News versus emergence

From an economist’s point of view, there are two big facts about the public finances. Fact one is that the government is now being paid to borrow. 20-year gilt yields are minus 2.5% which means that for every £100 the government borrows it must repay only £60 over the next 20 years. Fact two is that record government borrowing is, by definition, the counterpart of the fact that the household savings ratio hit a record high in Q2.

Many political journalists, however, underweight these facts. Laura Kuenssberg talks of the nation’s credit card being maxxed out, whilst Matthew Parris rages at those of us who have the temerity to criticise her.

Which poses the question: why is there just a gulf between political journalists and economists here?

I suggest it’s because political journalists and economists see the world differently. The news is usually about the day-to-day events of what individuals do and say. A lot of economics, however, is not like that. It is the study of emergence, of states of affairs which arise from decentralized human action but not intention. This isn’t just true of economics, but of the social sciences generally – which is why there are great limits upon what you can learn about history and politics from biographies alone.

Take, for example, the long-term decline in interest rates since the 1990s. This reflects a slowdown in economic growth in western economies – a fall into what Larry Summers has called secular stagnation. There are several possible (and non-exclusive) explanations for this. Maybe a falling rate of profit has reduced incentives for firms to invest and expand. Perhaps a shortage of safe assets and increased risk aversion has depressed demand. Perhaps there are fewer (pdf) big innovations to drive growth. Maybe the 2008 financial crisis has had a long-lasting scarring effect on animal spirits. Maybe firms have finally wised up to William Nordhaus’s finding that the returns to innovation are generally small. Or maybe the fear of competition from future technologies is deterring investment today.

For my purposes, all these explanations have some things in common. All are the result of countless decisions by countless individuals. They cannot be traced to the action of any single policy-maker. And they are gradual processes. At no stage in the last 20 years could we have said for sure: “the world economy has today entered a new era of permanently slow growth.”

These processes get overlooked by journalists who are focused instead upon precise day-to-day events and the actions of identifiable persons. News is one thing; emergence another. And so journalists’ are insufficiently awake to the downtrend in interest rates.

Government borrowing is also an emergent process. It is at a record high this year because household savings are at a record high: the lockdown and fear of catching Covid-19 has kept us out of gyms, pubs and restaurants. None of us, however, thought: “I shall save more and so cause the government to borrow more”. But that is the aggregate result of our actions. And the same economic weakness that arises from increased private savings also justifies the Bank of England’s buying of government bonds – which is another reason not to worry about government borrowing.

Both government borrowing, and the ease of financing it, are the result of emergent processes - processes which even good journalism under-rates.

Of course, political journalists can be forgiven for overlooking economic processes. Except that economic events shape political ones.

Anti-Europeanism, for example, has been a longstanding strand in UK politics: the Sun’s notorious headline “Up Yours, Delors” is now 30 years old. But in the late 90s and early 00s, the Tories were punished harshly in elections for their obsession with the EU. So what changed?

The economic climate, that’s what. Ben Friedman has shown that economic stagnation fosters intolerance and nationalism – perhaps because a sense of national decline leads to a yearning for the past. And Thiemo Fetzer and Nick Crafts have shown how austerity contributed to Brexit. It is wrong to treat public opinion merely as a datum; it is shaped by the economy – often in ways we can only identify with hindsight.

Emergent processes set the climate. But journalists who focus only on the day-to-day weather miss this. And so they worry unnecessarily about government borrowing – and mislead their viewers and readers, some of whom are politicians.

Now, I am emphatically not making a purely partisan point here. Emergence doesn’t only give us stagnation and Marxian exploitation. Hayek regarded the spontaneous order of a market economy as a benign form of emergence. And the decline in global poverty and disease in recent decades has also been (partly) an emergent process. Journalists’ bias against emergence also leads them to neglect these. And again, in doing so they mislead the public: people are unduly antipathetic to markets and under-estimate the extent to which living conditions have improved for billions.

The news, then, is not the whole truth. It is in this sense, rather than simple-minded partisanship, that the BBC is biased.

Comments

[Bruce]

Given the current trend of stagflation, can we expect the world to continue doing "better"? Does government borrowing have no downside? And, if it does, won't this emerge as well somewhere down the line?

[UserFriendly]

Maybe it's the slow and steady immiseration of the working class. Odd how siphoning wealth to the very top leads to those at the bottom cutting back on spending and the decrease in demand means there are much fewer worthwhile investments. Our stupid faux meritocracy has created the most self righteous, arrogant, clueless, out of touch ruling class. It's a meritocracy so all the best and the brightest are in charge of everything. Wall Street greed blows up the world's economy? No ones fault, all the smart people did everything they could to stop it. Poor people are starving to death? Idiots should have worked harder in school, go learn to code. There is not one shred of anything worth saving in this worthless society.

[Oakchairbc]

@UserFriendly
I disagree that there isn’t one thing about current society worth saving. I think you disagree with that statement as well unless you consider yourself who is a product of this society unworthy of saving.

[jim2]

But my dear, we can't allow the lower orders to get the idea they can run up debts willy nilly. They are there to pay their debts - and ours.

If newspapers and blogs and academic papers came out once per year we would have to seek excitement elsewhere. The human desire for gossip would seek some other outlet. Different timescales, different markets.

What causes economic stagnation? We seem to have stagnation but China does not, Saudi seems a bit stagnant but India and Australia not quite so much. What seems to matter is that dominant groups in each country have made themselves comfortable with the status quo. What causes this?

Maintaining a status quo looks tricky. My status quo is your repression. I like sending my kids to Eton but I don't want you chavs coming along as well. I fancy living in the Cotswolds, nice old vicarage etc but I don't want a load of council houses nearby. I am quite content with a bit of economic stagnation around me so long as I am OK, even if I must step over street sleepers when I venture out.

But why might China's elite be happy to let things rip along? Perhaps because there is still plenty for everyone even if the elite cream off the top. Perhaps there is still the chance of social churn, a kind of societal snakes and ladders. Perhaps there is the clue - once one group in society has a firm grip on the goodies they don't want to let go. They concrete in their grip. They think owning the goodies is a zero sum game. Which in our crowded society is the case. Pull up the ladder Jack.

[ltr]

We seem to have stagnation but China does not...

[ Really, really important to ask why.

For all the prejudiced bashing of The Economist, rapid growth in China is surely continuing. ]

[aragon]

I agree with UserFriendly and not Chris.

https://countercurrents.org/2020/04/theres-class-warfare-and-the-rich-are-winning/

"investment billionaire Warren Buffet told us, There’s class warfare, all right…but it’s my class, the rich class,

that’s making war, and we’re winning"

Regan/Thatcher executed an elite policy, just waiting for the opportunity provided by the oil shock crisis (1973

and 1979).

https://www.investopedia.com/terms/n/neoliberalism.asp

"The policies of neoliberalism typically supports fiscal austerity, deregulation, free trade, privatization, and a

reduction in government spending."

* Privatisation

* Monopolies

* Increased Financial Instability

* Inequality

* Globalisation

It wasn't emergence, it was a deliberate policy change by the political elite, from keynesism to neoliberalism!

A changr Tony Blair embraced.

Remember the elephant chart? We are the bit that falls, before the raid rise of the rich trunk.

https://www.economist.com/finance-and-economics/2016/09/17/shooting-an-elephant

"But the era of globalisation seemed to offer little for the people in between: households in the 75th to 85th

percentile of the income distribution (who were poorer than the top 15% but richer than everyone else) seemed

scarcely better off in 2008 than they had been 20 years before. They constituted a decile of discontent, squeezed

between their own countries’ plutocrats and Asia’s middle class."

https://www.spiked-online.com/2020/12/04/why-trumps-america-will-live-on/

"In their current guise, Democrats today can only offer redistribution of wealth, which itself can come in two

forms, each with inherent problems. A traditional socialist approach would hardly be in the interest of the

Democratic funders or the non-profit establishment, given it would involve siphoning off the wealth of people like

Jeff Bezos, who expended much of his media power, through the Washington Post, opposing Bernie Sanders’

presidential bid. Yet the progressive left continues to push this agenda, notably in big urban centres, a

continuing challenge to more oligarch-friendly liberals.

The other alternative would be to turn the middle and working class into future serfs – that is, people

increasingly dependent on what Marx called ‘the proletarian alms bag’ (1). This ‘oligarchal socialism’ – backed by

many tech oligarchs – would transfer funds, likely from the remaining middle class, to fund a ‘guaranteed annual

income’ to keep hoi polloi in subsidised apartments, spending their time in low-wage gig jobs, while they play

video games, smoke pot, drink and water their houseplants. It is an approach that allows the oligarchs to continue

accumulating the wealth and power they see as their due, while keeping the peasants separate from their

pitchforks."

Neoliberalism has failed, the old is dead, (but staks the UK), the new has yet to come.

Not only are the neoliberals wrong, but the opposite action is needed.

https://foreignpolicy.com/2020/04/29/federal-reserve-global-economy-coronavirus-pandemic-inflation-terminal-
deflation-is-coming/

"The economic suffering of the coronavirus crisis already dwarfs the disaster of 2008, and policymakers need to

respond accordingly. There should have been a Main Street bailout after 2008, and there should be People’s Quantitative Easing now."

Yes, an expansionary fiscal policy for the people.

[Blissex]

«At no stage in the last 20 years could we have said for sure: “the world economy has today entered a new era of permanently slow growth.”»

Actually since 1980 it has been official policy of most "Washington consensus" (reaganista or thatcherite) elites to cut wage growth by any means necessary, and in particular by creating unemployment (as "justified" by the NAIRU), and indeed GDP-per-person growth rates have halved, creating a permanent semi-recession and permanent glut of labour.

Just like with the obsession on "cognitive bias" our blogger seems to focus here on "stuff happens" explanations when instead it is pretty clear that despite a lot of messy events there have been clear persistent policies.

[ltr]

Vaccination is coming, but nonetheless this represents a profound failing of the public health system and Tories will take no responsibility and Labour leaders obviously do not care.

December 6, 2020

Coronavirus

UK

Cases   ( 1,723,242)
Deaths   ( 61,245)

Deaths per million   ( 900)

Germany

Cases   ( 1,177,126)
Deaths   ( 19,050)

Deaths per million   ( 227)

[Blissex]

«Laura Kuenssberg [...] Matthew Parris [...] I suggest it’s because political journalists and economists see the world differently. [...] Of course, political journalists can be forgiven for overlooking economic processes. [...] It is in this sense, rather than simple-minded partisanship, that the BBC is biased.»

Or there could be a simpler and less "wykehamist" point of view from which it is obvious that journalists and economists can be partisan, and that most journalists and economists, at least those who are given media prominence, are "sell-side". I mean, *Kuessenberg* as an example of "emergent" bias is a bit "optimistic".

As to the BBC it is not necessarily partisan, but I guess it has several people who are biased, not necessarily towards a specific party, but perhaps towards whatever the elite consensus is.
After all, it is on the public record that the hiring of BBC journalists have been vetted for decades for "reliability" by the security services.

For example my guess is that most BBC big cheese, both on the journalism and management sides, are neither tory nor labour, but mandelsonian whigs.

[Blissex]

«They think owning the goodies is a zero sum game. Which in our crowded society is the case.»

My usual guess is that since the improvement and diffusion of oil-fueled technology in the economy has pretty much peaked (S-curve) in "advanced" economies productivity improvement has slowed down so much that zero-sum is not that much of an exaggeration.

Conversely in China there are still many regions with stick porters, ox driven carts, or just old crap machines to replace with recent oil-fueled machines that productivity can still rise rapidly (from a low base).

https://www.latimes.com/archives/la-xpm-1995-09-17-mn-46789-story.html
http://news.bbc.co.uk/2/hi/asia-pacific/3287667.stm

[Blissex]

«Neoliberalism has failed»

Ah the usual delusional leftoid view: it has made a large minority much richer thanks to lower wages and higher asset prices, which is what it was designed to do. Seems like neoliberals have made it a big success *for themselves*, but that was what they wanted.

The political problem in our current era of mass rentierism is how to persuade most of that large minority addicted to lower wages and higher asset prices that is not in their long term interests. But considering that problem requires not suffering from the delusion that neoliberalism has "failed".

[ltr]

Conversely in China there are still many regions with stick porters, ox driven carts, or just old crap machines to replace with recent oil-fueled machines that productivity can still rise rapidly (from a low base)....

[ This is an important but now mistaken assertion. The development of infrastructure, relocation where productively necessary and technology advance has just about ended this. The advance in technology application has been astonishing and promises to continue so.

President Xi has continually emphasized the importance of rural development, and this emphasis is already set for the coming 5-year plan. ]

[aragon]

"The political problem in our current era of mass rentierism is how to persuade most of that large minority addicted to lower wages and higher asset prices that is not in their long term interests"

With the standard of living losses due to COVID-19, and much more Austerity how long before the worm turns?

Local Government is already on the bread-line (near bankrupt).

With wage freezes for the public sector, tax hikes for, inequitus, council tax and that is, just so far.

How long before it's an effigy of the chancellor been burnt on bonfire night?

Also given the Financial Instability of neoliberalism, how long before another financial crisis, assuming house prices don't collapse in the near future. Housing under water, unemployment soaring. With London/South East no longer insulated from the effects.

In the longer term the economy has been hollowed out and outsourced to the mercantilists including China.

When will the balance of trade bite us?

Welcome to a neoliberal future, the future is not bright. Neofeudalism?

[James Charles]

Not long now?

“ . . . our best estimate is that the net energy
33:33 per barrel available for the global
33:36 economy was about eight percent
33:38 and that in over the next few years it
33:42 will go down to zero percent
33:44 uh best estimate at the moment is that
33:46 actually the
33:47 per average barrel of sweet crude
33:51 uh we had the zero percent around 2022
33:56 but there are ways and means of
33:58 extending that so to be on the safe side
34:00 here on our diagram
34:02 we say that zero percent is definitely
34:05 around 2030 . . .
we
34:43 need net energy from oil and [if] it goes
34:46 down to zero
34:48 uh well we have collapsed not just
34:50 collapse of the oil industry
34:52 we have collapsed globally of the global
34:54 industrial civilization this is what we
34:56 are looking at at the moment . . . “

https://www.youtube.com/watch?v=BxinAu8ORxM&feature=emb_logo

[ltr]

Blissex:

Conversely in China there are still many regions with stick porters, ox driven carts, or just old crap machines to replace with recent oil-fueled machines that productivity can still rise rapidly (from a low base)....

[ China is strikingly advanced in technology development, adoption and use:

Congress, in 2011, simply stopped all participation by China in programs of the “International” Space Station.  Now, in 2020, China has already launched and manned a prototype space station, which will soon be followed by a complete International Space Station.  China has an advanced global positioning system.  A comprehensive satellite system.  China has sent an explorer to Mars.  China has a rover which has been exploring the far side of the Moon for almost 2 years now.

China has just launched a set of 4 vehicles to travel to and land on the Moon, to gather surface and subsurface samples and bring them back to Earth.... ]

[rsm]

"The economic climate, that’s what. Ben Friedman has shown that economic stagnation fosters intolerance and nationalism – perhaps because a sense of national decline leads to a yearning for the past."

I agree; we are currently stagnating economically, and Biden, representing an intolerant nationalism yearning for a return to normalcy, just got elected.

Also: the point about government deficits creating private savings ignores that big banks can decide to save by not buying gilts. The Bank of England buys gilts though, so that creates a market. The BoE credits banks with reserves; the banks have a corresponding liability attached to the reserves; that liability is easily Net Worth, which shows up as savings even though it is really a transfer of created money to the accounts of bank investors ...

Thirdly, interest rates have been declining for 700 years, so short-term relations between rates and growth are just analyzing noise.

https://www.visualcapitalist.com/700-year-decline-of-interest-rates/

Fourth, Blissex said:

"The political problem in our current era of mass rentierism is how to persuade most of that large minority addicted to lower wages and higher asset prices that is not in their long term interests"

Basic income (funded and inflation-proofed by central banks) should give everyone enough income to invest some of it in rising asset prices, which central banks are insuring anyway.

[Nanikore]

You seem to hold economists, including Nick Craft and Summers in high regard, but not journalists.

But I can remember when it was some astute journalists, not economists, that were criticising the policies imposed on countries inflicted by the Asian Financial Crisis. These were carried out under the recommendations of economists at the very heart of the mainstream - Stanley Fisher and Summers. But I remember journalists calling out the IMF's insistence on "further capital market deregulation" when the problem was capital market deregulation in the first place.

Journalists in some quality left-wing papers have also done a good job calling out economists, especially after 2008. They can sense that something is not quite right.

The Brexit result cannot be entirely, or even primarily, blamed on austerity. As some journalists, like Chakrobatty and Harris in the Guardian have noted, this is a result of long term problems developing in British capitalism - including the north south divide, deindustrialisation, low quality and low paying jobs and the associated effects on communities - together I would add with the impact of events such as rapid EU enlargement. With high rates of immigration and macro-policy that does not benefit large parts of the population sufficiently, even if there was an overall macro expansion, most likely the country would have still been divided over the European Union even if Remain narrowly won. Immigration started to become an issue from about 2000 - before austerity. Once this was linked to the EU and "taking back control of our borders" the referendum was lost. Craft is more of an economist than an historian. The situation that led to Brexit and the rise of the far right and populists in certain countries is much more complex than he makes out.

Summers, likewise, is very much linked to the rise of neo-liberalism and the current economic and political fall-out. His journalistic critics (including those behind The Insider) did an admiral job and a difficult job taking on the economics profession, including one of the three 'masters of the universe'.

Many of the economists responsible for the ideas behind economic policy that contributed to 2008 have not paid the consequences In fact many went on to get 'Nobel' prizes - Sargent, Fama,.. There has been little introspection within the discipline.

Krugman in the 1990s critised large scale Japanese government expenditure, saying it was 'unworthy of a great nation' (I remember, I was in Japan at the time). This was despite huge domestic savings, a current account surplus and very low interest rates. The Japanese had outlined the arguments well before his 1998 article. Krugman then used some of the same arguments used by the Japanese to justify high G/Y when the US started to have low interest rates and found itself in the same position decades later. A true chameleon.

Of course, journalists in the end could not take on economists and totally succeed. So I think you are underestimating the power of economists, and overplaying those of journalists. All I can say is we need journalists, and thank goodness there are some good ones.

[Nanikore]

I'm glad Blissex mentioned NAIRU. It highlights the point that austerity was not the fundamental reason behind Brexit. Neo-classical economists like macro-stabilisation to be centred on monetary policy run by a central bank that mechanically adjusts liquidity according to a highly questionable 'output gap'. You can see how this would affect regions and renters/asset owners differently and exacerbate inequalities, irrespective of whether macro policy was expansionary or contractionary. The view of neo-classical economists is that the zero lower interest rate bound is a special case where fiscal policy is the main form of stabilisation.

When things get back to 'normal', we go back to macro policy pre 2008.

The real causes of Brexit are perceptively outlined in today's Guardian. Rightly so, she argues the problems have been building up for a long timed, before austerity.

https://www.theguardian.com/commentisfree/2020/dec/08/london-bubble-england-levelled-up-north-wall-red-blue-voters

Kuessenberg is an excellent journalist; critical, takes risks, and has stepped on many powerful toes.

If you want analysis taken uncritically and congenially from business, bankers and economists, the man you want could be Faisal Islam. But maybe I am being unfair.

But anyway, the BBC is not the problem. Attention should be directed at the Daily Mail, Daily Telegraph and social media platforms.

[Blissex]

«austerity was not the fundamental reason behind Brexit.»

My usual claim here is that there was not one fundamental reason behind "Leave", but at least 3 major blocks that put together went over 50%. One of these, that was absent in the 1975 referendum, and has been indeed resentment in "pushed behind" areas against a globalist elite centred on propping up London and the south-east.

«monetary policy run by a central bank that mechanically adjusts liquidity according to a highly questionable 'output gap'.»

Central banks are not stupid, if they choose a "mechanical" policy that has certain consequences it is not because they cannot think of something better, but because they do want those consequences, or at least could not care less.

Or because the central bank cannot be the "loyal opposition", and if the political majority has all but mandated those policies they have to follow it.
The rule that the overall target is 2% "forces" the central bank to have an overall expansionary credit policy, targeting the "wealth effect", when fiscal policy is contractionary, and that has been the policy mix since 1980.

[Blissex]

«The real causes of Brexit are perceptively outlined in today's Guardian.»

That article summarizes many of the arguments that I often repeat here, But there are some points that are "optimistic":

«"Successive governments pumped up London’s economy because it was the path of least resistance, and they hoped the money would trickle outwards."»

That seems to me amazingly naive: the Conservative, New Labour, LibDem parties have pumped up the housing costs of (much of) the south-east to buy the votes of affluent property owners there, and to reward their core constituencies, as described by P Mandelson, C Umunna in “Labour would only win if the party championed aspirational voters who shop at John Lewis and Waitrose”.

«"To deflate London’s bubble while raising up the north is the only chance we have of levelling out, never mind levelling up. But mention that in polite circles and what’s the answer you get? More tumbleweed."»

To move businesses and jobs from the south-east to the "pushed behind" area would be indeed nice, but the consequence would be a huge crash of property prices in the south-east, and that's why "polite circles" are not that keen to do that.

It is impossible to merely "deflate" south-east property prices, or even to keep them stable, because it is a third-stage minskyian situation, where a lot of speculators invest only because of the "certainty" that prices will continue to double every 7-10 "forever", if that is no longer the case they will liquidate their positions as fast as they can, and then the whole thatcherite house of cards (the City to begin with) unravels, Argentina-in-the-1990s style.

[Blissex]

«But anyway, the BBC is not the problem. Attention should be directed at the Daily Mail, Daily Telegraph»

That seems to me very naive, as demonstrated by the constant threats from the Conservatives to the BBC and the previous takeover of the BBC by the Mandelson Tendency, because:

* The electoral impact of overt propaganda mouthpieces like "Daily Mail, Daily Telegraph" or some social media areas is quite small, because they preach to the already converted, that is their marketing strategy.

* The electoral impact of the BBC is much bigger because it is much more widely consumed, and by being more subtle by wrapping its propaganda in the appearance of being "even" it can swing voters.

Kuenssberg is a master at that, while she somewhat (but not much) "is critical, takes risks, and has stepped on many powerful toes", that is always within narrow ideological limits.

The usual "Westminster bubble" story is that of breathless reporting of minor conflict between factions within those narrow ideological limits (e.g. Johnson vs. May, etc.), and utterly partisan hostility to those outside them (e.g. Corbyn etc.).

[Blissex]

«When will the balance of trade bite us?»

That's the really big question. Interesting that someone else realizes that is the limiting factor.

As to that limiting factor, once scottish oil became depleted and the UK became a net importer of oil in 2007, exports of oil have been replaced by exports of property deeds and of treasury gilts. That can continue for a while, but it is a fragile situation. Everything depends on oil or property in this thatcherite system.

Some of my usual graphs:

https://1.bp.blogspot.com/-00MUXYqP2Us/V3-e-WNA5II/AAAAAAAAD-U/VbTXuSWoH-YOA0D8JX4bjTxJwWLeCtxOwCLcB/s640/tom%2Bhirst%2BUK%2Bproductivity.png

http://mazamascience.com/OilExport/output_en/Exports_BP_2016_oil_bbl_GB_MZM_NONE_auto_M.png

https://blissex.files.wordpress.com/2018/02/dataelectreuothersconsperhead1960to2015.png

[ltr]

Krugman in the 1990s criticized large scale Japanese government expenditure, saying it was 'unworthy of a great nation' (I remember, I was in Japan at the time). This was despite huge domestic savings, a current account surplus and very low interest rates. The Japanese had outlined the arguments well before his 1998 article....

[ This makes no sense. Please set down a reference when possible. ]

[rsm]

> «When will the balance of trade bite us?»

> That's the really big question. Interesting that someone else realizes that is the limiting factor.

Even more interesting is that a recent BIS working paper uses a DSGE model that includes a financial sector to counter that view. See https://www.bis.org/publ/work890.pdf

"[...] US households do not finance current account deficits with foreigners’ physical saving, but with digital purchasing power, created by banks that are more likely to be domestic than foreign."

Thus, the trade balance does not matter: as long as London traders create Eurodollars at will, physical trade goods will be imported. Gross financial flows dwarf, and determine, real trade flows.

It's interesting that a mainstream DSGE model that includes a financial component debunks the mainstream "gravity" trade theory. It doesn't matter how far away your imports come from. All that matters is how many dollars your banks print.

[Nanikore]

"reference if possible"

His NYT blog from this era seems to have been removed: Krugman, like most American economists and the IMF during the 1990s, was critical of large scale government expenditure and debt accumulation in Japan believing it was something akin to a banana republic and being used to prop up "zombie companies". He was in tune here with Moodys, Goldman Sachs and the IMF who also argued that the deficits and debt were unsustainable and the country would basically fall off a cliff. JGBs were basically junk bonds. Japanese economists at the time pointed out that the purchasers of the debt were Japanese investors themselves who lacked alternative investment opportunities. They were also passive investors who were unlikely to sell off Japanese government bonds en masse. In any case the country, they argued, could not be compared with small open economies with current account deficits, high dependence on foreign capital, and low amounts of domestic savings. There were contradictions here, as Krugman (and the IMF) often called for Japanese macro-expansion to close the bilateral current account deficit with the US.

Of course what the Japanese were saying is now conventional wisdom. It wasn't then - well not outside Japan anyway. The country was basically written off.

There were also major debates here between US educated Japanese economists (eg K.Ihori) and Japanese based ones. This debate took place in the Japanese language. This was well ahead of what would appear in Krugman's 1998 article on liquidity traps.

[Nanikore]

I agree Blissex, the issue for the UK is the trade deficit. If there are high domestic savings rates because of covid, this is not an immediate problem. But due to its industrial structure after decades of hollowing out and dependence on foreign capital, it will be. This is when government debt matters. It is in the context of an external accounts deficit.

Sterling is not the USD. It is not a currency denominated by the Pax Americana which everyone will buy in a crisis. Britain is a small open economy, even more vulnerable now with Brexit, where an exchange rate crisis is a real possibility.

It needs to guard its foreign relations. It must be sure that the Fed and ECB provides euros and dollars when there is extreme pressure on the pound.

[rsm]

Focusing on the current account is Trumpian in its simplicity. You are wilfully ignoring the size of financial flows. Your Model simply excludes 90% of reality ... Study your Mehrling: "Supply chains are payment chains in reverse." I.e., the payment system comes first.

"It must be sure that the Fed and ECB provides euros and dollars when there is extreme pressure on the pound."

Swap lines are an explicit and intentional sign of central bank coordination, and they are here to stay. Casting doubt upon them is hopelessly backwards. The UK has been using dollar swaps since the 1960s to manage its currency. The swap lines benefit the Fed too because it helps them manage the dollar. See https://www.bis.org/publ/work851.pdf

"This paper explores the record of central bank swaps to draw out four themes. First, this recent device of central bank cooperation had a sustained pre-history from 1962-1998, surviving the transition from fixed to floating exchange rates. Second, Federal Reserve swap facilities have generally formed a part of a wider network of central bank swap lines. Third, we take issue with the view of swaps as previously used only to manage exchange rates and only more recently to manage offshore funding liquidity and yields. In particular, we spotlight how in the 1960s the Federal Reserve, working in conjunction with the BIS and European central banks, repeatedly used
swaps to manage eurodollar funding liquidity and Libor yields. BIS, Bank of England and Swiss National Bank archives show an intention to offset seasonal disturbances to funding liquidity in order to prevent eurodollar yield spikes. Fourth, this earlier cooperation underscores the Federal Reserve’s use of swaps to prevent eurodollar shortages from interfering with the transmission of its domestic monetary policy. The
US interest in the eurodollar market, and thus its self interest in central bank cooperation, is unlikely to end even when Libor is replaced as the benchmark for US floating-rate loans and mortgages."

[Nanikore]

Rsm, at the end of the day the problems in Britain, including its external accounts lie in the real economy. And no amount of paper (digital or otherwise) and financial engineering can change that. Until then we are on borrowed time.

True about central banks. But that settlement is ultimately a result of a major event that ended in 1945.

We could face a new 'normal'. Covid, Brexit, China and Trump have shown us that the unthinkable can happen.

You must be prepared for worse case scenarios, including those unimaginable by Model.

[rsm]

@ Nanikore:

I apologize, if my tone sounded a touch impatient. I just think you lot should take advantage of a marvelous opportunity to call upon politicians, economists, journalists, and bloggers alike to acknowledge openly that central banks have within their grasp the power to solve the economic problem. Real production is constrained by financial shocks, not physical resources. (This current pandemic should be supportive enough of this claim.) We can thus end financial uncertainty. Everyone can be supplied enough money to access vast, persistent surplus. Bank runs are by definition avoidable when one bank is at the top of the hierarchy; the existing central bank unlimited currency swap network acts as a proxy for one world bank issuing the best money. Inflation risk can be eliminated with inflation swaps, which central banks can make markets in as needed to manipulate breakevens to where they want them. We should encumber ourselves with this knowledge and demand an expansion and liberal use of central bank currency and inflation swaps to end financial uncertainty about accessing basic resources.

Society now uses artificial scarcity of money to define goals. But this microfoundation's utility and productivity is maximized when it sets its own goals, regardless of what economists think it should be doing.

> You must be prepared for worse case scenarios, including those unimaginable by Model.

Finance gives us the tools to eliminate financial uncertainty, at least. Then it is up to you and me to do the work needed to deal with the physical uncertainty in our lives. We can cooperate without needing poverty to exist because money must be kept scarce to avoid upsetting Model ...

[James Charles]

"Krugman in the 1990s critised large scale Japanese government expenditure, . . . "

Not only Krugman?

From my favourite 'destroyer of industrial civilisation'.

Prof. R.A. Werner shows {in his book, New Paradigm in Macroeconomics} that government spending will only increase nominal GDP if the government finances the spending by borrowing the {new} money from the private banking system or is financed by money created by the central bank. Government spending financed by borrowing from the public will have very little effect.
If not financed by borrowing from a bank or from the central bank, fiscal policy will be offset by falls in other components of aggregate demand. This is because the velocity of the real circulation is relatively constant.
' . . . whereby the coefficient for ∆g is expected to be close to –1. In other words, given the amount of credit creation produced by the banking system and the central bank, an autonomous increase in government expenditure g must result in an equal reduction in private demand. If the government issues bonds to fund fiscal expenditure, private sector investors (such as life insurance companies) that purchase the bonds must withdraw purchasing power elsewhere from the economy. The same applies (more visibly) to tax-financed government spending. “With unchanged credit creation, every yen in additional government spending reduces private sector activity by one yen. “ '
"The empirical results for the Japanese case have been unambiguously supportive. The Japanese asset bubble of the 1980s was due to excess credit creation by banks for speculative purposes, largely in the real estate market. The apparent velocity decline is shown to be due to a rise in credit money employed for financial transactions, while the correctly defined velocity of the real circulation is found to be very stable“
As for favouring private credit creation, he is in favour of this as, bank credit creation for "transactions that are part of GDP, has been identified as the main determinant of nominal GDP growth."
http://eprints.soton.ac.uk/339271/1/Werner_IRFA_QTC_2012.pdf

See, also?
'Princes of the Yen: Central Bank Truth Documentary'
https://www.youtube.com/watch?v=p5Ac7ap_MAY

[James Charles]

"Real production is constrained by financial shocks, not physical resources."

Not for very long?

“ . . . our best estimate is that the net energy
33:33 per barrel available for the global
33:36 economy was about eight percent
33:38 and that in over the next few years it
33:42 will go down to zero percent
33:44 uh best estimate at the moment is that
33:46 actually the
33:47 per average barrel of sweet crude
33:51 uh we had the zero percent around 2022
33:56 but there are ways and means of
33:58 extending that so to be on the safe side
34:00 here on our diagram
34:02 we say that zero percent is definitely
34:05 around 2030 . . .
we
34:43 need net energy from oil and [if] it goes
34:46 down to zero
34:48 uh well we have collapsed not just
34:50 collapse of the oil industry
34:52 we have collapsed globally of the global
34:54 industrial civilization this is what we
34:56 are looking at at the moment . . . “

https://www.youtube.com/watch?v=BxinAu8ORxM&feature=emb_logo

Or,
“Global peak oil production may have already happened in October of 2018 (Will covid-19 delay peak oil? Table 1). It is likely the decline rate will be 6%, increasing exponentially by +0.015% a year (see post “Giant oil field decline rates and peak oil”). So, after 16 years remaining oil production will be just 10% of what it was at the peak. “
http://energyskeptic.com/2020/climate-change-dominates-news-coverage-at-expense-of-more-important-existential-issues/

[Blissex]

«“the correctly defined velocity of the real circulation”»

Is an hallucination by monetarists, like the "quantity of money". As it there was only one "velocity" or only one "money".

«“With unchanged credit creation, every yen in additional government spending reduces private sector activity by one yen."»

That is more hallucination by monetarists. Even if tax-and-spend were to result in close to 100% crowding out, the mix of spending and the distributional impact would be different and would have a different impact on "growth", of course could be negative in the aggregate in principle.

But it is going to be positive in practice, because public spending and investment would be more targeted at unused resources than private spending and investment. Then of course that positive impact would need to be "accommodated" by monetary expansion, else it would be choked, but that is true of any non-deflationary growth.

Going back to the Economists vs. Journalists theme of this post, that kind of discussion might not be entirely well represented by either, because most of both Economists and Journalists are "sponsored" by some side affected by distributional impacts. Most of both categories are not "wykehamist" philosopher-kings...

[ltr]

[Krugman's] NYT blog from this era seems to have been removed: Krugman, like most American economists and the IMF during the 1990s, was critical of large scale government expenditure and debt accumulation in Japan believing it was something akin to a banana republic and being used to prop up "zombie companies". He was in tune here with Moodys, Goldman Sachs and the IMF who also argued that the deficits and debt were unsustainable and the country would basically fall off a cliff....

[ Forgive me, but Krugman did not work for the NYTimes in the 1990s. Also, I know Krugman, a to z, and this is simply incorrect. Krugman never, ever criticized Japanese government spending efforts during the 1990s.

Later, Krugman realized that in fact Japan had repeated pretended to stimulate the economy by increasing spending during the 1990s, but the increases were only announced and not followed by actual spending.

Japanese fiscal policy during the 1990s was pretense.

I will set down the reference when I have a moment. ]

[ltr]

http://krugman.blogs.nytimes.com/2008/12/01/people-should-be-reading-adam-posen/

December 1, 2008

People Should be Reading Adam Posen
By Paul Krugman

Everyone's looking back to the 1930s for policy guidance — and that's a good thing. But we don't have to go back that far to see how fiscal policy works in a liquidity trap; Japan was there only a little while ago. And Adam Posen's book, * especially on, "Fiscal Policy Works When It Is Tried," is must reading right now.

* http://www.petersoninstitute.org/publications/chapters_preview/35/2iie2628.pdf

September, 1998

Restoring Japan's Economic Growth
By Adam S. Posen

[Nanikore]

Adam Posen is not an authority on Japan. I regard knowledge of the language a basic prerequisite. The situation in Japan is more complex than you can possibly understand with the English language literature. Posen and Krugman are non-starters. You have to understand the debate in Japan - and that is in Japanese even to begin to understand what really happened there.

I can't find the particular column/blog I was looking for, but even in the late 1990s/early 2000s Krugman was saying things like this in places like the NYT:

"What continues to amaze me is this: Japan's current strategy of massive, unsustainable deficit spending in the hopes that this will somehow generate a self-sustained recovery is currently regarded as the orthodox, sensible thing to do - even though it can be justified only by exotic stories about multiple equilibria"

The Old Krugman talks about "bridges to nowhere". The New Krugman says that countries should "dig holes and refill them".

During the 1990s the Old Krugman also supported structural adjustment policies (deregulation, and macro contraction) following the Asian Financial Crisis, in sync with his mentor, Stanley Fischer. He blamed the problems on corruption. (The New Krugman does not use these arguments in relation to the Euro and the southern periphery).

Wrt to Japan, it is clear that other people have noticed twists and turns in Krugman's position - and it follows the NYT including roughly the time period we are talking about (late 1990s, early 2000s).

You can read more about it here:
https://www.themoneyillusion.com/when-did-krugman-change-and-why/

You might have better things to do than read that, and I probably agree you do. But Japan itself is not unimportant. But to understand it read a Japanese economist or historian who speaks the language and really knows about the country. Don't read people who see ISLM and Samuelson crosses, look at some numbers and suddenly think they can call themselves Japan experts. Believe me, particularly when we are talking about things like the JGB market, they cannot begin to understand what those numbers really mean.

[Nanikore]

Rsm thanks for the reference.

[ltr]

Adam Posen is not an authority on Japan. I regard knowledge of the language a basic prerequisite. The situation in Japan is more complex than you can possibly understand with the English language literature. Posen and Krugman are non-starters. You have to understand the debate in Japan - and that is in Japanese even to begin to understand what really happened there....

[ Good grief, I was completely wrong. Krugman and Posen were wrong; Krugman especially so.

I am so grateful for your correction. I bragged about knowing Krugman's work, but here I was wrong and had never read the article you referenced and that article turns out to have been terribly wrong.

Thank you so so much. Now yo read your comments again and think!

Excellent comments. ]

[aragon]

James Charles

You might want to visit a site called the oil drum http://theoildrum.com/node/10249

And where are they now?
http://theoildrum.com/node/10250

And why it was archived in 2013

rsm

I guess the balance of trade matters, because when push comes to shove, e.g during COVID-19 or War, real resources, production and logistics matter.

What are the Chinese doing with the currency.

https://foreignpolicy.com/2020/12/03/how-china-is-buying-up-the-wests-high-tech-sector/

"To be sure, start-ups in Oxford, Cambridge, Silicon Valley, and beyond benefit from the Chinese cash—and, by extension, so does the broader economy. But at what price? If the United States and Europe hand over access to their most innovative sectors to their competitors, they have only themselves to blame when they lose the race."

In a word "Power"

Technology/Resources etc.

[ltr]

Nanikore, your comments are very important and have allowed me to solve a number of problems. Again, you were right about Krugman and I was wrong and would have remained wrong but for your comments; this means I would have been teaching incorrectly since I refer to the experience of Japan and how Krugman supposedly analyzed the experience.

Now I will make corrections and expressly refer to your comments.

Excellent, and thank you so much for correcting me.

[Nanikore]

You're welcome ltr, I am glad my scribblings lead to some use somewhere.

Rsm, don't think those central bank arrangements can unwind. Think of what happened in the 1920s when France forced gold conversion by the Bank of England. When the multilateral system breaks down this is what happens. What France did absolutely understandable in terms of its own risk management.

Attention now is on this Brexit Deal. The Times thinks the EU is not playing fair. Of course the EU is. It must not give ground: it cannot allow access to its single market if a country is not going to stay in harmony with the rules agreed by the other 27. A lot is at stake in this deal for the EU. My concern is they might flinch.

Britain is playing an old game. The London Eurodollar market was created as a way of circumventing US financial regulations (Regulation Q). This also played a role in the breakdown of the Bretton Woods capital controls
system, financialisation, and ultimately successive financial crises later.

The Tory's dream is to keep this free-riding tradition alive. Maintain London and the UK as a light touch European centre on financial and labour regulations, while others struggle to maintain standards.

This can't be allowed to happen from the EU's perspective. It would lead to the single market's and EU's unravelling.

And another thing; Europe's financial centre should be in the European Union. Is Japan's financial centre in Taipei? EU should not only be protecting its ground, it should be expanding it.