Four Things Economic Experts Don't Tell You

by metatron 1 Replies latest jw friends

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  metatron

  I'm just astounded at how 'experts' ignore all sorts of simple facts in their comments and predictions. As this applies especially to the current economic crisis, I offer three thoughts.

  Deficit budgets aren't balanced at zero. Well, not in real dollars, anyway. Dropping a government budget to a zero deficit would be deflationary since there is always a certain percentage of inflation. So, in real dollars, the budget needs to be balanced with a small deficit that matches the inflation rate ( to be neutral). Not even Senators seem to understand this.

  America gets away with debt because of its size and liquidity in markets. It's amazing just how much money foreigners keep dropping into US markets and Treasury bills. In part, this is because we have a large enough market to dump large sums into, together with good liquidity. Also, nations end up with huge piles of dollars they have to do something with ( from selling us oil, etc.) and so they get stuck putting it back into US investments. What a neat deal for us! Who knows how long this craziness will go on?

  We have the demographic issue. The US has large numbers of young workers while Europe and Japan are aging rapidly. Japan actually lost net workers last year. How can huge debts ever be paid off if the population is old - and in need of more and more services from governments? Like healthcare? Recent events exposed the fact that many European banks are far more leveraged than those in the US. Result: The US is in awful shape and most everyone else is worse! Russia may be losing close to a million people a year in net deaths over births. Australia should do well with their birthrate and feeding commodities to China for many years to come.

  Canceling debt is deflationary. Experts seem to miss this point. If I owe a bank a million bucks and never pay any of it back, I Have just pulled a million bucks out of the money supply. It's gone. Poof! And you wonder why everything financial is going down? The air is being let out of the balloon and governments are looking for ways to re-inflate economies while consumers reduce borrowing. You may see large government work programs to try to get things pumped up again.

  metatron
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  quietlyleaving

  an interesting article I was reading today

  http://www.businessspectator.com.au/bs.nsf/Article/Asias-revenge-K8TBB?OpenDocument&src=sph

  Between January 2000 and April 2007, the stock of global foreign currency reserves rose by $5,200 billion. Thus three-quarters of all the foreign currency reserves accumulated since the beginning of time have been piled up in this decade. Inevitably, a high proportion – probably close to two-thirds – of these sums were placed in dollars, thereby supporting the US currency and financing US external deficits.
  
  The savings glut had another dimension, related to a second financial shock – the bursting of the dotcom bubble in 2000. One consequence was the move of the corporate sectors of most high-income countries into financial surplus. In other words, their retained earnings came to exceed their investments. Instead of borrowing from banks and other suppliers of capital, non-financial corporations became providers of finance.
  
  In this world of massive savings surpluses in a range of important countries and weak demand for capital from non-financial corporations, central banks ran easy monetary policies. They did so because they feared the possibility of a shift into deflation. The Fed, in particular, found itself having to offset the contractionary effects of the vast flow of private and, above all, public capital into the US.
  
  A simple way of thinking about what has happened to the global economy in the 2000s is that high-income countries with elastic credit systems and households willing to take on rising debt levels offset the massive surplus savings in the rest of the world. The lax monetary policies facilitated this excess spending, while the housing bubble was the vehicle through which it worked.

  and the way out

  So among the most important tasks ahead is to create a system of global finance that allows a more balanced world economy, with excess savings being turned into either high-return investment or consumption by the world’s poor, including in capital- exporting countries such as China. A part of the answer will be the development of local-currency finance in emerging economies, which would make it easier for them to run current account deficits than proved to be the case in the past three decades.
  
  It is essential in any case for countries in a position to do so to expand domestic demand vigorously. Only in this way can the recessionary impulse coming from the corrections in the debt-laden countries be offset.
  
  Yet there is a still bigger challenge ahead. The crisis demonstrates that the world has been unable to combine liberalised capital markets with a reasonable degree of financial stability. A particular problem has been the tendency for large net capital flows and associated current account and domestic financial balances to generate huge crises. This is the biggest of them all.
  
  Lessons must be learnt. But those should not just be about the regulation of the financial sector. Nor should they be only about monetary policy. They must be about how liberalised finance can be made to support the global economy rather than destabilise it.
  
  This is no little local difficulty. It raises the deepest questions about the way forward for our integrated world economy. The learning must start now.