"Ample theoretical reasons to worry about debt..."

Rogoff and Reinhart seem to be debunked, at least somewhat, but fear not -- the result is still true!

9.  There are still ample theoretical and empirical reasons to worry about debt.  To name just a few:

a.  "Crowding out": the logic of Clintonomics.  If the government borrows too much, the private sector doesn't have money to invest.  Pretty certain that this doesn't apply in America or Europe right now, but it certainly has and could in other times and places.

Government deficits are what gives the private sector money to invest. If the government taxed back all the money it ever printed, I would have no money for anything.

b. Debt crisis: these are ugly, and often accompanied by other ugly, destructive things,like hyperinflation.  Of course causality runs both ways; countries in trouble are more likely to get into a debt crisis.  But the more debt you have on the books, the higher the risk that a downturn tips you into crisis.  Sudden fiscal contractions are much worse for the economy and other living things than gradual winddowns.  

Hyperinflation is definitely a problem, and the reason to worry about running too high debt/deficits. Good thing we have no sign of it here, and Japan has had no sign of it for a generation and counting.

 c. Debt dynamics driving fiscal contraction:  Well short of an all-out crisis, if your interest rates start rising faster than inflation, you start having to either raise taxes or cut spending; usually both.  That slows your GDP, at least in the near term.  

 

Interest rates are set by the Government, up and down the yield curve depending on how they choose to manage their QE. If you see rates go up, you don't actually need to do anything unless you want the rates to be different.

d. Income redistribution: worth noting that repaying a big debt load usually involves cutting spending or raising taxes on middle class folks who have to cut their own spending, and giving that money to capital owners.  Some of those owners are outside your country, so you don't even get derivative benefits.

Repaying debt involves changing numbers in a spreadsheet. Paying down debt involves running surpluses, but you would only do this if there was a problem with inflation. How you would run surpluses through taxes and spending, and where that incidence falls, depends on implementation.

Our Internet Surveillance State

Just a great post from Bruce Schneier:

So, we're done. Welcome to a world where Google knows exactly what sort of porn you all like, and more about your interests than your spouse does. Welcome to a world where your cell phone company knows exactly where you are all the time. Welcome to the end of private conversations, because increasingly your conversations are conducted by e-mail, text, or social networking sites.

And welcome to a world where all of this, and everything else that you do or is done on a computer, is saved, correlated, studied, passed around from company to company without your knowledge or consent; and where the government accesses it at will without a warrant.

Welcome to an Internet without privacy, and we've ended up here with hardly a fight.

His examples are particularly good. Sort of like Elementary.

What is Bitcoin?

Might as well wander into the fray.

I won't say whether Bitcoin is "money" or not, because that depends on your definition of "money". It is certainly not a "fiat currency" because fiat currencies are manifestations of a Sovereign's power to set and enforce taxes. If the US$ can tax you, you will need US$ to extinguish that tax obligations, which mean you will need US$. The Schelling Point, or Nash equilibrium (pick your model) is not spontaneous -- it is an outcome of demand creation generated by power.

Now, there may be users who do wish to use it as a store of value, and to that extent it may be money in some true Schelling or Nash sense, but this will only be true if it actually wins. Which it won't. Bitcoin is not a good alternative to your sovereign's scrip, nor is it a better mechanism to hold wealth than land or other real assets.

It is also not a Ponzi scheme because it does not rely on new investors to fund payouts to old investors.

It is certainly a vehicle for financial speculation, much like a penny stock except there are no real assets at all behind it. Making it, perhaps, a perfect, purely speculative instrument. It's ironic that it's championed by gold bugs who tend to be suspicious of flimsy specie.

Ron Johnson, Apple, JC Penny

Ron Johnson, after 18 months where he saw same-store sales fall by 30%, and the share price half, is out of JC Penny. I feel sorry for the guy.

First, JC Penny's difficulties long predated Johnson coming on board. The mid-market department store chain has been under pressure as higher-end specialty stores pick off more affluent customers, and discounters pick off the price sensitive. And then there are online competitors putting pressure on retail on general.

These structural problems put JC Penny in a difficult position between serving it's shrinking base of existing customers--who by definition are particularly loyal to JC Penny since they haven't defected yet--or trying to find a new mass market. It's the classic position of an incumbent being disrupted, and it's a tough place to be.

I don't know to what degree Johnson was running his old Apple playbook, or to what degree he was relying on research, analytics, and calculated hunches to try and find a new market. I'm not sure who this market was (or could be). If Johnson reflexively reached for his old tool kit, then there could be hope yet for someone to come, focus on customer needs in a disciplined way, and find a market they can successfully contest. If Johnson was doing the best he could with data, then I'm not sure what options JC Penny has left.

Wet pavements don't cause rain

Megan has a good, conventional wisdom post, on the mechanics of debt and deflation in Japan. Japan is a fantastic case study because it has run up massive, truly massive, deficits, and has had extremely loose monetary policy for almost a generation now, and still remains in the post-crash funk it was in after its property bubble popped in the mid-80s. And yet, despite all of this, priors around deficits and monetary policy remain unchanged. Here's Megan:

I join most economists in thinking that deflation is bad, and it will be good if Japan can stop it.  Deflation causes money hoarding--if that dollar you have now will be worth more later, it only makes sense to spend it later.

Deflation does not cause money hoarding any more than wet pavements cause rain. Money hoarding--driven by animal spirits--causes deflation when the Government does not meet it's responsibility as the currency monopolist to print money that people desire to hoard. When you can hoard through paying lower taxes (or getting a cheque from the Government) you do not need to try and hoard by skimping on your grocery bill, and thus reducing someone else's income.

Similarly, think through the assertions here and compare them to what actually happens in real life:

Deflation is good for creditors.  But it's terrible for debtors.  Say that business is slow and your mortgage is really starting to pinch.  If inflation is 2-3%, you just need to hold on a bit; every year, the real value of your mortgage will shrink, making it easier to pay.

Really? If your nominal income stays the same and your nominal mortgage stays the same, how will a change in the real value of anything have any impact?

Debt is nominally denominated, it's just a number in a spreadsheet somewhere, just as currency is. Nominal problems need nominal solutions, otherwise they become real problems and you get high unemployment and the various social ills that come from that.

Do not make a vice out of virtue

Nice article by James Surowiecki on the "war-on-savers":

But, to his detractors, Bernanke is guilty of waging a “war on savers”—fleecing people, especially retirees, of hundreds of billions of dollars that they could have earned in interest. Among many conservatives, this notion has become mainstream. Last year, both Mitt Romney and Paul Ryan regularly attacked the Fed for keeping interest rates too low, and, when Bernanke testified before Congress in February, Senator Bob Corker, of Tennessee, upbraided him for “throwing seniors under the bus.”

Certainly, it’s not the easiest time to live off interest income. The average rate on a savings account is less than 0.25 per cent. Long-term certificates of deposit offer rates well below inflation, and even a ten-year government bond yields less than two per cent. No wonder people with lots of savings want the Fed to start tightening—to stop buying bonds, and to raise interest rates. But most Americans depend on wages and salaries for their livelihood, not on interest income, and higher interest rates would hurt the job market, which is still weak, with unemployment near eight per cent and wages barely rising. Also, most Americans have more debt than savings, which means that they benefit directly from lower interest rates

Lots of assumptions, let's see what's actually true.

First, it is true (but an oft neglected fact) that interest rates have a fiscal knock-on effect through the interest rate channel. Low rates mean low interest income, which is a fiscal contractor just as higher taxes of lower government spending is.

Second, to the extent that low interest rates are fiscally contractionary, it is not at all clear that higher rates would hurt the economy. Americans do depend on wages, but wages depend on sales, and sales depend on people having money in their pocket. Higher rates put more money in peoples' pockets.

Lastly, it is not true that most Americans have more debt than savings. On a net basis, the non-Govt sector is a net lender, not a net borrower, and we know this because the Govt sector has an outstanding multi-trillion dollar debt -- money which it has spent but not collected. That money must be somewhere. And within the non-Govt sector, horizontal lending must, by accounting, net out to zero.


I think it is fair to consider savers to be collateral damage, since they harm they are suffering is incidental to the intentions of Government officials and regulators alike. Ultimately, only higher deficits, and more fiscal transfer, will sate their savings desire and begin to generate aggregate demand again.

What price is wrong?

Krugman tries to distinguish between Austrians vs Monetarists as two groups arguing about what is being priced incorrectly. The assumption is that something is price incorrectly because we have a market which is failing to clear (unemployment):

As I see it, the whole structural/classical/Austrian/supply-side/whatever side of this debate basically believes that the problem lies in the labor market. (I know, the Austrians will deny it — but it doesn’t matter what you say about their position, any comprehensible statement leads to angry claims that you don’t understand their depths). For some reason, they would argue, wages are too high given the demand for labor. Some of them accept the notion that it’s because of downward nominal wage rigidity; more, I think, believe that workers are being encouraged to hold out for unsustainable wages by moocher-friendly programs like food stamps, unemployment benefits, disability insurance, and whatever.

As regular readers know, I find this prima facie absurd — it’s essentially the claim that soup kitchens caused the Great Depression. But let’s stick with the economic logic for now.

So what’s the alternative view? It’s basically the notion that the interest rate is wrong — that given the overhang of debt and other factors depressing private demand, real interest rates would have to be deeply negative to match desired saving with desired investment at full employment. And real rates can’t go that negative because expected inflation is low and nominal rates can’t go below zero: we’re in a liquidity trap.

My question is, suppose what's wrong is that there are insufficient Net Financial Assets (Equity) to supply the demand for private sector savings (broadly, and precisely defined)? In this model, the extra required savings, at the sector level, aren't available for any price and so the market doesn't clear. Deflation doesn't help, because it makes real debt burdens worse, and low interest rates don't help because ameliorate and exacerbate the issue at the same time.