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No time to be afraid of budget deficits

In November 2008 G20 nations used fiscal stimulus to save the global economy.

The Japanese who had experienced a bubble and a crash twenty years earlier had learnt that to maintain growth governments would have to stimulate their economies. Fortunately leaders of the G20 headed listened to the Japanese and the Global stimulus plan was put in place.

The stimulus was very much the idea of economist Richard Koo, author of Holy Grail of Macro Economics.

Here is part of a review of this book:

It's still boom and bust. Koo claims that in the boom phase, monetary policy works, but not fiscal; in the bust phase, only fiscal policy works, not monetary. He shows how monetary policy cannot fight a slump. He contends that only huge fiscal stimuli, government actions to boost domestic demand, can prevent slumps.

Recently Richard Koo gave a lecture at the Lowy Institute which now on SlowTV.

In Japan 15 years ago housing prices soared and then slumped to 87% of their former value. Lower interest rates had little effect and unemployment climbed rapidly. Even with interest rates at zero no one was borrowing money. Asset prices had slumped and many were left bankrupt. In the private sector, the Japanese people and private companies were left with either no cash flow or were using their cash flow to pay off debt. Only government spending kept the Japanese economy from total collapse.

The US suffered a similar collapse in 2008 resulting in a 46 percent drop in GDP and unemployment around 25 percent.

Spain, Ireland and the UK have also suffered a similar fate.

Many are now calling for these governments to reduce deficits and stop stimulus spending.

Richard Koo says that if government stimulus stops now we will face another downturn in the global economy. He says governments should continue with their fiscal stimulus until private sector borrowing reaches more normal levels.

The Chinese government has managed to maintain an 8 percent growth knowing that if it fails to keep up economic growth it has a very short future. Being a dictatorship it does not have to worry about voices that may be worried about growing government deficit.


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Ireland heading to a sovereign debt crisis.

The Irish central bank instructed four lenders yesterday to raise 24 billion euros ($34 billion) and announced plans to merge two of them, taking the bill to clean up Europe’s worst banking crisis to as much as 100 billion euros. That equates to about two-thirds the size of the Irish economy.

Roubini said that a better solution would be to take the senior secured and unsecured debt of the banks “reduce it, convert it into equity so you recapitalize the banks that way and you’re not adding further losses to the balance sheet of the government. Otherwise, you’re going to have not only a banking crisis, but also a sovereign debt crisis.”

More governments are borrowing to avoid bank failures, pushing each of them closer to a sovereign debt crisis.

On a seasonally adjusted basis, the jobless rate in the fourth quarter rose to 14.7 percentfrom 13.7 percent. Unemployment has more than doubled since 2008 as the country’s 10-year property boom burst, saddling banks with bad loans.

It seems to me that if you spent the money creating jobs it would have a better result than throwing good money after bad.

If governments are going to borrow they should at least invest in real assets and create jobs for the millions of unemployed.

Do we still hope for a recovery?

House prices in the United States have sunk to new lows, dashing hopes of a sustained recovery in a key pillar of the overall economy.

Home prices in 20 major American cities fell for the seventh month in a row in January, and were down on average by more than 3 per cent compared to this time last year.

The US and the world are still still hoping for a recovery. We need to understand that there probably will be no recovery.

The financial system is broke.

China has a housing bubble.

No one knows where this will end. But if Australia thinks it can avoid the ‘Dutch disease’ by relying on the relentless construction of empty Chinese shopping malls, ghost cities and unused infrastructure, then we too could be in for a hard landing.

Ricardo's Law


Not quite convinced about a land tax being a principal answer.

Am quite annoyed, however, by the loopholes created by family trusts and overseas residents being able to get away with much lower taxes on Australian income.

Business over people

Consider the flood levy, in which people are being taxed, but not businesses. The whole system if biased in so many ways to favour businesses over people - and people includes wage earners and small businesses who can't afford the experts and  tax structures to reduce their taxes.


... putting a Claude among the albatrosses, iJustin?

Hits and Myths

Scott Dunmore: "The problem isn't money, it's the nature of the smart-arses and slack governance. So called "wealth creation" a la hedge funds and the like is exactly the opposite. It is the garnering of wealth at others expense: in other words, parasitic. People who've never done a productive days work in their lives have the best lifestyle."

Statements such as the above are unhelpful and driven by media myth.

The fund industry is the most diverse industry in the world, it also attracts the most diverse people. I could give multiple examples to prove my statement.

The biggest myth of all is that nobody, not one person, in the industry saw the meltdown coming. Or if some people did they conspired to hide the fact. It's a complete fiction driven by profit making hypocrites such as Mikey Moore.

For every position taken in a financial market, somebody, somewhere, is holding the opposite. That's actually the reason for origin of the word "hedge" in the fund (many so called hedge funds aren't hedging at all).

An example: During the recent housing meltdown one small fund manager was holding a mass of credit default swaps (he was banking on what happened would happen). It eventually netted him  three billion for the year. A tidy sum in any mans language. My point is that somebody, somewhere, did indeed see a meltdown coming, and there wasn't any "secret" about it.

The doom mongers on here should pull their money and place it in a fund short on everything. When the "certain" apocalypse eventuates they could then proceed to fund the "feeding the world".

A taxing puzzle

John Pratt: "I suggest we may have to put a wealth tax on anyone with say over a million dollars worth of bandwidth in the bank."

I suggest that any person with over a million in an Australian domiciled bank is an idiot. Why in Gods name would anyone pay the current excessive taxes (very legally avoidable)? See an international tax adviser and don't pass go!

Someone has to spend! To kick start the economy.

If you want people spending, why are you calling for broad taxation increases? That's the thing I just don't get. Far from picking you out, I also understand the same logic is a widely held one. As I've written, I just don't get it.

In very simple terms, governments collect money from tax. To collect tax one needs "others" making a profit or spending. Discouraging business through excessive taxes will decrease the overall tax take. That's simple mathematics.

Tax and spend for the hell of it is called churn - ultimately a futile project. Did you ever play pass the parcel as a child?

Governments need business making profits, that's how governments make profits called tax. Sure, government could take charge of all business and return all profit to "the people". This particular noble idea worked a treat in the now defunct Soviet Union.

I was recently in Asia and I heard a European stock analyst caution against the currently red hot Australian economy. He summed it up the Australian business environment as two international miners, a couple of banks and a supermarket (poetic licence).

The Australian company tax take tells a tale. A cooling in commodity prices or volumes will be problematic.

Large sums come from a very limited source. That's not a good thing moving forward.

Basically the above means Australia has a limited business environment, with a small number of large entrenched players. The government revenue stream is very reliant on those limited players. Ultimately it means whatever taxes are placed on these businesses, the Australian consumer will pay as the end user.

I think the smart solution would be rather than try and collect large amounts from small pool, why not encourage activity and collect smaller amounts from large pool? Why not encourage a business environment?

Australia isn't an island in its current backward thinking (it's nowhere near the worse offender), however it's not anywhere near world's best practice either.

Public sector spending or double dip recession?

When the financial crisis hit the United States in 2008, Americans briefly turned away from unfettered free markets and a do-nothing government that had been the hallmark of President George W. Bush’s two terms in office. They wanted their government to implement economic reforms that would help revive economic growth. But a more responsible attitude lasted only a few months, until the money supplied by the Federal Reserve and the government stabilized the economy. Since then, the failed policies of the past not only reasserted themselves, but the radical right-wing ideology that underpinned them has become even more extremist.

The Tea Party movement has no plans to revitalize the U.S. economy. It merely wants the federal government to slash its spending at a time when the money spent by the public sector is the only thing that keeps the economy from slumping and suffering a double-dip recession.

Alexei Bayer, a New York based economist.

Yet another economist who thinks that if we stop public sector spending we are in for a double dip recession.

It is no time for a tea party.

Why Isn't Wall Street in Jail?

Over drinks at a bar on a dreary, snowy night in Washington this past month, a former Senate investigator laughed as he polished off his beer.

Everything's fucked up, and nobody goes to jail," he said. "That's your whole story right there. Hell, you don't even have to write the rest of it. Just write that.

Matt Taibbi - Rollng Stone

Madoff: Government a ponzi scheme.

So, by the above reckoning the dominant global financial system is a Ponzi scheme run by criminals.


Fiona: Exactly, Justin. Those who know where the bodies are buried are always safe ... but given that they are the (amoral) offspring of the Robber Barons and Al Capone, what else could one expect?

Ponzi schemes

The problem with modern capitalist economics is that it sells a Ponzi scheme. If people spend up, the more they earn as the money comes back to them.

According to Accounting 101, there are two critical financial statements, the balance sheet and a profit and loss account. Governments, of course, don't comply with Accounting 101, and it is very hard to see whether a country is actually developing, or putting on a show while selling the furniture (minerals in our case).

There are good years and bad years, years when we can save for a rainy day and years with rainy days (cyclones in our case).

The real question is how wisely we use our money. Do we invest in assets that deliver solid investments, or do we fritter it away on upgrading it to the latest iphone? 


To the specific topic, I'm like the others, I wish the politians, economists, and bankers would grow out of economic rationalism.

Interesting to catch a brief excepts from an ABC show today about the Chinese about to liberalise their currency policies a move toward integration.

Moodys and so on were discredited in 2007 and it is a testament to the stubborn unimaginativeness of economic mandarins that they cling to the enforcement of these Bs ratings at the three levels of government. But of course the politicians love them too, it gives them excuse to wangle out of taking responsibility for bounties promised earlier. 

Why do we need growth

 It has me in mind of a question Jay Somasundaram once put to me, about whether we need growth.

What we need is personal growth and economic growth provides an opportunity for that. Thinking personally, i was born in Australia and of a generation brought up with and to great things, universal nutrition, health, education and the like. But I cringe at the wastage.

And I wonder why we've got hooked on growth and its material diversions, for its/ their own sake and maybe losing touch a bit with the common person's life and life itself.

America's forgotten millions

So the next time you hear some Republican declaring that he’s concerned about deficits because he cares about his children — or, for that matter, the next time you hear Mr. Obama talk about winning the future — you should remember that the clear and present danger to the prospects of young Americans isn’t the deficit. It’s the absence of jobs.

But, as I said, these days Washington doesn’t seem to care about any of that. And you have to wonder what it will take to get politicians caring again about America’s forgotten millions. 

This is an extract of an opinion piece by Paul Krugman in the New York Times.

Today's headlines in the Cairns Post is unemployment now at 13% and rising. Yes its more proof of  the two speed economy.

People are more important than deficits: destroy the hopes of millions and you end up with streets of blood. Look at what is happening in the Middle East.

Money makes the world go around

Scott, sorry you are getting weary. But let's try to use a bit of logic here.

Money is what makes the world go around, I think we can all agree on that.

If no money is being spent there is no work for those of us that are forced to work for a living. The world stops spinning.

Governments can print money.

People love to spend money.

Companies love to make profit

All good so far.

If people have no money and are scared to borrow because of falling asset prices, there is no way people will kick start the economy.

If companies have high debt levels and no cash flow because of the GFC or similar economic disaster companies will pay off debt before they invest money, so we can not rely on the private sector to kick start the economy.

This leaves us with the government, the only people that can print money.

The government prints money builds infrastructure people are employed (instead of being on the dole).

Companies eventually pay off there debt look for ways to invest and eventually have more money than the government.

The government can stop printing money and start collecting tax.

And yes the world begins to spin.

Money and Wealth

John, one might get the impression that money is wealth - all we have to do is print the stuff,  the world turns, and people prosper.

On the surface one could be led to believe that is the case, but it's not that simple.

You see, the world is at present saturated with money, so why aren't we all wealthy, why is unemployment rising, why are over 40 million Yanks on food stamps, why are people rioting over food prices and lack jobs?

What is happening to all that freshly printed money?

The difference between money and wealth.

It won't be long before the arse falls out of the global financial complex, and when it does, all the money printing in the world won't be worth a tinkers dam.

Ah, democratic capitalism: it was a good ride while it lasted (for some).

Wealth and Money

Justin, money is a measurement of wealth. How do we judge if a person is wealthy or not?  We look at the monetary value of their assets.

The world is not suffering from a lack of money or wealth. The problem is that we have deflation asset prices are falling. People and companies are paying off debt or putting their money into banks. The banks are making borrowing more difficult. Money is sitting uselessly in bank accounts.

The only way out of this mess is for governments to invest in infrastructure until the private sector is willing to risk its money and begin to invest.

 When unemployment levels begin to come down and governments start to compete with the private sector for workers that is the time for government to cut back its spending. 

If neither the government nor the private sectors uses money to build wealth we will all be in trouble.

That is why I believe that we should not be afraid of deficits.

Borrowing money to build infrastructure when the private sector is not capable of employing the total workforce is just common sense.


The 'tross and the wombat went to sea.....

..in a beautiful pea-green boat.

John, sorry old son but you didn't put much thought into that did you? You've already stated that it's OK for governments to "print" money so by extrapolation, printing money creates wealth and we can all see where that's heading; nowhere.

Your premise is wrong; money is a medium by which we exchange goods/servises for like.  Think of it if you like, as band width, the more you've got the more data you can send and receive.

I've said this all before but obviously the message didn't get through.

Marshall McCluhan back in the sixties understood that the "medium" had become the message and when that happens reality is defenestrated.

(I threw that in for Fionas's  benefit but to save you looking it up, "out the window." I don't mean to be patronising, it's a bloody obscure word and I'm a bloody obscure person.)

Did you follow  the wombat's link? because if you did you'll have noticed a reference to Adam Smith, all you have to know about economics.

The growth in terms of  the much vaunted GDP for Australia over the last 20 years has been in lockstep with the growth of household debt; in other words, no real growth.

Get the picture?

Adolph Hitler didn't need "money" to transform Germany from a state impoverished and suffering from hyper inflation by the terms of the Treaty of Versaille, he had organisation provided by the likes of Albert Speer.

Autobahns, the "peoples wagon" and a radio in every house.

All this raises the spector of Kipling's "The ghosts of the copy book headings",  David Roffey's introduction.

Think about it.

Post script : Well the former paragraph was rubbish, how come no one picked up on my mis-spelling of "spectre" and what was in my head ; the ghost of ghosts? Jeez Dunmore, lift your game.

All the bandwidth in the world doesn't help

Scott, all the bandwidth (money) in world is not going to fix the unemployment problem nor put food into the mouths of the hungry. 

Only action can do that, If all the wealth is stored in banks then nothing happens. Too few have too much and are not using it (bandwidth or money).

Someone has to spend! To kick start the economy.

If people can't or won't spend, if companies won't either then only governments can get the economy moving.

In Australia the choice is governments will either pay wages or dole.

What do you think would be the best option?

I suggest we may have to put a wealth tax on anyone with say over a million dollars worth of bandwidth in the bank.

Get the money out of bank accounts and working again.

What else can we do, to make the under employed or unemployed productive again?

All I am saying is that when unemployment is high it is better for governments to go into debt to keep the workforce occupied rather than rioting.

Pretty simple really. 

You still haven't got it

John, when you say "Get the money out of bank accounts and working again", to which bank are you referring? Because there isn't much Aussie money in domestic banks, they borrow wholesale from overseas and lend it on. This becomes a problem at some point because debt has to paid off and that's when people stop spending and the economy slows. Boom and bust.

The point I'm making is that plenty of stuff happened without "money", trade was conducted by barter and often labour was coerced but still had to be housed, clothed and fed, even slaves. I don't mind the idea of work for the dole but the work must be meaningful and rewarded appropriately. There's nothing wrong with governments printing money as long as it is put to use properly, not given away like the stimulus package to be frittered away on (mostly foreign) trivia.

We agree on one thing though: a wealth tax. The original tax and to my mind it should be the only tax. In that way the "filthy" rich wouldn't be able to get away with paying no tax while pensioners and the poor are stiffed via the regressive GST. Think "Domeday Book". Money was scarce in those days so people paid by kind, no PAYG. If you owned ten cows you'd have to give up one, the "tithe".

The problem isn't money, it's the nature of the smart-arses and slack governance. So called "wealth creation" a la hedge funds and the like is exactly the opposite. It is the garnering of wealth at others expense: in other words, parasitic. People who've never done a productive days work in their lives have the best lifestyle.

The (negative) Marginal Productivity of Debt

 I agree Paul, in theory, however one must take into account that Keynes was a man of his times.

Fortunately in many ways Australia is still the lucky country, in spite of the morons running the show; our public debt is circa 6% of GDP and our debt to income ratios are easily manageable.

Thank you China.

Unfortunately personal debt in Australia poses many risks, and a significant downturn will see many in tears, however our nation has many resources (thanks you black fellas) and should have a better chance of recovery.

Infrastructure spending should be not negotiable. The punters and industry alike always benefit from improved transport, communication and eduction etc-  stuff that is necessary to create real wealth and prosperity. However such projects have to be managed prudently, and in the interests of the common wealth - sadly politicians in general are not good money managers (no need to provide examples).

These days the punters have been conditioned into thinking that all (government) debt is bad; this is not the case and that is the point you are making John, we agree.

But money, or debt can/does act like a drug, when you have an unlimited supply of your poison why would you want to turn off that supply? That's why all  governments that run fiat currencies always end up printing too much of the stuff (it helps them get elected) - overdose is inevitable (history supports this 100%).

On one hand many punters want their benefits from the government, but on the other hand many punters don't want to pay the interest on the debt (tax) created to supply those benefits. Selfish little buggers aren't we.

At the end of the day all fiat currencies have a life cycle; at present we are witnessing the decline of the world's reserve currency.


Because no matter how much money the Yanks print they are now in negative territory regarding the marginal productivity of debt. A sure indication that the game is up. Funny that, when was the last time you read anything about the marginal productivity of debt in the main stream? Probably because nobody wants to discuss it.

Back in the days of Keynes when US national debt was bugger all (and the alphabet soup of incomprehensible derivatives was unknown) a $1 investment in debt could return around three dollars to GDP. 

But this can work for only so long.

Today, in the era of Barrack Obama and his Keynesian intellectuals (never had a real job) for every one dollar of public debt created only around 86 cents (and falling) is added to GDP. In short there is no longer enough income to cover debt - and it's getting worse.

The game is over bar the shouting - and believe you me the shouting could go on for some agonising years yet.

And in the mean time the greedy bludgers who engineered this mess (and who are still in control, rather than in gaol) are positioning themselves to take it all when the reset button is inevitably pressed.

Once again the peons (and their children) will pay - while the greedy bludgers enjoy matinees and cocaine upon their yachts in Monaco. 

Finally, iJustin has absolutley no idea how all this is going to play out, but based on what we are witnessing accross the Planet at present you have to admit: it ain't pretty.

Buy gold, silver, oil, cotton, corn - anything but debt

Who's afraid of budget deficits, in the US it all gets added to the tab, just the same as we do; pretty well the same all over.

Now, how does one pay back all that debt?

The answer to that is easy - it's not gunna happen. China knows it, the Yanks know it, and everybody else (who is paying attention) know it. China's banks and the Chinese are buying (physical) gold and (physical) silver like crazy.

Why would they do that? 

They talk about boom and bust, a natural business cycle and attempt to make sense of today by looking at the past.  Sadly one suspects this is not a cyclical thing, rather a secular change.

Globalisation was a big con, the free market was a big con, because what we've ended up with is Corporatism, and when the Corporation goes belly up the taxpayer foots the bill. The Corporate oligarchy have become communists: The (global) Party, sucking off the taxpayer's teat like the criminal bludgers they are.

"I've abandoned free-market principles to save the free-market..."  George Bush.

A financial paradigm underpinned by debt and criminality is "absurd".

Interesting times indeed.

Unfortunately most of the above is all too hard - let's go watch telly and forget about it.

No brainer

I commentented on this long enough to be weary of it.

You can't live on credit indefinitely and the idea of a globalised economy with differing standards of life style, disparate terms of trade and currency will all end in tears.

And we thought Friedman economics was dead. Not just yet.

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