It lets the Treasury continue to spend (which is good) and there don't seem to be too many immediate cuts (which is also good). However, it has codified the current deficit and I think that the non-Govt sector is still at its limit of leverage. So I do not see private sector credit expansion in the near future, and I also don't see a material increase in Government deficit spending either. This will put a lid on AD, which may or may not be sufficient to keep equities subdued.
What has been a good investment in Japan since it's crash in the 1980s? Answer: Nothing.
Warren raises an interesting point here:
Looking back at past cycles it seems the support from private sector credit expansions that ’shouldn’t have happened’ has been overlooked, raising the question of whether what we have now is the norm in the absence of an ‘unsustainable bubble.’ For example, would output and employment have recovered in the last cycle without the expansion phase of sub prime fiasco? What would the late 1990’s have looked like without the funding of the impossible business plans of the .com and y2k credit expansion? And I credit much of the magic of the Reagan years to the expansion phase of what became the S and L debacle, and it was the emerging market lending boom that drove the prior decade. And note that Japan has not repeated the mistake of allowing the type of credit boom they had in the 1980’s, accounting for the last two decades of no growth, and, conversely, China’s boom has been almost entirely driven by loans from state owned banks with no concern about repayment.If anyone has first had experience with Japan over the last 30 years, please write in.
So my point is, maybe, at least over the last few decades, we’ve always needed larger budget deficits than imagined to sustain full employment via something other than an unsustainable private sector credit boom? And with today’s politics, the odds of pursuing a higher deficit are about as remote as a meaningful private sector credit boom.
Welcome to nothing.
There is a simple solution to “unsustainable private sector credit booms”: get rid of fractional reserve banking. Abraham Lincoln opposed it. Thomas Jefferson opposed it. Milton Friedman opposed it. Mervyn King, governor of the Bank of England opposes it. Apart from the Wall Street crooks who benefit from it and the politicians they’ve bought, who backs it?
ReplyDeleteThat's not a simple solution.
ReplyDeleteIt just moves the expansion to the Fiat arena - replacing an insurance policy with Fiat notes in vaults.
The currency issuer is already captured by Corporatism. So how is there going to be any change? The corporate masters will simply lobby for more notes to put in their vaults.
Neil, If corporatism or the private sector effectively controls the central bank, then there is not much the relevant country can do. And given that there are allegedly ten bank funded lobbyists for every member of Congress, that could be an accurate description of the US.
ReplyDeleteHowever if the government of a country really is a government, that is if it really is in charge, then it should be able to enforce a steady annual increase the monetary base, at the same time as banning or restricting the creation of horizontal money. Milton Friedman thought this would be perfectly feasible.
That would at least prevent gyrations in the total money supply, which would improve stability.
It's also perfectly feasible in the current system with decent bank capital controls.
ReplyDeleteAgain a dampening system on the Credit money part of the economy to stop it expanding and contracting too much.
And that system has failed due to the lobbying power of the banks.
So I'm sceptical of any control system short of bank nationalisation. The temptation to 'clip the coins' somehow is always going to be there. History shows that.
Neil & Ralph: I would simply require any debt issuer to keep that loan on its books until maturity.
ReplyDeleteMaking good credit decisions -- ie. assessing whether a loan will be paid back or not -- is important, value adding work. Anything that undermines this (which includes having the government do the vetting) is likely to create credit bubbles
Winter: Re the debt issuer keeping the loan, as you probably know, the great Warren Mosler agrees with you. But if not, see item No 1 here:
ReplyDeletehttp://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html
Re your suggestion that is ALL that needs to be done, it strikes me the latter restriction on bank activity alone does not deal with the pro-cyclical nature of commercial bank lending. So I’m still in favour of curtailing fractional reserve banking.
Ralph: What element of "fractional reserve banking" do you mean? The conceit that a bank lends out a "fraction" of it's "reserves" (which we know does not represent reality)?
ReplyDeleteWinter: I mean a system under which commercial banks only need to keep a small “fraction” of their total assets / liabilities at their central bank. What might be called the “opposite” of fractional reserve is so called full reserve. Under full blown full reserve, ALL money deposited in banks is then deposited at the central bank, so commercial banks do no lending. Lending is done by institutions funded by entirely by shareholders. That’s sometimes called “narrow banking”. I think Dennis Kucinich favours that system.
ReplyDeleteAn alternative, a compromise between full and fractional is to force depositors to chose between two types of account. 1. 100% safe and state backed accounts. Money in these accounts is deposited at the central bank, and little or no interest is earned. 2. Accounts where money is lent on to commerce or to those wanting mortgagtes, etc. In this case interest is earned, but there is no state backing – and quite right: it’s not the taxpayers’ job to subsidise commerce.
The latter system is advocated here:
http://www.positivemoney.org.uk/wp-content/uploads/2010/11/NEF-Southampton-Positive-Money-ICB-Submission.pdf
I can't say I have very much first hand knowledge. But I did spend 5 weeks living with a family back in 2000. My impression was that the recession/depression/lost years were pretty much unnoticeable. It was just very normal times. They weren't experience any real estate or building booms, but they were experiencing the normal technological growth such as cell phones and internet, etc. (and in cell phones they were quite ahead of where the U.S. was). No one really mentioned or talked about the poor economy.
ReplyDeleteI think the difference with Japan, is that their corporate/economic structure tries to avoid any layoffs and unemployment. Since there were no widespread unemployment, there was no experience of being in a downturn or depression.
Ralph: You've been around MMT circles for a while, so I'm surprised to hear you making this argument.
ReplyDeleteA bank's ability to lend is unrelated to what fraction of its reserves it needs to deposit at the central bank.
Devin: Good point!