If a bomb doesn't go off, is it still a bomb?

by liberal japonicus

It would be hard to overestimate my lack of understanding of economics. So when I read an article like this, I'm totally baffled. Some graphs from the article

Takatoshi Ito, an economist at Columbia’s School of International & Public Affairs, argued at a panel discussion on Monday that unless the Japanese government can raise its sales tax to north of 15%, from its current 8%, Japan’s economy will suffer a fiscal crisis sometime between 2021 and 2023. That’s because as Japan’s population continues to age, its famously high savings rate will have to fall, and the Japanese public will no longer be able to absorb the large amount of debt the government is assuming.

Unlike Greece, the Japanese government can print as many yen as it wants to pay its debts—debts that are largely owned by the government, Japanese banks, and citizens. So there’s no reason Japan would have to default on its debt. But all that money printing, argued Ito, will lead to an inflation crisis and a serious decline in the Japanese standard of living.

but

Others are not so sure. It’s been clear for two decades that Japan faces demographic difficulties. Its low birthrate and cultural aversion to immigration means that its working age population is shrinking at an alarming rate while the population of non-working retirees (who demand expensive healthcare) is on the rise. This dynamic has lead countless traders to bet against Japanese debt, with disastrous results, even though the demographic predictions that led traders to bet against the nation have come true.

So why hasn’t there been a fiscal crisis in Japan, and should we believe prognosticators like Ito, who continue to say it’s imminent? For economists like Paul Krugman, worrying over a possible inflation crisis in Japan seven years from now is crazy when you have a very real problem of stagnant growth and deflation right now.

Japan's saving rate went negative for the first time on record in Dec and a lot of outlets were saying this is the beginning of the end. However, this is how I see things.

Japan has been at that zero bound for a decade now (or is it two?) and has been facing deflation all this time as well. Part and parcel of Abe’s economic policy is trying to shock the country out of this low output and low growth equilibrium and into a higher one (again, entirely standard Keynesian stuff, although he’s using rather more monetary policy than the standard Keynesian would suggest he should). Excellent: and people drawing down their savings to go out and spend them is an excellent example of the sort of thing that policy is trying to engender. Bring forward some of that future consumption into the present and thus provide that bounce to shift the economy into a higher growth equilibrium.

Curious if any of the more economically knowledgable folks here might take a stab at explaining this.

Comments

[sanbikinoraion]

So, wait, we want people to buy stuff so we're massively raising sales tax?

[CharlesWT]

Japan: Time For Womenomics 4.0 Says Goldman Sachs

[Slartibartfast]

Yes, a bomb that doesn't go off is still a bomb. There are no bombs that didn't go off; there are only bombs that haven't gone off yet.

I am not sure the analogy applies here, though.

[hairshirthedonist]

...its famously high savings rate will have to fall, and the Japanese public will no longer be able to absorb the large amount of debt the government is assuming.

Why would the government be assuming large amounts of debt once the public stopped saving? Is there going to be a large change in the balance of trade in the direction of deficit?

[Marty]

well there are some bombs that didn't go off, but I concede the actual point.

[Marty]

hsh, what I got from this is that the debt is bought in large part by the Japanese saver, which in turn pays for the high level of benefits that are provided for retirees. Without new savers buying the debt then the government cant raise the money except by raising taxes.

So:

Why wouldn't bond prices go down, rates up and foreign buyers buy the debt? Is there a legal limit to the amount of debt sold outside the country? The rates rising would be inflationary, the taxes would have a significant short term inflationary effect. The closed nature of the Japanese economy(and culture) to some extent could exacerbate the problem.

All random thoughts generated by the question.

[hairshirthedonist]

Taxes will raise themselves if the savings rate goes down. The public will be injecting money into the economy rather than removing it. If you assume the trade deficit stays the same, whatever reduction there is in aggregate savings (i.e. increase in net spending by Japanese households) results in an equal reduction in government deficit spending (i.e. the assumption of debt).

I can understand if the argument is that government spending is going to shoot up to pay for pensioners but there won't be any change in revenue, but that doesn't seem to be the argument.

And where exactly would all that pensioner spending go? Wouldn't that be income to people in Japan? How is it that they're worried about both high inflation and a stagnant economy at the same time? Are they going to run out of gold? Is their debt denominated in a foreign currency?

[hairshirthedonist]

net spending by Japanese households and firms, that is

[hairshirthedonist]

Another possibility that occured to me for inflation and stagnation coinciding - Japan's productive capacity is insufficient to provide the resources needed to meet the needs of pensioners while also meeting the needs of everyone else. I don't know if that's actually the case, but I guess it's possible.

[Marty]

I the key is the savings rate is now approaching zero, the workforce continues to shrink, these two factors offset each other in terms of government income until there is no extra spending because the savings rate is zero and the workforce continues to shrink. All the while additional retirees get added so government costs go up.

[hairshirthedonist]

But the government costs are someone's income. What are they doing with that income - saving, spending or paying taxes? Short of there not being the real resources necessary, be they human or material, to care for the pensioners, I don't see the problem.

It sounds like there will be plenty of work to go around for working-age population, which is usually good, unless there's too much. If that's what they're really saying, I can understand it. (So they should just say that, instead of unnecessarily making it about money as a proxy for real things.)

[wj]

It's pretty clear that Japan could have a massive economic/fiscal problem in the future. Not that it necessarily will, but that it could. However, they could also start finding the combination of higher productivity and other things which will make it possible to sustain their economy even as their demographics change. Information on which other parts of the world -- Europe, for openers -- could really use as well. After all, Japan's demographics are more typical of where the rest of the developed world is heading than not.

But it is far from clear how this problem in Japan, if it happens, would be a disaster for the rest of the world economy. Suppose inflation in Japan skyrockets. Then the exchange rate for the yen tanks, and . . . the rest of the world either sees no particular impact or maybe sees a reduction in the cost of goods from Japan. And it gets harder to sell to Japan . . . except that, since the problem is a shortage of workers, they can't really ramp up production of stuff that they used to import simply because they don't have the people to do it. Hardly a disaster.

Or suppose the standard of living in Japan is what tanks. Yes, the world can sell less to Japan. But big as their economy is overall, is Japan as an export market really that enormous? I would guess that, except in a few really high end sectors, the growth of India and China will overwhelm any shrinkage in the Japanese market.

In short, I tend to doubt that even a huge economic disaster in Japan will mean big trouble for the rest of the world's economies. It won't be good for the rest of us, of course. But it will hardly be a major problem either.

[bobbyp]

Marty,

If the problem is with the real economy that is one thing. To conflate that with some imagined far off "fiscal crisis" is another.

The shrinkage of Japan's work force is not a crisis.

Advanced economies have steadily reduced the ratio of workers to retirees* since the onset of the Industrial Revolution. Why now is it now suddenly a "crisis"?

The political agenda of this nonsense is quite clear: Squeeze the workers some more.

*productivity, which see.

[Slartibartfast]

China, by the way, has its own economic/sociological trainwreck in the pipeline that is caused by changing demographics. Without looking, I'd say it's going to be worse than Japan's.

In the case of both China and Japan, the only alarming thing should be not that there are changes in the works, but what ripple-effects those changes produce.

[hairshirthedonist]

In the case of both China and Japan, the only alarming thing should be not that there are changes in the works, but what ripple-effects those changes produce.

Yeah, higher wages scare me, too.

[hairshirthedonist]

Here's an interesting article on China (from a year ago).

[bobbyp]

Yeah, higher wages scare me, too.

Yep. Nothing like having to give the pool boy a raise to cause consternation and heartburn amongst the rich.

Real economy: Fewer workers harnessing technological productivity produce more and more stuff with less hours/unit of output raising living standards.

Fake BS economist: Well, surely, this is a crisis. We can't have that! The next thing you know, the proles might want more vacation time.

[wj]

The good news for China is that their demographic problem is the result of a government action (the one child policy), which can be reversed. As opposed to Japan, where the falling family size has been voluntary.

The bad news is, the habits set over the last half century may not change all that much, just because the absolute restriction has been lifted. That is, the fertility rate may still not rise to anywhere near 2.1 (the standard replacement rate).

[hairshirthedonist]

Voluntary? There's no place to put the damned kids!

[bobbyp]

Not that it necessarily will, but that it could.

Oh, please. The earth could also get hit by a meteor in the next hundred years. Tighten your seatbelts!

Stop confusing the real economy with silly notions about money. If every worker in Japan decided they would rather spend their time gazing at their navels and do no work, they would have a problem. If there was a plague, they would have a problem. If, given reasonable assumptions about future productivity growth, Japan's living standards continue to increase, THERE IS NO PROBLEM. If future productivity totally goes into the toilet how is raising taxes or cutting social spending right now doing anything to solve such a problem?

[bobbyp]

As opposed to Japan, where the falling family size has been voluntary.

Yes. People make choices. Who could have known? Markets adjust...except when they don't. Then the free marketeers crank up the fear machine: Vee must have more kids! Vee must sacrifice!

Stalin couldn't put it better.

[Slartibartfast]

The good news for China is that their demographic problem is the result of a government action (the one child policy), which can be reversed. As opposed to Japan, where the falling family size has been voluntary.

But not quickly. The problem is not population collapse; the problem is there's a lot of people heading into retirement and not so many people of working age to support them.

Historically a working couple has not had to support both sets of parents.

higher wages scare me, too

a) that's not what I was referring to
b) you're not being truthful, here
c) what the hell are you even talking about?

[Slartibartfast]

Also, there's the male/female imbalance problem.

Somehow, I bet I'm still concerned about wages. I guess I have to wait and see.

[hairshirthedonist]

c) what the hell are you even talking about?

I was having fun at your expense. You could have been referring to any number of things when you wrote "ripple effects." The obvious ripple effect I saw was rising wages. But you're right about b). I actually welcome higher wages.

[Marty]

Unfortunately, the whole rising wages thing doesn't work as well anymore. There aren't closed labor markets and it doesn't take much wage inflation to drive lots of jobs elsewhere. So more people being supported by government dollars spent primarily on healthcare. Maybe healthcare dies get big enough to support the economy long term and its still primarily local.

[Slartibartfast]

I actually am not concerned at all about higher wages. But thanks for asking!

[Countme-In]

Conservative austerity economists have been predicting Weimar-style inflation since 2009, as Krugman has consistently pointed out, but alas, the bomb explodes before it even leaves their hands ---- plunging commodity prices, stagnant wages, etc.

https://www.youtube.com/watch?v=u9bC_3cNH34

Turn volume down if at work.

No doubt, there is a bomb(s) in the future, but economists haven't the detection equipment to let us know what, when, and where.

Well, there might be one guy, currently unknown, whose prescience is apparent after the fact, and he'll be nicknamed Dr. Doom, or Dr. Gloom, or Dr. GoesBoom by the nicknamers and be consulted forever afterward, while making his fortune, and while of course never being accurate again about the future.

"higher wages scare me, too."

The Fed, and other central banks, whom one should never fight, has the names of two people who they watch very closely to determine when two too many people are employed and/or about to receive a pay raise to therefore decide when to take away the punch bowl.

This is done to satisfy the one percent, who it was lately reported, have accumulated more assets among their few selves than 3.5 billion other human beings in the world.

The two names are not divulged, but we can profile who these two might be. The first is a person, probably long-term unemployed, who finally gets a job, probably without benefits and at a fairly low wage. The second is a person who, having recently gained employment, is up for some meager pay raise.

As they are just within reach of these milestones, the bankers, and the hedge fund managers, and stock and bond market analysts, and the economists, and the conservatives on legislative finance committees around the world, and Bono, (all of whom's wages, salaries, financial assets, home prices, waistlines, egos, and yacht displacements have been permitted to inflate without penalty for years) will stop in their tracks and proclaim as one "We can't have this! My God, we must maintain economic standards! Fire these people, and then after a few weeks, begin ridiculing them for not working and base all future political campaigns on cutting their guv-supplied health insurance, unemployment checks and foodstamps!"

[bobbyp]

So more people being supported by government dollars spent primarily on healthcare

So let me get this straight. All of our jobs have gone elsewhere. This means there are a lot of people sitting at home picking their noses with nothing to do.

But if we give them something to do (work in healthcare)somehow this is bad.

I don't get it.

[bobbyp]

So more people being supported by government dollars spent primarily on healthcare.

A complaint that is NEVER uttered by standard issue political conservatives when it comes to defense spending. How is that?

[Countme-In]

Mr. Spock had died.

https://www.youtube.com/watch?v=I5n28hpMFBE

"As you know, Jim, if we don't battle to the Death, they WILL kill us both."

As good of a explanation of conservative economics as I've ever heard.

[Countme-In]

"an"

[hairshirthedonist]

There aren't closed labor markets and it doesn't take much wage inflation to drive lots of jobs elsewhere.

Which does what to wages elsewhere? There's a bottom out there, somewhere in the world, in terms of labor costs to get something or other done, and there are other costs to consider when off-shoring work.

If wages rise in China and Japan, in what direction does that put pressure on wages elsewhere? Where has the United States been off-shoring its work to for the most part? What happens when the cost of doing that rises? Do Americans get more or less of that work?

What happens when the Chinese (and the Indians) start buying more of their own stuff that they make, as happens in developed countries? What does that do to their balance of trade, and what does that mean for ours?

[CharlesWT]

Do Androids Dream of Changing Bedpans?: Robots to the rescue for Japan's aging population

[hairshirthedonist]

I almost posted something earier about carebots.

[bobbyp]

What happens when the Chinese (and the Indians) start buying more of their own stuff that they make, as happens in developed countries? What does that do to their balance of trade, and what does that mean for ours?

Irrelevant. The Prime Directive is: No matter what the economic "crisis" de jour happens to be, the solution is always the same, cut taxes for the wealthy and cut public social spending.

/sarcasm

[CharlesWT]

China to have most robots in world by 2017

[bobbyp]

Also, there's the male/female imbalance problem.

What? One of them heavier than the other?

badda-boom, badda bing!

[Marty]

"A complaint that is NEVER uttered by standard issue political conservatives when it comes to defense spending. How is that?"

If the only growing part of the economy were defense spending I would be complaining. The great thing about this attitude is it denies every recession, depression, downturn or economic crisis that ever existed. They simply must not have happened because every change in the economy is simply replaceable with government spending. On anything, doesn't matter, somehow every person in any country will suddenly become competent in healthcare. Thank god.

[CharlesWT]

[...]
But one desperate man this year topped them all.

According to the Dalian Evening News, a 32-year-old bachelor in the northeastern province of Liaoning kidnapped a woman off the street and tried for 2 1/2 hours to talk her into becoming his wife. All so he wouldn’t have to face his parents’ excruciating Chinese New Year nagging.

It was a creepy plan — including 100-foot-long ropes he brought to tie her up — but the man’s intentions, though peculiar, were chaste, at least in his own thinking.
[...]
For unmarried, Chinese New Year brings dreaded parental nagging

[Countme-In]

Why aren't robots manufactured abroad considered undocumented workers when they sneak into our country to build driverless cars?

[CharlesWT]

In China’s Modern Economy, a Retro Push Against Women

[Countme-In]

The ambulatory toilet robot. (from ChasWT's link.

My Alzheimer's-ridden mother would make short work of that poor thing.

Would they talk? For some reason, I'm imagining the toilet robot barking orders in the voice of Joan Rivers.

Can we talk? No, sit first. I said SIT! You know, just between us girls, after my husband Edgar died, I had him cremated and kept his ashes at Nieman Marcus so I could visit him five days a week.

Are you done yet, for crying out loud?

[bobbyp]

Marty,

If you have a fiat currency system, and there are resources (labor, material, equipment) that are sitting idle, then the government, just like the magic fairies in the private sector, can elect to put them to use. They print the money, do they not?

The fact that there have been economic ups and downs in the past has nothing to do with this (current)basic truth.

If we can all become "competent" at waging war (WWII which see), then I see no reason why we cannot become equally "competent" wrt healthcare or what have you.

What a society choses to do with the resources at hand is driven by politics. If the US or Japan were to have a "fiscal crisis" it would be a political decision, not a monetary one.

I sincerely hope you know enough by now to know the difference. Have I taught you nothing? :)

[wj]

Also, there's the male/female imbalance problem.

What? One of them heavier than the other?

Bobby, I suspect you actually know, but just in case....
In Chinese culture, there is a great premium on having sons. Because the son is responsible for the care of his parents, while the daughter becomes part of her husbands family. (Also some religious factors.) As a result, the one child policy resulted in a significant amount of female infanticide -- so as to have the one permitted child be a son.

So now there are a lot of Chinese men for whom there are no Chinese women available as brides. To some extent, this has led to importing women (China being somewhat less xenophobic on the subject of immigrants than Japan.) But the imbalance between the sexes remains significant.

[bobbyp]

...the imbalance between the sexes remains significant.

This may be a social problem, possibly a small trade imbalance problem, but it takes a Great Leap (obscure Chinese history reference) to get from this observation to calling down the black cloud warnings about some kind of future "fiscal" problem. It is a leap of Keirkegaardian proportions, i.e., entirely irrational.

Now if, like Soren, you admit to being irrational, I see no reason take no issue with it. :)

[bobbyp]

delete second "no", please. Thank you.

[Marty]

You have taught me that you believe ridiculous things. Government just prints as much money they want and all this borrowing crap is a big charade. If only we could all just pretend there is no such thing as macroeconomics we would all be rich for doing nothing. Meanwhile, back in non Bizarro world none of that works for whatever reason you want to blame.

[bobbyp]

Historically a working couple has not had to support both sets of parents.

Well, life expectancy back the olden days may have played a role. But consider, where did Willa Cather stash all those old folks on the high plains prairie farm?

[Nigel]

Here's a really good essay on the problems resulting from excessive debt, and why it is sensible to resolve it eventually (it's primarily about Europe, which is a quite different kettle of fish than Japan, but many of the points made still apply):
http://blog.mpettis.com/2015/02/when-do-we-decide-that-europe-must-restructure-much-of-its-debt/

(Got the link from Marginal Revolution, which while probably politically antithetical to many here, is usually an interesting read.)

[hairshirthedonist]

If only we could all just pretend there is no such thing as macroeconomics we would all be rich for doing nothing.

If only we could actually understand at least a few basic things about macroeconomics, no one would have to be poor simply for having nothing available to do.

[hairshirthedonist]

More seriously, when bobbyp notes that money isn't the relevant constraint, rather that real resources are, it's hardly pretending there is no such thing as macroeconomics. And it definitely does not suggest that we can all be rich for doing nothing, particularly in light of the phrases "resources (labor, material, equipment) that are sitting idle" and "can elect to put them to use."

That doesn't sound like "doing nothing." Quite the opposite.

[CharlesWT]

I though macroeconomics is to economics what astrology is to astronomy?...

[bobbyp]

Government just prints as much money they want and all this borrowing crap is a big charade.

Governments with fiat currencies actually do print "as much money as they want" or at least, as much as they decide they need. How else can you characterize it? There is no spending constraint other than self-imposed ones.

If you go to the government and demand something for your dollar bill, they will give you exactly what they promised to-a replacement.

As for borrowing "crap", in essence, the only purpose government bonds serve is to satisfy the public's liquidity preferences (i.e., people's preference for holding financial assets in some other form than cash).

At least that is what I recall from my underground MMT propaganda classes, but it's been a while.

[Nigel]

Governments with fiat currencies actually do print "as much money as they want" or at least, as much as they decide they need. How else can you characterize it? There is no spending constraint other than self-imposed ones.

There is, of course the very real constraint of whether other parties will continue to accept your fiat money as having any value. 'Print' (create) too much, and you'll eventually discover that, even if it's hard to predict at what point you become Weimar

[Nigel]

More seriously, when bobbyp notes that money isn't the relevant constraint, rather that real resources are, it's hardly pretending there is no such thing as macroeconomics

No, but given Japan's paucity of natural resources, the perceived value of their currency is a very real constraint.

[Nigel]

It sounds like there will be plenty of work to go around for working-age population, which is usually good, unless there's too much. If that's what they're really saying, I can understand it. (So they should just say that, instead of unnecessarily making it about money as a proxy for real things.)

You could indeed define money as a 'proxy for real things'. Very difficult to run an economy without it, and impossible to run a prosperous one bigger than a village.

The reason for worrying about Japan's government debt is its size in relation to the economy, that it continues to grow faster than the economy, and that no one has any real certainty of how to change that.

[bobbyp]

Nigel,

Constraints: The constraint is indeed inflation. That happens when all available resources are being used at capacity and the government's attempt to "buy more stuff" only raises prices, not output. Then you get inflation.

Just about all sovereign currencies have been fiat currencies of some kind since Nixon closed the gold window in '71 (some have pegged to the dollar-effectively ceding control over their own currency).

Where are all the Weimars?

Trade: The "other parties" would, I surmise, be your foreign trading partners. As long as the currencies have freely floating exchange rates there will be a "market" for the currency.

Japan is currently running a trade deficit. However, the now cheapened currency has promoted an export surge.

They still know how to make stuff. Real stuff.

That is what is important, because people are just about always willing to pay somebody who can produce "stuff".

[Nigel]

This dynamic has lead countless traders to bet against Japanese debt, with disastrous results, even though the demographic predictions that led traders to bet against the nation have come true...

This is, I would argue, merely an extreme demonstration of the truth of the Keynsian maxim that the market can remain irrational for longer than any trader betting rationally can remain solvent.

It's entirely conceivable that the can is able to be kicked down the road for another decade... but eventually that can will become a bomb.

Of course Keynes again - in the long run, we're all dead - but there you go.

[Nigel]

Where are all the Weimars?

The central bankers became a little less stupid since then.

But there are still the Greeces, Portugals, Spains, Argentinas.... Let government debt get too far out of control and there are consequences.

I suspect inflation will eventually be the means of disposing of the problem (a bit like the UK in the 1970s). It's the least difficult way of adjusting living standards downwards.

[wj]

The problem with arguments about money is that they tend to conflait the three rather different functions of money.

1) a unit of exchange That is, something you can buy something with, so you don't have to barter. For that purpose, it doesn't really matter if the value drops, because (except in really unusual circumstances) you are turning it around too fast for you to lose much anyway.

2) a unit of account That is, it lets you keep track of how much stuff costs and how much it will be worth if you go to sell it. For that purpose, you don't want it changing value too fast, or it becomes difficult to figure out whether it is worth making something or not.

3) a store of value This is the "stuff it under the mattress" part. If you are holding money (saving), inflation is your dire enemy because it can destroy whatever you have saved.

If you look back over this argument, you will discover that most of the positions are given based on one or another of these. But almost none of them even acknowledge the other two functions exist.

Which has the happy side effect of allowing us to denounce the others as fools for not understanding that our position is obvious . . . for the one function of money we are talking about -- if not for the function the others are talking about.

[Slartibartfast]

If I'm understanding what bobby is saying about fiat currency correctly, we can cut taxes on the wealthy to zero, and still be fine.

Carry on.

[Nigel]

A couple more points...

...its famously high savings rate will have to fall, and the Japanese public will no longer be able to absorb the large amount of debt the government is assuming....

Why wouldn't bond prices go down, rates up and foreign buyers buy the debt?

Why not indeed.
Problem is that (noodling round the stats on the OECD site) Japanese debt is of relatively short maturity, so you have to finance not just the continuing deficit, but also refinance the debt that comes due for repayment.

Lower bond prices mean higher yields, and when debt is well over 200% of GDP, anything about the tiny present yields gives you a (literally) compounding problem.

[Nigel]

For that purpose, it doesn't really matter if the value drops, because (except in really unusual circumstances) you are turning it around too fast for you to lose much anyway.

If you're trading overseas, it can matter a great deal, in far from unusual circumstances. As a major exporter/importer, this applies particularly to Japan.

[bobbyp]

But there are still the Greeces, Portugals, Spains, Argentinas

Those are all unique cases, so lumping them all together to make some point about "oh! nos! National debt! is simply not correct.

[liberal japonicus]

If I'm understanding what bobby is saying about fiat currency correctly, we can cut taxes on the wealthy to zero, and still be fine.

I think that works if there is a sense of noblesse oblige among the wealthy. Otherwise, not so much.

[bobbyp]

If I'm understanding what bobby is saying about fiat currency correctly, we can cut taxes on the wealthy to zero, and still be fine.

You have to have the currency to pay the taxes. You cannot pay federal taxes with chickens. Thus taxes create demand for the currency, because otherwise it would just be useless pieces of paper.

Who gets the currency in the course of day to day business is a political question. If you insist on public policies that give all the money to the rich, well then it follows you had better tax them.

So, no, you are not understanding. Hope this helps.

[bobbyp]

Nigel,

Great Britain had a national debt of over 200% of GNP after the Napoleonic Wars. Please explain how that led to disaster.

Thanks.

[bobbyp]

Lower bond prices mean higher yields, and when debt is well over 200% of GDP, anything about the tiny present yields gives you a (literally) compounding problem.

If bond prices crash, the coupon payment stays the same.

If bond prices crash, it costs less to buy them back.

[bobbyp]

But almost none of them even acknowledge the other two functions exist.

Really? Please do explain.

[bobbyp]

Of course Keynes again - in the long run, we're all dead - but there you go.

Yup.

[wj]

But almost none of them even acknowledge the other two functions exist.

Really? Please do explain.

For example,
"If you have a fiat currency system, and there are resources (labor, material, equipment) that are sitting idle, then the government, just like the magic fairies in the private sector, can elect to put them to use. They print the money, do they not?"

That's money as a unit of exchange: the government can just print money and buy stuff (exchange it). But it ignores the store of value aspect -- any money already in circulation starts to be worth less. And also the unit of account aspect -- it gets hard to figure out the value of what went in to things in the past in current money terms.

Thus eliciting, for example, Nigel's:
"There is, of course the very real constraint of whether other parties will continue to accept your fiat money as having any value."

Two comments, focused on different aspects of money. And so able to both be correct in isolation, while ignoring the fact that the other was as well.

Does that help?

[Nigel]

Great Britain had a national debt of over 200% of GNP after the Napoleonic Wars. Please explain how that led to disaster.

Britain at that point controlled world trade - it was effectively a global hegemon for the next century. You may be familiar with the term 'exorbitant privilege'
http://en.m.wikipedia.org/wiki/Exorbitant_privilege
Its population doubled in fairly short order.
The Industrial Revolution - strong economic growth.
Life expectancy rather less than that of Japan today....

We also had a national debt of a similarly high order after WW2. A decade of austerity, and hyper inflation in the 70s dealt with that eventually.

There's nothing magical about 200%, but unless everything else is working in your favour, simple arithmetic means that at some point a fairly drastic re-adjustment (austerity; massive inflation; default) is going to be required.

In Japan's case, which is highly unusual in that most of the debt is held domestically, and that the bulk of the debt carries an extremely low interest burden (so no compounding problem up until now), it has defied conventional wisdom for a long time.

However, it's now evident that domestic buyers are drying up.
The budget deficit is large, so the problem is going in the wrong direction. Inflation is very low, and has been for decades,so ditto. Economic growth is very low, and has been for decades (and demographics suggest that won't change quickly), so ditto.

The debate is therefore about what is likely to be the least painful means of readjustment required.

[bobbyp]

But it ignores the store of value aspect -- any money already in circulation starts to be worth less

Maybe. However, if the magic private investors opened their wallets and started buying stuff, would you say the same thing? If the price level does not rise (you just assume it will) what's the difference?

it gets hard to figure out the value of what went in to things in the past in current money terms.

How? A little inflation is seen as a good thing by many policy makers.

[Nigel]

But there are still the Greeces, Portugals, Spains, Argentinas

Those are all unique cases, so lumping them all together to make some point about "oh! nos! National debt! is simply not correct.
My point was "if debt is out of control".
I entirely take your point about Spain, and in no way am I making any kind of moral judgment, but debt is a problem for them as they are running a very high budget deficit, so while the absolute level of debt not at nosebleed levels, it's going in the wrong direction.
Monetary policy is literally out of their control, since they joined the Euro, and the ECB, dominated by Germany, is imposing one which is entirely antithetical to their interests.

There's a great table here:
http://www.tradingeconomics.com
None of those individual statistics is definitive (the UK has a similar level of debt to Spain, and a similarly high budget deficit), but the combination is extremely informative.
(Look at our relative rates of economic growth and unemployment.)

Had the UK been in the Euro, we'd probably be in a similar bind to Spain and the rest.

Italy's case is particularly perverse, as they have been running primary budget surpluses, but deflation imposed by the Northern Europeans means their debt continues to compound.

[bobbyp]

Thanks Nigel.

it has defied conventional wisdom for a long time.

Then perhaps conventional wisdom is wrong in this instance.

We also had a national debt of a similarly high order after WW2. A decade of austerity, and hyper inflation in the 70s dealt with that eventually.

In nominal terms, we did not pay down the national debt during the period 1945-1980. In fact, it increased. Basically, due to economic growth, we outgrew it as a % of GNP.

Generally speaking, at the zero bound, austerity just makes the debt problem worse. Why do you even bring it up?

[bobbyp]

...and hyper inflation in the 70s

Ah, yes. The terrible 70's. We actually had decent real economic growth during that decade. As for inflation, there were a couple of years where it got a little over 10%/year. That is a far cry from "hyperinflation".

[bobbyp]

Monetary policy is literally out of their control...

As I understand it, the member nations cannot control their own currency. When they run a government deficit, they have to borrow from the ECB or private banks.

Essentially, Germany insists on maintaining a trade surplus within the Eurozone. That seems to be the heart of the problem. The "problem countries" are hard pressed to "grow" their way out of debt because they cannot devalue the currency to make exports less expensive.

They really are in a bind, and austerity is not helping any.

[Hartmut]

Hyperinflation is when you need a wheelbarrow to shop for groceries not for the items bought but for the money. It also means that you will have to pay with the wheelbarrow because the money will have lost its value during the time you go from the bank to the shop.

[Brett Bellmore]

"Ah, yes. The terrible 70's. We actually had decent real economic growth during that decade."

Surely you're joking.

[Slartibartfast]

You have to have the currency to pay the taxes. You cannot pay federal taxes with chickens. Thus taxes create demand for the currency, because otherwise it would just be useless pieces of paper.

This makes it sound as if taxes is the only thing that demands currency.

I am guessing I am once again not understanding you correctly.

I don't think either of us believes that money is something that can be printed at will, bobbyp. But you keep saying things that sound as if you believe just that.

Probably the problem is all over here on my side of the screen. If you'd 'splain, once again, for the slower students out here (meaning: me), I'd be grateful.

[bobbyp]

This makes it sound as if taxes is the only thing that demands currency.

wj pointed out some other attributes of a sound currency that is widely accepted as a unit of exchange. Taxes are the foundation of the "widely accepted" attribute (bitcoins, which see).

I don't think either of us believes that money is something that can be printed at will

Let's try this. Fiat money is created at will, but that is not the same as saying it is a good thing to create it willfully (i.e., in vast wheelbarrow quantities). My main points are these:

1. When there is a slump in demand, the sovereign government can step in and buy stuff and run deficits without necessarily causing inflation (standard Keynesian fiscal policy). The period 2008 to the present should make this abundantly clear.
2. When people typically assert the federal government "cannot afford" something they are generally making a statement about what they think the government should buy, not what it can buy. As the creator of the currency, it can purchase anything denominated in that currency.
3. In sum: The federal government is not budget constrained like private actors are, and the currency is essentially a tool, not a straight jacket.
4. There is more to sovereign debt than a number followed by a long string of scary zeros.

[bobbyp]

The wikki has a good summary of MMT and its critics (there are indeed many!).

http://en.wikipedia.org/wiki/Modern_Monetary_Theory

[wj]

"it gets hard to figure out the value of what went in to things in the past in current money terms."

How? A little inflation is seen as a good thing by many policy makers.

The critical word here is "little". Inflation in the 2%-3% range is seen as a good thing simply because of a phenomena known as sticky wages. (This is also one of the reasons why deflation is such a problem when it happens.) Basically, wages can rise easily (to, for example, deal with inflation) -- you just give everybody a (nominal) raise. But cutting the nominal wages of existing employees is very hard. So a little inflation allows you to cut real wages without having to touch nominal wages.

But in the short term, even with a couple percent inflation, how much you paid for stuff (inputs) is stable enough that you know where you stand. But when inflation gets high (the value of money drops substantially), the prices of stuff you bought last week and the prices of stuff you bought last month or last quarter have a wildly different relation to its actual value. To the point where you can't even tell if you would be better off buying in bulk (to get a volume disocunt) or buying at the last minute (to pay in cheaper currency).

[Slartibartfast]

Thanks for the unpacking, bobbyp.

I actually don't disagree with any of it. But we could perhaps disagree as to what constitutes an alarming amount of debt, or whether there is such a thing.

Disagreement: like Jello, there always seems to be room for it.

[skeptonomist]

The reliance on central banks and monetary policy is not "standard Keynesian" if that means what Keynes himself said - he did not believe that monetary manipulations could control economies (see the end of Ch. 12 of The General Theory, also Ch. 24). In fact neither Abenomics nor quantitative easing has done what theorists thought it would - basically Keynes was right. Of course the inflationistas were also wrong, actually because they also thought that central banks would be able to "print money" and this would go out of control. The fact is that no economists have any solutions based on monetary policy - they have all been continually proven wrong (since Keynes).

[bobbyp]

Slarti: Yes, there is always room for disagreement. Why humans seem always on the hunt for more of it is indeed a mystery.

Brett: Average real GDP growth/year by decade...

50's 5.30%
60's 5.42%
70's 3.77%
80's 3.62% (St. Ronnie)
90's 3.92%
00's 1.8% (the golden era of GW Bush).

The decade started badly and ended badly, but there were several years in between with very good economic growth.

[wj]

Well, perhaps it's clear why so many people have this golden glow around their recollection of the 1950s. At least the economy was booming (whatever else was going on).

[Tony P.]

I'd like to see the per capita numbers, myself, before judging the goldenness of any of these decades.

GDP growing 5% is good, but not if population is growing 10%. GDP growing 1% is bad, unless population is falling 6% at the time.

Also, median income growth relative to per capita GDP growth is a big fat hairy deal, for me. If per capita GDP grows 10% while median income stays flat, what the hell good does it do for most people?

--TP

[bobbyp]

Tony,

US population growth was about 1.75%/yr back in the 50's and 60's. It slowed to about 1% in the 70's and 80's, and is currently about .75%/yr or slightly less.

I would expect per capita income to match the gross figures insofar as we had higher rates of growth in the 50's and 60's but also higher population growth rates.

I would expect that median income growth has been somewhat flat over the last 40 years.

http://economyincrisis.org/content/study-shows-meager-increase-median-wages-1980

The real tell is the % of income going to different income levels.

http://www.cnbc.com/id/101025377#.

[bobbyp]

At least the economy was booming (whatever else was going on).

Elvis.

[Barry]

Slartibartfast:

"Yes, a bomb that doesn't go off is still a bomb. There are no bombs that didn't go off; there are only bombs that haven't gone off yet."

Uh, this is interesting, in a world where bombs can be recycled. Heck, the US just got finished dismantling an awesome number of nerve gas munitions. Nuclear bombs have to be recycled every so often.

It's a nice saying, but has nothing to do with reality.