In a comment to this earlier post, Charlie writes:
For all of Russ's doom and gloom, I would love to see some actual predictions, something specific and on record.
My guess is his rhetoric is far bolder than what he actually thinks will happen.
What do I actually think will happen? I have little or no idea and neither does anyone else. Instead, let's talk about what has already happened and then a little bit about what is likely and what is possible.
What has happened already is that over the last ten months, starting with the Bear Stearns collapse, the government has tried to steer and run the financial system. It has poured a few hundred billion dollars into the system and sent a signal for the future that really big mistakes can be forgiven. It has tried to coordinate the merger and acquisition market–marrying Bear Stearns to JP Morgan and Merrill Lynch to Bank of America. The latter appears to be a complete fiasco. The government has bailed out the bondholders of Fannie Mae and Freddie Mac. In short, the government has sent a signal to all future risk takers that sometimes bad decisions will cost you less than they should. And sometimes they will cost you zero.
Will those decisions have negative consequences in the future? I think they will. I can't measure the consequences but logic suggests that future risk-taking will be less prudent.
The Federal budget is about 3 trillion right now. Not sure what that includes from the past 10 months. Some of the actions of the last 10 months involved money creation and some of it was real spending. But either way, we're on the verge of passing an $825 billion increase in spending over the next two years making a large federal government even larger. That is roughly a 15% increase, maybe a little less. The deficit will approach $1 trillion. Maybe higher. Again, not sure what it's running right now. Hard to know.
Many (most) states are broke. Apparently, California cannot meet its obligations and is "delaying" some payments.
That cheerful picture is where we are at the present. That's gloomy enough for me. But wait, there's more excitement to come!
What does the future hold? I don't know, but here are some things that worry me.
If the current stimulus package is ineffective or if it takes time to actually go into effect, what will be the response of the government? Monetary policy is close to impotent. Yes, more money can be poured into the system even if the Federal Funds Rate is zero. Japan tried that too. It didn't work. If the expansion of federal spending doesn't help the economy, will there be a demand for more spending or less? If the auto makers cannot recover in time to pay back their loans, will an Obama administration let them go bankrupt? If China goes into recession or depression, will they continue to buy or Treasuries? I doubt it. What will the Federal government do if it cannot meet its obligations? Cut back on spending or start inflating? I suspect the latter.
So the really gloomy scenario is a situation of rising inflation, rising nominal interest rates, ongoing unemployment, private investment stagnating because of regime uncertainty and on top of all that, everyone expecting a magical wizard of a president who loves them to fix everything.
And you want to know why I'm worried?
What are the odds of the really really gloomy scenario? I have no idea. I do know the odds are much higher than they were a year ago. I used to be a deficit dove. I used to argue that the deficit isn't nearly as important as the size of government. Now both are growing dramatically. So now I'm worrying about both–government's share of the economy and how it's financed. If you spend enough relative to the inflow, you can actually start to call into doubt your ability to repay your debts. That would make me a deficit hawk. We're heading down that road right now.
What really worries me is that our political system is dysfunctional. Put your hand out and Washington will fill it. (Unless you're Lehman Brothers. Too bad they were a rival of Paulson's ex-firm.) Who in Washington is going to say no to the next request?
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Wow! You said it all. Thank you.
Why we should always be deficit hawks:
If deficits are accepted as policy, then, given the propensities of politicians, the risk of high deficits is increased.
IOW, the acceptance of any deficits has led to imposing and, likely, unsustainable deficits.
Humility and honesty from an American economist – there is hope yet. Maybe even Paul Kru… oh never mind.
What I'd like to ask Russ is does he think the economic model that is dependent on always increasing consumer spending is long-term viable? I think it is not.
Russ,
I share your concern. It seems to me that we either face the prospect of massive government intervention turning a recession into a depression, or government intervention creating a massive inflation problem.
As an aside, every time I see one of our "all knowing" politicians on camera talking about how he (or Obama) is going to fix some problem, I'm reminded by Hayek's title "The Fatal Conceit." It's such a simple title that's actually very deep and still very much relevant today.
Also I'd like to have some predictions on what the upper bound on govt as a % of GDP will be in the next 8 years. Currently is sits at 21%. I think it might go up to 30-35% by 2016.
Govt outlays as % of GDP 1930-2009:
http://origin.www.gpoaccess.gov/usbudget/fy05/sheets/hist01z2.xls
Does anyone think that Obama will take us into the 30-something range? Basically European level intervention.
The deficit is a cancer on the economy.
Those who invest in U.S. Treasury securities are not investing in the U.S. economy. Bond holders are repaid whether or not the U.S. Government invests wisely, and therefore, the costs of malinvestments are shunted onto the taxpayer. If productivity is to be maintained, then real investment must compensate for the wasteful use of resources made possible by the deficit.
The risks of malinvestment is greater with the U.S. Government than in the private sector, because bureaucrats have neither the incentive nor feedback to guide their decisions wisely. But why are U.S. Treasury securities considered safe? Of course, the high risk of malinvestment does not disappear, it is simply socialised.
Muirgeo worries…"Superstition about perfect deities scars the crap out of me Gods and invisible hands will solve everything…"
LOL. He would not worry about Blagejoviches of the world though. Blagejovich was just unfortunate to be exposed, there are many others like him, living large on public money, under wilful the protection of the socialist state.
Oil Shock – to be noted one of muirgeo's heroes Stiglitz argues for a balance between government and free markets, not a abolition which is what muirgeo argues for. This puts muirgeo firmly on the most extreme left wing.
Let's not use this space to explore Muirgeo's philosophy of government. Please stick to the topic.
Russ, last week on EconTalk you interviewed Steve Fazzari on Keynesian Economics. In that interview he mentioned the 'Paradox of Thrift'.
I think under normal market conditions the paradox is just false. People save by putting their money in banks, banks lend the money to businesses and businesses pay employees or buy goods from other companies. There is no drop in total income.
But we're not in normal market conditions. We're in a recession were banks purportedly aren't lending. Instead, they want to hold on to treasuries. Excess reserves are through the roof.
Right now there is apparently a high demand for risk free/low risk assets (ie. treasuries), so, I have to ask, why shouldn't the government supply that market?
I detest the idea of government deficit spending and market intervention with every ounce of my being yet I cannot get around this simple fact: if the U.S. government was not issuing 'risk free' treasuries banks and people would be hoarding gold. Which, it seems to me, would be the worst possible use of capital that could be conceived short of burning it.
I already understand all the problems with government spending and the likely hood of them not spending it as wisely as they could. But is that really worse than hoarding gold which seems to be the only other actual alternative to the government issuing bonds.
Would you please resolve the paradox of thrift for us little people. And I don't mean resolve it for a normal market. I mean resolve it for us in this market.
Thanks.
Marcus – was 2003-2006 "normal market conditions" with out of control lending(sub-primes, Alt-As, leveraged 20:1,etc..)? Not everything is the fault of "big bad government". This was a market failure.
What I know has happened is that money and credit have been transferred from me and my children to Wall Street and a small group of very, very rich people. Their debt obligations have been eliminated and mine have been massively expanded.
This is on of the greatest transfer of wealth from the people to the super rich in the history of mankind.
And it's an ugly, ugly thing.
Mezzanine, did you even read my post? Apparently not.
Marcus – I did. You do seem to agree with me that there is a fundamental problem with a consumer-spending oriented economy. Particularly one predicated on payment plans.
Greg – if you are not in debt I don't understand why you care how much assets belong to other people….
Prof. Roberts has carried the doom and gloom to about where we were in the 1930s. But remember that the thirties were followed by the forties, the Great Depression by World War II, holocaust and genocide, and, as a Jew, at least a sentient one, that has always been my greatest fear, a recurrence, first of the thirties, and then, the forties.
I never thought it could happen. How could we possibly repeat the mistakes of the thirties? Well, here we are, doing just that, and eagerly, Jews and Gentiles alike, rushing to the arms of the next Hitler.
Say what you will to your own people, here's what I say to mine:
Dumb Jews!
Marcus,
Even saving money in a mattress would merely force prices downward, and the purchasing power of the money remaining in circulation upward. So, though less money in circulation, there'd be no less purchasing power and demand. For, all of it saved would, in effect, be lent to the spenders.
Savings are never a drain upon aggregate purchasing power, but an essential factor of its creation. For there is no purchasing power without production, little or no production without investment, and no investment without savings.
We lose purchasing power not to savings but mistakes. And while the market would liquidate them, and accummulate the means of recovering from them, the Keynesians would accummulate them and liquidate the means of recovering from them, and spend us into the poor house, just like a micro economic individual.
It's spending, not saving, that worries me.
Saving is just what we need now.
First a little dose of humility, from the link Russ provides (Dec.2004):
"At current tax rates, barring a recession, the federal government will run large and growing surpluses during the next decade and beyond. Yet, regardless of the identity of the new President or the character of the new Congress, we are certain to hear a great deal of talk in the coming months about deficits rather than surpluses."
In fact, in every year we ran a budget deficit, combining for a total deficit of 1.2 trillion. Had we run surpluses as many left-center economists were urging we would be in a much better policy space than we are today (remember the much maligned "lockbox").
Currently, the debt held by the public is 40% of GDP (year end 2008). It has been at 50% in the mid 90s and several countries have held debt near 100% of GDP and still borrowed at reasonable rates. I must admit I too fear large national debt, but it seems obvious Russ has turned 180 on this stance not primarily because the economics have changed, but because the politics have changed. Since most of the direness of the U.S. fiscal picture is due to long term liabilities of social security and medicare, Russ should have had the same reaction to a 1.8 trillion dollar tax cut and a 2 trillion dollar war, as he is having to a 850 billion dollar stimulus package. While we never know where the tipping point is, and I share some of his fears, he has hardly been good on this issue in the past.
Second, I find it interesting that my question was meant to be interpreted in light of the post, about why Russ was so afraid of "King Obama's" policies. And his answer contains relatively little about the new administrations policies.
Finally, Russ's main error is that he can only see downside in government policies, but not in the situation itself. He gives the feeling that he thinks all risk is "regime risk" and forgets all other types of risk like systemic risk, risk of negative shocks (world policies, oil shocks, weather, global turmoil). Mostly he seems to completely unacknowledge the risk that the economy left to it's own devices won't grow. I doubt Russ really believes that such a thing as a deflationary trap can exist, and he doesn't seem to think a shortfall in aggregate demand can leave unutilized resources. I think this just shows that he knows as little macro as he admits. If you agree with Russ, then you basically think macroeconomics is a worthless discipline. That is bold, but, I think, a silly position. At times like these, one should rely more on standard macro theory not less.
Anyway, I thank Russ for answering my question. I share many of the same concerns as Russ, but from a far different angle. I fear that we will enter a Japan like trap, because we, like them, won't do enough to spur demand. They didn't do enough to overcome the zero-bound; they didn't succeed in raising inflation expectations and they didn't succeed in having a positive real interest rate. I am optimistic that we won't make the same mistake. I am happy that we are both somewhat on record.
Thanks,
Charlie
Charlie,
How does the government save? How does it run a surplus? What is a lockbox? Please provide a few quotes from the economists who wanted perennial surpluses. I don't remember that.
I have not "gone on the record." There is no such thing in macro, unfortunately. In fact, I explicitly made it clear I wasn't making a prediction. I'm not interested in being proven right. I'm interested in learning and teaching. Gotcha is not my game. I'm not in a competition with anyone over who can make better predictions. Maybe I'll be wrong. Maybe a spending increase of roughly 15% financed by debt will spur the economy. I just don't think "standard" macro has much to teach us on this question. There are smart people saying it will help and smart people saying it won't. How do you distinguish between them?
But you are right–I did fail to talk enough about why I'm worried about "King Obama," as you phrase it. That has more to do with what happens in a democracy when people turn power over to the central government in the absence of Constitutional restraints. I don't see much of the latter.
Russ Roberts – what we need is a massive de-leveraging of the private sector in order to get back to some sensible form of economy. The last 15 years of credit bubble economy does not work.
"Macro Economists" would love to take credit for such things as, the transition from hunter/gatherer to agrarian society and invention/discovery of the wheel, Diesel Engines, Printing Press, Fire Arms, Automobiles, Molecular Chemistry, Prosthetics, Aviation, Nuclear Power, Semi Conductors, Petro Chemicals, Medicines, Surgical Instruments, Microwave ovens, Clothing, Sliced Bread, Toilet Paper, Ships,
I wonder, what world would be like without macroeconomists and their wonderful inventions.
Oil – careful, you are treading on thin ice! We all know that without macro economists the free market would fail to function!
I'll chime in for Charlie here. The "lockbox" was a plan, proposed by Gore and others in 1999, to pay off publicly held Federal debt over a decade or so with a budget surplus, to increase the Treasury's ability to finance Social Security benefits ("repay the Social Security trust fund") in the next few decades without further income tax increases, borrowing or inflationary monetary policy.
Of course, the "trust fund" is only a promise to raise more taxes (presumably income taxes) later as Congress currently spends surplus payroll tax revenue allegedly reserved for Social Security benefits; however, although the Federal debt increases by the amount of the payroll tax surplus each year, as Congress spends the surplus and promises to repay what it spends from other tax revenue later, this increase in the debt is not part of the Federal "deficit".
Under the "lock box" scheme, while Congress ran a "surplus", the payroll tax would have continued to increase the Federal debt, but debt held by the public (and by the Fed) would have been withdrawn, leaving more income tax revenue to pay Social Security benefits ("repaying the trust fund"), all else being equal.
In 2000, when I was a half-hearted Bush supporter, I accepted Greenspan's argument that withdrawing so much Federal debt held by the public could be counterproductive, because the Fed conducts monetary policy by buying and selling this debt in open market operations. If the public holds no T-bills, the Fed has not this mechanism. The T-bills aren't so much about raising Federal revenue to spend. T-bills rather create a lever that the Fed can turn to increase real investment, so when the Fed wants the public to invest more rather than holding T-bills, it creates money to bid up the price of T-bills, thus lowering their yield. As simple entitlements to tax revenue, T-bills are cash equivalents, so holding a T-bill is not investing at all but is refraining from investment.
At the time, to counter the "lockbox" proposal, Bush proposed to repay Treasury debt "as it comes due" while running roughly balanced budgets and leaving the proposed "surpluses" with taxpayers. This proposal was nonsense, since most Federal debt is short term and "comes due" each year, whereupon it must be refinanced, often by swapping one bill for another at the Fed. I confess that I swallowed this Madoffian con game, hook, line and sinker. Only as Bush expanded Federal spending and the deficit incredibly did I realize what a chump I had been.
It's very clear to me now, as it should have been then, that the Bushniks simply wanted any excuse to sell more entitlement to tax revenue and spend it for whatever reason seemed most salable at the time. I'm no conspiracy theorist, but had 9/11 never happened, they would have had to invent a "crisis" as apparently perilous to justify their policy of creating negotiable entitlement to tax revenue and spending new cash into the pockets of their cronies. The looming "Great Depression" seems a lot more of the same. Another war isn't politically marketable at the moment, but a Great Depression can always be cooked up instead.
In fact, much of the "borrowing" done to finance recent deficits wasn't really "borrowed" at all. Rather, the Fed simply created money to finance the Bush deficits. This fact is very apparent in the increasing share of Federal debt held by the Fed rather than the public. The share held by the Fed and other central banks (or sovereign wealth funds) rose even faster in the last decade.
The proportion of Federal debt held by the Fed, Federal agencies (like the Social Security "trust fund"), foreign interests (mostly other central banks and foreign governments) and state and local governments in the U.S. rose from 64.5% in 1997 to 83.89% in 2007. I haven't seen more recent figures, but when the Fed "lowers interest rates", it's actually buying up Federal debt, so this proportion presumably is still higher today.
Martin – you don't need any conspiracies to understand the following:
* Bush was elected in 2000 in a disputed result, he had literally no mandate to do anything
* In order to make nice with the Democrats he went along with increasing social spending, which would have been even greater w/o 9/11
* Gore would have done similar military operations as Bush, just not to the same extent and expense
You see, no need for the tinfoil. Just understand basic political realities.
And remember:
"Harding (elected in 1920) inherited…one of the sharpest recessions in American history. By July 1921 it was all over and the economy was booming again. Harding had done nothing except cut expenditure…"
Modern Times, by Paul Johnson, P 216
I've read of that too. I wish one of the professors would go into more detail on that recession also so we could see what lessons there are to learn from it.
And if you are still suspicious of Mr. Roberts' crystal ball, try any of a number of history books.
If we just let the private sector de-leverage itself it would recover in 2-3 years all by itself. However "the people" are agitating for government intervention. It is in a certain % of the population's interest to be bailed out at our expense because "falling on their financial swords" means possible long-term poverty with all the awful consequences. Thus, they'd rather drain us of a % of our wealth then bear the consequences of their actions.
Aint democracy grand?
"You never waste a crisis" was enough for me to worry.
Charlie, you’re quite confused.
Since most of the direness of the U.S. fiscal picture is due to long term liabilities of social security and medicare, Russ should have had the same reaction to a 1.8 trillion dollar tax cut and a 2 trillion dollar war, as he is having to a 850 billion dollar stimulus package.
Many lefty economists have been making similar errant assertions, that all liabilities are economically equal. They’re not.
The Social Security & Medicare liabilities arise from programs designed to create further obligations (by left-center administrations, I might add). You can argue that war has long-term negative economic effects, and some “positive” ones as well (using positive in the quantitative sense, not moral), but they generally do not create Social Security-sized liabilities.
Likewise, tax cuts spur growth and business investment. Social Security & Medicare/Medicaid do not (except maybe in a few narrow fields like healthcare recordkeeping & admin). As several have stated above, it is spending that is the problem, not tax cuts.
Russ correctly identifies the dramatic change of events, in the midst of this absurd Obama-induced euphoria (which I personally find distasteful & sickening), that this very mentality will lead to even more of the economically destructive behavior, government spending on government projects, by government bureaucrats – government will be the growth industry (it already is). An $850 billion stimulus package, along with the rest of Obama's agenda, will likely carry with it far-reaching implications costing far more than just $850 billion.
Instead of getting back to prudent lending and private innovation and scaling back intervention, we're expanding our already bloated government, having just elected the most adamant collectivist in the history of this country. That's scary.
Charlie,
Forgot to respond to this:
"I must admit I too fear large national debt, but it seems obvious Russ has turned 180 on this stance not primarily because the economics have changed, but because the politics have changed."
Are you suggesting I've started to worry about deficits because a Democrat is in the White House? Or did you mean something else by "politics?"
Mezzanine, I agree. It's all very open and even well accounted for, considering the mind boggling scale of the operation. On their way out, the Repugnicans seem to be greasing the skids for their comrades in the two-party state to glide into yet another round of Orwellian crisis management.
Ironically, with so much Federal debt held by the Fed, Federal "trust funds" and state and local governments, and so little actually held by the public, "government debt" is mostly fictitious, being essentially an accounting for future spending plans and an instrument of monetary policy.
The Fed can't circulate all of the Treasury paper it holds, because it would discourage too much real investment, and while the Fed holds the paper and continually refinances it, the Treasury effectively pays neither interest nor principal on it. These holdings are less "debt" than a record of money Congress creates to spend.
The "trust fund" is less a debt the Treasury owes than a promise to spend income tax revenue on Social Security benefits in the future.
If we ignore the increasingly obvious fiction that state and local governments in the U.S. are "independent" of the central government, then Federal debt held by state and local government also represents only established government spending plans, presumably to pay state and local employee pensions and the like. These plans may be unrealistic, but they don't differ substantially from other entitlement programs in this regard.
Of course, the real problem is that all of these entitlement programs demand no real productivity of the persons entitled, so as we play out this game, those of us not so entitled must produce more for the title holders to consume, leaving less of our produce for our own consumption. We haven't begun to feel the weight of these rents yet, but the die is already cast.
Charlie:
Who says he didn't? I certainly did. I opposed some of the tax cuts less when it wasn't so obvious that the Bushniks had no intention of controlling spending as deceitfully promised. The multi-trillion dollar war was a non-starter for me from the get-go.
Mesa:
You can argue that pigs fly, but I don't see many positive effects of the Iraqi invasion, quantitative or otherwise, and the scale of the cost does rival the Social Security problem in fact. Taking the "trust fund" at face value and ignoring the Medicare program, the projected, 75 year old deficit in the old age pension scheme is on the order of the cost of the highly dubious "war on terror".
If the "tax cutters" go right on spending as though the taxes had never been cut, even more so, I doubt this outcome.
It's scary, but it's not scarier to me than the disaster engineers on the way out.
Martin – please refrain from name-calling, it does nothing to advance your argument.
What name calling?
Agreed Martin, Bush certainly has made a nice mess, and had every opportunity to address (scale back/eliminate) the big offenders like Social Security, etc. when his party ran everything in sight.
But the people coming into power have an established history of creating massive entitlements and economic/demographic time bombs. Bush isn’t even in Single A ball compared to these guys.
The tendency to spend money has now become an imperative, and there is little to no difference between the 2 major political parties, which is what Russ (and I) has been saying all along.
The system is broken, and it's about to get worse.
Martin – "Repugnicans".
Can't apologize for that one, but I'll label the Demoncrats more descriptively as well if that makes you feel any better. I haven't labeled you personally. If you want to submerge your individual identity in some mindless political party, that's up to you.
Martin and I disagree about the Iraq War, but the way both parties have behaved regarding the economy, I have no problem describing them as Repugnicans and Dimocrats; Bushniks and Obamatons.
Just remember that it's accurate when Martin uses such phrases and hyperbole if you use them while debating him.
I'll try to separate my replies to follow the arguments better, and I have much to respond to and scarce time. Sorry to others that wish to engage my comments, but I have just been reading Russ's and I hardly have time to respond to all of those points sufficiently.
"I just don't think "standard" macro has much to teach us on this question. There are smart people saying it will help and smart people saying it won't. How do you distinguish between them?"
It's disingenuous to say that there isn't a consensus among macroeconomists about standard macro theory. Almost no one defends the position you lay out where neither fiscal nor monetary policy should be attempted. It is true that there are critics of fiscal policy, but even among them most of the critics agree with the underlying theory, but voice practical concerns like it won't be timely, it won't be focused, or it will be more wasteful than tax cuts. Those are wholly different objections that denying the theoretical model. Most of the critics, epecially on this blog, are either not macroeconomists or Austrian economists far out of the mainstream, with a surprising many that are both. If I have a heart problem and a host of cardiologists are prescribing one treatment, and a host of pediatritions disagree, whose opinion should I weight higher? As far as Austrians, maybe they are right, maybe this will be their shining hour, but there is a mainstream consensus and to the extent economics is a science, that should be respected. If this is the year or two Austrians finally have their day and start changing some minds after 80 years, they can say I told you so then.
"I'm not interested in being proven right. I'm interested in learning and teaching."
I also want to learn. The reason I wanted you to state clearly your concerns or a prediction (maybe about the level of government spending or taxation) is because I don't see how the future can evolve that will falsify any of your priors. I think no matter what this president or congress does, you have laid such broad claims that you will find something that will have satisfied your fears. Very rarely on this blog do you seriously consider counter arguments. Rather you spend much of your time finding support for you priors and hardly any trying to falsify them, or even contemplating how they could be falsified. Maybe they can't be, but surely you can downshift in confidence, you can be given pause.
So I just wonder how we will proceed, how we will learn. If our assumptions about the world lead to no predictions, if the scary desire that we want a king leads to no predictions, than how will we know in five years how right our assumptions were? How will we tweak our model, so that we are smarter and better prepared? How will we know if fighting the zero bound is more or less important than resisting the growth of national debt? And even more than that, without specifics I don't even know what you are saying. I mean, I get that you are afraid of Obama and this congress, I've talked to many who are. But I want to know how afraid, how high will government spending as pct of GDP be in 4 years? What will the marginal tax rate be? Corporate tax? Cap gains? Don't tell me how scared you are, be specific about what you are scared of, otherwise are you really saying anything at all?
Thanks,
Charlie
"Charlie,
Forgot to respond to this:
"I must admit I too fear large national debt, but it seems obvious Russ has turned 180 on this stance not primarily because the economics have changed, but because the politics have changed."
Are you suggesting I've started to worry about deficits because a Democrat is in the White House? Or did you mean something else by "politics?""
I don't think it has to do with party affiliation. I think you are just very afraid of a growth in government. I don't think you would be near as afraid of a growing national debt if the increased deficit was caused by tax cuts as by a spending increase. In fact, I think we are in a similar situation as Bush's large tax cut. Granted it is worse now, because of the economic outlook, but unless you have some special reason to think we are at that tipping point, it is hard to explain how much your view has changed by the difference in America's default risk.
I have more to respond to. But I have run out of time. Thanks again to Russ for engaging me. I realize I am coming across as a pompous ass sometimes, forgive me I am young.
Thanks,
Charlie
Marcus,
I'll tell you a little bit more about that 1920-21 recession. The great historian, Paul Johnson, had said that Harding got us out of it by doing nothing except cut government exprenditure.
Well, as a matter of fact, not exactly nothing.
"Inflation was promoted by a desire to speed recovery from the 1920-1921 recession."
Rothbard, America's Great Depression, P 126
But Johnson was close enough to the truth.
Stock market crashes and recessions don't cause depressions. The emergency policies aimed at keeping the recessions from becoming depressions is what causes the depressions.
There was practically no such policy in 1921, and no depression, and no world war.
There was such a policy in the 1930s, and a depression, and a world war.
There is again such a policy today, and, I am afraid, a great likelihood of another depression, and God knows what else to follow.
This old Jew is more afraid than at any time in his life, especially for his children and grandchildren.
Nearing the time I'll be leaving this world, it is painful to contemplate it as I'm leaving it to them, that they may not enjoy the wonderful country and wonderful life that my generation has been blessed with, and that the fate of Europe's Jews awaits those in America as well.
I thought the story about the Bank of Japan is that it continued with the traditional policy tool of making loans to banks. It set that interest rate at zero. It failed to move to a new policy approach–open market operations targetting base money and the quantity of money.
When anyone begins to say that there is plenty of money but no one wants to borrow, or no one wants to lend… It is clear to me that they don't get it.
A problem develops if there an imbalance between the quantity of money and the amount that people want to hold. Lending is relevant because that can influence the quantity of money that exists.
If it is true that "uncertainty" will cause people to accomodate the amount of money they choose to whatever amount exists.. then expanding the quantity of money can't solve the problem. The demand for money = 20 billion more than the amount that exists. I suppose it is possible.
But it sounds to me like an excuse not to try.
You people are beginning to sound like a bunch of socialists, sitting around and running the world, managing other people's money and their lives for them.
So many of your questions are questions for socialists, not for individuals who want to be free. The question for those of us who do is not how best to run other people's finances and lives for them, but why do so at all, why not let them run their own.
To put it another, leave my grandchildren alone!
"Let's be clear: the work of science has nothing whatever to do with consensus. Consensus is the business of politics. Science, on the contrary, requires only one investigator who happens to be right, which means that he or she has results that are verifiable by reference to the real world. In science consensus is irrelevant. What is relevant is reproducible results. The greatest scientists in history are great precisely because they broke with the consensus…" – Michael Crichton, A.B. Anthropology, M.D. Harvard
Oil Shock,
My god! You people are smarter than I thought!
"The greatest scientists in history are great precisely because they broke with the consensus…"
Just before I go to bed, I will take a moment to respond to this, because it is a simple and obvious misunderstanding of probability. While it is true that some great people have stood against consensus and won, they are great because it is so rare. The fact is given a scientist that is far from consensus, the odds are very high that he is wrong rather than right.
Such simple probability errors are easy to make if we only analyze ex post, rather than ex ante. Let us not forget the graveyard of scientific ideas that disappeared into oblivion.
Charlie,
My god! You people are actually dumber than I thought!