Stabiliseringspolitik

The 2012 rivals can be named: Hayek v Keynes
In a fusillade of debates and speeches President Barack Obama and his Republican challengers have firmly established
the economic policy combat lines for next year.
Steven Rattner, FT 12 September 2011

Friedman and Keynes
Many economists agree that the drastic measures taken probably prevented a repeat of the Great Depression. But...
Howard Gold, MarketWatch 1 July 2011

Keynes’s landmark 1936 General Theory
As he saw it, the propensity to save has exceeded the propensity to invest throughout most of recorded history.
The unpopularity of very low interest rates leads to what is known in financial circles as “the search for yield”.
Samuel Brittan, FT March 31 2011

Some links to stuff I’ve written over the past three years bearing on macroeconomic policy.
Paul Krugman 10 June 2011

What is the “stall speed” of an economy?
Unemployment tends to rise when GDP growth falls below about 2.5-3 per cent
Gavyn Davies blog June 15, 2011

One Sunday in October 2008, Alistair Darling flew back from Washington to find Britain on the brink of banking meltdown. The chancellor was told by his Treasury officials that unless a rescue plan was announced by the time the City opened for business the following morning, there was no guarantee that cashpoints would work and that cheques would be honoured.
The possibility of global financial implosion concentrated minds wonderfully; bailout plans were announced that ensured disaster was averted. Co-ordinated and collective action meant there was no return to the 1930s, and within six months most countries were recovering.
Larry Elliott, Guardian, 31 May 2011

China's economy is now almost a third bigger than it was at the start of 2008, while India's has grown by almost a quarter.
The US and Germany have recouped all the ground lost in the Great Recession.

Economists are divided as to whether the Fed can or should do anything
Some call for the Fed to be much more aggressive. Others say that a slow and painful recovery is inevitable
Here, four economists suggest what options they think the Fed chairman should be mulling ahead of his Jackson Hole speech.
BBC 25 August 2011

Om man har en sedelpress går man inte i konkurs
It looks increasingly clear that sub-sovereign eurozone borrowers are in a different position from a sovereign country, such as the UK
Martin Wolf, Financial Times 2 February 2012

Financial Times: Italien har ingen sedelpress
Just like the banks in 2008, Italy cannot print money to alleviate its problems

Det som Tyskland fruktar, dvs. en kraftig förlust av konkurrenskraft mot södra euroområdet, är nödvändig för att komma ur eurokrisen.
Detta är inte en olycklig biprodukt utan själva syftet med den nu förda politiken,
som ju går ut på att sänka offentliga utgifter och höja skatter så att skyhög arbetslöshet och företagskonkurser tvingar fram fallande löner
Det är det man menar med uttrycket ”interndevalvering”
Nils Lundgren, 22:e januari 2012

Britain’s slump has now gone on longer than the slump in the 1930s
it’s worth remembering the rapturous reception the Cameron austerity program received here,
not just from the right, but from centrists. Here’s David Broder:
Cameron and his partners in the coalition have pushed ahead boldly, brushing aside the warnings of economists that the sudden, severe medicine could cut short Britain’s economic recovery and throw the nation back into recession.
Paul Krugman, January 28 January 2012

Indeed, Broder's column - which I mercifully did not read at the time - is worse than I imagined
- That the Washington Post Published and Kept on Publishing David Broder Is Reason Enough for It to Shut Down Today and Never Reopen
Brad DeLong January 28, 2012

European governments have signed a "suicide pact" by imposing fiscal austerity plans that will collapse their economies,
Joseph Stiglitz, the liberal economist, has warned.
Malcolm Moore, Daily Telegraph,Hong Kong, 17 Jan 2012

The German chancellor remains a believer.
This weekend she said that Greece could rebuild its economy despite austerity.
She accepts that spending cuts alone won't work, but she believes that structural reforms have to be forcefully implemented although they take time.
Gavin Hewitt, BBC Europe editor, 16 January 2012

The big divide is between those – the Austrians
– who hold that the mistakes are made by governments while the solution is to let the distorted financial edifice collapse
and those – the post-Keynesians
– who hold that a modern economy is inherently unstable, while letting it collapse would take us back to the 1930s.
I am decidedly in the latter camp.
Martin Wolf, Financial Times, January 3, 2012

The dominant theoretical paradigm holds that a financial crisis cannot happen and cannot matter if it does happen, at least provided broad money is not allowed to collapse.
In this view, the only things now holding economies back are structural rigidities and policy-induced uncertainties.
This is, in my view, a fairy story, based on theories that reduce capitalism to a barter economy under a thin monetary veil.

Far more persuasive, to me, are views that accept that people make important mistakes. The big divide is between those – the Austrians – who hold that the mistakes are made by governments while the solution is to let the distorted financial edifice collapse and those – the post-Keynesians – who hold that a modern economy is inherently unstable, while letting it collapse would take us back to the 1930s. I am decidedly in the latter camp.

In his prescient 1986 masterpiece, Stabilizing an Unstable Economy, the late Hyman Minsky laid out his financial instability hypothesis. Janet Yellen, vice-chair of the US Federal Reserve, remarked in 2009 that “with the financial world in turmoil, Minsky’s work has become required reading”.

In Minsky’s view, leverage – and so fragility – are determined by the economic cycle.
A lengthy period of tranquillity will raise fragility: people will underestimate dangers and overestimate opportunities.

Minsky would have warned that the “great moderation” contained seeds of its own destruction.

In the eurozone this shift to fiscal austerity is running alongside a still bigger experiment:

the construction of a currency union around a structurally mercantilist core among countries with negligible fiscal solidarity, fragile banking systems, inflexible economies and divergent competitiveness.

The ideas that sustained the pre-crisis policy framework have been thoroughly discredited
Among these ideas, the central and most clearly falsified are the supposed “Great Moderation” in economic volatility
and the “Efficient Financial Markets Hypothesis”.
John Quiggin, FT November 29 2010

Inept politicians
It looks like 2012 will be the year of self-induced sluggishness.
History teaches that financial crises are followed by years of weakness.
But some of the current pain is unnecessary.
The Economist editorial, Jan 7th 2012

There is no excuse for the lack of clarity around the euro zone’s future, nor for America’s fiscal paralysis.
Europeans do not need to compound the peripheral economies’ problems with even deeper austerity.
A more calibrated approach with more financing and more structural reforms makes far more sense.

Inept politicians have placed a big burden on central banks, which will have to take more unconventional measures, such as quantitative easing (see article). That will ease the agony, but it won’t make up for politicians’ mistakes

1 lacking in fitness or aptitude : unfit
2 lacking sense or reason : foolish
3 not suitable to the time, place, or occasion : inappropriate often to an absurd degree
4 generally incompetent : bungling

Ponzi
Western economies have not acted much differently than the fraudster Madoff.
Almost everyone - in Europe and in the United States - has been living beyond their means, from consumers to politicians to entire countries
Alexander Jung, Der Spiegel, 5 January 2012

Why the housing burden stalls America’s economic recovery
The central irony of financial crisis is that while it is caused by too much confidence, too much borrowing and lending and too much spending,
it can only be resolved with more confidence, more borrowing and lending, and more spending.
Lawrence Summers, FT October 23, 2011

Most policy failures in the US stem from a failure to appreciate this truism and therefore to take steps that would have been productive pre-crisis but are counterproductive now with the economy severely constrained by lack of confidence and demand.

Third, stabilising the housing market will require doing something about the large and growing inventory of foreclosed properties.

Recent events have given us a dramatic demonstration of
the reality of nominal wage stickiness.
Despite crushing unemployment, wages in Ireland and Latvia have come down only slightly
— but Iceland, by letting its currency devalue, achieved a quick 30 percent fall in wages relative to the euro zone.
Paul Krugman. December 24, 2011

Via Brad DeLong, there’s a paper by David Romer (pdf) summarizing recent research on fiscal policy, inspired by the crisis and aftermath.
And his conclusion is not at all what you hear on the talk shows; it is that there is now overwhelming evidence that fiscal policy does in fact work when it’s not offset by monetary policy.

And since we’re now in a liquidity trap in which conventional monetary policy has no traction, that’s the world we’re in.

Keynes
Finding the human causes of this financial crisis can set us on the road to recovery
The starting point is to recognise that this proto-depression is not natural or inevitable.
It is not the result of destruction through earthquake, or famine.
It results from human actions and inactions.
Roger Bootle, Daily Telegraph 9 Oct 2011

Confronting the painful reality of depression conditions in the 1930s, he /Keynes/explained how this happened,
why it might persist and what needed to be done to overcome it.

So why did the prime minister change his speech at the last minute?
There’s a school of thought out there that suddenly having every consumer in the country
close his or her wallet might not be terribly good for the economy.
Tim Harford, FT October 7, 2011

- Not quite. The paradox of thrift is the idea that when we all try to pay off our debts, in fact we end up more indebted than ever.

EU finance ministers this week will discuss whether governments with the strongest public finances can provide some budget stimulus to help support flagging economic growth in the 27-nation bloc.
That means governments with the strongest finances—Germany, the Netherlands, Sweden, Finland and Luxembourg—could run smaller surpluses or bigger deficits than expected, diplomats said.
WSJ 2 October 2011

"There are countries for which fiscal consolidation is less useful than others," said one diplomat.

Snillen spekulerar
“The evidence is very clear,” said EU employment commissioner Laszlo Andor at a European Parliament hearing.
“The most rapid increases of the unemployment rate in the last one year were observed in countries that underwent very tough austerity.”
WSJ 22 sept 2011

The truly screwy thing about both op-eds is that they both pretend that the problem that caused the recession was a downturn in business investment, with Barro saying not a word about construction and Mankiw only slightly better:

Barro:
How to Really Save the Economy: [T]he main driver of business cycles is investment… the main decline in G.D.P. during the recession showed up in the form of reduced investment…. What drives investment? Stable expectations of a sound economic environment…

Mankiw:
Business Investment as a Key to Recovery: "he most volatile component of G.D.P. over the business cycle is spending on investment…. From the economy’s peak in the fourth quarter of 2007 to the recession’s official end, G.D.P. fell by only 5.1 percent, while investment spending fell by a whopping 34 percent. The subpar recovery has coincided with a historically weak investment recovery. Compare our recent experience with that of the early 1980s, when the nation last experienc…. While the sluggish housing market can explain the slow pace of residential investment, it is not the whole story…

Governments are pushing austerity; bankers are hoarding cash; a recession looms in the United States and Europe.
But Adam S. Posen has a solution: a shock-and-awe display of coordinated central bank attacks aimed at reviving sluggish economies.
An American economist on the Bank of England’s monetary policy committee, Mr. Posen is no academic scribbler or lonely blogger
New York Times 17 Sept 2011

Mr. Posen’s central premise is that governments in Japan, Europe and the United States are running the risk of repeating the policy mistakes of the 1930s, when the conventional wisdom called for strict monetary policy and budget cutting, only deepening the Depression.

”I am here to warn policy makers in the United States, Europe, everywhere that we cannot take our foot off the pedal,” Mr. Posen said before a roomful of small-business leaders and bankers. “The outlook is grim — the right thing to do now is engage in more monetary stimulus.”

Interestingly, for all the anti-Keynesian rhetoric of the German government
in 2008/9, as a share of GDP, Germany launched the largest Keynesian expansion of any G7 country.
Roger Bootle, 11 Sepember 2011

G-7 Torn Between Stimulus and Cuts
The inability of finance ministers and central bankers from the Group of Seven nations to come up with a decisive response
so far to problems of growth was reflected in U.S. and European markets, which tumbled as the G-7 officials met in a palace overlooking the sea.
Wall Street Journal, September 10 2011

The difficulty in coming up with a common solution was reflected in the group's communique, which hovered between backing stimulus and backing austerity.

"Given the still fragile nature of the recovery, we must tread the difficult path of achieving fiscal adjustment plans while supporting economic activity, taking into account different national circumstances."

During the height of the global financial crisis in 2008 and 2009, the G-7—the U.S., Canada, Britain, Germany, France, Italy and Japan—came together with others in the G-20 to stimulate their economies and limit the global downturn.

The prime minister revels in his pre-Keynesian views.
When weak demand is the immediate constraint on output, that is simply terrifying.
Martin Wolf, FT October 13, 2011

Alice's Adventures in Wonderland
The prospect that one of these people may well be our next president is, frankly, terrifying.
Republican debate on the economy, like falling down a rabbit hole into a fantasy world
Paul Krugman, New York Times October 13, 2011

Reading the transcript of Tuesday’s Republican debate on the economy is, for anyone who has actually been following economic events these past few years, like falling down a rabbit hole. Suddenly, you find yourself in a fantasy world where nothing looks or behaves the way it does in real life.

And since economic policy has to deal with the world we live in, not the fantasy world of the G.O.P.’s imagination, the prospect that one of these people may well be our next president is, frankly, terrifying.

Down the Rabbit-Hole
Alice was beginning to get very tired of sitting by her sister on the bank, and of having nothing to do: once or twice she had peeped into the book her sister was reading, but it had no pictures or conversations in it, `and what is the use of a book,' thought Alice `without pictures or conversation?'
So she was considering in her own mind (as well as she could, for the hot day made her feel very sleepy and stupid), whether the pleasure of making a daisy-chain would be worth the trouble of getting up and picking the daisies, when suddenly a White Rabbit with pink eyes ran close by her.
Read more here

Finanskrisen blev speciell för Sveriges del. Exporten säckade ihop, vilket slog hårt mot BNP och de anställda i industrin,
men många andra fick det bättre ekonomiskt tack vare jobbskatteavdrag, höjd lön och sänkta räntor.
P J Anders Linder Chefredaktör Ledare, SvD 8 januari 2012

Interndevalvering
Grekland står sannolikt inför en nationell kollaps.
Den europeiska makteliten har fastslagit att vägen till ekonomisk balans i de sydeuropeiska eurokrisländerna är s k interndevalvering.
Nils Lundgren, Newsmill, 2011-11-08

Anders Borgs motivering för den försiktiga budgeten är den internationella osäkerheten och de risker som en konjunkturavmattning innebär.
Det kan låta klokt. Men det finns samtidigt skäl att reflektera över principerna för regeringens finanspolitik.
Det är en olämplig konjunkturpolitik med större reformer i goda tider än i dåliga, vilket blir fallet om konjunkturdämpningar får leda till att utrymmet för reformer revideras ner.
En sådan procyklisk finanspolitik förstärker konjunktursvängningarna.
Lars Calmfors, Kolumn DN 22 sept 2011

Budgeten är utformad så att det faktiska finansiella sparandet blir precis noll nästa år.
Det verkar som om regeringen infört ett ytterligare budgetmål: att undvika underskott även i en lågkonjunktur av det slag som förutses. Om målet uppnås, kommer förmodligen överskottsmålet, som ju gäller över en hel konjunkturcykel, att överskridas.
Ett sådant budgetbalansmål kan därför innebära en avsevärd skärpning av de budgetpolitiska ambitionerna.

Riksbankens inflationsmål bör höjas från nuvarande 2 till 3 eller 4 procent för att skapa bättre möjligheter att möta framtida kriser.
Det säger professor Lars Calmfors 2011-09-05

Det skall bli intressant att se hur de svenska ny-hooveristerna
skall ta emot President Obamas senaste stimulanspaket på 447 miljarder dollar.
Rolf Englund blog 10 september 2011

SvD genom Johan Ingerö om Obamas stimulanspaket på 447 miljarder dollar
10 september 2011

The U.S. economy would get a boost of up to 2 percent under President Barack Obama’s $447 billion jobs plan,
say economists at Goldman Sachs Group Inc., Moody’s Analytics Inc. and JPMorgan Chase & Co.
Bloomberg 10/11 2011

Mark Zandi, chief economist at Moody’s
“The plan would go a long way toward stabilizing confidence, forestalling another recession and jump-starting a self-sustaining economic expansion.”

JPMorgan chief U.S. economist Michael Feroli:
“It offsets what would otherwise have been a huge drag from the fiscal restraint” that was due next year, he said.

“The plan reduces the risk of a recession in 2012, though it doesn’t do much for growth in the second half of this year.”

Restraint or stimulus?
Markets and governments swap roles
Stephanie Flanders, BBC Economics editor, 7 September 2011

There was a time, not so long ago, when politicians were profligate and the markets begged for restraint. Not any more.

Now it is politicians - on both sides of the Atlantic - who demand fiscal restraint and spending cuts. While the financial markets seem to be looking for stimulus.

Interest rates are already extremely low. And the talk in Washington - and across Europe - is all of fiscal austerity. This has many on Wall Street extremely concerned.

To cite just one example - a recent report by economists at Bank of America/Merrill Lynch says that "while fiscal austerity could help the long-run outlook, near-term fiscal consolidation threatens the recovery in developed economies".

The biggest constraints on action in the major developed economies now have less to do with those economic realities and
more to do with political paralysis, misplaced fears about inflation and moral hazard,
and unwarranted disaffection with the efficacy of the traditional fiscal tools of tax cuts and investment to encourage growth.
Tim Geithner, FT 8 September 2011

It is time to take the bull by the horns and say that
fiscal policy should aim to balance the economy and not just the national budget,
especially at times when monetary policy cannot do the job on its own.
Samuel Brittan, FT, 8 September 2011

How can we do this without giving every spending authority an excuse for going on a spree when it likes?

Listen to the markets. They are saying: borrow and spend, please.
Yet those who profess faith in the magic of the markets are most determined to ignore the cry.
Martin Wolf, FT 6 September 2011

Are the markets mad? Yes, insist the wise folk: the biggest risk is not slump, as markets fear, but default.

Yet if markets get the prices of such governments’ bonds so wrong, why should one ever take them seriously?

I cannot be the only person who fears that the situation we are in is causing Martin Wolf's mind to crack.
BradDeLong 6 september 2011

The worst of the euro crisis is yet to come
The most disturbing aspect about the eurozone right now is that
every crisis resolution strategy depends on a moderately strong economic recovery.
Wolfgang Münchau, FT September 4, 2011

Något för Klas Eklund
"Give Karl Marx a Chance to Save the World Economy"
George Magnus, senior economic adviser at UBS and author of “Uprising: Will Emerging Markets Shape or Shake the World Economy?”
Bloomberg 29 August 2011

Policy makers struggling to understand the barrage of financial panics, protests and other ills afflicting the world would do well to study the works of a long-dead economist: Karl Marx.

The sooner they recognize we’re facing a once-in-a-lifetime crisis of capitalism, the better equipped they will be to manage a way out of it.

So how do we address this crisis? To put Marx’s spirit back in the box, policy makers have to place jobs at the top of the economic agenda, and consider other unorthodox measures.

The crisis isn’t temporary, and it certainly won’t be cured by the ideological passion for government austerity.

Kommentar av Rolf Englund:
Klas Eklund var Trotskyist, "trottare", som han, som chefsekonom på SEB, leende brukade säga,
varvid direktörerna skrockade.

The current UK depression will be the longest since at least the first world war.
Without a dramatic surge in growth, it is also quite likely to generate a bigger cumulative loss of output than the “great depression”.
All this is disturbing enough. What is even more disturbing is the near universal view that almost nothing can be done to change the prognosis.
Martin Wolf, Financial Times, 1 September 2011

Worse, what almost no one initially foresaw is now seen as next to irremediable.

In an important pamphlet, Bill Martin, at the Centre for Business Research at Cambridge, forcefully attacks this pessimism. His conclusion is that the problem has been the collapse in demand, not in potential supply. Worse, he notes, the longer output remains depressed, the more likely it is that supply potential will be needlessly damaged.

The private sector is seeking to improve balance sheets, by paying down its debt. Frightened by deficits, the government is now trying to do the same. This can add up, without a prolonged slump in activity, if and only if the economy shifts into huge external surplus.

Many ask whether high-income countries are at risk of a “double dip” recession. My answer is: no,
because the first one did not end. The question is, rather, how much deeper and longer this recession or “contraction” might become.
Martin Wolf, Financial Times, 30 August 2011

The fading out of the stimulus is already and noticeably leading to substantial withdrawal of government demand.
Paul Krugman, New York Times 3 September 2011

Look, in particular, at actual government purchases of goods and services — governments at all levels buying stuff — which is what standard macroeconomics says should have the highest multiplier, since unlike transfers and tax cuts it is by definition spent rather than saved. Here’s the picture, showing changes in real spending over the previous year:

The Disaster That Is American Macroeonomic Policy
Brad DeLong 29 August 2011

Jackson Hole will be a Black Hole for Those Hoping for QE3
Hope still springs eternal in the financial markets, where there remains the perennial hope that the Fed will “do something.”
/But/ The problem is a failure of demand which has to be addressed via demand measures – that is, fiscal policy.
Auerback/Parenteau August 25, 2011, via Rolf Englund blog 25 augusti 2011

Att Merkel och Sarkozy lägger förslag som i bästa fall är ineffektiva och i värsta fall direkt dubiösa är bara en del av Europas problem.
En annan del är att dessa ledare – men långt ifrån bara de – skjuter in sig så ensidigt på makroekonomin.
Det känns inte 100-procentigt säkert att den här åtgärdslistan kan ställa Europas affärer till rätta (om åtgärderna mot all förmodan skulle bli verklighet)
Svenska Dagbladet, ledare 18 augusti 2011

Det hägrande överskottet i de offentliga finanserna uteblir helt.
Desto viktigare alltså att hålla i; vad motsatsen leder till finns många otäcka exempel på ute i Europa.
DN-ledare 27 augusti 2011

Konjunkturinstitutet har angett det så kallade reformutrymmet till 30 miljarder kronor, men Borg ser bara 10–15 miljarder. Därtill kan spelrummet inte användas som tänkt, utan tyngdpunkten landar på tillfälliga efterfrågestimulanser och arbetsmarknadspolitik.

Men regeringen måste akta sig för att bli för passiv. Ekonomin kan behöva robust stöd.

Anders Borg: merparten av reformutrymmet kan komma att användas till ett antal tillfälliga efterfrågestimulanser
Den sortens politik tjänade Sverige väl under krisåren 2008–2009
SvD-ledare 27 augusti 2011

Inhemsk efterfrågan (stimulerad bland annat genom Rut och Rot) drev på tjänstesektorn medan den mer kapitalintensiva industrin säckade ihop.

Regeringen nu räknar med ett årligt inkomstbortfall på 50–60 miljarder kronor under mandatperioden, jämfört med tidigare prognoser.

Av det 30 miljarder kronor stora reformutrymme som Borg skissade på i våras, återstår sannolikt inte mer än max hälften.

- Rent sakligt talar fortfarande mer för än emot att sänka skatterna nästa år.
Det skulle inte äventyra stabiliteten i de offentliga finanserna, det skulle däremot dämpa nedgången i efterfrågan och därmed tillväxtfallet.
Men eftersom Moderaterna investerat allt i imagen av ekonomiskt ansvarstagande sätter Reinfeldt och Borg stopp.
Nu kan de säga "skapa säkerhetsmarginaler" lika ofta som "vara garant för ordning och reda i de offentliga finanserna".
Det låter bra
Expressen-ledare 18 augusti 2011

In 2008 the world economy was saved from depression by a bold and co-ordinated plan
to shore up banks and counter the slump with fiscal and monetary stimulus.
And, to the extent that policies have a common theme, it is the wrong one:
politicians across the rich world are taking too short-term a view of fiscal austerity
The Economist, editorial print 27 augusti 2011

Today there is no boldness (the euro-zone crisis is the epitome of politicians doing too little too late).

And, to the extent that policies have a common theme, it is the wrong one: politicians across the rich world are taking too short-term a view of fiscal austerity—a bout of budget-cutting which will only increase the risk of another recession.

Reinfeldt och Borg kommer att argumentera för att skjuta på skattesänkningar. Moderaterna trycker på pausknappen.
Rent sakligt talar fortfarande mer för än emot att sänka skatterna nästa år. Det skulle inte äventyra stabiliteten i de offentliga finanserna, det skulle däremot dämpa nedgången i efterfrågan och därmed tillväxtfallet. Säkert är det inte. Men sannolikheten är sisådär 70 procent. Men eftersom Moderaterna investerat allt i imagen av ekonomiskt ansvarstagande sätter Reinfeldt och Borg stopp.
Nu kan de säga "skapa säkerhetsmarginaler" lika ofta som "vara garant för ordning och reda i de offentliga finanserna".
Det låter bra
Expressen-ledare 18 augusti 2011

The crusade for a balanced-budget amendment that roiled American politics this summer reached Paris this week,
with the announcement from Nicolas Sarkozy and Angela Merkel that every country in the euro zone would commit to passing a balanced-budget amendment to their constitutions by next summer.
Wall Street Journal 18 August 2011

Who says there's no tea party in Europe?
Alas, who says that Europe is immune from the tea party's bad ideas?

We doubt it would be possible to get 17 democracies to approve such an amendment.

We doubt even more that it would be possible to enforce those amendments
— certainly not any more than it proved possible to enforce the Maastricht Treaty rules for the currency union,
which France and Germany were among the first to violate.

Europe's economy slides towards disaster
The EU leaders’ rhetoric in Paris makes it clear that they are not facing up to the existential crisis.
Jeremy Warner, Daily Telegraph 17 Aug 2011

A reporter asked Perry what he would do about the Federal Reserve.
Standing next to a "Perry President" sign, the governor replied,
"If this guy prints more money between now and the election, I don't know what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas."
"I mean, printing more money to play politics at this particular time in American history, is almost treacherous, or treasonous, in my opinion," he added.
A Federal Reserve spokesman said the central bank had no comment.
CNN 16 August 2011

Christine Lagarde urged policy makers to include measures to support economic growth in the short term
as they implement fiscal tightening plans under market pressure.
Bloomberg Aug 16, 2011

“For the advanced economies, there is an unmistakable need to restore fiscal sustainability through credible consolidation plans,” Lagarde wrote in the Financial Times. “At the same time we know that slamming on the brakes too quickly will hurt the recovery and worsen job prospects.”

A prevailing misconception about US economic policy is that no good options remain.
Fiscal policy is all used up. With interest rates at zero and its balance sheet engorged, the Federal Reserve is powerless too. Revised figures for recent growth show a failing recovery – and there is nothing anybody can do.
This is wrong.
Clive Crook, FT August 14, 2011

This is wrong. Policymakers could act if they chose to. Over the next few months, it is especially important that the Fed shows some gumption – but the point applies more broadly. Politics, not economics, has neutered US policy.

Sparprogram är standardmedicinen för alla stater dessa dagar.
Men om alla följer detta mode och drar åt till sista hålet
så riskerar den ekonomiska cirkulationen att skadas rejält, skriver Per Lindvall.
e24, 15 augusti 2011

The Greenspan put is not out of the money: it simply no longer exists.
If you can’t count on policy to support equity prices, you’re left with book value, cash flow, and dividends.
That’s a sobering message. As Buttonwood notes, valuations are still not cheap based on long-term earnings trends.

Skuldproblemen i Europa och USA beror i grund och botten på en ohållbar budgetpolitik.
Lättnaderna i EU:s stabilitetspakt har visat sig få ödesdigra konsekvenser för Europa och USA:s grundproblem är ju inte att man hade problem att höja skuldtaket, nu senast. Problemet är att det har höjts tio gånger på tio år. Man lånar för att ha råd med de befintliga lånen.
Till syvende och sist handlar västvärldens ekonomiska problem om att regeringar under lång tid har spenderat mer än vad de har. Mer av samma kommer bara att göra saker och ting värre. Mycket värre.

On Wednesday Mr Sarkozy summoned members of his government back from holiday for an emergency meeting
In a statement after the two hour meeting in the Elysee Palace in Paris, Mr Sarkozy said France’s pledge to reduce the budget deficit from last year’s 7.1 per cent to 3 per cent by 2013
“will be kept whatever the evolution of the economic situation”.
Financial Times 10 August 2011

The general view is now that in this, the next round of the Great Recession,
there is a high risk of things getting worse, with no effective instruments at governments’ disposal.
The first point is correct but the second is not quite right.
Throughout the crisis – and before it – Keynesian economists provided a coherent interpretation of events
Joseph Stiglitz, August 9, 2011

Throughout the crisis – and before it – Keynesian economists provided a coherent interpretation of events. Pre-crisis, America, and to a large extent the world economy, was sustained by a bubble.

The breaking of the bubble has left a legacy of excess leverage and real estate.

Consumption will therefore remain weak and austerity on both sides of the Atlantic now ensures the state will not fill the void.

Given this, it is not surprising that companies are unwilling to invest – even those that can get access to capital.

The Federal Reserve pledged for the first time to keep its benchmark interest rate at a record low at least through mid-2013
in a bid to revive the flagging recovery after a worldwide stock rout.
Bloomberg Aug 9, 2011

Interest rate cuts work their way through to the real economy by a number of transmission channels.
Cui bono? The banks, of course. The bank-bailout channel will be the only monetary transmission mechanism to function like clockwork.

So do not be fooled by anybody who says that the central bank should cut interest rates for the benefit of innocent citizens
Wolfgang Munchau, FT January 20 2008

Another recession may not be preventable. But policy can stop a second depression.
Nouriel Roubini

Ett så kraftigt kursfall förutsätter att man tror det ska bli en global djup recession,
och det tror inte jag säger Arne Karlsson, vd på Ratos

Jag har tidigare hävdat att det enda genomförbara sättet att förkorta den kommande perioden av smärtsamma nedskärningar och långsam tillväxt är en bibehållen måttlig inflation på till exempel 4–6 procent i flera år.
Kenneth Rogof, Kolumn DN 16 augusti 2011

Inflation är ju en orättvis och godtycklig överföring av kapital från sparare till låntagare, men en sådan övergång är faktiskt den kortaste vägen till snabbare återhämtning. Det är den väg man kommer att ta, något Europa just nu får känna av.

Somliga anser att minsta antydan om en ens blygsamt förhöjd inflation är kätteri. Men stora kontraktioner är till skillnad från recessioner mycket sällsynta och inträffar kanske en gång på 70 eller 80 år. Nu måste centralbankerna offra lite av den trovärdighet som de samlar på sig i normala tider.

Ett lån i dag på två miljoner kostar 56 000 kronor om året i räntor efter skatteavdrag.
Om vi får en inflation på 5-6 procent kan räntan stiga med ytterligare ett par procentenheter till säg 7.
Då ska lönekronorna räcka till räntebetalningar på 98 000 kronor om året.

Everyone agrees that bold action is required, but what kind of bold action?
Kenneth Rogoff, Financial Times August 8, 2011

It is far from clear that any huge temporary fiscal stimulus will rev up the engine enough to achieve self-sustaining growth. Higher government debt adds an overhang of higher expected future taxes on top of pre-existing private debt overhang. True, in the classic analysis of a zero interest rate liquidity trap, the ideal policy is a money-financed temporary surge in government spending. But the canonical model completely ignores debt overhang.

The eurozone is a modern version of the gold standard
with the expectation that long and painful adjustment processes in deficit countries would unfold without a systemic crisis.
Miguel Carrion, Eurointelligence 19 July 2011

At Bretton Woods, Lord Keynes proposed an International Clearing Union with a surplus recycling mechanism and penalties for both deficit and surplus countries.

Today, we ignore at our peril that trade imbalances cannot be moderated by taking corrective action on the deficit side alone, especially in the presence of a fixed-exchange-rate regime such as the gold standard of Keynes' time or a monetary union without fiscal union where the central bank's price stability mandate trumps concerns over financial stability or full employment.

When the debt-financed asset-price bubble burst in the deficit countries, as such bubbles eventually do, a “balance sheet recession" ensued, with the corresponding banking crisis.

This has also been known essentially since the Great Depression when Irving Fisher formulated his Debt Deflation theory but, like Keynes' contemporaneous insight on international trade imbalances, it has been studiously ignored since

What about the spectre of “debt deflation”?
This was invented by the leading US economist, Irving Fisher, after he had bankrupted himself in the 1929 stock market crash.
Samuel Brittan, Financial Times January 29 2009

We also studied historical financial crisis as well as the existing literature that was available at the time.
Especially I remember that Irving Fisher’s well-known paper in Econometrica, “The Debt-Deflation Theory of Great Depressions” from 1933 provided inspiration.
Bo Lundgren

There are four deflationary spirals presently at work in the world economy, i.e.
the Keynesian savings paradox, Fisher’s debt deflation,
the cost cutting deflation, and the bank credit deflation.
Each of these deflationary spirals can be dealt with when they occur in isolation.
They become lethal when they interact with each other.
Paul de Grauwe 6/4 2009

Raising taxes or cutting spending has side effects that cannot be ignored.
Either one or both will make it more difficult for the economy to grow. Let’s quickly look at a few basic economic equations.
The first is GDP = C + I + G + net exports, or
GDP is equal to Consumption (Consumer and Business) + Investment + Government Spending + Net Exports (Exports – Imports). This is true for all times and countries.
John Mauldin 16 July 2011

Now, if you mess with our equation, what you find is that Investments = Savings.

For the last several years, the real growth in GDP has come from the US government borrowing money. Without that growth in debt, we would be in what most would characterize as a depression.

This is why Paul Krugman and his fellow neo-Keynesians argue that we need larger deficits, not smaller ones.

For them the issue is final aggregate consumer demand, and they believe you can stimulate that by giving people money to spend and letting future generations pay for that spending.

But others (and I am in this camp) argue that business-cycle recessions are normal and that recoveries would come anyway, and are not caused by increased government debt and spending but by businesses adjusting and entrepreneurs creating new companies. Correlation is not causation. Just because recoveries happened when the government ran deficits does not mean that they were the result of government spending.

Keynes /The Treatise on Money's/ message was that savings and investment, being different activities carried on by different people, could not simply be presumed identical. It took interest rate to bring them into equilibrium

The Sorrow and the Pity of Another Liquidity Trap
I had read Hicks. I even knew Hicks. But I thought that his era, the Great Depression, had passed.
Brad DeLong, Bloomberg 5 July

While Democrats favor tax increases and mild adjustments to entitlements, Republicans pound the table for trillions of dollars of spending cuts and an axing of Obamacare.
Both, however, somewhat mystifyingly, believe that balancing the budget will magically produce 20 million jobs over the next 10 years.
Bill Gross, July 2011

Stall speed
Richard Yamarone notes that if year-over-year GDP growth dips below 2%, a recession always follows.
John Mauldin 2 July 2011

Many commentators remain complacent about the debt ceiling;
the very gravity of the consequences if the ceiling isn’t raised, they say, ensures that in the end politicians will do what must be done.
But this complacency misses two important facts about the situation: the extremism of the modern G.O.P.,
and the urgent need for President Obama to draw a line in the sand against further extortion.
Paul Krugman, New York Times, 30 June 2011

In about a month, if nothing is done, the federal government will hit its legal debt limit. There will be dire consequences if this limit isn’t raised. At best, we’ll suffer an economic slowdown; at worst we’ll plunge back into the depths of the 2008-9 financial crisis.

Friedman and Keynes
Many economists agree that the drastic measures taken probably prevented a repeat of the Great Depression. But...
Howard Gold, MarketWatch 1 July 2011

But the “recovery” has been so weak that much of the public thinks, with good reason, that we never emerged from recession.

Truth is, the giants Friedman and Keynes have met their Waterloo in a housing depression that shows few signs of recovery,
a financial crisis that has suppressed growth and a looming debt crisis in Europe and the U.S.

Click here for a nice try, that so far has failed
Together we will create The Hayek-Friedman-Keynes Synthesis
Rolf Englund blog 2005-02-07

Debt ceiling
Although it is still very likely that Republican leaders in Congress will strike a last-minute deal with the White House,
the very fact that the two sides can contemplate a fight to the death over this issue is truly frightening,
not only for America but for the world as a whole.
Anatole Kaletsky, The Times July 6 2011

It reminds us that the greatest threat to global prosperity and peace in the coming decades is not global warming or public debt or the rise of China. It is the risk that America, the nation that has led, protected and inspired the world, both politically and economically, for the past century, may now be in terminal decline.

When the Soviet Union began to collapse it was described as “Upper Volta with rockets”.

This is a question that does not bear asking — just like the question of whether the US Treasury will decide to pay its debts.

The key point here is the difference between raising the economy’s long-run growth rate, which is very hard,
and increasing demand when the economy is operating below potential, which isn’t hard at all.
Paul Krugman blog 12 July 2011

Look: under normal conditions, when interest rates are well above zero and there’s room for conventional monetary policy to operate, we actually take it for granted that the Fed can produce dramatic acceleration of short-run growth.
When Paul Volcker decided in 1982 that the economy had suffered enough, he loosened the reins — and it was Morning in America.

I den med rätta uppmärksammade boken, Capitalism 4.0, av Anatole Kaletsky, USA:s tidigare centralbankschef Paul Volcker är mest känd för att ha blivit tillsatt av Ronald Reagan för att få ner inflationen, vilket lyckades genom en hård åtramning med recession som följd. Det ryktet kvarlever med märklig kraft. Men Kaletsky menar att det var Paul Volcker som ledde återgången till "demand management".
Read more here

Turn on your TV and you’ll see some self-satisfied pundit declaring that nothing much can be done about the economy’s short-run problems (reminder: this “short run” is now in its fourth year), that we should focus on the long run instead.

The truth is that creating jobs in a depressed economy is something government could and should be doing
Paul Krugman NYT 10 July 2011

Excuse No. 4: We tried to stimulate the economy, and it didn’t work.
Everybody knows that President Obama tried to stimulate the economy with a huge increase in government spending, and that it didn’t work. But what everyone knows is wrong.
Think about it: Where are the big public works projects? Where are the armies of government workers?
There are actually half a million fewer government employees now than there were when Mr. Obama took office.

A strange thing has happened to policy discussion: on both sides of the Atlantic,
a consensus has emerged among movers and shakers that nothing can or should be done about jobs.
Paul Krugman 29 May 2011

In the first half of last year a strange delusion swept much of the policy elite on both sides of the Atlantic
— the belief that cutting spending in the face of high unemployment would actually create jobs.
Paul Krugman, New Yourk Times, 13 September 2011

I went after this stuff early and hard (I suspect that the confidence fairy will be one of my lasting contributions to economic discourse); still, it’s good to have a steadily mounting weight of evidence about just how wrong that view was.

The latest entry is a comprehensive review of past episodes of austerity by economists at the IMF.

Unfortunately, austerity programs are now the rule everywhere; even if the new Obama plan became law, which it won’t, it would only slow the pace of fiscal consolidation in America, and there’s nothing like it even on the table elsewhere.

This is truly a tragedy
Barack Herbert Hoover Obama
Paul Krugman, New York Times, July 2, 2011

"Government has to start living within its means, just like families do. We have to cut the spending we can’t afford so we can put the economy on sounder footing, and give our businesses the confidence they need to grow and create jobs. "

Yep, the false government-family equivalence, the myth of expansionary austerity, and the confidence fairy, all in just two sentences.

This is truly a tragedy:
the great progressive hope (well, I did warn people) is falling all over himself to endorse right-wing economic fallacies.

Greklands höger har inte någon Thatcher
Lady Thatcher, dåvarande premiärminister i Storbritannien, gjorde sig först känd som skicklig politisk kommunikatör när hon inför britterna i slutet av 70-talet jämförde statens ekonomi med ett vanligt hushålls matkassa. Man kan inte handla för mer än vad som finns i plånboken, det visste varje brittisk husmor, och detsamma gällde statens finanser.
Maria Ludvigsson, ledare SvD, 21 juni 2011

The debate over post-crisis monetary and fiscal policy has been heating up, on both sides of the Atlantic.
So who is right? It will come as no surprise that economists disagree deeply.
Martin Wolf, Financial Times, 2 June 2011

The Arab uprisings and the world financial crisis
What they have in common is the complete failure of almost all these experts to predict them.
The moral is to try to understand a bit more and compute a bit less.
Samuel Brittan, FT, May 26 2011

This elementary point has not been well covered in the so-called literature on the origins of the credit tsunami. But it has been made very well in June’s issue of Foreign Affairs by Nassim Taleb (of Black Swan fame) and Mark Blyth. “The critical issue in both cases is the artificial suppression of volatility in the name of stability,” they write. One moral is that the US government should stop supporting dictatorial regimes “for the sake of pseudostability” and that a robust economic system encourages early failures. Alan Greenspan is criticised for intervening at the slightest sign of a downward tick.

They argue that political and economic “tail events” (ones that are unlikely in terms of conventional statistics) are inherently unpredictable “no matter how many dollars are spent on research”.

They illustrate this by the now familiar analogy of the tipping point. Imagine someone who keeps adding sand to a pile until it crumbles. The foolish and common error is to blame the collapse on the last grain rather than on the structure of the pile.

Nothing has done more to discredit serious economic analysis than its identification with the guesses about output, employment, prices and so on which politicians feel obliged to make. The fundamental error springs from the identification of scientific method with prophecies, which was demolished long ago by the philosopher of science Karl Popper.

The ECB's governors might usefully study
Systematic Monetary Policy and the Effects of Oil Price Shocks, a seminal work in 1997 by a Professor Ben Bernanke of Princeton.
The reason why such shocks often lead to slumps is because policymakers make a hash of it.
Ambrose Evans-Pritchard 7 March 2011

"The majority of the impact of an oil price shock on the real economy is attributable to the central bank’s response, not the inflationary pressures engendered by the shock,” wrote Bernanke.

The ECB seems caught in a 1970s time-warp, wedded to the fallacy that the Yom Kippur oil shock caused the Great Inflation.
The actual cause was rampant growth of the broad money supply, US spending on the Vietnam War and the Great Society, and a near ubiquitous picture of over-stimulus and over-heating across the West.
It was a demand story, not a supply shock.

No doubt ECB governors need to prove their hawkishness after Bundesbank chief Axel Weber walked out of the Eurotower in disgust, more or less stating that he did not wish to take over a body that had departed so far from orthodoxy, and succumbed to political pressure by purchasing the bonds of bankrupt states.

Abstract
Macroeconomic shocks such as oil price increases induce a systematic (endogenous) response of monetary policy. We develop a VAR-based technique for decomposing the total economic effects of a given exogenous shock into the portion attributable directly to the shock and the part arising from the policy response to the shock. Although the standard errors are large, in our application, we find that a substantial part of the recessionary impact of an oil price shock results from the endogenous tightening of monetary policy rather than from the increase in oil prices per se.
More

Those new GDP figures I mentioned yesterday showed real household disposable income falling by 0.8% in 2010.
That's the first time this measure has fallen since 1981.
As Graham Turner of GFC Economics has pointed out, it's also the largest annual decline since 1977
Stephanie Flanders, the BBC's economics editor, 30 March 2011

Dominique Strauss-Kahn, managing director of the IMF,
warned countries against cuttting their budgets
too far and creating long-term unemployment
Daily Telegraph 13/4 2011

"Fiscal tightening can lower growth in the short term, and this can even increase long-term unemployment, turning a cyclical into a structural problem," Mr Strauss-Kahn said in a speech in Washington DC.

"The bottom line is that fiscal adjustment must be done with an eye kept keenly on growth."

Many European banks need bigger capital cushions to restore market confidence and help reduce the risk of another financial crisis,
according to the IMF's Global Financial Stability Report

Why economic recovery has been so long in coming
Some economists expected a rapid bounce-back once we were past the acute phase of the financial crisis
— what I think of as the oh-God-we’re-all-gonna-die period —
which lasted roughly from September 2008 to March 2009.
Paul Krugman, New York Times March 3, 2011

Sverige har länge haft stora överskott i bytesbalansen och trenden fortsätter.
Under fjolårets fjärde kvartal var överskottet 53,3 miljarder kronor.
Det var en ökning från motsvarande kvartal 2009 då överskottet uppgick till 39,9 miljarder.
Viktor Munkhammar, DI 3/3 2011

Sverige bekräftar nu sin plats bland tigerekonomierna.
Under fjärde kvartalet 2010 växte Sveriges bruttonationalprodukt (BNP) med 7,3 procent och tillväxten för hela fjolåret blev 5,5 procent, den högsta siffran sedan 1970.
e24 2011-03-01

For those of us who lived through the ERM crisis of 1992 and followed German events closely at that time, all this has a familiar ring.
It was not just recession in the UK, Italy, Spain, and parts of Scandinavia that caused the fixed exchange system to blow up, it was the deadly cocktail of slumps and banking troubles in these countries combining with German overheating. The mix triggered the final crisis.
Ambrose Evans-Pritchard, February 21st, 2011

Ever since the early 1970s, every single time oil prices have spiked sharply (rising by 80pc or more),
regular as clockwork the US has entered recession.
Given America's massive influence on worldwide economic sentiment,
the past five global recessions have all come in the wake of sharp jumps in the price of crude.
Liam Halligan, Daily Telegraph, 26 Feb 2011

Tack vare regeringens framgångsrika hantering av finanskrisen har Sverige inte drabbats av de underskott som nu plågar så många europeiska länder.
Detta budskap har upprepats så många gånger det senaste året att det förvandlats till ett slags sanning, höjd över varje form av ifrågasättande.
Men hur väl stämmer finansministerns version överens med vad som faktiskt inträffat?
Peter Wolodarski, DN 20/2 2011
Highly recommended

Because the three sectors cover all of the activities of the US economy, at home and abroad, their financial balances must sum to zero.

After 2007, falling house prices and the financial panic caused both households and companies to slash their spending relative to their income, and to generate excess cash.

The shift in the private balance was a remarkable 14 per cent of GDP, and the consequent collapse in spending caused the recession.

In comments on that post, Martin Wolf, Tom and others suggested that I should break the private sector into at least two parts, comprising the household sector and the business sector. Here is the resulting graph:

When the housing market peaked in 2005, households realised that they should correct their financial imbalance, and eventually this led to a slowdown in the economy and a collapse in the bloated financial sector. Only then – not before – did the business sector also seek to move into financial surplus, and this combined shift by businesses and households together triggered a very deep recession.

Payroll employment is still 7.7 million below the pre-recession peak,
and if the the U.S. adds 2.5 million payroll jobs per year it would take 3+ years to return to the pre-recession peak.
And that doesn't include population growth
CalculatedRisk with nice charts, as usual, 6/2 2011

I den med rätta uppmärksammade boken, Capitalism 4.0, av Anatole Kaletsky,
USA:s tidigare centralbankschef Paul Volcker är mest känd för att ha blivit tillsatt av Ronald Reagan för att få ner inflationen, vilket lyckades genom en hård åtramning med recession som följd. Det ryktet kvarlever med märklig kraft.
Men Kaletsky menar att det var Paul Volcker som ledde återgången till "demand management".
Click here

Roubini:
Europe needs growth to prevent a disorderly collapse of the euro area.
Der Spiegel 11/1 2011

Portugal
Åtstramningarna som har framtvingats av marknaderna gör saken inte bättre, i alla fall inte på kort sikt. Medan länder som Tyskland och Sverige växer så det knakar väntas Portugals BNP sjunka i år,
precis som investeringarna, sysselsättningen och den offentliga och privata konsumtionen.
Hur Portugal i det läget ska klara av att sänka budgetunderskottet är för många en gåta.
Tomas Lundin, SvD Näringsliv 12/1 2011

The great austerity debate
Over the next week some of the world’s leading policymakers and economists will be addressing in the FT the all-consuming contemporary economic debate: austerity versus stimulus. The writers, including Larry Summers, Jean-Claude Trichet and the FT’s Martin Wolf will argue whether cutting now risks suffocating the fragile recovery of the global economy.
FT July 18 2010

In the spring of 2010, fiscal austerity became fashionable.
I use the term advisedly: the sudden consensus among Very Serious People that everyone must balance budgets now now now wasn’t based on any kind of careful analysis.
It was more like a fad, something everyone professed to believe because that was what the in-crowd was saying.
Paul Krugman, NYT October 21, 2010

Portugal is the next example of a country to demonstrate that austerity in the middle of a financial crisis is a sure recipe for disaster.
The mood in the bond markets is deteriorating sharply, as Portuguese, and Spanish, spreads reach new records,
amid expectation that the crisis is very certain to spill over to Portugal, and possibly even to Spain.
FT Deutschland makes the remark the Portuguese spreads are about as high now as the Greek spreads
were ahead of the rescue.
Eurointelligence 24/11 2010

Rep. Mike Pence, a Republican from Indiana
"The Fed can print money, but they can't print jobs,"
"Printing money is no substitute for sound fiscal policy
CNN December 3, 2010

We ought to be looking to the Congress to embrace the kind of policies that will get this economy moving again."

A House bill introduced last month by Rep. Mike Pence, a Republican from Indiana, seeks to scale the dual mandate back to a single goal of focusing only on prices, and leave job creation policy up to Congress.

Between 2010 and 2015, the UK is forecast to have the third largest reduction in the share of government borrowing in national income among 29 high-income countries:
only Iceland and Ireland are to cut more.
The reduction in cyclically adjusted borrowing, is even forecast to be the second largest, after Greece.
Yet the UK has had no fiscal crisis. That makes its austerity remarkable.
Martin Wolf, FT 8/2 2011

The Dark Ages, Returned In Full
Schumpeter, Wolfgang Schauble, the government of China,
Narayanan Kocherlakota, and Sarah Palin
Paul Krugman November 17, 2010

There’s a famous passage in Schumpeter’s writings during the Great Depression, in which he lays out the extreme liquidationist position, arguing not just against the use of fiscal policy to fight unemployment but even against monetary policy, lest it get in the way of the “work of depressions”.

That passage has been held up by many people as an example of the wrong-headedness that prevailed at the time.

But here we are, in 2010 — and something very much like that position is being forcefully advocated by Wolfgang Schauble, the government of China, Narayanan Kocherlakota, and Sarah Palin.

History lessons for a world out of balance
The prevailing rhetoric about currency wars smacks of the 1930s
John Plender, FT November 11 2010

The prevailing rhetoric about currency wars smacks of the 1930s, when a sauve qui peut mentality marred international monetary relations. What are the lessons of that beggar-thy-neighbour period for Group of 20 policymakers meeting at a time of renewed uncertainty in sovereign debt markets?

While the world has so far avoided the extreme loss of output experienced in the Great Depression, history suggests, among other things, that competitive devaluations and capital controls are the inevitable consequence of surplus countries failing to take any responsibility for global payments imbalances.

Ben S. Bernanke’s push to jump-start the U.S. economy this week may weaken the dollar
Within 33 hours this week, fallout from the Fed could cause even ECB change course if the euro surges
Bloomberg 1/11 2010

This week’s meetings are the greatest concentration of monetary-policy action by leading central banks since the first week of October 2008, when they met in emergency sessions to fight the global financial crisis. On that occasion, all except Japan joined an unprecedented coordinated interest-rate cut.

Republicans
Mellon-style liquidationism is now the official doctrine of the G.O.P.
“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”
Paul Krugman, New York Times, March 31, 2011

“Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”
That, according to Herbert Hoover, was the advice he received from Andrew Mellon, the Treasury secretary, as America plunged into depression.
To be fair, there’s some question about whether Mellon actually said that; all we have is Hoover’s version, written many years later

Two weeks ago, Republican staff at the Congressional Joint Economic Committee released a report, “Spend Less, Owe Less, Grow the Economy,” that argued that slashing government spending and employment in the face of a deeply depressed economy would actually create jobs.

Here’s the report’s explanation of how layoffs would create jobs: “A smaller government work force increases the available supply of educated, skilled workers for private firms, thus lowering labor costs.”

Dropping the euphemisms, what this says is that by increasing unemployment, particularly of “educated, skilled workers” — in case you’re wondering, that mainly means schoolteachers — we can drive down wages, which would encourage hiring.

From the report: Sweden’s economy was shrinking in the early 1990’s. After reducing Swedish government spending by 11.4 percentage points of GDP from 1994 to 2000, Sweden’s negative growth economy revived – to an average 3.4% annually.

Goodbye Keynes, hello Hoover
To Keynesian critics the switch to austerity is a colossal blunder.
The Economist print July 1st 2010

The victims are the people of Britain, who have the misfortune to be ruled by a government that took office at the height of the austerity fad and won’t admit that it was wrong.

Britain, like America, is suffering from the aftermath of a housing and debt bubble. Its problems are compounded by London’s role as an international financial center: Britain came to rely too much on profits from wheeling and dealing to drive its economy — and on financial-industry tax payments to pay for government programs.

Over-reliance on the financial industry largely explains why Britain, which came into the crisis with relatively low public debt, has seen its budget deficit soar to 11 percent of G.D.P. — slightly worse than the U.S. deficit. And there’s no question that Britain will eventually need to balance its books with spending cuts and tax increases.

The operative word here should, however, be “eventually.” Fiscal austerity will depress the economy further unless it can be offset by a fall in interest rates. Right now, interest rates in Britain, as in America, are already very low, with little room to fall further. The sensible thing, then, is to devise a plan for putting the nation’s fiscal house in order, while waiting until a solid economic recovery is under way before wielding the ax.

British Budget Cuts 'A Dangerous Experiment'
British Prime Minister David Cameron is embarking on a painful period of austerity.
Some economists say his savings plan is dangerous. Some German columnists agree.
Der Spiegel 21/10 2010

"It may make good political sense to be this brutal when the next elections are so far off. But from an economic point of view, it would have made more sense to enact this savings package more gradually. The British economy has only just started to emerge from the recession. In such a situation, if politicians dampen demand to the degree that the savings package is suspected to do so, then it becomes a dangerous experiment. It could stifle the upturn, and by doing so, diminish the tax revenues that the government needs so badly."

Den brittiska finansministern George Osborne sätter den ekonomiska återhämtningen på spel med de kraftiga nedskärningarna han föreslagit.
Det säger en av årets Nobelpristagare i ekonomi, Christopher Pissarides.
DI/TT 24/10 2010

The answer of orthodox economists was that the rate of interest would bring savings and investment into line without excess unemployment. Keynes did indeed prescribe low interest rates as part of a long-term full employment policy, although he believed that this required active monetary policies. This is how he arrived at his famous slogan of the “euthanasia of the rentier”.

But he feared that the lowest feasible interest rate might not be enough to deter saving and encourage private investment to the required extent. Hence his advocacy of state investment to the extent that “Keynes” stands in the popular mind for public works.

The fact is that low real rates – let alone the negative real rates that sometimes occur – are extremely unpopular with millions of people, not merely top-hatted financiers but small savers looking forward to retirement pensions or merely looking for a safe haven where their money will not lose its value too quickly.

The unpopularity of very low interest rates leads to what is known in financial circles as “the search for yield”. It is this that lies behind the banking scandals, the epidemic of frauds and, on a lesser level, the public toleration for bankers’ refusal to pass on to their customers the very low “policy interest rates” established by central bankers

"Savings and investment, being different activities, carried on by different people, could not simply be presumed identical."
A Treatise on Money

Jag tycker det är skriande uppenbart att räntan världen över är för låg
och att en större del av stimulanserna borde ske via finanspolitiken
Rolf Englund blog

Laughable
35 business leaders back Osborne's cuts
The 35 also make one statement that will amuse many economists.
They say "everyone knows that when you have a debt problem,
delaying the necessary action will make it worse not better".
Robert Peston, BBC 17 October 2010

That may be true of individuals and even for most businesses. But there is a whole school of economists, largely those who call themselves Keynesian in some way, who would describe that statement as laughable.

They would argue that it was the application of prudent principles of personal finance to the level of the state that was to a large extent responsible for the severity of the Great Depression of the 1930s.

The scale and speed of these reforms, intrinsically desirable though some may be, could nonetheless prove damaging to the economy and the coalition Government.
Anatole Kaletsky, The Times, October 13 2010

First, there is the short-term macroeconomic impact of cuts on unemployment, growth and consumer spending, which has nothing to do with the long-term benefits that cuts may produce.

Second, there is the risk that a slowdown will make fiscal targets unattainable. Since hitting these targets has been presented as the main justification for spending cuts, the consensus in favour of reforms is likely to collapse if the targets are missed.

Finally, there is the challenge of political acceptability. To back the fiscal programme, the public must be convinced that the priorities embodied in the cuts are fair and sensibly balanced. The Government is heading for big trouble on all these counts.

Come and meet the world's leading Austrian economist
Jesús Huerta de Soto, who is delivering the annual Hayek Lecture at the LSE
Daniel Hannan October 22nd, 2010

Ben Bernanke declared war today - not on China, but on the possibility of deflation.
He knows that a vicious cycle of slow growth, stagnant or falling prices and high unemployment poses a much greater threat to America's way of life than China's silly exchange rate.
But like it or not, the exchange rate will be caught up in the Fed's response.
Stephanie Flanders, BBC 15 October 2010

It is fitting that on September 15 Japan, the world's only major economy battling actual deflation, initiated what has come to be a global round of quantitative easing.
Quantitative easing involves a central bank creating money to buy securities, adding reserves to the banking system, and hoping to increase lending and economic activity in the process.
By John H. Makin AEI Online October 2010

Japan's deflation problem, while fairly acute, is symptomatic of a typical post-financial-crisis problem. The huge erasure of wealth brought on by a collapse in the U.S. housing market has weakened private-spending growth in the United States. For the end of the second quarter, substantial growth of federal government spending and transfers cushioned the weakness in U.S. demand growth, but that fiscal thrust has turned to fiscal drag since midyear.

Another source of substantial fiscal drag comes from the sovereign-debt crisis in Europe, where pledges for drastically contractionary policy by southern-European governments have further subtracted from global demand growth, notwithstanding the spotty record of achievement on such tightening to date.

Roubini vänder sig mot synen att skuldkrisen ska lösas genom att alla länder med underskott i den offentliga sektorn ska bedriva åtstramningspolitik.
Det leder till deflation och att allt blir ont värre.
Men dessvärre är Roubinis sätt att måla fan på väggen något som inte kan negligeras.
Den mera nyanserade analys som Barry Eichengreen framförde i juli ser vi inte mycket av längre. Det bådar inte gott.
Danne Nordling 16 oktober 2010

Federal Reserve Chairman Ben S. Bernanke said additional monetary stimulus may be warranted
because inflation is too low and unemployment is too high.
Blooomberg Oct 15, 2010 2:43 PM GMT+0200

Är Diamond, Mortensen och Pissarides värda Nobelpriset?
Men transaktionskostnader läste jag om på universitetet redan på på 1960-talet.
Rolf Englund blog 2010-10-11

“You can’t cut debt by borrowing.” How often have you read or heard this comment from “austerians” (a nice variant on “Austrians”),
who complain about the huge fiscal deficits that have followed the financial crisis?
The obvious response is: so what?
Martin Wolf, September 26, 2010

The obvious response is: so what? Shifting debt from people who cannot support it to those who can - the population at large, both now and in future - seems to make a great deal of sense if the alternative is an economic collapse that leads to a loss of output and investment now and so of income in the long term.

Indeed, under the latter alternative, even the fiscal deficits may end up little, if any, smaller if one tries to slash them, as the UK could be about to discover.

How can people reduce their indebtedness or restore their net worth, after an unforeseen fall in asset prices?
There are three mechanisms: sale; bankruptcy; and frugality. Let us consider each of these, in turn.

But remember that, at the global level, debt cancels out: net debt is zero. So, in paying down debt, one is also reducing credit by an equal amount.

The third approach is repayment. Under any imaginable resolution of the debt overhang, some people are going to seek to pay down their loans. Indeed, a great many are going to try to do so: those who dislike the idea of bankruptcy, including the stigma; and those whose assets are worth not much less than their loans. To these groups of higher savers should be added those who are simply poorer than they thought they would be and so decide to save more.

My conclusion, then, is the exact opposite of the conventional wisdom with which I began: the only way that the private sector can de-leverage, when large economies are in a post-crisis recession, is for the government to leverage.

Video of Krugman, Feldstein and Hatzius
I'm not sure who is the most pessimistic.
CalculatedRisk on 10/07/2010

Here is the video of Professors Paul Krugman and Martin Feldstein (former Reagan advisor and NBER president), and Jan Hatzius, chief economist of Goldman Sachs:

The IMF’s foolish praise for austerity
Some argue that we have no right to bequeath higher debt to future generations.
But why would it be wise to bequeath a smaller economy to posterity, instead?
Martin Wolf, FT September 30, 2010

Adam Posen, a member of the Bank’s monetary policy committee, in a powerful recent speech
(entitled “The Case for Doing More”)argues: first, that the UK economy now possesses large, possibly very large, excess capacity

Second, the big danger is not a resurgence of inflation, but deflation, as happened to Japan; and,
third, there is a substantial risk that prolonged weak demand will make temporary losses in output
structural and permanent, via weak investment and long-term unemployment:
“The damage to our economy, our companies and our workforce can be made permanent through inaction by policymakers.”

Mr Trichet and other devotees of “expansionary fiscal consolidations” believe that belt-tightening can actually aid growth in the short term?
The intellectual backing for these claims comes from a study by two Harvard economists, Alberto Alesina and Silvia Ardagna, which studied past fiscal adjustments in rich countries*.
They found that, more often than not, fiscal adjustments that relied on spending cuts boosted growth, even in the very short run.
But a new study by economists at the IMF reckons that the Harvard study was seriously flawed**.
The Economist Sep 30th 2010

What can be done about mass unemployment?
All the wise heads agree: there are no quick or easy answers.
all the facts suggest that high unemployment in America is the result of inadequate demand — full stop.
Saying that there are no easy answers sounds wise, but it’s actually foolish
Paul Krugman, NYT, September 26, 2010

But don’t bother asking for evidence that justifies this bleak view. There isn’t any. On the contrary, all the facts suggest that high unemployment in America is the result of inadequate demand — full stop. Saying that there are no easy answers sounds wise, but it’s actually foolish: our unemployment crisis could be cured very quickly if we had the intellectual clarity and political will to act.

In other words, structural unemployment is a fake problem, which mainly serves as an excuse for not pursuing real solutions.

We live in an amazing world. Everybody has big budget deficits and big easy money
but somehow the world as a whole cannot fully employ itself,”
said former Fed chair Paul Volcker in
Chris Whalen’s new book Inflated: How Money and Debt Built the American Dream.
Ambrose Evans-Pritchard, 26 Sep 2010
RE: Very Important Article

A 69-year-old plan for dealing with imbalances in currency unions
One weekend in September 1941, John Maynard Keynes sat down in his farmhouse in Tilton to consider
how the world’s currencies might be managed once the war was over.
Within a few days the prolific economist produced two papers.
These set out his thoughts on what lay behind the breakdown in the early 1930s of the gold standard, in which currencies were linked at fixed rates to the gold price and so to each other.
The Economist September 23rd 2010

Portugal
That is what happens when you cut interest rates suddenly from 16 to 3 per cent
yields back to May crisis levels when the EU faced its "Lehman moment"
Ambrose Evans-Pritchard, 19 Sep 2010

Ireland has shown what happens when you grasp the fiscal nettle, slashing public wages by 13pc – to applause from EU elites – without offsetting monetary and exchange stimulus.
Ambrose Evans-Pritchard, 19 Sep 2010

TO: President Obama FROM: Thomas I. Palley
Plan B for Obama on the economy
FT, September 6, 2010

Mr President,
With hopes of a V- or U-shaped recovery fading, there is the increasing prospect of an L-shaped future of long stagnation, or even a W-shaped future in which W stands for something worse.
The reason for this dismal outlook is economic policy is trapped by failed conventional thinking that can only deliver wage stagnation and prolonged mass unemployment.
Your administration’s current economic recovery programme has been marked by four major failings:
1. Inadequate fiscal stimulus.
2. Failure to cauterise the housing market
3. Failure to neutralise the trade deficit
4. Failure to restore the link between wage and productivity growth

Throughout the crisis, policy has disproportionately benefited banks and corporations. It has largely failed to help households directly and has instead relied on hopes of trickle-down effects from banks, combined with expensive tax subsidies to attract new home buyers.
The failure to directly help households has been a grievous policy error

The adverse effects of the trade deficit can be understood through the metaphor of a bathtub. Fiscal and monetary stimulus is being poured into the tub but that demand is leaking out through the plughole of the trade deficit. Moreover, it is not just demand that leaks out, but also jobs and investment due to off-shoring.

Escaping the Great Recession requires jumpstarting the economy by increasing demand.

This early cycle weakness is often associated with fears of another recession.
During my own professional career, I can recall the US “growth scares” of 2002, 1992 and 1984.
Is the “growth scare” of 2010 different?
Sushil Wadhwani, FT September 8 2010

Sushil Wadhwani is chief executive of Wadhwani Asset Management and a former member of the UK Monetary Policy Committee

It is worrying that European policymakers have not created a mechanism for dealing with an insolvent state in the European Monetary Union.
Sushil Wadhwani, FT September 8 2010

It is even more worrying that many of these governments do not appear to have a Plan B with respect to providing fiscal stimulus if growth is weaker than expected.

SCB, reviderar upp det andra kvartalets BNP-tillväxt från tidigare 3,7
till urstarka 4,6 procent i årstakt.
DI 2010-09-08

The conservative counter-revolution
The Great Recession almost certainly marks its end
Martin Wolf's Exchange August 23, 2010

The conservative economic counter-revolution associated with the names of Ronald Reagan and Margaret Thatcher began some three decades ago. The Great Recession almost certainly marks its end. What follows will be something different, though how different it will is still unclear. This is a good opportunity to assess the broad economic consequences of that revolution.

Central bankers are flying blind.
With short-term policy rates at or near zero,
getting more of a monetary boost means expanding a set of instruments whose efficacy, and side-effects, are ill-understood (see article).
The Economist Sep 2nd 2010

Mr Bernanke and his colleagues have no shortage of proposals, from buying more government bonds to promising to keep interest rates low. But some ideas are untested. And those that have already been used, such as printing money to buy government bonds, are likely to suffer from diminishing returns. To make a further meaningful dent in bond yields, for instance, the Fed might need to buy another $1 trillion-2 trillion of government debt.

Sverige klarade finanskrisen bättre än de flesta andra länder
genom att de offentliga finanserna var goda från början och regeringen fortsatte värna dem.
DN-ledare 6/10 2010

Delta Force
GDP = C + I + G + Net Exports (that is, exports minus imports)
Savings = Investments
We believe that the recent stimulus in the US, as an example, did in fact have a temporary effect and kept the US out of what might have been a depression, but not without its own costs. That debt must be repaid.
John Mauldin 4/9 2010

Double-entry bookkeeping was a great invention.
It is a shame that so many macroeconomists and political pundits – and therefore, politicians themselves – seem to have forgotten it.
Paul McCulley July 2010

/The Treatise on Money's/ message was that savings and investment, being different activities carried on by different people, could not simply be presumed identical. It took interest rate to bring them into equilibrium
John Maynard Keynes

- Krisen orsakades av en global finansiell krasch där giriga spekulanter tog orimliga risker, skriver Alliansen i sitt valmanifest 2010

- Vi ska vårda den ljusnande konjunkturen och föra Sverige tillbaka till överskott.
Annons från Alliansen 28/8 2010

Enligt Ekonomifakta var det svenska bytesbalansöverskottet 2009, runt 7,5 procent av BNP,
av samma storleksordning som USA:s bytesbalansunderskott.
Ekonomifakta

Two results from Gallup, in March 1938:
Do you think government spending should be increased to help get business out of its present slump?
37% Yes - 63% No

In your opinion which will do more to get us out of the depression: increase government spending, or reduce taxes on business?
15% Increase government spending - 63% Reduce taxes on business - 21% No opinion
Paul Krungman 4 september 2010

The improvement in Germany’s economic growth is driven not by productivity gains but by real devaluation.

The intra-eurozone imbalances will not only persist, but probably increase.
This will make the economic adjustment for Spain, Portugal or Greece even more difficult than it already is.
Those persistent imbalances, much more than the build-up of debt, are my deep cause of concern about the long-term health of the eurozone.
Wolfgang Münchau, FT August 29 2010

As the policy debate intensifies, investors might spare a thought for Korekiyo Takahashi,
Bank of Japan governor from 1911 to 1913.
Gillian Tett, FT September 2 2010

How I Learned to Stop Neoclassicizing and Love the Liquidity Trap
There is only one real law of economics: the law of supply and demand.
If the quantity supplied goes up, the price goes down.
Brad DeLong, November 05, 2011

At the end of 2008, as the economy collapsed and the pace of net Treasury debt increases quintupled, it seemed we were about to discover that limit. I presumed we had a little time for expansionary fiscal policy to boost the economy -- a year, maybe 18 months -- before the bond-market vigilantes would arrive. They would demand higher interest rates on Treasury bonds, which would begin seriously crowding out the benefits of fiscal stimulus. The U.S. government would have to react, pivoting from fighting joblessness, via deficit spending, to reassuring the bond market via long-run tax increases and spending cuts to Medicare and Medicaid.

But it didn’t happen in 2009. It didn’t happen in 2010. And it isn’t happening in 2011. There are no signs from asset prices that the market is betting heavily that it will happen in 2012. Looking at the yield curve, it appears the market intends to swallow every single bond that the Treasury will issue in the foreseeable future -- and at high prices. The prices of inflation-protected bonds suggest that the market expects the new Treasury issues to be devoured without any acceleration in inflation.

There are clear-cut things that you do if you’re in a liquidity trap.
A liquidity trap is simply defined as when the private sector is in a deleveraging mode, or a de-risking mode,
or an increasing savings mode — all of which you can also call deleveraging phenomena —
because of enduring negative animal spirits caused by legacy issues associated with bubbles.
Paul McCulley, at John Mauldin, 3 October 2011
Highly Recommended

Paul Krugman has a piece up on his blog which he appears to regard as
a knockout blow to the concept of "Ricardian Equivalence"
Andrew Lilico, Daily Telegraph, December 27th, 2011

(i.e. the doctrine that, under most circumstances, funding government spending with a deficit does not increase output relative to funding that same government spending with tax).

OK. So funding the bridge with the deficit might not provide a stimulus, but mightn't the $100,000 injected into the economy by building the bridge create some kind of multiplier effect, such that the total increase in output is more than the initial $100,000 outlay?

Perhaps, but then why wouldn't similar multipliers apply to the taxes raised to fund the bridge-building (a question asked by Lucas in Krugman's piece)?

Klas Eklund, Danne Nordling, Claes-Henric Siven, Peter Stein och några till kan läsa
Full text here

However unclear monetary policy might be, the current state of thinking around fiscal policy was far worse.
Why Even Central Bankers Are Unsure What to Do Now
Jean-Claude Trichet, president of the European Central Bank, tried to reclaim the Ricardian high ground
The late economist Hyman Minsky came more and more into the discussions
For monetary policy, the financial crisis has been the geologic equivalent of the faults that uplifted the Grand Tetons.
CNBC 30 Aug 2010

The Bernanke trap Speech at the annual Federal Reserve retreat in Jackson Hole
to do whatever is necessary to keep the economy from stumbling down the Japanese path
CNN/Fortune, August 27, 2010, with good links

In Friday's highly touted speech at the annual Federal Reserve retreat in Jackson Hole, Wyo.,
Bernanke pledged to do whatever is necessary to keep the economy from stumbling down the Japanese path to a debilitating spiral of falling prices known as deflation.

The Fed chief expressed confidence that he will be able to do so, despite widespread assertions that the Fed is out of bullets.

The NBER committee in April issued a statement that it was too soon to declare an end to the recession that began in December 2007.
How the hell can the NBER put odds of a double-dip at 5% to 33% without having declared the end to the last recession?
Mish 28/8 2010

Bernanke, in his Aug. 27 speech in Jackson Hole, Wyoming
“Strong and stable” growth will “require appropriate and effective responses from economic policy makers across a wide spectrum”
“We all know that the main gorilla in the room is fiscal policy,” Jacob Frenkel, a former Bank of Israel governor who’s now chairman of JPMorgan Chase International
Bloomberg 30 August 2010

USA-ekonomins Moment 22
Fastighetsmarknaden vänder inte uppåt förrän arbetsmarknaden förbättras.
Och arbetsmarknaden förbättras inte förrän fastighetsmarknaden vänder uppåt
Rolf Englund blog 2010-08-27

What are we learning about the relative role of monetary and fiscal policies?
As Joseph Stiglitz argued in the FT this week... Monetary policy has worked, in practice, via credit expansion.
It is, as a result, at least partly responsible for the debt crisis of today.
Who can now confidently state that reliance on a policy which worked by financing overpriced housing was better than using surplus savings for higher public investment?
Martin Wolf, FT October 19 201

Similarly, who can confidently state that it must be better to rely on relaunching a private credit boom than on higher public investment? Monetary policy is not self-evidently the most reliable instrument for tackling the implosion of a prior private debt explosion.

It is folly to place all our trust in the Fed
The US Federal Reserve may make funds available to banks at close to zero interest rates,
but if the banks make those funds available it is at a much higher rate.
Joseph Stiglitz, FT October 18 2010

In certain circles, it has become fashionable to argue that monetary policy is a superior instrument to fiscal policy

A quarter-century ago proponents of monetary policy argued, with equal fervour, in favour of monetarism: the most reliable intervention in the economy was to maintain a steady rate of growth in the money supply

The fundamental reason should be obvious: what matters for most companies (or consumers) is the availability of funds and the terms that borrowers have to pay. The US Federal Reserve may make funds available to banks at close to zero interest rates, but if the banks make those funds available to small and medium-sized enterprises at all, it is at a much higher rate.

Indeed, in the last US recession, the Fed’s lowering interest rates did stimulate the economy, but in a way that was disastrous in the long term.

Companies did not respond to low rates by increasing investment. Monetary policy (accompanied by inadequate regulation) stimulated the economy largely by inflating a housing bubble, which fuelled a consumption boom.

By contrast, if we extend unemployment benefits we know, not perfectly but with some degree of precision, how much of that money will be spent

Jag tycker det är skriande uppenbart att räntan världen över är för låg och att
en större del av stimulanserna borde ske via finanspolitiken.
Rolf Englund blog, 2009-12-05

Future generations will curse us for cutting in a slump
In 1937 Keynes wrote: “The boom, not the slump, is the right time for austerity at the Treasury.” Jean-Claude Trichet disagrees.
Robert Skidelsky and Michael Kennedy, FT July 27 2010

Economics is not hard - Part I: Don’t let professional economists tell you otherwise
Why did economics bloggers appear in the years after the collapse of the tech bubble in the early 2000s and flourish during the rise of the housing bubble starting in 2002?
Answer: to fill the vacuum created by the professional economics community that repeatedly failed to protect consumers from the ravages of not one but two asset bubbles in ten years that resulted in the greatest wealth transfer in world history and the near dismantling of the remnants of the world’s once most productive economy.
Itulip 13/7 2010

Joseph Stiglitz, winner of the Nobel Prize for Economics in 2001, said austerity as a policy to end the global crisis was a "disaster",
adding that Europe was heading towards more economic difficulties if politicians meant what they say when they promised to cut back spending rather than just trying to calm down markets.
CNBC 8 Sep 2010

The European economy is at risk of sliding back into a recession as governments cut spending to reduce their budget deficits.
Nobel Prize-winning economist Joseph Stiglitz, Bloomberg 24/8 2010

“Because so many in Europe are focusing on the 3 percent artificial number, which has no reality and is just looking at one side of a balance sheet, Europe is at risk of going into a double-dip,” Stiglitz said.

Nobel Prize-winning economist Joseph Stiglitz
The U.S. economy must grow at least 3 percent to create enough jobs for new entrants into the labor force
CNBC 21 Dec 2009

I know it’s over the top, but here it is anyway:
the policy elite — central bankers, finance ministers, politicians who pose as defenders of fiscal virtue
are acting like the priests of some ancient cult,
demanding that we engage in human sacrifices to appease the anger of invisible gods.
Paul Krugman, New York Times 19/8 2010

When, however, the economy suffers from Post Bubble Disorder,
characterised by private sector deleveraging and a fat-tail risk of deflation
In such a liquidity trap, private sector demand for credit is, axiomatically, very inelastic to low interest rates,
as evidenced by contracting private sector debt footings, even when the central bank’s policy rate is pinned against zero.
In such circumstances, the central bank has a profound duty to act unconventionally
Paul McCulley August 2010

Wynne Godley’s analytical framework should be the workhorse of discussions of global rebalancing, in the context of a deciency of global aggregate demand.

Let’s start with a simple tautology for any individual country:

Household Financial Balance +
Business Financial Balance +
Government Financial Balance +
Foreign Financial Balance = 0

Again, double-entry bookkeeping: The only way that one of the four sectors can run a deficit or surplus is for one or more of the other three sectors to run the opposite.

Ricardian Equivalence is the notion that governmental deficits cause the private sector to increase its surpluses, so as to save for the future increase in taxes that inevitably will be required to reduce the government deficits. Thus, current evangelists of front-loaded fiscal austerity preach that if only governments would reduce their deficits, the private sector, freed from the fear of future tax increases, will spontaneously reduce their surpluses. Put differently, it is argued, if only governments would put their fiscal houses in order, the private sector would immaculately regain confidence in their own financial affairs, pull down their savings and borrow more, boosting aggregate demand. Really, that is the argument, made with a straight face.

It is most disheartening to hear born-again cyclical fiscal austerians (Hats off to my friend and fellow Minsky follower Rob Parenteau for recently coining this delightful word) tout the notion that somehow there will not be a deflationary negative shock to global aggregate demand, if their course is followed.

Martin Wolf declaring that the austerians’ reverse-Ricardian cyclical path to salvation may be right, musing that “the moon may be made of green cheese, too.”

There is neither the political will nor the public appetite for a new round of spending to create jobs.
A recent Time magazine poll found that only 24% of Americans favored a fresh stimulus program, as against 67% who opposed it.
Fortune 11 August 2010

Republican critics of the Obama administration, when they have anything at all to say about unemployment, seem to imagine that tax cuts and deregulation will unleash animal spirits in the private sector, leading to a wave of investment and consequent job creation.

Is America facing an increase in structural unemployment?
When an economy experiences a severe recession associated with a sharp decline in aggregate demand, we should not begin by asking whether structural unemployment is the problem.
Instead, we should first try to see how much of the unemployment can be explained by nominal shocks.
Structural unemployment is a sort of residual; it represents those long-term unemployed that would be without jobs even if aggregate demand was on target.
Scott Sumner The Economist July 25th 2010

When the private sector is deleveraging even with zero interest rates, the economy enters a deflationary spiral as it loses aggregate demand equal to the sum of unborrowed savings and debt-repayments every year.
If left unattended, the economy will continue to contract until either private sector balance sheets are repaired, or the private sector has become too poor to save any money (=depression).
The last time this deflationary spiral was allowed to materialise was during the Great Depression in the US.
Richard Koo, Chief economist, Nomura Research Institute, The Economist Jul 26th 2010

Since the government cannot tell the private sector NOT to repair its balance sheets, the only thing the government can do to keep the economy going is for the government to borrow and spend the unborrowed savings in the private sector and put them back into the economy’s income stream.

In other words, fiscal stimulus becomes indispensible in a balance sheet recession. Moreover, the stimulus must be maintained until private sector deleveraging is over.

In fact, banks have virtually ceased to function as financial intermediaries since 2008, preferring to use the zero cost of money provided by the Fed to finance purchases of Treasury securities instead of supplying loans to households and small businesses.
John H. Makin, American Enterprise Institute, July 2010

After a financial crisis, banks become much more risk averse, as is manifest in their willingness to lend only to the government instead of to households and businesses. That development is deflationary because it means that a sharp boost in the monetary base engineered by the Fed does not translate into faster monetary growth at a time when the precautionary demand for money has been boosted by elevated uncertainty.

The increased demand for money that results from higher desired precautionary balances and stingy monetary creation by the banks is deflationary, just as an excess supply of money is inflationary.

The fear that a sharp rise in the size of the Fed's balance sheet--the reflection of a sharp boost in the monetary base--is inflationary is misplaced for two reasons.
First, such fear does not recognize that the money multiplier has dropped so rapidly that the money supply--a key determinant of inflation--has stagnated.
Additionally, it overlooks the increase in the precautionary demand for money that adds to the deflationary excess demand for money.

There is a bigger risk that deflation will intensify sharply because once the price level actually starts to fall, the demand for money will be further enhanced. A deflationary spiral--a self-reinforcing, accelerating drop in the price level--can result.

This is because a falling price level means that cash "earns interest" since it enhances the purchasing power of otherwise sterile cash assets that pay zero interest, just as interest on a bond adds to its value in terms of its ability to be used to buy goods and services.

What lessons does history have to teach us about Jean-Claude Trichet’s call for immediate, rapid, and substantial fiscal and monetary retrenchment and austerity
- his full-throated endorsement of the agenda of the Pain Caucus?
Brad DeLong, FT July 23 2010

Unfortunately, the front-loaded deficit reductions may push economically weak countries into recession for the next year or two. That is the cost of achieving the needed long-term deficit reduction in the current economic and political environment.
However, government officials are not warning the public that this is the choice that they have made.
Instead they are claiming that the front-loaded fiscal deficit reductions will not weaken the economy
Martin Feldstein, FT July 22 2010

Our economies are emerging from the worst economic crisis since the second world war, and without the swift and appropriate action of central banks and a very significant contribution from fiscal policies, we would have experienced a major depression.
Now is the time to restore fiscal sustainability.
But the timing remains disputed.
Jean-Claude Trichet, FT July 22 2010

The world economy is entering a new phase after the failure of fiscal stimulus to create a sustained recovery in either the US or Europe. Consumers will not provide the engine of recovery, nor should they after overspending for a decade.
Jeffrey Sachs FT July 21 2010

The Fed Can Print More Money, But It Can’t Print Jobs
Larry Kudlow 10 Aug 2010

With a trillion dollars of excess bank reserves already in the system, there’s no shortage of money. The recovery is being held up by the tax-and-regulatory threats and anti-business attitude coming out of Washington.

Kudlow On The Trade Deficit
Mr. Kudlow's rhetoric typifies an ongoing Wall Street, government, and media propaganda effort
that would even amaze George Orwell.
Peter Schiff 11/3 2005

The abysmal results came as no surprise to those who knew that
the Keynesian doctrine of spending your way to prosperity had been discredited decades ago.
Research conducted by Harvard economist Robert Barro, for instance, found that the extra economic impact of government spending – also known as the Keynesian multiplier effect, which must be greater than one for any fiscal stimulus to be effective – was “insignificantly different from zero”.
The Romer-Bernstein report, however, dubiously assumed a multiplier of 1.57.
Darrell Issa, FT, February 7 2011

The writer is a Republican member of the US House of Representatives, and chairman of the committee on oversight and government reform

It is far too soon to end expansion
Greece, Ireland, Spain, Portugal and Italy need to be austere.
But Germany, Britain, America and Japan do not.
Brad DeLong, FT July 19 2010

My new maxim, never to stand in the middle of a fight between Paul Krugman and Niall Ferguson
It says a lot about the talents of John Maynard Keynes – and just as much about the shortcomings of modern macroeconomics – that when the financial crisis struck, policymakers instinctively reached not for their fancy models, but for the Keynesian idea of fiscal stimulus
Tim Harford, FT July 20 2010

The academic evidence on Keynesian growth effects of fiscal deficits is thoroughly inconclusive.
Kenneth Rogoff, July 20 2010

Krugman versus Ferguson: Round Two
Not since Ken Rogoff’s famous attack on Joe Stiglitz has the dismal science of economics provoked such pompous, self-important, personalised squabbling.
The reality is that nobody knows what cutting the deficit into a weak economic recovery is going to do to output and jobs
Jeremy Warner, The Daily Telegraph, 20 July 2010

Jeremy Warner, assistant editor of The Daily Telegraph,
is one of Britain's leading business and economics commentators.

Professors Paul Krugman and Niall Ferguson, of course, have form; they’ve been at it on and off for nearly a year now over the efficacy of deficit spending in fighting the downturn

Ferguson, an eminent economic historian, has penned for the Financial Times on the dangers of attempting to spend your way to economic recovery. Foolishly – or perhaps deliberately, for it is sometimes possible to imagine that the two have secretly agreed to slag each other off for the publicity – he mentions Krugman by name.

Quick as flash, Krugman has risen to the bait. On his New York Times blog, he writes “Brad DeLong does the necessary on Niall Ferguson; no need for me to pile on”.

Ferguson is a “mere” historian of finance. Krugman, by contrast, is a Nobel prize winner. The last time they quarrelled, Krugman wrote:

For the record, I don’t think that Professor Ferguson is a racist. I think he’s a poseur. I’m told that some of his straight historical work is very good. When it comes to economics, however, he hasn’t bothered to understand the basics, relying on snide comments and surface cleverness to convey the impression of wisdom. It’s all style, no comprehension of substance

The reality is that nobody knows what cutting the deficit into a weak economic recovery is going to do to output and jobs

And as for citing the historical evidence of the Depression, where apparently premature fiscal tightening caused the economy to dip back down again, the precise mechanisms by which this occurred are again highly debatable

In an unusually personal and public rebuke, the International Monetary Fund's top economist accused Nobel-winning economist Joe Stiglitz of slander, self-aggrandisement and intellectual vanity.
Mail Guardian Online 1 January 2002

The blunt assault on Stiglitz, a former World Bank chief economist, came from IMF Chief Economist Ken Rogoff in response to the Columbia University professor's best-selling new book, "Globalization and its Discontents," which takes what the IMF man sees as too many cheap shots.

In his book, Stiglitz contends that IMF prescriptions of demanding that crisis-torn countries implement budget cuts and higher interest rates to restore market calm worsen recessions and plunge more people into abject poverty.

"Åtstramning för expansion"
I sydeuropeiska länder kan finanspolitiken fungera på ett omvänt sätt.
Stora underskott och viss risk för statsbankrutt kan behöva motverkas med drastiska nedskärningar.
Men detta borde inte gälla mer välskötta länder trots deras underskott.
Danne Nordling 17/7 2010

Ekonomkåren har manifesterat en avsevärd vilsenhet det senaste året både när det gäller att dimensionera och varaktighetsbestämma finanspolitisk stimulans.

Den ekonomiska vetenskapen har inte kunnat komma fram till en teori som beskriver hur den finansiella ekonomin hänger ihop med den reala.
Danne Nordling blog 5 juni 2010

Economics may be dismal, but it is not a science
The failures of economics in the recent crisis are most evident in two areas:
The inadequacies of the efficient market hypothesis, the bedrock of modern financial economics,
and The irrelevance of recent macroeconomic theory.
John Kay, FT April 13 2010

Det är ett sedan länge känt faktum att sysselsättningen svänger med konjunkturen. Hög efterfrågan, från in- och utland, gör att sysselsättningen stiger. Låg efterfrågan, från in- och utland, gör att sysselsättningen sjunker.

Den närmast till hands liggande förklaringen är således att se efter hur det är med efterfrågan, från in- och utland, i Sverige och i USA, nu och i gången tid. Som alla vet är det inte bara att öka efterfrågan, från in- och utland, för att få ökad tillväxt och stigande sysselsättning. Då hotar nämligen handelsbalansen att försämras, när importen stiger. När handelsbalansen försämras blir det antingen (vid fast växelkurs) valutakris följt av förlorade år, eller (vid rörlig växelkurs) fallande växelkurs och ökande inflationstryck.

I dag har Sverige ett större handelsbalansöverskott än Japan i förhållande till BNP. USA har nu ett rekordstort handelsunderskott. Huvudspåret är således att den låga sysselsättningen i Sverige beror på för låg efterfrågan, och att den höga sysselsättningen i USA beror på för hög efterfrågan. Detta är huvudspåret.

Om man vill förklara världen med hjälp av nya eror (USA) eller strukturproblem av gammalt datum (Sverige) har man bevisbördan.

Sverige, Estland och Luxemburg
Den ekonomiska krisen har slagit sönder många länders offentliga finanser.
3 av 27 länder som inte är föremål för EU:s underskottsförfarande
Anders Borg DN Debatt 2010-07-13

It is far too soon to end expansion
Greece, Ireland, Spain, Portugal and Italy need to be austere.
But Germany, Britain, America and Japan do not.
Brad DeLong, FT July 19 2010

With their debts valued by the market at heights I had never thought to see in my lifetime, the best thing they can do to relieve the global depression is to engage in co-ordinated global expansion.

Expansionary fiscal, monetary and banking policy, are all called for on a titanic scale.

But, the members of the pain caucus say, how will we know when we have reached the limits of expansion? How will we know when we need to stop because the next hundred billion tranche of debt will permanently and irreversibly crack market confidence in dollar or sterling or Deutschmark or yen assets?

Followers of the US economist Hyman Minsky say the monetarists and the Hicksians (usually called Keynesians, much to the distress of many who actually knew Keynes) are sometimes right but definitely wrong when the chips are as down as they are now.

expansionary monetary and fiscal and banking policy, we need all of them – until further government action begins to crack the status of the US Treasury bond as a safe asset

The US has exorbitant privileges that give it freedom of action that others such as Argentina and Greece do not have.

Trust me, we will know when the time comes to stop expansion.
Financial markets will tell us.

Many today are complaining about Alan Greenspan’s monetary stewardship, which kept these three locomotives stoked:
“serial bubble-blower” is the most polite phrase that I have heard.
But would the world economy really be better off today under an alternative monetary policy that kept unemployment in America at an average rate of 7% rather than 5%?
Brad DeLong April 05, 2008

There are two schools of thought on how to respond.
On the one hand, we have the new and unexpected coalition of monetarists and Keynesians.
On the other, there is the Austrian school
Jamil Baz, FT July 13 2010

The so-called “Washington consensus” /monetarists and Keynesians/ sees policymakers in the US pursuing a combination of fiscal expansion and monetary stimulus, thus uniting former ideological enemies in an attempt to reprime the world financial and economic system.

On the other, there is the Austrian school, which draws on the ideas of Ludwig von Mises, Carl Menger, Friedrich von Hayek and others, and is given expression in the restrictive monetary and fiscal policy favoured by the EU today.
These economists are social libertarians who believe the role of the state in society should be limited. While this conjures up visions of Tea Party extremists and hillbillies decamping to Montana, their ideas have a substantial intellectual pedigree.

Pressure from the bond market has forced Greece to deleverage, and it is the continuing indulgence of the bond market that allows the US to prolong the party by maintaining its twin budget and trade deficits.

Dagens globala finanskris har utlöst en kris för ämnet nationalekonomi.
Sökandet efter bättre ekonomisk analys pågår för fullt.
Lars Jonung kolumn DN 29/4 2010

Keynes Versus Hayek, 1932
It’s deeply tragic that we’re having to have this debate all over again,
as the world economy slides into deflation and stagnation
Paul Krugman July 9, 2010

Kevin Daly som är makroekonom på finansjätten Goldman Sachs, och som nu besöker Almedalen, håller med om att den svenska ekonomin ser stark ut.
Och han tillägger att den svenska regeringen gått och väl skulle kunna lätta på finanskranarna för att stimulera ekonomin ytterligare
Ekot 5 juli 2010

Samtidigt som det svenska skattetrycket går ned kraftigt och börjar närma sig EU-snittet, har Borg etablerat de borgerliga som mer trovärdiga i ekonomiska frågor än de rödgröna.
Borg har vittring på något stort. Han får se upp så att framgången inte stiger honom åt huvudet.
Peter Wolodarski, DN 2010-07-05

So what is the material difference between the optimists and the pessimists?
The optimists divide into two groups. There are those who have difficulties counting to zero,
who cannot add up the global private, public, and foreign balances, which must equal zero by definition.
Wolfgang Münchau, FT July 11 2010

The pessimists believe that a strong global recovery is unlikely given the persistence of financial stress, and the deleveraging of the private and public sectors across the industrialised world.

The optimists divide into two groups. There are those who have difficulties counting to zero, who cannot add up the global private, public, and foreign balances, which must equal zero by definition.

And then there are the rational optimists, whose expectations of resurgence in private sector demand must surely rest on the assumption of a return to even greater global imbalances than before the crisis, to which the eurozone will this time contribute actively. But this is surely not a sustainable position.

They (G-20) may hope that retrenchment now will spur on private spending.
But what is their plan if it turns out that it does not?
Martin Wolf, July 6 2010

My conclusion, then, is that the advanced countries remain highly short of demand.
In this environment, rapid cuts in fiscal support make sense if, and only if, monetary policy can be effective on its own and expanding the interest-elastic parts of the economy is the best way to climb out of the hole. There is reason to doubt both ideas.
Martin Wolf, July 6 2010

On Monday, the yield on 10-year government bonds was 1.1 per cent in Japan, 2.6 per cent in Germany, 3 per cent in the US and 3.3 per cent in the UK.
Based on yields on index-linked securities, real interest rates on borrowing by these governments are very low (1.2 per cent, or less, in the US, Germany and UK).
Investors are saying that they view the risk of depression and deflation as greater than that of default and inflation.
Martin Wolf, July 6 2010

Is monetary policy too expansionary or not expansionary enough?
Martin Wolf blog June 27, 2010

First, the monetary base does not itself have any impact on spending by the public.

Second, such reserves have no direct impact on lending by commercial banks (their assets) or on the broad money supply (their liabilities).

Fourth, the policy of expanding the balance sheet of the central bank has an inflationary impact if and only if it succeeds in expanding the overall broad money supply beyond what the public wishes to hold, given the levels of economic activity, interest rates and expected inflation.

Such an inflationary impact of “money printing” can indeed only happen if the overall money supply starts to grow rapidly. This is not now happening.

what is happening to broader measures of money (principally the liabilities of the banking system). The former has exploded. But the growth rate of the latter is extremely low. (Look at the chart that accompanied my column, “Why it is right for central banks to keep printing”)

What matters is the overall supply of credit and money in economies. This continues to be stagnant in the developed world. Concern about an imminent outbreak of inflation is consequently a grave mistake. To the extent that there is a danger of “monetisation” of debt, it will emerge only if we fail to return to growth, because that is the situation in which it is most likely that public sector deficits will fail to close.

Why it is right for central banks to keep printing
By Martin Wolf, FT June 22 2010

If the economy were a coal mine, the job market would be an 800-pound canary,
warning of a recovery that is running out of oxygen. Congress has failed to provide even the most basic support — extended unemployment benefits and bolstered aid to states.
New York Times editorial 2nd July 2010

There is undeniably a risk that tightening policy too early will cause the economy to dip back into recession. But ...
In the view of The Times, the balance of risks suggests that policymakers should begin to withdraw the stimulus.
The Times editorial, July 2 2010

When the financial crisis of 2007-08 plunged the global economy into recession, policymakers adopted exceptional measures to arrest the downturn. But economics is no exact science, and the remedial measures have turned out to have consequences. Policymakers at the Bank of England have expressed concerns this week about a steady rise in inflation even while economic recovery remains fitful. Their comments are timely.

There is undeniably a risk that tightening policy too early will cause the economy to dip back into recession. But there are always uncertainties in any economic course, and these are magnified when the statistics are volatile.

In the view of The Times, the balance of risks suggests that policymakers should begin to withdraw the stimulus. The coalition Government is right to embark early and decisively on deficit reduction. The Bank should be wary of maintaining an easy monetary stance for long.

Could the West simply start saving and paying back its debt?
If too many debtors pursued this path at the same time, the ensuing reduction in consumption would lead to lower growth, higher unemployment, and correspondingly less income,
making it more difficult for other debtors to save and pay back.
This phenomenon, described by Irving Fisher in 1933 in The Debt-Deflation Theory of Great Depressions, can result in a deep and long recession,
combined with falling prices (deflation).
David Rhodes and Daniel Stelter, via John Mauldin, January 2012

This is amplified when governments simultaneously pursue austerity policies — such as we see today in many European countries and will see in the U.S. beginning in 2012.

A reduction in government spending by 1 percent of GDP leads to a reduction in consumption (within two years) of 0.75 percent and a reduction in economic growth of 0.62 percent.

Saving (or, more correctly, deleveraging) will reduce growth, potentially trigger recession, and drive higher debt-to-GDP ratios—not lower debt levels.
Indeed, during the early years of the Great Depression, President Hoover — convinced that a balanced federal budget was crucial to restoring business confidence — cut government spending and raised taxes.
In the face of a crashing economy, this only served to reduce consumer demand.

Goodbye Keynes, hello Hoover
To Keynesian critics the switch to austerity is a colossal blunder.
Supporters of the shift to austerity believe by boosting firms’ and households’ confidence and lowering the risk premium on government debt, well-designed fiscal consolidation can actually boost growth.
(RE: Ha, ha, ha. Det var det som Bildt, Wibble, Carl B Hamilton och Olle Wästberg, med flera trodde)
The Economist print July 1st 2010

To Keynesian critics the switch to austerity is a colossal blunder. Paul Krugman, an economist who writes in the New York Times, frets that officials who “seem to be getting their talking points from the collected speeches of Herbert Hoover” will push the world economy into a depression. With unemployment high, output far below its potential, private spending still weak and interest rates close to zero, Mr Krugman and his allies argue that fiscal stimulus remains an essential prop to the economy and that deficit-cutting now will spell stagnation and deflation.

From the other side, supporters of the shift to austerity believe it is both essential and appropriate: deficit spending cannot go on for ever, and by boosting firms’ and households’ confidence and lowering the risk premium on government debt, well-designed fiscal consolidation can actually boost growth. Jean-Claude Trichet, president of the European Central Bank, argues that fiscal thrift will increase private spending by reducing uncertainty about government tax policy and debt.

Both sides in the row over stimulus v austerity exaggerate, but the austerity lobby is the more dangerous

Gabriel Stein: The BIS ought to know better"
The Bank for International Settlements has warned authorities across the developed world that they cannot rely on ultra-low interest rates to cushion the blow of austerity measures.
The Swiss-based "bank for central bankers" said ultra-low rates and massive fiscal stimulus saved the world from an economic meltdown during the credit crisis, but the balance of advantage has since shifted.
Ambrose Evans-Pritchard, 28 JunE 2010

"Such powerful measures have strong side-effects, and their dangers are becoming apparent. The time has come to ask how they can be phased out," it said.

"There are limits to how long monetary policy can remain expansionary. Keeping interest rates near zero for too long, with abundant liquidity, leads to distortions and creates risks for financial stability. We cannot wait for the resumption of strong growth to begin the process of policy correction."

Dominique Strauss-Kahn, the IMF chief, warned against zealous self-flagellation at the G20 summit. "It could be a catastrophe if all the countries were tightening, it could totally destroy the recovery."

Gabriel Stein, of Lombard Street Research, said the BIS is playing with fire. "Fiscal and monetary tightening were tried in tandem in the early 1930s and it didn't work then. The BIS ought to know better," he said.

Alla kan inte exportera sig ur krisen, för då är det ingen som köper.
Grekland och Spanien måste skära ned drastiskt, inget annat kan återställa finansmarknadernas förtroende.
Tyskland ska ha ordning på statsfinanserna, men ....
DN-ledare 29 juni 2010

Likaså måste det finnas grader när det gäller hur länder hanterar sina budgetunderskott. Grekland och Spanien måste skära ned drastiskt, inget annat kan återställa finansmarknadernas förtroende. Tyskland ska ha ordning på statsfinanserna, men behöver också stimulera den haltande inhemska privata konsumtionen. Detsamma gäller Kina, som dessutom behöver bygga ut de sociala skyddsnäten. USA klarar att ha större underskott. En yngre befolkning och större invandring gör det lättare att möta den demografiska utmaningen än i Europa och Japan.

Världsekonomin är nära en ny depression, och om en sådan utveckling blir verklighet beror det främst på en misslyckad politik.
Paul Krugman i New York Times med anledning av helgens G20-möte i Toronto.
DI 2010-06-28

Han konstaterar att medan recessioner är vanliga så är depressioner mycket ovanliga. Enligt Paul Krugman är det bara två perioder som kan betraktas som depressioner; den "långa" depressionen med deflation och instabilitet som följde på den stora paniken 1873, och den "stora" depressionen, åren med massarbetslöshet som följde finanskrisen 1929-1931.

"Och denna tredje depression kommer primärt vara ett politiskt misslyckande. Runt om i världen - senast vid helgens nedslående G20-möte - oroar sig regeringarna för inflation när det verkliga hotet är deflation, de predikar behovet att dra åt svångremmen när det verkliga problemet är otillräckliga utgifter", skriver Paul Krugman.

The Third Depression
You might have expected policy makers to realize that they haven’t yet done enough to promote recovery.
But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy
Paul Krugman, New York Times June 27, 2010

Future historians will tell us that this wasn’t the end of the third depression, just as the business upturn that began in 1933 wasn’t the end of the Great Depression. After all, unemployment — especially long-term unemployment — remains at levels that would have been considered catastrophic not long ago, and shows no sign of coming down rapidly. And both the United States and Europe are well on their way toward Japan-style deflationary traps.

In the face of this grim picture, you might have expected policy makers to realize that they haven’t yet done enough to promote recovery. But no: over the last few months there has been a stunning resurgence of hard-money and balanced-budget orthodoxy.

Why the wrong turn in policy? The hard-liners often invoke the troubles facing Greece and other nations around the edges of Europe to justify their actions. And it’s true that bond investors have turned on governments with intractable deficits.

But there is no evidence that short-run fiscal austerity in the face of a depressed economy reassures investors.

On the contrary: Greece has agreed to harsh austerity, only to find its risk spreads growing ever wider; Ireland has imposed savage cuts in public spending, only to be treated by the markets as a worse risk than Spain, which has been far more reluctant to take the hard-liners’ medicine.

Only a closer union can save the eurozone
I am aware that, at a time of rising nationalism and regionalism throughout the EU, there is no consensus for such sweeping reforms
Wolfgang Münchau, FT, June 27 2010 19:52

Wolfgang Munchau on the BIS annual report
ultra-low nominal interest rates play a significant role during the built-up of bubbles – a role that may not yet be sufficiently understood
Eurointelligence 30 June 2010

In his FT Deutschland column, Wolfgang Munchau says the Bank for International Settlements had a disturbing good track record during the crisis, and that one should listen when it says that persistently low interest rates would cause a rerun of the crisis.

He says such a recommendation is not rooted in any macroeconomic models currently in use, but he suspects that the BIS might be right nevertheless, that ultra-low nominal interest rates play a significant role during the built-up of bubbles – a role that may not yet be sufficiently understood.

The age of easy credit and its aftermath
Is there life after debt?
The Economist print, Jun 24th, 2010

For a long time debt in the rich world has grown faster than incomes. As our special report this week spells out, it is not just government deficits that have swelled. In America private-sector debt alone rose from around 50% of GDP in 1950 to nearly 300% at its recent peak

The origins of the boom go even further back, reflecting huge changes in social attitudes. In the 19th century defaulting borrowers were sent to prison. The generation that lived through the Great Depression learned to scrimp and save. But the wider take-up of credit cards in the 1960s created a “buy now, pay later” society. Default became just a lifestyle choice. The reckless lender, rather than the imprudent debtor, was likely to get the blame.

For policymakers, the priorities are clear. First, they need to focus on generating growth.

We have discussed the above equation before, but let's look at it again from a different angle. Basically, the equation is another accounting identity. GDP (Gross Domestic Product) for a given country is the total of Consumption (personal and business) plus Investments plus Government spending plus exports minus imports.

The Keynesians argue that when there is a drop in C due to a recession that the G must rise to offset the drop. That was at the heart of the argument for stimulus packages in so many countries. And there is no doubt that stimulus did help keep a very deep recession from turning into an even deeper depression. One can legitimately argue about the size of the stimulus, or about the nature of the spending, but it is difficult to argue that it did not have an effect.

Now, of course, the hope is that a recovery will allow C to begin to rise so that there is no more need for government deficits. Keynes argued that governments should run surpluses in good times, which is conveniently forgotten by most government spending types. The problem is that we are still running massive deficits. Tax receipts are way down (10% unemployment will do that to you!) and show no sign of turning back up soon all over the developed world.

If you reduce government spending, that also has a negative effect on GDP in the short run. But in past recoveries the growth of the private sector has overcome that negative effect. Normally at this time in a recovery growth is in the 7% range. This is a very tepid recovery in the US and the developed world.

There are loud calls in the US and elsewhere for more fiscal constraints. I am part of that call. Fiscal deficits of 10% of GDP is a prescription for disaster. As we have discussed in previous letters, the book by Rogoff and Reinhart (This Time is Different) clearly shows that at some point, bond investors start to ask for higher rates and then the interest rate becomes a spiral. Think of Greece. So, not dealing with the deficit is simply creating a future crisis even worse than the one we just had.

But cutting the deficit too fast could also throw the country back in a recession. There has to be a balance.

Grekland, Spanien och grunderna i macro
BNP är C + I + G +/- X Skall det vara så svårt att förstå för microhjärnorna?
Rolf Englund blog 2010-05-29

Euron är främst ett politiskt projekt, ett nödvändigt steg mot Europas Förenta Stater.
Om det bara handlade om ekonomi finns det fördelar med euron, men också nackdelar. Jag menar att fördelarna uppväger, men det är ganska jämt.
De politiska fördelarna med att vara med i eurokretsen är däremot huvudskälet för att vara med.
OLLE WäSTBERGS NYHETSBREV 17 JUNI 2010

Att Euron är en problematisk valuta har sagts från början. Länderna som ingår har olika förutsättningar att parera ”asymmetriska chocker”, d v s stora utifrån kommande problem som drabbar ett land. Ett gemensamt valutaområde kräver både penning- och finanspolitik, och euroområdet har bara penningpolitik, d v s endast en riksbank och inget finansdepartement.

John Maynard Keynes (och samtidigt Bertil Ohlin och andra i Stockholmsskolan) lanserade för 75 år sedan tanken på att stater ska kunna parera konjunktursskiften genom en aktiv finanspolitik. Det är en politik som fått nytt uppsving i de senaste finanskriserna. Obamas stora stimulans tycks fungera.

Jag tillhör de skeptiska. När Keynes och Stockholmsskolan kom med sina teorier hade de utvecklade ekonomierna mindre än 15 procent av sin ekonomi i den offentliga sektorns regi. Måttliga ekonomiska stimulanser i dåliga tider och skatteökningar i sämre fungerade. När nu den offentliga andelen av ekonomin i Sverige ligger på 50 procent är stimulansvapnet långt mer trubbigt.

Dessutom fungerade demokratin för 75 år sedan sämre i den bemärkelsen att människor hade svårare att följa vad som hände i makroekonomin samtidigt som politikerna var mindre beroende av den omedelbara folkopinionen.

Regeringar klarar att stimulera i dåliga tider, men att strama åt i goda är långt svårare. Det är svårt att i en opinionskänslig och ganska upplyst demokrati bedriva konjunkturpolitik. Och den internationella finansmarknaden slår tillbaka med räntehöjningar när stater börjar låna för mycket.

När stater stimulerar står det en hord av bankekonomer i TV-rutan och talar om att det kommer surt efter – och då väljer många att spara. Därför fungerar Keynes recept dåligt idag.

The initial response to the crisis (sharp cuts in interest rates, bank bailouts, stimulus spending) probably averted a depression.
But the crisis has also battered the logic of all major theories: Keynesianism, monetarism and "rational expectations."
Robert J. Samuelson, June 28, 2010

The Keynesian logic seems airtight. If consumer and business spending is weak, government raises demand through tax cuts or spending increases.

But in practice, governments' high debts impose financial and psychological limits. The ratio of government debt to the economy (gross domestic product) is 92 percent for France, 82 percent for Germany and 83 percent for Britain, reports the Bank for International Settlements in Switzerland.

That's lunacy, writes Martin Wolf, chief economic commentator for the Financial Times. Concerted austerity may destroy the recovery.

Exactly, echoes Nobel Prize-winning economist and New York Times columnist Paul Krugman, who argues that the U.S. economy needs more stimulus and bigger deficits. "Penny-pinching at a time like this . . .," he writes, "endangers the nation's future."

There's a great deal economists don't understand. Not surprisingly, the adherents of "rational expectations" -- a theory that people generally figure out how best to respond to economic events -- didn't anticipate financial panic and economic collapse. The disconnect between theory and reality seems ominous.

Krugman: "That '30s Feeling" In the NY Times
Suddenly, creating jobs is out, inflicting pain is in. Condemning deficits and refusing to help a still-struggling economy has become the new fashion everywhere ...
CalculatedRisk 6/17/2010

Many economists, myself included, regard this turn to austerity as a huge mistake. It raises memories of 1937, when F.D.R.’s premature attempt to balance the budget helped plunge a recovering economy back into severe recession.

Alan Greenspan writes in the WSJ:
An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon.
I believe Greenspan is flat wrong

Den kritiska frågan är:
Hur ska man få ned den totala skuldsättningen i världsekonomin
utan att förvärra krisen ännu mer?
Det oroande svaret på denna fråga om åtstramningar är nog att det inte finns några framträdande ekonomer som kan ge besked.
Danne Nordling blog 11 juni 2010

De akademiska nationalekonomerna är pinsamt medvetna om sitt eget tillkortakommande. Det framgick t ex av diskussionen på Nationalekonomiska föreningen i januari 2010. Ytterligare en indikation finns i senaste numret av Ekonomisk Debatt (4/10) där hela häftet ägnas åt "makroekonomins kris".

Här inleder professor Assar Lindbeck med en artikel (pdf) om "Lärdomar av finanskrisen".
Han är kritisk till teorin om effektiva finansiella marknader och s k ny klassisk makroteori.

Professor em Axel Leijonhufvud avslutar med en mera personlig redogörelse för olika nationalekonomiska inriktningar och skolor.

Teorin drev fram de s k DSGE-modellerna (dynamisk stokastisk allmän jämvikt) som kan kalibreras med empiriska data. Denna Lucasversion av monetarismen ersattes sedan med teorin om reala konjunkturcykler där den monetära utvecklingen inte finns med som en förklaringsfaktor. Diskretionära finans- och penningpolitiska åtgärder ses där som farliga och skadliga.

Den ekonomiska vetenskapen har inte kunnat komma fram till en teori som beskriver hur den finansiella ekonomin hänger ihop med den reala.
Nästa steg är att denna (hypotetiska) teori måste få sådant genomslag att aktörer och kommentatorer agerar utifrån denna institutionella ram.
Först därefter kan man med större säkerhet uttala sig om vilka olika konsekvenser störningar och stabiliseringsåtgärder sannolikt kommer att ha.
Danne Nordling blog 5 juni 2010

Nationalekonomins makroteori och den stabiliseringspolitiska teoribildningen står inför en mödosam uppbyggnadsprocess. Den kommer att ta många år.

Are these hardships necessary?
The trick of the British establishment is to turn discussion from “whether to” into “how to” questions. The media debate is on which government services to cut or on the balance between spending cuts and tax increases. Once the discussion has been channelled into these trenches the establishment has won.
The real argument, however, should be on whether we need unparalleled fiscal austerity or not.
Samuel Brittan, FT June 17 2010

In the last resort, however, the government can borrow directly from the Bank, a course recommended in such situations not by Keynes but by no less dangerous a firebrand than Milton Friedman.

We could live with an old-time religion Conservative Budget if the rest of the world stayed with sensible demand management. The real harm is that the British government has tipped the balance in favour of ill-timed financial austerity at gatherings such as the Group of 20.

And all is not lost so long as the Obama administration and China’s leaders stick to quasi-Keynesian policies.

While it's certainly too early for historical perspective on the stunning events of 2007-2009, I venture to guess that, when the history of the period is written, it will read something like this:
For a host of reasons the U.S. economy was struck by a calamitous financial crisis followed by a vicious recession.
The government—including two administrations, Congress, and the Fed—marshaled enormous resources to save the financial system and to fight the recession.
It worked.
Alan S. Blinder, WSJ 16 June 2010

Mr. Blinder, a professor of economics and public affairs at Princeton University and vice chairman of the Promontory Interfinancial Network, is a former vice chairman of the Federal Reserve Board.

Enligt en allmänt vedertagen uppfattning bör industriländerna möta globaliseringen med satsningar på utbildning så att den egna sysselsättningen kan uppgraderas när låglöneländer tar över de enklare jobben. Alan Blinder avfärdar det som en myt och konstaterar att sambandet mellan utbildning och outsourcing är nästan noll.
Lennart Pehrson, DN 15/4 2007

In a sea of academic economic literature, there are a handful of essays that provide lifelong analytical anchors.
Some Unpleasant Keynesian-Minsky Logic
Paul McCulley June 2010

The unemployment rate for teenagers remains at 26.4 percent, while 15.5 percent of African Americans and 12.4 percent of Hispanics can’t find jobs.
Seventeen states, along with the District of Columbia, still have jobless rates well in the double digits, and the fate of the long-term unemployed is terrifying.
Newsweek 4 June 2010

The BIS noted in a separate report that, while large depreciations in currencies tend to be associated with substantial permanent losses of output, since the losses usually take place before the fall in the currency, it is likely the factors that spur the drop in the currency's value rather than the depreciation itself that is the trigger.
Taken alone, the currency depreciation can actually be good for output.
Wall Street Journal 14 June 2010

.The eurozone’s tragic small-country mindset
One of the most important characteristics of a small open economy is that its own actions have little impact on the rest of the world.
Wolfgang Münchau, FT 13 June 2010

The fixed-exchange mechanism had gone horribly wrong
The tragedy of the interwar years in Germany was that the Social Democrats - then the world’s foremost socialist party - became fatally tainted by acquiescing in /accepting/ Bruning’s deflation torture from 1930 to 1932.
They did so, of course, because they dared not confront the orthodoxies of the Gold Standard.
The result in Germany was the Reichstag election of July 1932 when the Communists and Nazis won over the half the seats.
Ambrose Evans-Pritchard 23 May 2010

It is an elementary fact of accounting that the private sector as a whole can only spend less than it earns if some other sector spends more than it earns.
That sector has tended to be the government, usually as automatic stabilizers kicked in while recessions deepened.
nakedcapitalism MAY 17, 2010

Indeed, most of the dramatic widening of government deficits is due to a collapse in tax revenues, not to discretionary stimulus.
Pursuing fiscal retrenchment in order to reduce government debt default risk will merely raise the odds of private sector debt defaults. Cash flow will be taken from households and firms attempting to rebuild their net saving positions, and private debt servicing will falter.

BNP är C + I + G +/- X Skall det vara så svårt att förstå för microhjärnorna?
Rolf Englund blog 2010-02-02

Finance ministers from the world’s leading economies ripped up their support for fiscal stimulus on Saturday, recognising that financial market concerns over sovereign debt had forced a much greater focus on deficit reduction.

The meeting of the Group of 20 finance ministers and central bank governors in Busan, South Korea, also dropped proposals for a global banking levy, instead giving countries leeway to do what they thought best for their domestic circumstances.

The communiqué of the meeting made it clear that the G20 no longer thought that expansionary fiscal policy was sustainable or effective in fostering an economic recovery because investors were no longer confident about some countries’ public finances. “The recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, growth-friendly measures, to deliver fiscal sustainability,” the communiqué stated.

“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” it added. “We welcome the recent announcements by some countries to reduce their deficits in 2010 and strengthen their fiscal frameworks and institutions”.

These words were in marked contrast to the G20’s previous communiqué from late April, which called for fiscal support to “be maintained until the recovery is firmly driven by the private sector and becomes more entrenched”.

Right or wrong – whether this plunges the whole world into a deflationary abyss from which there is no escape or if, somehow, this has the desired effect of restoring financial stability over time –
it’s nice to see that there are at least a few elected officials in the world who question the idea of simply piling on more debt to cure the world’s economic ills.
Tim Iacono 7 Jun 2010

Madmen in Authority
Rereading my post on the folly of the G20, it seems to me that I didn’t fully convey just how crazy the demand for fiscal austerity really is.
Here’s the IMF’s estimate of sources of the growth in debt over the next few years
Paul Krugman 7 June 2010

So how much we spend on supporting the economy in 2010 and 2011 is almost irrelevant to the fundamental budget picture. Why, then, are Very Serious People demanding immediate fiscal austerity?

To repeat: the whole argument rests on the presumption that markets will turn on us unless we demonstrate a willingness to suffer, even though that suffering serves no purpose.

Lost Decade, Here We Come
The deficit hawks have taken over the G20
Paul Krugman June 6, 2010

But don’t we need to worry about government debt? Yes — but slashing spending while the economy is still deeply depressed is both an extremely costly and quite ineffective way to reduce future debt. Costly, because it depresses the economy further; ineffective, because by depressing the economy, fiscal contraction now reduces tax receipts.

A rough estimate right now is that cutting spending by 1 percent of GDP raises the unemployment rate by .75 percent compared with what it would otherwise be, yet reduces future debt by less than 0.5 percent of GDP.

Yet the conventional wisdom now is that these countries must nonetheless cut — not because the markets are currently demanding it, not because it will make any noticeable difference to their long-run fiscal prospects, but because we think that the markets might demand it (even though they shouldn’t) sometime in the future.

Time to plan for post-Keynesian era
Mainstream Keynesian economics is facing its last hurrah. The global fiscal stimulus championed last year by the Obama administration is coming undone, repudiated by the same Group of 20 that endorsed it last year.
Jeffrey Sachs, FT June 7 2010

The new OECD Economic Outlook is a terrifying document
OECD wants the Fed to start raising interest rates soon
what’s scary is the utter folly that now passes for respectable opinion
Paul Krugman, NYT 27 May 2010

What possible reason would there be to tighten monetary policy now, when the economy will still have vast excess capacity and inflation that’s too low at the end of next year?

What’s so scary about this is that the OECD virtually defines conventional wisdom; it’s a numbered-paragraph sort of place, where a committee has to sign off on everything, policing the nuances as they say.
So what we get from this is that among sensible people the idea that you should undermine recovery to appease those who think there might be inflation even though actually there isn’t has become conventional wisdom — so conventional that it’s treated as self-evident.

What’s the greatest threat to our still-fragile economic recovery?
I currently find most ominous is the spread of a destructive idea:
the view that now, less than a year into a weak recovery from the worst slump since World War II, is the time for policy makers to stop helping the jobless and start inflicting pain.
Paul Krugman 30 May 2010

When the financial crisis first struck, most of the world’s policy makers responded appropriately, cutting interest rates and allowing deficits to rise. And by doing the right thing, by applying the lessons learned from the 1930s, they managed to limit the damage: It was terrible, but it wasn’t a second Great Depression.

Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts.

It sounds crazy. And it is. Yet it’s a view that’s spreading. And it’s already having ugly consequences. Last week conservative members of the House, invoking the new deficit fears, scaled back a bill extending aid to the long-term unemployed

Paul Krugman blogs (Martin Wolf Is Not A Serious Person): And neither am I.
As Ricardo Caballero says (It’s the general equilibrium, stupid), the big problem right now is that the world economy has too little safe high-quality financial assets, and thus excess demand for them is, by Walras's Law, producing excess supply of goods and services
Brad DeLong 30 May 2010

Hur långt är ett snönre?
How long is an "Extended Period"?
Short answer: Longer than many analysts expect.
CalculatedRisk on 4/28/2010 with very nice chart

This graph shows the effective Fed Funds rate (Source: Federal Reserve) and the unemployment rate (source: BLS)

In the early '90s, the Fed waited more than a 1 1/2 years after the unemployment rate peaked before raising rates. The unemployment rate had fallen from 7.8% to 6.6% before the Fed raised rates.

Germany
Four professors will launch a legal challenge in early May at the Verfassungsgericht (high court).
Should they secure an injunction, EMU may fly apart.
EMU shut the warning signals, disguising risk.
What investors overlooked is that currency risk mutates into default risk in a monetary union
The EU-IMF "therapy" of deflation for Greece repeats the catastrophic errors of Chancellor Heinrich Bruning in the early 1930s and must lead to a depression
Ambrose Evans-Pritchard, 25 Apr 2010

The Taylor Rule
Professor Taylor made one huge, simplifying assumption, that the neutral real Fed funds rate is a constant 2%.
Paul McCulley April 2010

A year later, the evidence is in: Depression 2.0 has indeed been avoided.
No, I haven’t yet bought that second home. In fact, I actually sold my only one, at a good level, as I was no longer using it, preferring to live in a little rental house on the water where I have my 32-foot fishing boat, named the Moral Hazard, and my 18-foot electric Duffy boat, named the Minsky Moment. Yes, I am sorta non-normal.
Paul McCulley April 2010

More evidence has arisen that the "strategic default" consumer spending thesis is correct
- and that the economic recovery on the whole is based on a rotten sham.
In this sleazy imitation of a free market economy, liars, cheats and deadbeats are the ones getting rewarded.
Marcet Oracle, Apr 20, 2010 By: Justice_Litle

Financial markets and rating agencies fail to see
the interconnectedness of government and private debt
Paul De Grauwe Eurointelligence 6/5 2010

It is true of course that government deficits and debt levels in the Eurozone, but also in the US and the UK, are not sustainable, and that at some point measures to reduce these deficits will be necessary. Financial markets and rating agencies today focus on this fact.

They fail to see, however, the interconnectedness of government and private debt.

The main reason, if not the only one, why government debts have exploded is that governments correctly judged that the expanion of their own debt was necessary to save the private sector, and in particular, the financial institutions. For every euro of extra government debt stands a euro of private debt that has been taken over or made sustainable by the government.

Deflation is the only way Greece can effectively tackle its debt problems,
International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn was quoted on Monday as saying.
CNBC 12 Apr 2010

Greece must squeeze a further 13pc of GDP from the budget to stabilise debt costs by 2012, and do so during a slump when every euro of tightening leads to €1.5 to €2 in lost demand.

The most audacious monetary experiment in modern history ended on April Fools' Day.
The US Federal Reserve has completed its purchase of $1.7 trillion of mortgage securities, agency debt and US Treasuries,
the conjuring trick of "credit easing" that allowed Ben Bernanke to create stimulus equal to 12pc of GDP.
Ambrose Evans-Pritchard, 04 Apr 2010

The Fed's money creation has been more or less the size of Washington's borrowing needs for the last year, as Beijing notes with suspicion.

We will never know whether it was wise to go nuclear. My view – anathema to readers, I fear – is that Ben Bernanke and Britain's Mervyn King saved us from potential calamity. We were all too close to the tipping point illustrated in Irving Fisher's Debt Deflation Causes of Great Depressions, the moment when the sailing ship catches water and capsizes instead of righting itself by natural rhythm.

The orthodoxy on inflation is certainly shifting.
The best policy may well be to talk tough about inflation while keeping interest rates low for as long as possible.
The Economist print March 11th 2010

Across Europe, from profligate Greece to newly strait-laced Ireland, countries are promising deep, painful cuts in public spending even as they face the likelihood of a new recession.
But some argue that Berlin is pressing too hard, and that the region’s new fixation on debt has created a “cult of austerity” that could make it harder to recover from the slump.
New York Times 17/3 2010

Det finns alltid bedömare som i vaga ordalag hävdar att utvecklingen kommer att gå åt skogen. Svårigheten ligger i att kunna skilja fantasterna från dem som har hittat fundamentala orosfaktorer av sådan karaktär att de borde tas på allvar.
En sådan person är den iransk-israeliske ekonomen Nouriel Roubini
Vad som skulle behövas är en utvärdering av varför Roubinis varningar inte togs på allvar. Hur såg de första varningarna i september 2006 ut?
Danne Nordling 16/3 2010

Greece, Ireland, Portugal and Spain will cut the demand
So, unless as-yet-unspotted foreign cavalry ride to Europe’s rescue by buying up the continent’s products, aggregate demand will fall.
Less competitive Eurozone countries will be forced to deflate and shrink their economies to match Europe’s diminished and diminishing circumstances.
FT Editorial March 15 2010 20:16

So, to use Ms Lagarde’s tactful phrase, “those with surpluses could do a little something”.
If the big savers were to start consuming, they could allow the continent’s big spenders to cut back and start living within their means without dooming Europe to years of hairshirted stagnation.

Europe must rebalance. It can do so, as Mr Schäuble would have it, by forcing Europe to import less from Germany. Or, as Ms Lagarde suggests, Germany could start importing more from the rest of the currency union

Thomas Mayer, economist at Deutsche Bank, said the latest Greek austerity measures could cause the economy to shrink by 4 per cent this year, making the government’s task even more formidable.
“The adjustment remains a Herculean task, and the costs of the adjustment in terms of lost output could be larger than policymakers currently anticipate,” Mr Mayer said.
FT March 15 2010

Establishing the EMF would require a new treaty
We must note an even greater difficulty. The notion that the big threat is fiscal indiscipline is false.
Martin Wolf FT March 9 2010

Leading the PIIGS to an (as yet) Unrecognized Slaughter
Everyone cannot export their way out of this crisis.
Someone has to actually run a current account deficit.
Rob Parenteau at John Mauldin 9/3 2010

If we divide the economy into three sectors
- the domestic private (households and firms), government, and foreign sectors,
the following identity must hold true:

Domestic Private Sector Financial Balance + Fiscal Balance + Foreign Financial Balance = 0

It is not out of the question that fiscal rectitude at this juncture could place the private sectors of a number of nations on a debt deflation path - the very outcome policy makers were frantically attempting to prevent but a year ago.

If eurozone countries try to return to 3% fiscal deficits by 2012, as many of them are now pledging, unless the euro devalues enough or some other measure produces a large current account swing, then either
a) the domestic private sectors of many nations will have to adopt a deficit spending trajectory, or
b) nominal private income will deflate, and Irving Fisher's paradox will apply (as in the very attempt to pay down debt leads to more indebtedness), thwarting the ability of policy makers to achieve fiscal targets.

we remain hard pressed to identify which nations or regions of the remainder of the world are prepared to become consistently larger net importers of Europe's tradable products. Countries currently running large trade surpluses view these as hard won and well deserved gains. They are unlikely to give up global market shares without a fight, especially since they are running export led growth strategies.

Policymakers are desperate to unwind the “unconventional support”, to activate “exit strategies” and begin the long march back to normality.
But there is still little sign of the sustained private-sector recovery required to take up the slack.
Jeremy Warner Daily telegraph 5 Mar 2010

At the level of the early 80s.
A very nice graph shows the employment-population ratio;
this is the ratio of employed Americans to the adult population.
Calculated Risk 5 March 2010

Even long-term rates are low — the real interest rate on
10-year bonds is below 1.5 percent.
Paul Krugman NYT March 5, 2010

Keynes och moral hazard
Min hypotes är att det finns en makroekonomisk moral hazard (ung trygghetsrisktagande) som innebär att själva föreställningen, att det finns en kraftfull stabiliseringspolitik att ta till om det skulle gå snett, kan leda till stora obalanser.
Danne Nordling 4 mars 2010

"Rädslans politik" är rubriken på en signerad ledarartikel i DN idag 4/3-10 av Henrik Berggren. Den handlar om ideologier med tillbakablick mot Keynes och Hayek

Han tar sin utgångspunkt i en artikel av den brittiske historikern Tony Judt i NYRoB som utmynnar i att socialdemokratin inte står för någon särskild idé om staten: Alla partier delar nu socialdemokratins föreställning att staten har ett grundläggande ansvar för medborgarnas välbefinnande.

även om deras slutsatser skiljer sig åt är både Hayeks och Keynes teorier födda ur rädsla.
De är inte utopiska, de utlovar inget framtida lyckorike. De säger bara att den som följer deras läror har en god chans att undvika social kollaps, anarki och diktatur.
DN-ledare 4 mars 2010 signerad Henrik Berggren

även om borgerliga partier över hela Europa kanske vill ha en något mindre stat i allmänhet delar man i stort sett socialdemokratins föreställning om denna stats grundläggande ansvar för medborgarnas välbefinnande.

Det var inte rädsla som skapade ett brett stöd för välfärdsstat och marknadsekonomi över hela västvärlden på femtio- och sextiotalet utan medborgarnas framtidstro och hopp om ett bättre samhälle.

"I allt väsentligt kan staten jämföras med hushållet", skriver Svegfors,
med en formulering som kan komma att bli (herostratiskt?) ryktbar.
ökar penningmängden för mycket kan det bli överhettning i ekonomin.
Att det läget inte nu råder beror på att andra aktörer, hushåll, byggbolag, banker, ägnar sig åt kreditkontraktion, i st f kreditexpansion som under 80-talet.

Mats Svegfors har humor. Det framgår av att han idag 940531 skriver att Keynes och Friedman har tänkt fel och att Anne Wibble har tänkt rätt.
Rolf Englund 13 jun 1994

Rolf Englund 5 mars 2010:
Jag kom att tänka på mitt meningsutbyte med Svegfors sommaren 1994 när jag häromdagen såg ett diagram i en artikel av Martin wolf.

Jumps in fiscal deficits are the mirror image of retrenchment by battered private sectors.
In the US, the financial balance of the private sector (the gap between income and expenditure) shifted from minus 2.1 per cent of GDP in the fourth quarter of 2007 to plus 6.7 per cent in the third quarter of 2009, a swing of 8.8 per cent of GDP.
Martin Wolf February 16 2010

The big intolerably uncertain question for Britain and America (and for Greece, Ireland and others) is
can we reduce our debts in an orderly way
- one which would be gruelling for us, as we save more and consume less, but not unbearable?
Robert Peston, the BBC's business editor, 30 December 2009

The “inflation fundamentalists”
This elite of central bankers, top economic officials, politicians, academics and journalists maintains the risks of allowing inflation to climb above 2 per cent are unacceptable.
Uri Dadush and Moisés Naím, FT March 4 2010

Their view is informed by the disastrous experience with hyperinflation in Germany in the 1930s and stagflation in industrial countries in the 1970s and 1980s. Undoubtedly, moderate inflation can creep up to become high inflation. But, like many good ideas that take on the mantle of a cult, inflation fundamentalism can hurt.

There is little if any empirical evidence that moderate inflation that stays moderate hurts growth.

This misunderstanding pops up now and then, also in this article:
"the disastrous experience with hyperinflation in Germany in the 1930s"
But the hyperinflation was in the 1920s, not in the 1930s.
In the 1930s there was unemploymnet, as we all know.
Rolf Englund FT March 4 2010

We need a Plan B to curb the debt headwinds
An unsustainable level of private sector debt is the main factor explaining the present severe downturn,
as well as many previous downturns in history.
William White FT March 2 2010

The writer is chair of the Economic and Development Review Committee at the OECD and was economic adviser at the Bank for International Settlements

Policymakers have responded to successive economic downturns in essentially the same Keynesian way since the 1950s.

Fiscal deficits have been allowed to rise and interest rates to fall to stimulate aggregate demand.

Though Keynes hardly anticipated such repeated use of macro instruments, these policies have worked.

The problem with debt is that it constitutes a claim on future earnings, which cannot be met if earnings expectations fail to materialise.

Both monetary and fiscal policies may now have reached the limits of their effectiveness.

Encouraging an orderly deleveraging of balance sheets, both household and financial, is one route. But as saving rates rise, multiplier and accelerator effects might interact to produce a much less orderly outcome than anticipated.

Economics is often about hard choices. If the headwinds of debt have overwhelmed the capacity of macro policies to stimulate real growth, then other, more structural, measures must be turned to. Failing to muster the political will to do so would increase the likelihood of an inflationary solution to the debt problem.

Why have markets reached their exposed position? The answer is that success breeds excess.
This is the argument of a fascinating new paper from William White, economic adviser to the Bank for International Settlements.
Martin Wolf, Financial Times 24/5 2006

To begin with, let’s get reacquainted with the fundamental economic problem of our age – lack of global aggregate demand – and how we got to where we are today:
(1) Twenty years of accelerated globalisation incrementally undermined the real incomes of most developed countries’ workers/citizens,
forcing governments to promote leverage and asset price appreciation in order to fill in what is known as an “aggregate demand” gap – making sure that consumers keep buying things.
Bill Gross March 2010

What if, as Carmen Reinhart and Kenneth Rogoff have pointed out in their book, “This Time is Different”, our modern era was similar to history over the past several centuries when financial crises led to sovereign defaults or at least uncomfortable economic growth environments where real GDP was subpar based on onerous debt levels – sovereign and private market alike.

What if – to put it simply – you couldn’t get out of a debt crisis by creating more debt?

The West risks a slow grind into debt-deflation unless central banks offset fiscal tightening with monetary stimulus – QE, of course – to keep demand alive.
Yet the Fed and the European Central Bank are letting credit contract.
Ambrose Evans-Pritchard, 28 Feb 2010

- Det är klart att Göran Perssons historiska insats är monumentalt betydelsefull för Sverige. Vi kan ha haft olika synpunkter på hur man borde sanerat vår ekonomi. Men den sanering de gjorde är oerhört viktig för att vi har en god ordning i vår ekonomi.
Anders Borg ref. i DN 2010-02-19

The risk premium on Greek government bonds continues to hover around 3 per cent, depriving Greece of much of the benefit of euro membership. If this continues, there is a real danger that Greece may not be able to extricate itself from its predicament whatever it does. Further budget cuts would further depress economic activity, reducing tax revenues and worsening the debt-to-GNP ratio. Given that danger, the risk premium will not revert to its previous level in the absence of outside assistance.
George Soros FT February 21 2010

Cantillon, en irländsk ekonom, bankir och börsspekulant på 1700-talet, var först med att poängtera att
effekten av penningpolitiken beror på de kanaler genom vilka nya pengar pumpas in i samhällsekonomin,
på vem som får pengarna och vad de används till.
Lars Jonung Kolumn DN 2009-12-17

Nu trycker Riksbanken frenetiskt in nya pengar i svensk ekonomi för att möta den globala krisen. Kreditökningen kanaliseras i betydande utsträckning till fastighetsmarknaden. De svenska huspriserna har sedan 1990-talets finanskris stigit mer än de amerikanska huspriserna – innan den amerikanska bolånekrisen bröt ut och huspriserna störtdök i USA.

Vår kris är emellertid en exportkris – inte en bostadskris som i USA. Exporten av Volvobilar kan inte hållas uppe med låga räntor i Sverige.

Dagens låga styrränta är inte långsiktigt hållbar. Den måste förr eller senare höjas. Då finns risken att vi på nytt överraskas av en fastighetsbubbla som brister med dystra konsekvenser. Uppgången i bopriserna har kusliga likheter med den fas då en finansiell bubbla pumpas upp.

Alan Greenspan, förre chefen för den amerikanska centralbanken, ansåg att centralbanken ska ta hand om bubblor först när de spruckit. Bolånekrisen i USA ger oss det motsatta budskapet. Nu vet vi att en politik som ignorerar prisbubblor bär fröet till kommande krasch. Det förstod redan Cantillon. Han gjorde sig nämligen en enorm förmögenhet genom att sälja innan den stora finansbubblan 1719–20 sprack.

Kommentar av Rolf Englund:
Det är detta, tror jag, som är en av grundbultarna i tänkandet hos Hayek och de andra österrikarna.

Om man stimulerar ekonomin med sänkta räntor och borttagen fastighesskatt, då ökar efterfrågan på bankaktier, fastigheter, filipinska hembiträden, krogar och Porsche-bilar.

Om man stimulerar eftrfrågan med högre barnbidrag, då ökar efterfrågan på helt andra saker.

Both groups might be right.
The Sunday Times letter argued that “the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament”, instead of the two planned by the government.
In response, opponents argued that it would be foolish to slash the structural deficit if this led to a deeper recession and so to an offsetting rise in the cyclical deficit.
Martin Wolf February 25 2010

If all the economists in the world were laid end to end, they would not reach a conclusion. The “battle of the letters” – two letters in the FT, from Lord Skidelsky and others and Lord Layard and others, replying to a letter in the Sunday Times from Professor Tim Besley and others – brings this hoary joke to mind.

An obvious way to combine credibility with a pro-growth stimulus is to close the structural current deficit relatively rapidly, while introducing credibly temporary offsets, particularly via spending on investment and tax holidays.

This massive swing occurred despite the Federal Reserve’s efforts to sustain lending and spending. Similar shifts occurred in other crisis-hit countries.

If these governments had decided to balance their budgets, as many conservatives demand, two possible outcomes can be envisaged: the plausible one is that we would now be in the Great Depression redux; the fanciful one is that, despite huge increases in taxation or vast cuts in spending, the private sector would have borrowed and spent as if no crisis at all had happened.

The Case For Higher Inflation
Olivier Blanchard, currently the chief economist at the IMF,
conclusion, central banks have been setting their inflation targets too low
I’m not that surprised that Olivier should think that; I am, however, somewhat surprised that the IMF is letting him say that under its auspices. In any case, I very much agree.
Paul Krugman, Febr 13 2010

Keynes: The Return of the Master
“Why did no one see the crisis coming?”, Queen Elizabeth asked
A seminar at the British Academy tried to answer and the FT has taken up the discussion.
Robert Skidelsky, FT, August 5 2009

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy – zero interest rates plus quantitative easing – did.

First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped.

Second, there is a good deal of “leakage” from open economies in a globalised world.

Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect
Niall Ferguson, FT February 10 2010

My new maxim, never to stand in the middle of a fight between Paul Krugman and Niall Ferguson
Fiscal multipliers are certainly fun.
If the fiscal multiplier is 0.5, we’re getting government projects at half price: the government project draws half its resources away from private-sector activity, but the other half is just soaking up slack
Tim Harford, FT July 20 2010
Highly recommended

If new-classical and new-Keynesian economics are both wrong, where do we go from here?
For 30 years, macroeconomists have been of two stripes: new-classical and new-Keynesian.
Neither has anything interesting to say about the current crisis.
Roger E.A. Farmer FT January 28, 2010

In new-classical and new-Keynesian economics, all unemployment is temporary and unemployed workers will quickly find jobs. According to the Keynes of The General Theory, very high unemployment can persist forever. Nobody has taken this Keynesian idea seriously in respectable academic circles since the 1950s

Samuelson’s interpretation of Keynes evolved into a modern incarnation - new-Keynesian economics.

According to new-Keynesians, recessions occur because some firms are stubbornly unwilling to lower their prices in the face of a fall in demand. Workers quit their jobs and choose to take a prolonged vacation. This is not the main theme of The General Theory. But the idea that some firms are slow to change prices is central to new-Keynesian economics. To explain why firms don’t change prices, the new-Keynesians assume that a firm must wait until it’s randomly chosen to be given the privilege to change its price. This option is facetiously referred to as a ‘visit from the Calvo fairy’ after a paper by economist Guillermo Calvo who first introduced the idea into macroeconomics. I don’t believe in fairies.

Many economists recognise that it is time for economics to change. But so far, theoretical economists are trotting out the same tired old solutions and empirical economists are a long way from a consensus on the magnitude of the multiplier.

Say the US government orders a $10bn (£6bn) aircraft carrier. You might assume the effect of this would be merely to pump $10bn into the US economy. Under the multiplier argument, the actual effect would be bigger. The shipbuilder takes on more employees and generates more profits; its workers spend more on consumer goods. Depending on the average consumer’s “propensity to consume”, this could raise total economic output by far more than the amount of public money actually injected.
If the $10bn increase caused total United States economic output to rise by $5bn, the multiplier would be 0.5; if it rose by $15bn, the multiplier would be 1.5.
Read more here

The policies that new-Keynesian economists are advocating stem from a theory that is built on sand. Before economists become policy advocates we need a theory that is internally consistent and that can explain the evidence from the Great Depression, the stagflation of the 1970s and the current economic collapse. The Keynes of The General Theory was right about the problem, but he was wrong about the solution. High unemployment can persist forever unless we do something about it. But fiscal policy is not the way to restore full employment.

If new-classical and new-Keynesian economics are both wrong, where do we go from here?

I answer these questions from a new perspective in two new books, Expectations Employment and Prices(written for academics) and How the Economy Works: Confidence Crashes and Self-Fulfilling Prophecies(written for the general public). I argue that the solution is not to replace private demand by public demand through massive fiscal stimulus programs. A more effective policy solution is to maintain and extend the programs of quantitative easing that have been engaged in by central banks throughout the world.

Att stänga av respiratorn
Nu ska räddningspaketen avvecklas.
Första stegen blir strypta lån och högre räntor.
Anders Billing Fokus 22/1 2010

I Sverige har både Riksbanken och Riksgälden åtgärder som fortfarande är i funktion. Riksbanken har till exempel 80 miljarder kronor utlånade till ett antal svenska finansföretag (vilket är långt mindre än de flera hundra miljarder kronor som utlåningen låg på som mest under fjolåret).

Riksgälden har i sitt garantiprogram fortfarande sex banker och finansföretag anslutna (som Swedbank, SBAB och Volvofinans) som med hjälp av garantierna vid årsskiftet hade lånat mellan 250 och 300 miljarder kronor.

För det andra har centralbankerna spelat en aktiv roll genom framför allt räntesänkningar till historiskt låga nivåer under 1 procent, men också genom att tillföra pengar till marknaden via lån. Riksbanken har i dag strax under 300 miljarder i tre sådana lån, som löper ut i sommar och tidig höst.

Even the normally sober Martin Wolf has fallen for this line (FT, December 16 2009). The pre-crisis UK economy, he says, was a “bubble economy”. The bubble made UK output seem larger than it actually was!
Robert Skidelsky December 22 2009

This is old-fashioned Puritanism: the boom was the illusion, the slump is the return of reality.

The government must cut its spending now, because this is what “the markets” expect. These are the same markets that so wounded the banking system that it had to be rescued by the taxpayer. This is unacceptable. The duty of governments is to govern in the best interests of the people who elected them not of the City of London. If that means calling the bankers’ bluff, so be it.

Det fanns en tid när detta budskap kunde framföras:
"Svenskt Näringsliv avstyrker det föreslagna finanspolitiska rådet. Det finns inget behov för ett sådant eftersom vi anser att aktiv stabiliseringspolitik inte skall bedrivas."

The Great Moderation

The emotional markets hypothesis and Greek bonds
Gillian Tett, FT April 9 2010

The average British, German or American fund investors might have seen some market shocks in their lives. Just think of the 2001 internet crash or 1997 Asian crisis. But these prior shocks tended to be short-lived, relatively contained, and – crucially – did not threaten to bring down the entire system.

Instead, in the decade before 2007 the macro-economic climate appeared to be so utterly benign and stable that economists dubbed it the “Great Moderation”. Investors were so confident – or complacent – that this “moderation” would last, that they kept borrowing more and more, and accepting lower returns for the same risk.

Olivier Blanchard, the IMF’s chief economist called for several bold innovations.
Central banks should raise their inflation targets—perhaps to 4% from the standard 2% or so.
The Economist print Feb 18th 2010

Hyman Minsky, points out that stability leads to instability.
The longer a given condition or trend persists (and the more comfortable we get with it), the more dramatic the correction will be when the trend fails.
The problem with long-term macroeconomic stability is that it tends to produce highly unstable financial arrangements. If we believe that tomorrow and next year will be the same as last week and last year, we are more willing to add debt or postpone savings for current consumption.
Thus, says Minsky, the longer the period of stability, the higher the potential risk for even greater instability when market participants must change their behavior.
John Mauldin 26/3 2010

It has become known as the “Great Recession”, the year in which the global economy suffered its deepest slump since the second world war. But an equally apt name would be the “Great Stabilisation”. For 2009 was extraordinary not just for how output fell, but for how a catastrophe was averted.

Twelve months ago, the panic sown by the bankruptcy of Lehman Brothers had pushed financial markets close to collapse. Global economic activity, from industrial production to foreign trade, was falling faster than in the early 1930s. This time, though, the decline was stemmed within months.

Why have markets reached their exposed position?
The answer is that success breeds excess.
This is the argument of a fascinating new paper from William White, economic adviser to the Bank for International Settlements.
Martin Wolf, Financial Times 24/5 2006

Did inflation targeting fail?
Central banks have mostly escaped blame for the crisis.
How can it have gone so wrong?
Martin Wolf, Financial Times, May 5 2009
Just over five years ago, Ben Bernanke, now chairman of the Federal Reserve, gave a speech on the “Great Moderation”
Read more here

Recession? What Recession?
Talk about a recession from a very small group of people need to be balanced
against the fact that no major strategist is predicting a recession.
This "great moderation" of the economy has been explained many ways
Bob Pisani, CNBC 24 Aug 2007

Mot bakgrund av den kraftigaste recessionen i världsekonomin sedan andra världskriget finns det anledning att se över om den politik som centralbanker bedriver kan utformas för att bättre kunna främja en balanserad ekonomisk utveckling.
Vice riksbankschef Karolina Ekholm 2009-12-04

Om hushållens upplåning fortsätter att öka med 8 procent är det inte riktigt hållbart", säger SEB:s chefsekonom Robert Bergqvist.
Det är Statistiska centralbyråns, SCB:s, senaste finansmarknadsstatistik som ser ut som om Riksbanken misslyckats totalt i sin räntepolitik.
Tanken var ju att garantera företagen billiga lån för att få igång investeringarna och skapa nya jobb.
DI 27/10 2009

Hushållens samlade skulder uppgick i september till 2.274 miljarder kronor varav 1.508 miljarder var bostadslån.

I boken Krisen – orsaker, verkan, åtgärder (Leopard förlag, 192 s) sammanfattar den kände amerikanske ekonomiprofessorn Paul Krugman sin syn på den aktuella lågkonjunkturen.
Idag är John Maynard Keynes mer relevant än någonsin, skriver Krugman bland annat. Han beskriver världsdepressionen i början av 30-talet som en efterfrågekris:
”Det som satte stopp för trettiotalsdepressionen i USA var ett massivt underskottfinansierat program för offentliga arbeten som kallas andra världskriget”.
Carl Johan Gardell, Understreckare SvD 13 augusti 2009

Multiplying multipliers
Mark Thoma, Menzie Chinn, and The Economist all have posts on the question of the size of the fiscal multiplier.
Paul Kruman, October 1, 2009

This piece by Ilzetzki et alis interesting, and offers a wide range of multipliers depending on a country’s situation.

The question for the United States is which estimate is most relevant.

The US Job Numbers for September
263,000 more jobs lost in September, and unemployment now at 9.8 percent
The only reason the numbers don't look worse is that 571,000 workers dropped out of the labor force.
Remember that the economy needs about 125,000 new jobs every month just to keep up with a growing population.
Robert Reich 2/10 2009

Why the Dow is Hitting 10,000 When Consumers Can't Buy And Business Cries "Socialism"
Robert Reich 22/9 2009

The explanation is simple. The great consumer retreat from the market is being offset by government’s advance into the market. Consumer debt is way down from its peak in 2006; government debt is way up. Consumer spending is down, government spending is up. Why have new housing starts begun? Because the Fed is buying up Fannie and Freddie’s paper, and government-owned Fannie and Freddie are now just about the only mortgage games remaining in play.

Lars E O Svensson anses vara en av världens ledande akademiker inom området penningpolitik.
Men hans insatser i riksbanksdirektionen för tankarna till en kapten som slaviskt följer sitt sjökort, även om fartyget kört på ett isberg.
Peter Wolodarski 2009-12-27

Det var en sak att sänka räntan under det akuta krisläget för att avvärja en depression. Men nu när ekonomin börjat återhämta sig bidrar nollräntan bara till att elda på bostadsrallyt. Det är att upprepa de allvarliga misstag som Alan Greenspan begick under flera år på 00-talet – och som bäddade för finanskrisen och senare tvingade fram Ben Bernankes räddningsinsats.

Den som tror att Sverige följer samma ekonomiska tyngdlagar som länder som USA, Storbritannien och Spanien bör förbereda sig på att det smärtsamma prisfallet på bostäder kommer, kanske till och med under 2010.

Man har först en fast växelkurs som förhindrar åtstramningar av ekonomin under högkonjunktur. Och sedan har man fast växelkurs som förhindrar stimulans.
Det hade man under den tid som Lars Svensson var rådgivare åt Bengt Dennis på Riksbanken och under den tid som Kjell-Olof Feldt, nu ordförande i Riksbanksfullmäktige, var finansminister. Det var då som grunden för sammanbrottet lades.
Rolf Englund på Nationalekonomiska Föreningen 1995

RE: Njaa, hur är det med ECB?
Vice riksbankschef Lars E O Svensson om vilka lärdomar man kan dra av finanskrisen och inflationsmålspolitiken.
Han inleder med att konstatera att alla centralbanker med inflationsmål har detta som ett flexibelt mål som också går ut på att stabilisera realekonomin.
Detta till skillnad mot en strikt inflationsmålspolitik där enbart inflationen skall stabiliseras.
Danne Nordling 25/9 2009

LEOS redogör för sin syn på varför det blev finanskris. Det hade inte mycket med penningpolitiken att göra.

The primary objective of the ECB’s monetary policy is to maintain price stability.
The ECB aims at inflation rates of below, but close to, 2% over the medium term.
"To maintain price stability is the primary objective of the Eurosystem and of the single monetary policy for which it is responsible. This is laid down in the Treaty establishing the European Community, Article 105 (1).
"Without prejudice to the objective of price stability (kurs här)", the Eurosystem will also "support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community". These include a "high level of employment" and "sustainable and non-inflationary growth".
Read more at ECB

U.S. Economy Lost 216,000 Jobs in August
after falling by a revised 276,000 in July and 463,000 in June.
Total loss of jobs since the recession began in December 2007 - 6.9 million.
(Remember, it takes 150,000 jobs per month (or so) simply to maintain
the employment rate, due to growth in the population.)
RGE Monitor 2009-09-07

Både penningpolitiken och finanspolitiken bör vara expansiv under både 2009 och 2010.
Det sa finansminister Anders Borg vid en presskonferens på fredagen inför G20-mötet för finansministrar.
"Vad gäller ekonomin så står vi fortfarande i askan, och det är inte rätt tid att kalla tillbaka brandkåren.
Jag tycker det är rimligt att under både 2009 och 2010 behålla en expansiv penningpolitik och finanspolitik"
Anders Borg, DI 2009-09-04

Nästan alla väljer rörlig ränta
DI 2009-09-02

Fortsatt stor skillnad mellan den bundna tremånadersräntan och de längre bundna boräntorna bidrog till att 91 procent av låntagarna valde den kortaste bindningstiden i augusti. Det är den högsta andelen sedan mätningarna startade år 2000. Det visar SBAB:s månadsstatistik över nyutlåningen till privatkunder.

How Did Economists Get It So Wrong?
“central problem of depression-prevention has been solved,” declared Robert Lucas of the University of Chicago
in his 2003 presidential address to the American Economic Association
Paul Kruman, New York Times Magazine, 2/9 2009

Betrakta kurvan härintill.
Det är inte den som brukar publiceras i samband med nyheter om tillväxten, men det är den som visar hur värdet av Sveriges varor och tjänster utvecklats i fasta priser sedan 1950.
Som synes har Sveriges välstånd ökat kraftigt.
Man kan här läsa ut att Sverige med det värsta scenariot, drygt sex procents negativ tillväxt i år, kommer att backa till ungefär 2005 års nivå innan det vänder upp igen. Fattigare än så blir vi inte.

Anders Bolling, DN 2009-08-10

Samma förhållande gäller också andra länder eftersom den globala tillväxten varit enorm de senaste decennierna.

Den andra sidan av arbetslöshetsstatistiken är sysselsättningen. Där är vi ännu inte i närheten av krisåren på 1990-talet. Under åren 1990–1993 minskade sysselsättningen med hisnande 600 000 personer – från en nivå bra mycket lägre än den vi vant oss vid på senare år. Efter 1997 har sysselsättningen ökat kontinuerligt fram till toppåret 2008. Just nu är andelen sysselsatta vuxna nere på nivån i slutet av 2006.

Kommentar av Rolf Englund
Jaha, och jag som har läst så många gånger att det började gå utför för Sverige runt 1970......
Snacket om Eftersläpningen

Roosevelts New Deal på 30-talet gick ut på att med höjda inkomstskatter och utgiftsminskningar få balans i budgeten, som till slut uppnåddes 1938.

Då bröts uppgången och produktionen sjönk.
Först när balansmålet övergavs kunde ekonomin expandera tillräckligt mycket.
Danne Nordling, 20/2 2009

Arbetslösheten fortsätter att öka men det ekonomiska läget har blivit "ett par snäpp bättre".
Det finns därför ett visst utrymme för satsningar i höstens budget.
Anders Borg, E24 2009-08-06

Regeringen har hållit hårt i pengarna under krisen.
Belöningen kan komma som sänkt skatt under valåret 2010.
SvD-ledare 11 augusti 2009

Visst är det förståeligt att kommuner och landsting önskar mer resurser, men det är näppeligen där som arbetslösheten väntas stiga mest. Tvärt om, det är snarare den sektor som klarar sig lindrigast, åtminstone enligt Arbetsförmedlingens beräkningar. Inom industrin räknar man med att strax över 60000 personer förlorar jobbet både innevarande år och nästa, inom den privata tjänstesektorn mellan 30000 och 40000 både detta och nästa år. Inom offentlig sektor handlar det om strax under 10000 personer 2009 och 15000 personer 2010.
Det finns anledning att se över tillskotten till landsting och kommuner, men skälen att satsa på skattesänkningar för det privata näringslivet torde vara större inte minst då arbetslinjen hävdas.

Teorin om automatiska stabilisatorer förutsätter att kommunerna inte skall avskeda eller höja skatten.
Därför måste staten stabilisera kommunerna.
Men detta tycks inte vara motivet för att nu ge extra pengar till kommunerna.
Man kan dela in stabiliseringspolitiken i tre kategorier: automatisk, reaktiv och proaktiv.
Danne Nordling 11/8 2009

On a visit to the London School of Economics last November, the Queen asked why no one saw the financial crisis coming. For if people with enough authority and influence had foreseen it, some preventive action would have been taken and either the crisis would not have occurred, or it would at least have taken a different form.
Samuel Brittan, FT, August 6 2009

Hur vi en dag ska ta oss från lågränteträsket till en lite mer sund räntesättning förstår jag inte.
Det gör ingen annan heller och det börjar väl bli några av oss som undrar hur exit-strategin bland
”stora tänkare” som Ben Bernanke eller Lars E O Svensson egentligen ser ut.
Pekka Kääntä, 2 juli 2009

The efficient-markets hypothesis
Of all the economic bubbles that have been pricked, few have burst more spectacularly than the reputation of economics itself.
Paul Krugman argued that much of the past 30 years of macroeconomics was
“spectacularly useless at best, and positively harmful at worst.”
The Economist print July 16th 2009

Our economy’s lights, if not switched off in a rehash of the 1930s Depression, have certainly been dimmed in a 21st century version likely to be labelled the Great Recession. McHouses, McHummers, and McFlatscreens, all financed with excessive amounts of McCredit created under the mistaken assumption that the asset prices securitising them could never go down.
There is a developing optimism that we can go back to the lifestyle of yesteryear.
Forecasts based on econometric models inevitably miss these secular/structural breaks in historical patterns because it is impossible to quantify human behaviour
Bill Gross, July 2009

It could be that future generations of German politicians find ingenious ways around the balanced budget law.
Or that they find a two-thirds majority to overturn it.
Or that Mr Sarkozy or his successors follow Germany into a future of austerity.
But as long as one of those three events fails to happen, Germany may discover that unilateral fiscal rigour in a monetary union could prove extremely costly.
For the sustainability of the euro, you surely do not want to get into a position where a large member state has a rational economic reason to quit.
So if Germany and France really do what they both promise, you may as well start the egg timer.
Wolfgang Münchau, Financial Times June 28 2009

Den 2/6 2009 skrev Carl-Johan Westholm under rubriken "Politiskt inkorrekt av Reinfeldt och Borg"
ett hyllningsinlägg på sin blog Stateblind.
Rolf Englund blog 22/6 2009

What gave the Great Depression its name was a brutal decline over three years.
This time the world is applying the lessons taken from that event by John Maynard Keynes and Milton Friedman, the two most influential economists of the 20th century.
The policy response suggests that the disaster will not be repeated.
Martin Wolf, Financial Times, June 16 2009

Two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O’Rourke of Trinity College, Dublin, have provided pictures worth more than a thousand words (see charts)
The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted.
‘A Tale of Two Depressions’, June 2009, www.voxeu.org/index.php?q=node/3421

Two opposing dangers arise. One is that the stimulus is withdrawn too soon, as happened in the 1930s and in Japan in the late 1990s. There will then be a relapse into recession, because the private sector is still unable, or unwilling, to spend.
The other danger is that stimulus is withdrawn too late. That would lead to a loss of confidence in monetary stability worsened by concerns over the sustainability of public debt, particularly in the US, the provider of the world’s key currency.
At the limit, soaring dollar prices of commodities and rising long-term interest rates on government bonds might put the US – and world economies – into a malign stagflation.
Contrary to some alarmists, I see no signs of such a panic today. But it might happen.

A significant decline in both consumption and investment will mean a recession in the US.
This conclusion is so obvious that the only question is why the markets are not forecasting it already.
Barry Eichengreen Financial Times 20/12 2004

What I hear more and more, both from bankers and from economists, is that the only way to end our financial crisis is through inflation.
Their argument is that high inflation would reduce the real level of debt, allowing indebted households and banks to deleverage faster and with less pain.
The advocates of such a strategy are not marginal and cranky academics. They include some of the most influential US economists.
Wolfgang Münchau, Financial Times, May 24 2009

Consider what would happen if the UK or US were to attempt Hungarian or Estonian style cuts.
There would be a huge outcry.
So rather than taking the axe to public spending, the British and American governments are borrowing madly,
with no sign of any credible long-term plan to balance the books.
Gideon Rachman, Financial Times, May 25 2009

Did inflation targeting fail?
Central banks have mostly escaped blame for the crisis.
How can it have gone so wrong? Also about The Taylor Rule
Martin Wolf, Financial Times, May 5 2009

MV=PQ
Okay, when you become a central banker, you are taken into a back room and they do a DNA change on you.
You are henceforth and forever genetically incapable of allowing deflation on your watch.
It becomes the first and foremost thought on your mind: deflation, we can't have it.
John Mauldin 24/4 2009

MV=PQ. This is an important equation, right up there with E=MC². M (money or the supply of money) times V (velocity -- which is how fast the money goes through the system -- if you have seven kids it goes faster than if you have one) is equal to P (the price of money in terms of inflation or deflation) times Q (roughly standing for the Quantity of production, or GDP)

So what happens is, if we increase the supply of money and velocity stays the same, and if GDP does not grow, that means we'll have inflation, because this equation always balances. But if you reduce velocity (which is happening today) and if you don't increase the supply of money, you are going to see deflation. We are watching, for reasons we'll get into in a minute, the velocity of money slow. People are getting nervous, they are not borrowing as much, either because they can't or the animal spirits that Keynes talked about are not quite there.

In the world that existed before the financial crisis, central bankers were triumphant.
They had defeated inflation and tamed the business cycle.
And they had developed a powerful intellectual consensus on how to do their job, summarised recently by David Blanchflower, a member of the Bank of England’s monetary policy committee, as “one tool, one target”.
The tool was the short-term interest rate, the target was price stability.
The Economist Apr 23rd 2009

This minimalist formula fitted the laissez-faire temper of the times. A growing array of financial markets could price risk and allocate credit efficiently. Central bankers had merely to calibrate their interest-rate tools and all other markets would automatically adjust. Central banks still cared about financial stability and full employment, but could argue these were best served by stabilising prices—without, if you please, interference from politicians.

The financial crisis has upended all that.
The business cycle was supposedly subdued, yet the world is in the deepest recession since the 1930s. Deflation has become a more dangerous enemy than inflation; with interest rates in many countries at or close to zero, central banks have had to reach for other tools.

Folkpartiets ekonomiske talesman Carl B Hamilton säger nej tack till en kraftigt expansiv politik
i ett läge utan säker internationell uppgång i sikte.
DN/TT 31/3 2009

"Att i dag gå ut hårt med ökade offentliga utgifter för att motverka krisen är som att spänna upp en brygga över ett vattendrag med okänd bredd och utan visshet om var andra stranden befinner sig", skriver han i ett pressmeddelande.

Hamilton jämför med 1970-talet då den borgerliga regeringen körde i diket med en sådan politik och han slår fast att detta inte kommer att hända igen.

I det europeiska samarbetet har under dessa decennier diskuterats vad som kunde göras för att undvika en för den ekonomiska utvecklingen skadlig turbulens på valutamarknaderna.

Det första försöket till stabilitet var den s.k. valutaormen kring den västtyska D-marken som Sverige under några år försökte att vara en del av, men som vi misslyckades att klara eftersom vi tillät kostnader att skena iväg långt mycket snabbare än i den västtyska ekonomin.

1977 tvingades vi (RE: Gösta Bohman, Carl Bildt m fl), som ett resultat av den s.k. överbryggningspolitiken under mandatperioden mellan 1973 och 1976, att ge upp det försöket.

Jag var med när överbryggningspolitiken tog form, jag inbillar mig det i varje fall.
Det var efter valet 1973 och man sade ”vad skall vi nu göra, snart är det val igen”.
Det var jämviktsriksdag och det höll nästan på att gå åt pipan.
En kväll satt jag hemma hos Allan Larsson, och han förklarade för mig att ”varje lågkonjunktur följs av en högkonjunktur”, och jag nickade och sade ”lysande tanke”.
Han fortsatte: ”Då gäller det, att företagen när högkonjunkturen kommer är rustade, de skall ha varulager som de kan sälja av och de skall ha produktionskapaciteten intakt”.

Jag tyckte att det var briljant, att ingen hade tänkt på det förr!
Att efter en lågkonjunktur kommer alltid en högkonjunktur, det är klart att man skall överbrygga den,
och alla grep efter det där.

Samtal med Johan Norberg
Varför blev det finanskris?
Var det girigheten som löpte amok?
Den osunda kulturen före finanskrisen hade aldrig uppstått
om det inte varit för alla politiska misslyckanden.
PJ Anders Linder, SvD 29 mars 2009

Vi befinner oss mitt i den största ekonomiska nedgången på 80 år,
för första gången i världshistorien har vi en global kris.
Följderna kan bli synnerligen stora och kostsamma,
men det verkar inte ha utlöst någon nämnvärd kreativitet bland våra ledare.
Kristina Persson, Global Utmaning 17/3 2009

Trots att EUs ekonomier sammantaget har starkare finanser än den amerikanska finns inga stora och samordnade stimulanspaket på väg. Därmed kommer inte heller den amerikanska stimulansen att få tillräckligt bett.

Sverige hör till de länder som drabbas värst. Inte för att vi har en dåligt skött ekonomi, utan därför att vi är extremt exportberoende. ändå talar vår statsminister om att vi bör försöka uppnå budgetbalans! Som om det vore möjligt och lämpligt i dagens läge.

- Most mainstream macroeconomic theoretical innovations since the 1970s
(the New Classical rational expectations revolution associated with such names as Robert E. Lucas Jr., Edward Prescott, Thomas Sargent, Robert Barro etc, and the New Keynesian theorizing of Michael Woodford and many others)
have turned out to be self-referential, inward-looking distractions at best.
Rolf Englund agreeing with Willem Buiter, blogging at Maverecon, 5/2 2009

Bush orsakade krisen genom feltajming
Destabiliserande tajming av både sänkta skatter och räntor är den triviala förklaringen.
Bush förde expansiv finanspolitik i en högkonjunktur.
Danne Nordling, 13/2 2009

Kommentar av Rolf Englund:
Observera de stora budgetunderskotten under Reagan.
Talet om Reagans skattesänkningar som "Supply-Side" är struntprat.
Reagan fick fart på ekonomin genom hederlig Keynesiansk politik.