and "undo" the central bank's actions.

So ironically, while central banks want QE to increase lending, it can actually hurt pure-play banks! (Other than origination profits.) And it has very little other effect other than on psychology/expectations.

There are probably some frictional limits in the magnitude of the adjustment, but the theory seems consistent with Post-Keynesian Marc Lavoie's work, and some knowledgeable commenters on MMT sites agree.

A chart showing the impact of QE on bank lending in Japan (scroll down):

http://www.thoughtofferings...

And a chart showing the recent impact of QE on bank lending in the US (scroll down):

http://www.thoughtofferings...

Re: Bill Gross on fiscal profligacy and dumping the negative real yields of treasuries

hbl — Fri, 01 Apr 2011 09:11:06 -0000

I agree with most of your last comment (though there are some things I would respond to directly in your first paragraph if I had more time). I think I must not have put my previous comments in the proper context, as I seem to have given you the wrong impression. I don't think the safety nets are inherently inflationary in and of themselves, nor do I think they should be cut. And yes, without full employment, there may be some benefits to early retirement.

Most of my comments have been a response to Bill Gross's quote that Ed seemed to agree with, "Unless entitlements are substantially reformed, I am confident that this country will default on its debt... by... inflation... etc"

I was just attempting to cover part of the MMT perspective on these future obligations and whether or not they are problematic. There is no way to "inflate away" the cost of those future obligations in the present. Perhaps it would be possible to "inflate away" the value of some current treasury obligations (i.e., private sector savings) to make space (in a total future economy-wide demand sense) for more of them in the future, but I'm not sure that's what was being suggested (nor do I think that's the core of the issue).

Re: Bill Gross on fiscal profligacy and dumping the negative real yields of treasuries

hbl — Thu, 31 Mar 2011 21:25:51 -0000

DavidLazarusUK,

I agree that the evidence indicates that individuals are generally under-saving for retirement, and thus that current expectations may be misaligned with reality.

However, you also touch on another issue that I've been meaning to append to my last comment when I had a chance...

The core issue as it relates to potential inflation (in the context of this post) really is about changes in dependency ratios due to aging populations, not about government debt. It is the excess of demand over supply for real goods and services that would be inflationary. With a large enough ratio of retirees to workers, this could happen even in a country that had NO entitlement programs at all! (Where everyone had miraculously managed to save enough for their retirements in their private accounts).

Government safety net programs like social security and medicare could only be to blame for an inflationary scenario if they raise demand for real goods and services or reduce supply more than is politically desirable. If they raise demand too high because the benefits are too generous, is the alternative to have more homeless and starving retirees? Maybe, and that's a political choice. If social security somehow encourages people to retire "too early", thus reducing the labor supply, that could also be more inflationary. So there might be good reason to encourage later retirement ages, which I know is consistent with many people's positions. I haven't studied the data and don't have a personal opinion on this, but the entire debate is saturated by politics so it's hard to know who really has good data behind their positions, if such a thing even exists.

I think one of Bill Mitchell's valuable points is to focus on maximizing productivity growth (in a sustainable way) by employing almost all available labor in the present rather than let skills and mental health deteriorate, so that by the time that future date of lopsided demographics arrives we will have learned to use less resources (labor and commodities) for a given level of demand.

Re: Bill Gross on fiscal profligacy and dumping the negative real yields of treasuries

hbl — Thu, 31 Mar 2011 17:53:37 -0000

Hi Ed,

"Regardless of whether you believe sovereign currency nations like the U.S. or the U.K. can finance huge deficits indefinitely while users of currency like Portugal and Ireland are facing the music, you have to think that these debt burdens will reduce long-term growth."

MMTers don't think that. A government deficit would only damage growth if the economy was pushing up against real resource limits and thus government spending was competing in an unhealthy way with the private sector. But when Bill Mitchell discusses the job guarantee, he advocates "hiring off the bottom" by bidding for workers with no other bid, as opposed to hiring off the top in a way that would compete more directly with the private sector (and trigger potentially valid fears of "malinvestment"). Other than reducing poverty and social ills and boosting aggregate demand, the benefit is that it builds job skills and adds to the longer term productive capacity of the economy if even some of those workers are later more employable by the private sector.

But the rest of your post is correct that it's about real resources and political decisions.

I think the key from an MMT perspective is:

1. Run the deficits NOW if they are needed, as maximizing use of resources now builds a bigger and more productive economy, better able to support the rising dependency ratio of the aging population in the future.

2. It's fair to talk about future deficits but it should always be framed in terms of real resources, not what the government can afford (which is a false framing). So absolutely at the same time focus on policies that reduce the costs of those future services (reforming healthcare, etc). Jamie Galbraith's reply to one of Krugman's posts was enlightening too as he claimed (I hope I am summarizing correctly, but perhaps not) that most estimates of future deficits tend to be very wrong, so we can only plan so far in the future.

I do think MMTers somethings shrug off the issue of "unfunded obligations" more quickly than they should, as sovereign debt fears are a sort of [falsely framed] rough proxy for future real resource demands. So you in my opinion wouldn't want your government to over commit in a non-modifiable way to TOO large a future benefit "entitlement". But again that's no excuse not to run the right sized deficit in the present.

I think your post highlights a lot of really good points. I'm not sure I share the same degree of concern about currency or inflation crisis (for the US or Japan)... but if a dependency ratio became too lopsided (Japan in 10-20 years?) I have wondered myself how inflationary the result would be, so I won't claim to know you are wrong, either.

Re: A more malign interpretation of increased consumer spending

hbl — Wed, 02 Feb 2011 13:25:32 -0000

Hi Marshall,

The other half to the psychological effects from the Fed may simply be their influence on expectations about future prices of goods and services. While I largely agree with winterspeak's recent posts on most of inflation expectations theory being bunk, there certainly are SOME discretionary purchases especially among wealthier demographics that may be triggered by expectations of rising prices.

A friend I saw in December made a comment along the lines of "but aren't we entering an inflationary period?" I didn't get a chance to ask him if his perception was based on Fed QE actions, commodity prices, the general ongoing recovery, or something else...

Of course the extent to which both psychological factors can kick start a higher level virtuous cycle of rising incomes and spending versus a more rapid fade out remains to be seen...

Re: Back to the global imbalances norm

hbl — Tue, 01 Feb 2011 10:57:41 -0000

Thanks for sharing your outlook including on the likely direction of the personal savings rate. Despite boomers' retirement portfolios being way to small according to most reports, I suspect you're correct that this won't matter until another downturn.

There is one wildcard I sometimes wonder about... I've seen reports that many homeowners believe their homes are still worth at least what they paid, and often mentally anchor to the peak values. In other words, they consider falling house prices over the last couple years to only reflect foreclosure "fire sales" and not a reversion to pre-bubble price trendlines. I wonder how widespread that belief is, and to what extent it is causing people to save less than they otherwise would, because they believe their net worth hasn't *really* gone down (if only those foreclosures would stop!)

Case Shiller and other measures of prices do include foreclosure sales, so perhaps the "perceived value" of home prices hasn't come as close to mean reverting as many believe. If that's true, what might change that perception? If the answer is nothing, then the savings rate is unlikely to increase outside of a downturn. But if enough time or current falling house prices would gradually drive home the post-bubble housing reality, perhaps that effect could drive a mid-cycle increase in the savings rate? For example in the years the boomer downsizing wave hits (if it does) and they can't find buyers at the prices they want... But I suppose that's probably a very slow motion thing (and thus not likely to lead to crisis on its own).

Re: David Rosenberg on America’s Turning Japanese

hbl — Wed, 12 Jan 2011 14:06:41 -0000

I've learned to pay less attention to Rosenberg other than looking cautiously for interesting data he uncovers. He relentlessly data mines to validate his existing biases (sure that's a natural human tendency, but that doesn't make for a good macroeconomic forecaster). For just one example, that "Rolling Recessions and Recoveries" chart is mighty misleading. Between 1990 and 2007, Japan's real GDP only dipped (on an annual basis at least) in 1998. Yes, nominal matters when it comes to debt, but still...

Re: Cautiously Optimistic Into 2011

hbl — Wed, 12 Jan 2011 13:48:22 -0000

Hi Ed,

Thanks, these outlook posts are very useful! It's hard to find fault with much you've written here. I am curious as to your thoughts on a few things you didn't mention (either in comments or potential future post(s)):

1. You (and Calculated Risk, among others) make the good point that double dips are rare when investment is already so low. However, what are your thoughts on the odds of a traditional inventory-driven recession in 2011? Have you followed the inventory data lately to see if the increases (they have been a big contributor to recent GDP growth) have gotten too optimistic with respect to likely GDP growth rates?

While an inventory led recession would likely be relatively mild, it could trigger something deeper given lingering private debt issues.

2. I have personally been surprised that the household savings rate has not risen further than it did (and it has recently been declining again). Surveys I've seen of boomers' savings shows a dramatic shortfall in their ability to fund their current lifestyles in retirement, and they are starting to turn 65 this year. Do you think this resolves smoothly/gradually via them simply working longer on aggregate? Or very gradually increasing savings such that it is only a small drag on GDP growth? (Maybe they already have done so sufficiently). Etc? I realize this is more of a medium term trend than something that is likely to cause a 2011 macro "shock", but the direction of the household savings rate is clearly important to projecting GDP growth rates. And yes I know it's probably tied to the question of which way asset prices go from here...

3. You've probably seen the charts showing us tracking Japan's historical multi-year disinflation pretty closely. Calculated Risk seems to think rents have bottomed, which among other factors could contribute to breaking this downtrend for the US. Curious if you think we'll break that out of that Japan-like trend given our higher unemployment rate but more favorable demographics (two differences of note). This point would relate to the bond outlook post, also...