According to the Telegraph.co.uk in an article entitled "Savers told to stop moaning and start spending," Charles Bean, deputy governor of the Bank of England, said, "Savers shouldn't necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit." Mr. Bean also said savers "might be suffering" from the low bank rate, but they had done well from higher rates in the past and would do so again. Encouraging Britons to spend was one reason why the Bank had cut interest rates, he added.
Spend what exactly, Mr. Bean? Why is it that central bankers find it easy to recall the following equation: C (consumption) + I (investment) + G (gov't spending) = GDP (gross domestic product), but they can't seem to learn this one: HU (high unemployment) + HD (high debt levels) + 0 (no interest income) = AZS (almost zero spending).
I know why: because the latter depends on fiscal policy, and central bankers consistently agitate against fiscal policy. This continues despite the fact that expansionary government spending by accounting identity helps to sustain the private sector desire to save. Unfortunately, Charles Bean of the Bank of England fails to understand that today's predisposition to save is a natural reaction to the credit binge that preceded the crisis. Had the increased private sector saving that occurred over the past few years not been accommodated by rising deficits, then the negative income adjustments would have been more severe and the private sector's plans to return some safety margin to their balance sheet positions would have been thwarted. But he and his fellow central bankers appear incapable of acknowledging this fact.
Each week new evidence emerges that categorically demonstrates that the fiscal austerity proponents are clueless about the functioning of real economies and monetary systems. So today in Britain we have a new government committed to significant budget cuts, despite mounting evidence that cuts already undertaken are drastically curtailing their economic activity. The recently released Markit/CIPS UK Manufacturing Purchasing Managers' Indices, which is calculated from data on new orders, output, employment, supplier performance and stocks of purchases, fell to a ten-month low of 53.4 in September, down from a revised figure of 53.7 in August. Similarly, Ireland finds itself in the midst of a major banking crisis -- Anglo-Irish Bank was recently nationalized, for example -- despite the fact that the Irish government has steadfastly continued to apply the fiscal austerian measures urged on it by the ECB. In reality, this is because of the austerity measures it is taking. The budget deficit, as a percentage of GDP, now stands at 32 percent! Those are wartime-type levels of expenditures.
Yet the conditions attached to the European Central Bank's ongoing financial support of Ireland and the rest of the euro zone is continued fiscal austerity. The so-called PIIGS nations remained trapped between Scylla and Charybdis as a consequence of this Faustian bargain with the European Central Bank. If the ECB stops buying national government debt on the secondary markets, those governments are likely to default, and the big French and German banks it is protecting will be in crisis. Alternatively, every day governments like Ireland or Portugal continue with this policy, the more their economies continue to implode. Ultimately there will be mayhem. The euro itself could once again be threatened.
Don't get us wrong: we think such deficits ultimately put a floor on demand and will help the economy recover. But policy makers need to let these economies breathe for a time, rather than crushing them with additional threats of fiscal austerity. Isn't it interesting that the very policy prescriptions designed to eliminate the so-called "scourge of public debt" are actually increasing it? Shouldn't that make our policy makers pause in their enthusiastic embrace of fiscal austerity? Even the high priests of austerianism, the International Monetary Fund, are now conceding in their latest report that these current policies will condemn Southern Europe to death by slow suffocation, as well as leaving northern Europe, the UK, and the US in a slump for a long time to come.
Policy makers here in the US continue to hint at accounting tricks such as quantitative easing on the premise that central banks swapping one financial asset for another will help incite more speculation. That seems to be doing the trick for the stock market. But this does nothing to boost underlying aggregate demand. How about a solution for Main Street?
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Even as the markets continue to make new post-2008 recovery highs, governments continue to construct policies around bailing out fundamentally insolvent financial institutions. These policies ensure that the bankers and others can continue to get their exorbitant and totally unjustifiable bonuses, thereby sustaining the very practices that created the crisis in the first place. Lloyd Blankfein of Goldman Sachs warned that the bank could shift its operations around the world if regulatory crackdown becomes too tough in certain jurisdictions. To which any politician with an ounce of backbone ought to say, "Good! Take your socially polluting activities elsewhere and leave our populations alone."
Of course, they don't do that. The more likely supine response (as we've already seen in Basel III and Dodd-Frank) is a further undermining of any kind of serious regulation. We tinker around the edges but make no fundamental, structural reforms. It's a national scandal that our most elite businessmen and professionals, who have destroyed the global economy through an unprecedented orgy of mortgage and accounting fraud, have to date gotten away with it scot-free and continue to have a major hand in policy making. Equally incredibly, our governments continue to trumpet the "success" of abominations such as TARP along with their enablers in the media.
As the risk of being called a whiner by Vice President Biden, it has to be pointed out that these very same governments hand out little in spending to underpin the real economy, even as unemployment remains in double digits around the globe. Government support for the real economy via fiscal policy is minimal compared to the trillions thrown at the financial sector. But before we see any kinds of real reductions in unemployment, the cries of "socialism" and "intergenerational theft" rise. The fiscal austerians launch counter-attacks to mobilize against further fiscal expenditures that support employment growth. The expansion of fiscal policy is stopped dead in its tracks.
Curiously, progressives have come to be seen as the enemy because they dare to point out the incoherence and incongruity in current government policy.
For all of the recent hoopla in the stock market recently, much of the latest economic data is consistent with a slow to stagnant economic environment. In the US, inventories are rising. ISM new orders are now just barely hovering above 50, which usually marks the onset of falling levels. The same thing can be said of the leading indicator (which has been falling since the second quarter), and the coincident to lagging indicator ratio. Weekly chains store sales continue to slip toward the April/May lows, while mortgage applications for refinancing are also tipping over, despite the recent drop in mortgage rates. Second quarter revisions of GDP were mild, although this probably marks peak profit margins
Overseas, Japan appears to be reverting back into a recession. Additionally, very few people are looking at the direct impact of China's trade policies and how Beijing's mercantilism is beginning to hollow out other countries' manufacturing bases -- not just in the US but also in other parts of Asia (which are also experiencing decelerations in their exports and purchasing manufacturing indices).
Consumer expectations are tipping over, and we are concerned with a relapse back to a low level of confidence, which never improved from the recession lows. Euro zone company and macro data flow are starting to reflect more fiscal retrenchment , and with the euro higher, exporters may find more competition in the quarters ahead.
Message to today's policy makers: the public debt ratio will fall again when growth resumes. Growth will not resume very strongly unless it is continued to be supported by discretionary fiscal stimulus. There is no magical alternative. Hacking away the last vestiges of fiscal support will simply ensure much more misery, unemployment and social turmoil in the years ahead.
Cross-posted from New Deal 2.0.
Republican ideas don't work. They never do because they are abstractions. Every time the rights gets it's cold. clammy hands on the levers of power they screw everything up. Our debt rises. Our national security is harmed and the social fabric of our country gets torn apart. I've watched this pattern happen since 9 presidents ago. The democrats come in and fix everything the right screw up and just about the time things start going well again everyone freaks out about the cost of the clean up and hires the pigs again. Americans have a very short memory.
You can't ask the flea what he thinks of the dog overall. He'll just ask for more blood.
Alternatively, a 20% tax on the assets of the wealthiest 1% of our inhabitants (who control over $20 Trillion in assets with the top 10 individuals controlling about $300 Billion) would allow us to pay off the debt immediately. We do have a structural deficit because taxes on the wealthy are exceedingly low by historical 20th Century standards. If we took away about half of the Defense Budget (by winding down the two wars and having a less aggessive international posture), while simultaneously raising marginal tax rates to 90% for those with net incomes over $1 Million, we would have surpluses as as far as the eye can see.
Like Europe, if the Repiggies take control of the Congress, the harm to the middle class of this country will be massive. People are going to stop spending, and then everyone will wonder why the economy takes another drastic downhill slide.
Oh, I forgot. That measely little $10 or $20 a month I got from the Bush tax cuts - if the Repiggies let me keep that, it will make all the difference in the world.
Tell your citizens that they can starve, sleep on the streets, and take asprin to cure whateve ails them, and they are not going to blightly go out and buy stuff. No one seems to understand this, but its going to become very apparent - probably by early 2012, just in time to re-elect President Obama.
The Central Bank can charge the private sector what ever the market will bear. But the public sector is supposed to have sovereignty over the currency it creates from thin air (fiat money.)
Charging yourself interest when you control the creation of fiat money is stupid monetary and fiscal policy.
You said, "Curiously, progressives have come to be seen as the enemy because they dare to point out the incoherence and incongruity in current government policy."
Isn't it obvious why when you see what the real plan is?
What these "big financial institutions (sic)" actually did was old-fashioned financial crime; just stupendously big and audacious.
What made it happen was "old-fashioned bribery," just once again, stupendously big and audacious.
Want to solve this? Go find "McGruff."
It seems you are talking about Ricardian Equivalence. This is where ordinary people and businesses spend less now when deficits are high because they anticipate higher taxes in the future. Does this sound like something that happens in reality?
The other problem with that is that debt is a stock, not a flow. Taxes are a percentage of economic flow; when growth resumes, deficits (a flow) fall, and surpluses result. This can be used to pay down debt. So in other words, debt can be paid back without raising tax *rates* - just encouraging higher tax income from a growing economy.
On top of that, issuing government bonds (debt) is purely voluntary, and has absolutely no deflationary impact.
"When people are paid to ostensibly do nothing it does the opposite of promoting economic growth"
Thats unemployment benefits, and yes, it does promote growth - that money is spent, inventories go down, companies hire more people to replenish their stocks due to higher demand. This then causes unemployment to go down, and more stuff is produced!
I'm sorry, we can't all be doctors, lawyers, bankers, and real estate agents. The industrial base is what drives all other employment including the public sector, which is affected by lost tax revenue.
Just go to a town that has lost its mill and you'll see the devastating ripple effect that occurs throughout. That same thing is happening to the entire country, it just takes a lot longer for the ripples to spread.
"Hmm... this is the world's biggest industrial nation. Stuffed full of resources, willing workers (with good taste), mothballed factories still connected by serviceable rail lines ... Duh."
And that person, like her grandmother before her, is going to become stupendously (and genuinely!) wealthy.
Here.
In America.
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