The Rise of Debt, Interest, and Inequality

According to Paul Krugman, he’s “had a mild-mannered dispute with Joe Stiglitz over whether individual income inequality is retarding recovery right now.” Since both Nobel Laureates were focusing on gross private savings, I broke down that measure by individual components and sub-components. Insights gained from those charts led to the conclusion that:

This data is consistent with rising income and wealth inequality but requires reversing Stiglitz’s “underconsumption” hypothesis. Trying to maintain relative consumption levels, many households clearly chose to rely on previous savings or new debt as a means of temporarily boosting consumption. As inequality continues to rise, wealthy households are now electing to retain more of their savings within corporations. It doesn’t take a leap of faith to suggest this combination of factors depresses aggregate demand.

Still unconvinced, Krugman has been searching for further data (see here and here) that would lead him to believe inequality really is holding back the recovery.

Hoping to aid Krugman in his quest and expand upon my “overconsumption” theory, let me respond to a critique of the previous post. Over at Mike Norman Economics, a commenter (Ryan Harris) kindly noted the obvious omission of interest income and sectoral balances. After sorting through interactive data from the Bureau of Economic Analysis, here are net amounts of monetary and imputed interest by sector [positive (negative) total implies sector receives (pays) net interest]:

Unsurprising to those familiar with sectoral balance analysis, households net interest position took a sharp turn upwards when federal budget deficits began expanding more rapidly in 1980:

Around the same time, household interest income received a significant boost from the nonfinancial business sector. The pronounced decline in the net interest position of that sector aligns closely with high interest rates of the preceding period and a massive expansion of nonfinancial corporate debt shortly afterwards:

Since then the rise and fall of nonfinancial interest payments (and outstanding debt) has tracked the business cycle, with the overall trend remaining steadily lower (higher net payments and outstanding debt). Although these transfers support household income, they also increase income inequality since wealthy households hold a vast majority of financial assets (including corporate debt).

Turning to the foreign (rest of the world) sector, the U.S. current account (trade) balance fell heavily in the 1990’s:

Foreign countries began amassing large quantities of U.S. financial assets (primarily Treasuries) corresponding to the substantial trade deficits. The growth in net interest receipts arising from these holdings represents an ongoing leak in domestic aggregate demand.
   
With the beginning of a new millennium and the dot-com bubble, a hostile environment was created for the household net interest position. Federal budget surpluses, declining interest rates, rapidly expanding trade deficits, and increasing payments to the financial sector (for housing) led to a nearly 40% decline in household net interest receipts. Combined with increasing income inequality, many households drew upon savings and increased demand for new debt to maintain previous levels of consumption.

A side effect of the budget surpluses was a growing desire for safe financial assets separate from U.S. Treasuries. Securitization provided a means for new loans of varying risk to be converted into supposedly “super-safe” assets and transferred off of bank’s balance sheets. These factors encouraged banks to meet the surging demand for new loans coming from households (Chart: Household Debt-to-GDP):

The effects of these transactions can also be seen in the transfer of net interest payments from households, and later businesses, to the financial sector. Apart from adding to inequality, these transfers reduce aggregate demand since, as Michael Hudson notes in The Bubble and Beyond, “financial institutions tend to save all their income.” (2012: Kindle Locations 6814-6815)

Since the financial crisis ended, the trend towards higher net interest receipts by the financial sector and greater net interest payments by the nonfinancial corporate sector have returned. These transfers of income up the income/wealth ladder serve to exacerbate the weak demand stemming from two decades of stagnating household interest income. Unfortunately, and so far unsuccessfully, public policy (fiscal and monetary) remains dedicated to originating a new private debt led boom.  

The changes in net interest payments/receipts over the past few decades highlight the growing income and wealth disparities present in our society. For many years households dug themselves deeper in debt to maintain relative consumption levels. The costs of excessively accumulating private debt have now been recognized, but the burden of interest payments suppressing aggregate demand will be felt for years to come.  

  
Bibliography
Hudson, Michael (2012-10-04). THE BUBBLE AND BEYOND (Kindle Locations 6814-6815). ISLET. Kindle Edition.

Strengthening Euro May Reignite EU Crisis

Back in September, ECB President Mario Draghi outlined the central bank’s willingness to cap sovereign yields through unlimited open market transactions (OMTs) for countries that requested help and submitted to structural reform (i.e. deficit reduction). Following the announcement, sovereign yields began falling across Europe and the euro began appreciating against numerous other currencies. As sovereign credit markets have eased, no countries have been forced to ask for explicit help from the ECB and the ECB has not needed to purchase sovereign debt in the secondary market. Although credit and currency markets reflect a strengthening European economy, unemployment continues rising to all-new heights and GDP growth remains decidedly negative in many countries. If actual economic improvement is not forthcoming in the next few months, Joerg Bibow may be correct in claiming that Draghi’s Liquidity Bluff Will Be Called: 

Essentially there are three parts to properly resolving the euro crisis, and one vital precondition. The first is symmetric internal rebalancing, the second is dealing with the area’s debt overhangs, and the third is to turn the flawed euro regime into a viable one by fixing the original flaws. Crucially, crisis resolution will be difficult, if not impossible, without robust GDP growth. For in a shrinking economy not even a balanced budget will prevent the public debt ratio from rising further, while interest rates cannot be low enough when even nominal GDP growth is turning negative.

Mindless fiscal austerity is self-defeating when inflicted on a deleveraging private sector and fiscal multipliers large when neither monetary conditions nor exports can provide much relief. Pursued simultaneously across the continent, European countries are deflating each others’ key export markets, implicitly relying on extra-regional exports to make up for their suicidal pursuits. By forcing adjustment solely upon debtor countries, where debt overhangs are naturally concentrated, their solvency problems are made only worse. Resisting upward wage realignment, Germany is pushing its partners, including France, into debt deflation.

Structural reform is no offsetting growth strategy at all. It worked for Germany, and only with a long delay, because Germany was going it alone while the world economy was strong. Germany needed an external surplus of 7 percent of GDP to finally balance its public budget. Today, the world economy can barely tolerate a repeat of that feat for Euroland as a whole.

As over-indebted private sectors continue to deleverage alongside attempts at fiscal restraint, the EU is effectively relying on its export sector to make up the difference. In a weird twist, Draghi’s actions to stem the sovereign debt crisis have prompted a significant appreciation of the euro. This result all but ends the EU’s hopes of creating an external surplus sufficient to balance fiscal budgets and will increase downward pressure on economic growth. My conclusion remains similar to Bibow’s:

In short, the euro remains firmly on track for breakup. It is only a matter of time until Mr. Draghi’s liquidity bluff will be called.

BI: Wall Street’s Most Important Charts of 2012

Business Insider has put together a fantastic list of Wall Street’s 75 Most Important Charts of 2012 (h/t Pragmatic Capitalism). The entire list is worth looking through and sure to spark numerous insights. Many of the charts need no further comment, so I’ll just offer my top few here:

Canada Catches the Deficit Reduction Bug

Over the course of this year, economic growth has been slowing considerably in many countries that were previously considered beacons of strength following the global financial crisis. Among those countries falling on harder times is Canada, eking out growth of 0.1 percent in the third quarter. Canada appears determined not to be outdone by Europe and Australia in reducing its budget deficit at the expense of economic growth. Canadian optimism based on the last round of austerity is badly misplaced for reasons outlined in this fantastic post on Austerity in Canada: Then and Now (at Fictional Reserve Barking). Taking a sectoral balances approach, here are three charts that highlight the differences:

During the 1990’s, Canada witnessed a dramatic rise from a ten percent budget deficit to a fiscal surplus. That reduction in aggregate demand was countered by a significant decline in the household financial balance to a net borrowing position and a substantial trade surplus (foreign net borrowing). Keeping with global trends, the massive rise in Canadian household debt was primarily funneled into the domestic housing sector, pushing prices into bubble territory:
Source: Macleans.ca

The Canadian government’s hopes of repeating its “success” from over a decade ago will require a renewed surge in demand from one of the other sectors. Weak global growth, especially in China, suggests that commodity-rich Canada will not witness a dramatic reversal in their trade balance anytime soon. That leaves the household (or business) sector to pick up the slack.

As witnessed recently in the US and throughout Europe, there comes a point at which households can no longer credibly be expected to repay outstanding debts. Regardless of what event brings about this realization (possibly declining house prices), the ensuing household deleveraging will be a major headwind to growth.

A global commodity boom and domestic housing bubble bailed out the Canadian government last time it attempted to drastically reduce the budget deficit. This time around, the government’s actions may be enough to bust the housing bubble and push Canada into a recession.

Furthering the Post-Keynesian View of Wealth and Income Concentration

As frequent readers of this blog are well aware, my approach to understanding business cycles is most closely associated with the Post-Keynesian sub-disciplines of Monetary Realism (MR) and Modern Monetary Theory (MMT). The order of appearance is intentional since I find myself more frequently in disagreement with MMT when its proponents stray too far from their monetary operations expertise into the realm of policy recommendations. Though I support the government’s ability to offset private sector deleveraging with budget deficits, I find it troubling that more specifics on the distribution of funds and current tax laws are often omitted from the discussion.

Although these disagreements are meaningful, they do not discount the shared goal of promoting multi-sectoral analysis of business cycles. Thornton (Tip) Parker, at New Economic Perspectives, puts forth two ideas to further this goal. His first idea revolves around the issue of wealth and income concentration that I noted above:

The wealthy use much of their money just to make more money by gambling through hedge funds, leveraged buy-out funds, and other financial schemes.  They take some out of the economy by spending in other countries and hiding from taxes with off-shore accounts.  They are not using much to make productive investments to create more jobs that would provide good pay and benefits in this country.  Too much of what high earners receive leaks out of the Main Street economy to Wall Street, and often to other countries.

I do not think that MMT and MS consider the leak adequately. They explain why the government must create more new dollars to offset private sector and foreign surpluses.  But they do not explain how to prevent many of those dollars from flowing up and increasing the wealth concentration.  I suspect that more dollars flow out of the Main Street economy through the leak than as payments for net imports.  Just the need of many middle and lower income families to borrow ensures that some of their income will flow up in the form of interest and finance charges.  (Margrit Kennedy has recently estimated that thirty-five to forty percent of all purchases go to interest.)

The effect of concentration might be analyzed by dividing households into two subgroups, one for the wealthy (say top 10%) and one the rest.  Showing each subgroup’s surplus or deficit in relation to the rest of the private sector and the foreign and government sectors would show how much of a problem inequality really is.

I know of no easy way to do that, but conceptually, it would debunk the idea that income inequality is an envy, special pleading, or made-up class warfare issue.  It would also show that taxes can do more than just prevent inflation, they can be used to limit the leak of money out of the productive parts of the economy.

Though this research project faces significant challenges, the potential results could vastly improve current policy discussions both among Post-Keynesians and in the broader political arena.

Related posts:
Debt Inequality Remains Major Headwind To Growth
Bubbles and Busts: IMF - Leveraging Inequality
Bubbles and Busts: Forgotten Lessons from Japan's Lost Decades
Hayekian Limits of Knowledge in a Post-Keynesian World

Bubbling Up...8/19/12

1) Chart of the Day: Public deficits and private savings in the euro zone by Edward Harrison @ Credit Writedowns

Budget deficits are what results ex-post from an accounting identity between the sectoral balances and should not be a primary goal of public policy. What we want to do is target the cause of the deficits, insufficient demand which I believe is the result of the overhang of debt after a period of excess private sector credit growth. What you want to do is eliminate that debt overhang by reducing the debt or increasing private sector incomes to support the debt. That’s getting at root causes.

2) How the Economic Machine Works by Ray Dalio @ Bridgewater (h/t Humble Student of the Markets)

[I]f you understand the game of Monopoly®, you can pretty well understand credit and economic cycles. Early in the game of Monopoly®, people have a lot of cash and few hotels, and it pays to convert cash into hotels. Those who have more hotels make more money. Seeing this, people tend to convert as much cash as possible into property in order to profit from making other players give them cash. So as the game progresses, more hotels are acquired, which creates more need for cash (to pay the bills of landing on someone else’s property with lots of hotels on it) at the same time as many folks have run down their cash to buy hotels. When they are caught needing cash, they are forced to sell their hotels at discounted prices. So early in the game, “property is king” and later in the game, “cash is king.” Those who are best at playing the game understand how to hold the right mix of property and cash, as this right mix changes.

Now, let’s imagine how this Monopoly® game would work if we changed the role of the bank so that it could make loans and take deposits. Players would then be able to borrow money to buy hotels and, rather than holding their cash idly, they would deposit it at the bank to earn interest, which would provide the bank with more money to lend. Let’s also imagine that players in this game could buy and sell properties from each other giving each other credit (i.e., promises to give money and at a later date). If Monopoly® were played this way, it would provide an almost perfect model for the way our economy operates. There would be more spending on hotels (that would be financed with promises to deliver money at a later date). The amount owed would quickly grow to multiples of the amount of money in existence, hotel prices would be higher, and the cash shortage for the debtors who hold hotels would become greater down the road. So, the cycles would become more pronounced. The bank and those who saved by depositing their money in it would also get into trouble when the inability to come up with needed cash caused withdrawals from the bank at the same time as debtors couldn’t come up with cash to pay the bank.

Woj’s Thoughts - Although Dalio’s fund may be struggling this year as markets increasingly deviate from economic growth, his insights regarding economic cycles remain a great source of knowledge. In many advanced economies, property was clearly king until the shortfall in cash among households became so pronounced that a debt deflation ensued. The productive portion of the private sector (non-financial) continues to hold too much property and debt relative to cash (savings and income). Rather than encouraging and aiding a “smooth” shift towards cash, public policy remains supportive of reverting back towards property and debt. As long as this mix remains highly unbalanced, economies will prove fragile and prone to crises. (Fun tidbit about me...as a child I loved playing the game of Monopoly. This may have been an early sign that I was destined for a future in economics and finance.)

3) How Long Can Japanese Bond Prices Defy Gravity? by Cullen Roche @ Pragmatic Capitalism

As you likely know, Japan has been suffering a horrid deflation for 20 years as a result of a multitude of factors.  So we’ve witnessed an endless stream of JGB bond traders diving out of windows as they short JGB’s and lose out to ever increasing prices.  One interesting conclusion in the Hoshi/Ito paper is their view on Japan’s ”unrealistically optimistic assumption that Japan’s GDP will grow at 2% annually for the next 40 years”.   If growth is to stagnate then where will the inflation come from?  What could scare these bondholders into a massive JGB revolt leading to higher rates (something which, mind you, did not even occur in the USA during the great stagflation of the 1970′s)?   I am lost for a cause here because Japan’s central bank controls interest rates and as the supplier of reserves to the banking system they can always control the entire yield curve (yes, if they wanted to pin the 30 year bond at a specific rate they would just have to name it and challenge the bond traders to compete with their endless reserve position – the bond traders would lose quickly).

So the question remains – how long can Japanese bond prices defy gravity?  Well, the short answer is – as long as the Japanese central bank is willing to keep rates low.  The more important question is when will Japan experience an environment which forces their central bank to alter the current structure of the yield curve?  Will a stagflation occur similar to the 70s in the USA?  Will a hyperinflation occur for whatever reason?  Will growth rebound?   Or what if Hoshi and Ito’s pessimistic GDP projections are correct?  Then we’re likely to continue seeing JGB traders jumping out of windows following unsuccessful attempts to fight the Bank of Japan.

Woj’s Thoughts - So yes, the Fed can (and to a degree currently does) control long-term interest rates. These questions are equally important for investors currently betting against US Treasuries. When will economic factors cause the Fed to raise interest rates in the foreseeable future? Private sector deleveraging is likely to persist for a few more years and government deficits are decreasing. This suggests a still lengthy period of low growth and inflation, which is consistent with the Fed maintaining short-term rates near zero. The recent sell-off in Treasuries is approaching a level at which the long-side again becomes enticing.  

Modern Money Regimes Redefine Fiscal Sustainability

Mitt Romney’s selection of Paul Ryan as the Republican Vice Presidential candidate ensures that a major focus of the upcoming election will be the federal budget. Many voters appear concerned that continued deficits and an increasing debt-to-GDP ratio will lead to some combination of higher interest rates, slower growth, (hyper) inflation and/or default. In a debate that was already destined to center around this mainstream view of fiscal sustainability, the selection of Ryan will only further cement incorrect theories within public knowledge.

Over the past couple years I have attempted to help further an opposing view of the federal budget, one based on theories of modern money.* Recently I stumbled upon a 2006 paper by Scott Fullwiler, titled Interest Rates and Fiscal Sustainability, which offers a surprisingly complete explanation of a modern money regime. Presenting the major departures from mainstream views, Fullwiler concludes:

“in a modern money regime such as the U. S., deficits do not crowd out but rather create net financial assets for the non-government sector, the operational purpose of bond sales is interest-rate support, and the Fed’s interest rate target anchors other short-term rates given that tax liabilities must be paid in reserve balances. As a result of these regime characteristics, the interest rate on the national debt is a monetary phenomenon that primarily reflects the current (and expected, if long-term, fixed-rate time deposits are issued) interest-rate “anchor” set by the Fed, not the size of the current or expected future levels of the debt or deficits as assumed in the loanable fund market paradigm. This monetary nature of interest on the national debt is indisputable when one considers that the federal government never needs to issue its debt as time deposits and could simply create (assuming a positive interest rate target) interest-bearing reserve balances that earn interest at the Fed’s target interest rate, as in the proposals discussed earlier. Self-imposed constraints, including legal restrictions on operating procedures or lack of political will, might keep a simplified procedure such as this from being implemented, but they do not change the monetary nature of rates paid on the national debt; the choice to issue short-term or long-term securities (i.e., non-government sector time deposits at the Fed) is simply a more complicated version of this more general or (in the case of a zero interest rate target) “natural” case. (p.26)”

For readers interested in fiscal and/or monetary policy, Fullwiler’s paper is a fantastic resource. Over the coming days it is my intention to offer a more detailed examination of the various principles outlined above with further excerpts from the paper and real-world applications. Even if the basic principles of a modern monetary system supplants current mainstream theories, clear cut policy choices will remain out of reach. The policy conversations, however, will improve dramatically and the likelihood of better outcomes will increase significantly.

* I mention theories of modern money rather than Modern Monetary Theory (MMT) to include support for Monetary Realism, Post-Keynesians, Circuitistes, Horizontalists and others that accept the basic principles laid out by Fullwiler.

Debt Surges Don't Cause Recessions...Excessive Aggregate Amounts Do

In a post titled Debt Surges don’t cause recessions, Scott Sumner, questions the following argument from Paul Krugman:

Second, a dramatic rise in household debt, which many of us now believe lies at the heart of our continuing depression. Here’s household debt as a percentage of GDP

Sumner says:

What do you see?  I suppose it’s in the eye of the beholder, but I see three big debt surges:  1952-64, 1984-91, and 2000-08.  The first debt surge was followed by a golden age in American history; the boom of 1965-73.  The second debt surge was followed by another golden age, the boom of 1991-2007.  And the third was followed by a severe recession.  What was different with the third case?

The difference is the aggregate amount of household debt compared with incomes (GDP). The use of credit (debt) instead of money (income + savings) has an extra cost associated with the interest payments. As the aggregate amount of debt rises, aggregate interest costs follow. To simply stem the rise in debt, let alone maintain the current level, an increasing percentage of income and savings becomes necessary to cover interest costs and/or pay back previous debt. These actions reduce the amount of income and savings available for consumption and investment, creating a drag on economic growth.

Since households are no longer in a position to drive growth, other sectors must pick up the slack to prevent incomes from stagnating or falling. If incomes struggle, many households will have to shift an even larger percentage of income to paying interest and debt, while others simply become unable to repay the full amount. This deleveraging worsens the contraction from the household sector and leads to losses within the corporate and financial sector. If those sectors are equally leveraged with debt (as was the case in the US) then the losses in income and capital may cause those sectors to reduce spending and lending, respectively. This process can ultimately generate a vicious cycle where attempts to deleverage by each group reduces the income of others and subsequently increases the burden of debt. Absent growth in income from either the public or external sectors, this cycle will eventually slow but at a much lower level of GDP.
Update: The Arthurian continues to dissect the Monetarist disregard of rising household debt levels:

During the famous flat spot of 1965-1983, the comparable rate of debt growth was 9.36%. That's near 90% of the growth rate for the 1952-1964 "debt surge" and it is higher than the growth rate for the third debt surge Sumner identifies.

There was no remission. Debt did not stop growing. It barely slowed.

Prices increased at a compound annual growth rate of 6.6% per year between 1965 and 1983, more than tripling during those years. There was no remission of debt. There was only erosion of debt because of the inflation.

The Pain in Spain Continues

Along the way I have warned that Spain suffered from significant macroeconomic challenges that, at the time, appeared unrecognised by the markets. I also provided some analysis that the country’s problems were far greater in magnitude than something than could be fixed by simply lowering government sector deficits:

The private sector accumulated large debts on the back foreign capital inflows leading to a housing bubble.  This bubble has since collapsed leaving the private sector in a position of significant wealth loss and indebtedness, the banking system holding significant and growing levels of bad debts and the economy structured around the delivery of a failed industry.

…

The growing unemployment is leading to a slowing of industrial production, which means that even though the country is importing less it also appears to be exporting less. Combine this with the interest payments on borrowings from the rest of the world and at this point Spain continues to run a current account deficit which, in the most basic terms, means Spain is still paying others more than it is being paid back. That is, the external sector is still in deficit.

So with the external sector in this state and the private sector unable and/or unwilling to take on additional debt as it attempt to mend its balance sheet after an ‘asset shock’, the only sector left to provide for the short fall in national income is the government sector. If it fails to do so then the economy will continue to shrink until a new balance is found between the sectors at some lower national income, and therefore GDP.

It may appear logical to you that this must occur, and I don’t totally disagree, but that doesn’t change the fact that under these circumstances there is simply no way that the private sector will be able to continue to make payments on the debts it has accumulated during the period of significantly higher income. This is a major unaddressed issue. (my emphasis)

And this is the monetary trap much of the European periphery now find themselves in. Structural issues within their economies together with their pseudo non-floating currency means they are neither able to shrink nor grow out of their debts. Without significant debt restructuring they are left to flounder in a viscous spiral downwards.

Read it at Macro Business
Spain: The next leg down
By Delusion Economics

The most recent EU summit concluded with a memorandum of understanding (MoU) for Spain which by most accounts appears to largely reinforce the failed bailout measures used for Greece, Ireland and Portugal. In return for bank bailout funds, that are obviously inadequate, Spain must remain “committed to correct the present excessive deficit situation by 2014.” Although the allowable deficits for 2012 and 2013 were raised, the new levels are still overly optimistic given economic conditions. Recognizing this reality, Prime Minister Rajoy has already decided to raise VAT taxes. Considering that Spanish housing still has further to drop and the external sector is unlikely to improve, based on worsening global growth prospects, the pain in Spain will continue.

Related posts:
Spain Should Bailout Households Not Banks
Despite Bailouts, Irish Banks Remain Insolvent...Spain Too?

Crisis Events in Europe Speeding Up

Pain in Spain is Only Beginning

Nouriel Roubini - Get Ready for the Spanish Bailout

Private Debt Continues to Drag Down Europe

The Fed Can Do More...But It Won't Do Much

In any event, we’re in a balance sheet recession. We should be encouraging the private sector to borrow less, not taunting people with negative interest rates and encouraging them to leverage up. And we should recognize that the government’s deficit is the key to helping the private sector de-leverage.

Reducing the government’s deficit means cutting the non-government’s surplus, which frustrates their efforts to pay down debt.

We need rising incomes to support a recovery that can be sustained by private sector spending, and the Fed isn’t the agency we should be looking to for help on this front.

Read it at Naked Capitalism
Can the Fed Really Do More?
By Stephanie Kelton


Kelton expresses her frustration, which I share, with the unrelenting calls for further “stimulus” from the Fed. As I’ve mentioned repeatedly on this blog (see here, here, and here for examples), the mechanism by which monetary policy can induce real growth is weak, at best, especially when the private sector is deleveraging. Despite the efforts of Kelton and many others with an MMT/MMR/Post-Keynesian background, this message has still not gotten through to the mainstream media. Hopefully our experimentation with monetary policy will not cause too much damage before its ineffectiveness is finally understood.

Erin Haswell — A Closer Look at Three Sectors’ Financial Balances

A Closer Look at Three Sectors’ Financial Balances
by Erin Haswell
(h/t Tom Hickey at Mike Norman Economics)


Understanding of the sectoral balances approach helped a number of economists and analysts forecast the Great Recession in advance. Today it continues to illuminate the different struggles of nations within Europe and the future risks to the global economy. 

Ramanan - The Monetary Economics Of Sovereign Government Rating

The US dollar is the reserve currency of the world and slowly over time, the United States has turned from being a creditor of the rest of the world to becoming the world’s largest debtor nation. (Again not due to its public debt but because of its net indebtedness to foreigners). The US external sector is a great imbalance and any attempt to get out of the recession by fiscal policy alone will worsen its external situation leading to a crash at some point. (emphasis mine)

Read it at The Case for Concerted Action
The Monetary Economics Of Sovereign Government Rating
By Ramanan


Ramanan uses his expertise in the sectoral balances approach to take on the notion that countries with “sovereign currencies” cannot default. The US external deficit remains a significant source of demand leakage and requires significantly more attention going forward.

Points of Public Interest

1. In America, the shale gas revolution is creating jobs and growth. It can here too - Matt Ridley explains the importance of cheap energy in creating jobs.
2. Free Trade Ad Nauseam - Jagdish Bhagwati makes the case against increasing protectionism.
3. Why bother with microfoundations? - Noah Smith reasons that micro-founded models may only occasionally be better than aggregate-only models. This offers some good background on the potential misuse of current models for determining public policy.
4. Corruption and Politics - The motivation behind crony capitalism stemming from a highly centralized government.
5. JKH On Saving And Sector Balances (WONKISH) - MMR continues to illuminate flaws within the prescriptive portion of MMT, based on slight adjustments in meaning. Read the comments on the site to see much of the new insights being hashed out.
6. Warren Buffett: Baptist and Bootlegger - One of the all-time great investors has been as savvy in political calculation/courtship as he has been in picking stocks.
7. He Had Moves Like Jagger - Steve Horwitz praises the economic rhetoric of Frederic Bastiat.

Points of Public Interest

1. Why Jews Don’t Farm - Steve Landsburg approaches this question from the perspective of literacy and education as hallmarks of Jewish religion. (h/t Don Boudreaux, Cafe Hayek)
2. Repulsive progressive hypocrisy - Glenn Greenwald expresses fear over Democratic support for policies, including Guantanamo and drone usage, under the Obama Administration that were highly criticized when similarly carried out by the Bush Administration. I share Greenwald’s concern that political support may become tied to individuals rather than actual policy actions. (h/t Anthony Gregory, The Beacon: “Repulsive Progressive Hypocrisy” and Why Peaceniks Should Oppose Democrats)
3. What Europe might look like without the Eurozone and EU - Bruno Frey dispels with the view that a collapse of the Euro will lead to chaos and war. On the contrary, he argues that countries will likely establish more flexible, smaller agreements that maintain free trade and may even improve European economic prospects.
4. The Top Twelve Reasons Why You Should Hate the Mortgage Settlement by Yves Smith
5. S = I + (S – I) : The Most Important Equation in Economics The “mysterious” JKH explains a key component of sectoral balances in an incredibly clear and concise fashion.
6. How Economists Contributed to the Financial Crisis John T. Harvey discussed how making math the ends rather than means of economics has led much of the discipline off course from the real world. Post-Keynesianism, especially Steve Keen, and MMT receive acknowledgement for raising awareness of the crisis in advance and, in my opinion, continue to offer some of the best insights. (h/t Tom Hickey, Mike Norman Economics)