ECB and Inflation

[Admiral Yi]

CC's post doesn't contain the word "deficit", so the use of the word "definitionally" is extremely improper.

If austerity measures tank your economy, receipts go down and non-discretionary outlays go up.  Hence deficits can go up. 

And since debt doesn't really matter per se, but rather debt/GDP, the problem is compounded because GDP is going down.

I noticed you still haven't answered my question about who is going to finance these non-austere budgets

[The Minsky Moment]

Pile on even more debt than they did under so-called austerity.  That's what your recommendation is, no? 

No

Death to austerity, run deficits of 9-14%?

Who was going to lend them that money Joan?

For several the US was running deficits in that range.
The cost of borrowing went down

It is error to think of a government like a household.  It is error to think of a government budget constraint like a household budget restraint.

The problem in the Eurozone was a lack of federal fiscal authority, the presence of a highly constrained central bank, and the lack of political boldness at the inter-governmental level.  The Eurozone economies paid the price; their growth has lagged.

[The Minsky Moment]

I noticed you still haven't answered my question about who is going to finance these non-austere budgets

With its austerity package, Spain ran bigger and bigger deficits and its debt continued to climb.  Because the real economy collapsed, and revenue along with it.

And yet not only were they able to finance these deficits, but the interest rate cost declined.

Governmental budget constraints are not like private company/household budget constraints

[alfred russel]

CC's post doesn't contain the word "deficit", so the use of the word "definitionally" is extremely improper.

If austerity measures tank your economy, receipts go down and non-discretionary outlays go up.  Hence deficits can go up. 

And since debt doesn't really matter per se, but rather debt/GDP, the problem is compounded because GDP is going down.

I noticed you still haven't answered my question about who is going to finance these non-austere budgets

For the most part, the interest rates of the troubled european countries stayed somewhat reasonable, and that was without a strong commitment by the eurozone monetary and fiscal authorities to back them up (certainly exceptions existed). Had the leaders of the eurozone decided that they would work to keep Spain from having to impose austerity into the teeth of a recession, I think the financing would have been there.

[Admiral Yi]

No

You're being a little too mysterious.  Don't cut deficits, but don't raise them either.  The only conclusion left is that the whatever deficits they were running before the crisis were optimal, the one sweet spot.  IIRC for Greece (which doesn't count) that was 16% and for Spain that was 9%. 

For several the US was running deficits in that range.
The cost of borrowing went down

Are you suggesting that other indebted countries operate just like the US?

It is error to think of a government like a household.  It is error to think of a government budget constraint like a household budget restraint.

What's your point?

The problem in the Eurozone was a lack of federal fiscal authority, the presence of a highly constrained central bank, and the lack of political boldness at the inter-governmental level.  The Eurozone economies paid the price; their growth has lagged.

What I *think* this means is (a) net creditor countries should have given more free money to the debtors, (b) the ECB should have started monetizing debt quicker and more energetically, and (c) Germany in particular should have given more free money.

[Admiral Yi]

For the most part, the interest rates of the troubled european countries stayed somewhat reasonable, and that was without a strong commitment by the eurozone monetary and fiscal authorities to back them up (certainly exceptions existed). Had the leaders of the eurozone decided that they would work to keep Spain from having to impose austerity into the teeth of a recession, I think the financing would have been there.

Spanish yields were up at 6% and international investors were fleeing the market before the EU intervened.

[Razgovory]

What if "austerity", does not cut your deficit?

I give up.

Now, now you can't chide Minksy for not answering your question if you take that tact can you?  The Austerity programs didn't actually reduce defict spending, for the reasons Minksy outlined.  What good are they if they don't actually work?

[Admiral Yi]

Now, now you can't chide Minksy for not answering your question if you take that tact can you?  The Austerity programs didn't actually reduce defict spending, for the reasons Minksy outlined.  What good are they if they don't actually work?

You're confusing two different things.  When you say "the Austerity programs didn't reduce deficit spending," you're referring to the UK's experience, where deficits as a % of GDP rose.  Joan is talking about the Keynesian drag deficit reduction (a deficit that is actually reduced) has on GDP.

[alfred russel]

Spanish yields were up at 6% and international investors were fleeing the market before the EU intervened.

6% isn't that high, but yes international investors were fleeing. Would they have been fleeing if the ECB announced a policy of looser monetary policy and stood behind Spain with large purchases of Spanish bonds and an announcement to continue doing so?

[The Minsky Moment]

Spanish yields were up at 6% and international investors were fleeing the market before the EU intervened.

Bingo
Even a weak promise of EU support/backstop was enough to staunch the wound.  Not the austerity.  Austerity only mattered because the EU players demanded it as a condition to take useful action.  If they had demanded the hokey-pokey instead then Rajoy could have brought rates down by turning around in place.

As to the earlier questions, Spain is not the US.  It doesn't control it's own currency, its own central bank.  It isn't part of a larger federal system that has automatic fiscal stabilizers.  But the EU could so some or even in theory all those things.  Instead it "wasted" the crisis. But even taking a few baby steps helped stabilize the markets.

You raised the specter of debt monetization, I don't see that as dirty words per se.  A central bank can be a powerful tool.  the mere ability to act decisively and pump liquidity can affect the market even if not fully used.  Mario Draghi stopped the euro crisis in its tracks simply by saying 3 words.  He didn't  actually do anything, just said the words.  If the ECB hadn't been hamstrung with constitutional limits and Bundesbank scolds, there could have been real growth over the past few years.

As for the other prescription, history is littered with plenty examples of failed austerity packages.  Bruning had a terrific austerity program, instead of stabilizing debt though Germany got mass unemployment and Nazis.  That's an extreme case but an illustration nonetheless.

[The Minsky Moment]

You're confusing two different things.  When you say "the Austerity programs didn't reduce deficit spending," you're referring to the UK's experience, where deficits as a % of GDP rose.  Joan is talking about the Keynesian drag deficit reduction (a deficit that is actually reduced) has on GDP.

I'm talking both really
This is not a Keynesian vs nonkeynsian issue, most monetarists would agree that if for some reason monetary policy can't be effectively employed than fiscal retrenchment into a recession is dangerous.  This is all very mainstream macro stuff.

[Razgovory]

Nyeah, Nyeah!

[celedhring]

For the most part, the interest rates of the troubled european countries stayed somewhat reasonable, and that was without a strong commitment by the eurozone monetary and fiscal authorities to back them up (certainly exceptions existed). Had the leaders of the eurozone decided that they would work to keep Spain from having to impose austerity into the teeth of a recession, I think the financing would have been there.

Spanish yields were up at 6% and international investors were fleeing the market before the EU intervened.

Yet they are now down to 2% while still running a 7% deficit in 2013, having failed to meet all deficit reduction targets despite austerity. It was ECB's assurances what reduced our yields, not austerity.

[Tamas]

For the most part, the interest rates of the troubled european countries stayed somewhat reasonable, and that was without a strong commitment by the eurozone monetary and fiscal authorities to back them up (certainly exceptions existed). Had the leaders of the eurozone decided that they would work to keep Spain from having to impose austerity into the teeth of a recession, I think the financing would have been there.

Spanish yields were up at 6% and international investors were fleeing the market before the EU intervened.

Yet they are now down to 2% while still running a 7% deficit in 2013, having failed to meet all deficit reduction targets despite austerity. It was ECB's assurances what reduced our yields, not austerity.

But do you guys really believe this can go on to infinity? Will ECB's assurance carry weight ad infinitum as all members state continue to drawn in debt?

[celedhring]

Our GNP is projected to grow again. That will reduce the debt, plus people actually being able to pay taxes once they find jobs, while also reducing unemployment benefit spending.