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.....John Maynard Keynes in
The General Theory of Employment, Interest and Money:
For although the amount of his own saving is unlikely
to have any significant influence on his own income,
the reactions of the amount of his consumption
on the incomes of others makes it impossible for
all individuals simultaneously to save any given
sums. Every such attempt to save more by reducing
consumption will so affect incomes that the attempt
necessarily defeats itself. It is, of course, just as
impossible for the community as a whole to save
less than the amount of current investment, since the
attempt to do so will necessarily raise incomes to a
level at which the sums which individuals choose to
save add up to a figure exactly equal to the amount
of investment.
....In essence, the paradox of thrift is a fallacy of composition.
Whilst it may be perfectly rational for one household
(or section of the economy) to save more, if everyone
tries to save more, total income is lowered. If you aren’t
spending, then neither are the people who depend upon
you for their source of income. Firms won’t invest if
there is no demand for their products, and we end up in a
nasty downward spiral....
As Parenteau points out, “The financial balance map
forces us to recognize that changes in one sector's
financial balance cannot be viewed in isolation, as is the
current fashion. If a nation wishes to run a persistent
fiscal surplus and thereby pay down government debt,
it needs to run an even larger trade surplus, or else the
domestic private sector will be left stuck in a persistent
deficit spending mode.”....
The lessons of history
In early 2009, Christina Romer, Chair of the Council of
Economic Advisers, gave a speech laying out six lessons
from the Great Depression.3
Lesson I: Small fiscal expansion has only small effects.
Lesson II: Monetary expansion can help to heal an
economy even when interest rates are near zero.
Lesson III: Beware of cutting back on stimulus too
soon.
Lesson IV: Financial recovery and real recovery go
together.
Lesson V: Worldwide expansionary policy shares the
burdens and the benefits of recovery.
Lesson VI: The Great Depression did eventually end.
Of relevance to our current concerns are Lessons III and V.
The huge monetary expansion caused by the U.S. leaving
the Gold Standard seems to have produced remarkable
results in terms of real growth: the U.S. economy grew
by 11% in 1934, 9% in 1935, and 13% in 1936 in real
terms! This lulled the authorities into thinking that all
was well with the system again......
If the examples of history are ignored (as is all too often
the case) then policy error is likely to be a serious source
of deflationary pressure. This is the last thing a debtladen
economy needs, especially a debt-laden economy
that is teetering on the brink of deflation anyway. But
that doesn’t mean that policy makers won’t try to tighten.
Indeed, one of the world’s worst economists and a
paragon of orthodox belief, Alan Greenspan, opined in
a recent Wall Street Journal OpEd that “an urgency to
rein in budget deficits” is “none too soon.” Did you need
more evidence that this was a really bad idea!?!....
On one side, the Austerians and the (albeit
invisible) bond vigilantes argue that unless governments
act, there will be sovereign debt crises left, right, and
center. On the other side, the Keynesians (like me) argue
that tightening will lead to a relapse into recession.
....There are a couple of bond markets that
are still essentially at fair value (based on our measures):
Australia and New Zealand both offer government bonds
that look to be fairly priced. Are we happy about buying
fair-priced bonds? Of course not. We are happy only
when we buy cheap assets. However, these fair-priced
bonds provide us with some useful insurance, without
which our portfolios would be exposed to intensifying
short-term deflation pressure. If deflation does arise,
most likely we will be on the look-out for longer-term
insurance against inflation. Ultimately, I suspect that
is where we will end up.
.....John Maynard Keynes in
The General Theory of Employment, Interest and Money:
For although the amount of his own saving is unlikely
to have any significant influence on his own income,
the reactions of the amount of his consumption
on the incomes of others makes it impossible for
all individuals simultaneously to save any given
sums. Every such attempt to save more by reducing
consumption will so affect incomes that the attempt
necessarily defeats itself. It is, of course, just as
impossible for the community as a whole to save
less than the amount of current investment, since the
attempt to do so will necessarily raise incomes to a
level at which the sums which individuals choose to
save add up to a figure exactly equal to the amount
of investment.
....In essence, the paradox of thrift is a fallacy of composition.
Whilst it may be perfectly rational for one household
(or section of the economy) to save more, if everyone
tries to save more, total income is lowered. If you aren’t
spending, then neither are the people who depend upon
you for their source of income. Firms won’t invest if
there is no demand for their products, and we end up in a
nasty downward spiral....
As Parenteau points out, “The financial balance map
forces us to recognize that changes in one sector's
financial balance cannot be viewed in isolation, as is the
current fashion. If a nation wishes to run a persistent
fiscal surplus and thereby pay down government debt,
it needs to run an even larger trade surplus, or else the
domestic private sector will be left stuck in a persistent
deficit spending mode.”....
The lessons of history
In early 2009, Christina Romer, Chair of the Council of
Economic Advisers, gave a speech laying out six lessons
from the Great Depression.3
Lesson I: Small fiscal expansion has only small effects.
Lesson II: Monetary expansion can help to heal an
economy even when interest rates are near zero.
Lesson III: Beware of cutting back on stimulus too
soon.
Lesson IV: Financial recovery and real recovery go
together.
Lesson V: Worldwide expansionary policy shares the
burdens and the benefits of recovery.
Lesson VI: The Great Depression did eventually end.
Of relevance to our current concerns are Lessons III and V.
The huge monetary expansion caused by the U.S. leaving
the Gold Standard seems to have produced remarkable
results in terms of real growth: the U.S. economy grew
by 11% in 1934, 9% in 1935, and 13% in 1936 in real
terms! This lulled the authorities into thinking that all
was well with the system again......
If the examples of history are ignored (as is all too often
the case) then policy error is likely to be a serious source
of deflationary pressure. This is the last thing a debtladen
economy needs, especially a debt-laden economy
that is teetering on the brink of deflation anyway. But
that doesn’t mean that policy makers won’t try to tighten.
Indeed, one of the world’s worst economists and a
paragon of orthodox belief, Alan Greenspan, opined in
a recent Wall Street Journal OpEd that “an urgency to
rein in budget deficits” is “none too soon.” Did you need
more evidence that this was a really bad idea!?!....
On one side, the Austerians and the (albeit
invisible) bond vigilantes argue that unless governments
act, there will be sovereign debt crises left, right, and
center. On the other side, the Keynesians (like me) argue
that tightening will lead to a relapse into recession.
....There are a couple of bond markets that
are still essentially at fair value (based on our measures):
Australia and New Zealand both offer government bonds
that look to be fairly priced. Are we happy about buying
fair-priced bonds? Of course not. We are happy only
when we buy cheap assets. However, these fair-priced
bonds provide us with some useful insurance, without
which our portfolios would be exposed to intensifying
short-term deflation pressure. If deflation does arise,
most likely we will be on the look-out for longer-term
insurance against inflation. Ultimately, I suspect that
is where we will end up.
