Sovereign debt bubble thread

[The Minsky Moment]

I thought this was interesting on the subject:

High fiscal multipliers undermine austerity programmes
October 21, 2012 3:25 pm by Gavyn Davies
. . .

If the central bank is assumed to hold monetary growth or inflation at a given target rate when fiscal policy is tightened, then interest rates will decline and this will offset some of the negative effects of the fiscal change on output. The multiplier will be lower.

The opposite is also true. Now that interest rates are stuck at the zero lower bound, central banks cannot reduce policy rates when fiscal policy is tightened, and the multiplier is correspondingly increased.

Kudos to the Keynesians for predicting this in advance, but in many ways this is a fairly standard result from dozens of econometric simulations and it should not really have come as a total surprise to policy makers.

Pulling out key portions of the Sheilbh post.  It's been so long since the developed world outside of Japan went through a sustained deflationary, low interest rate period that lots of econfolks seem to have forgotten the basics.

[The Minsky Moment]

jumping into this thread about 147 pages late- but any interest in Modern Monetary Theory? My friend has been pushing it on me for about half a year. Long story short, MMT argues that in countries that control their own currency (notably NOT countries in the EU) deficits only matter to the extent they cause inflation, and in fact government deficits create private wealth. I'm not sure if I totally buy it, but it frames the European crisis in a different way.

http://en.wikipedia.org/wiki/Modern_Monetary_Theory

I've followed it a bit.  In essence, it is an elaboration on Abba Lerner's theory of "Functional Finance"  (Lerner was a heterodox Keynsian active during the postwar period).

The basic concept of Functional Finance is sound, arguably a truism - i.e. a fiat currency issuer need only recognized a budget constraint to the extent it chooses (and is willing to tolerate the inflationary impact).    The MMTers go farther and really get down in the weeds of how Fed monetary management operates on a detailed level.  I believe the MMTers take the position (for example) that Fed open market operations just involve maturity and liquidity transformations of assets and don't affect the quantity of money.

Randall Wray who was a student of Hyman Minsky's is a significant player among this group.

[alfred russel]

Pulling out key portions of the Sheilbh post.  It's been so long since the developed world outside of Japan went through a sustained deflationary, low interest rate period that lots of econfolks seem to have forgotten the basics.

Both the US and Eurozone are inflationary.

[Count]

jumping into this thread about 147 pages late- but any interest in Modern Monetary Theory? My friend has been pushing it on me for about half a year. Long story short, MMT argues that in countries that control their own currency (notably NOT countries in the EU) deficits only matter to the extent they cause inflation, and in fact government deficits create private wealth. I'm not sure if I totally buy it, but it frames the European crisis in a different way.

http://en.wikipedia.org/wiki/Modern_Monetary_Theory

I've followed it a bit.  In essence, it is an elaboration on Abba Lerner's theory of "Functional Finance"  (Lerner was a heterodox Keynsian active during the postwar period).

The basic concept of Functional Finance is sound, arguably a truism - i.e. a fiat currency issuer need only recognized a budget constraint to the extent it chooses (and is willing to tolerate the inflationary impact).    The MMTers go farther and really get down in the weeds of how Fed monetary management operates on a detailed level.  I believe the MMTers take the position (for example) that Fed open market operations just involve maturity and liquidity transformations of assets and don't affect the quantity of money.

Randall Wray who was a student of Hyman Minsky's is a significant player among this group.

My friend's been running a seminar series on it, so I've seen a few of the big names in MMT. It's interesting but a) I don't understand the finer points of banking b) people I trust like Krugman don't like MMT and c) they seem very dismissive about inflation.

this is the seminar series if anyone's interested: http://www.modernmoneyandpublicpurpose.com/

[The Minsky Moment]

Both the US and Eurozone are inflationary.

The only thing that is missing is the inflation.

[The Minsky Moment]

My friend's been running a seminar series on it, so I've seen a few of the big names in MMT. It's interesting but a) I don't understand the finer points of banking b) people I trust like Krugman don't like MMT and c) they seem very dismissive about inflation.

Krugman is a pretty traditional Keynsian type and guys like that see MMT as fringe.  And with some justification because there is a whiff of cultishness about it.  I do think there are interesting ideas in there but the ability to breakthrough to the mainstream may be hampered by the stance of some of those involved as lonely prophets subject to persecution by their academic peers.  Perhaps they should take a page from the Rothbardians and Randians who seem to have had success penetrating into public consciousness even though the quality of the ideas is considerably less (IMO).

Your point (c) is concerning (notwithstanding my response to Alfred below).  For Lerner, the use of fiscal tools for inflationary control is a key element of Functional Finance and inflation was the last thing he would be dismissive about.

Re (a) - I think this a key value-adder for MMT because the details sometimes really do matter .

[alfred russel]

Both the US and Eurozone are inflationary.

The only thing that is missing is the inflation.

Without looking up numbers, I think CPI in the US is around 3%, and the eurozone a point or so behind that. It isn't much inflation, but still positive (and all the central bankers seem willing to allow).

[The Minsky Moment]

Without looking up numbers, I think CPI in the US is around 3%, and the eurozone a point or so behind that. It isn't much inflation, but still positive (and all the central bankers seem willing to allow).

it was up to 3 last year but it is down again this year.
Also, CPI is just consumer prices; it doesn't take into account asset values.  Housing is just starting to turn around in the US.

The key question re multipiers is whether spare capacity exists and whether monetary policy is available to stoke demand.

[Count]

the ability to breakthrough to the mainstream may be hampered by the stance of some of those involved as lonely prophets subject to persecution by their academic peers.

This. I understand the frustration on some level -a lot of them think we could have full employment today, and governments have not covered themselves in glory in responding to the financial crisis- but this stance makes it hard to distinguish them from any other unpopular person on a soap box.

re: inflation, the argument i've seen is that right now there shouldn't be inflationary concerns (which I believe Krugman agrees with). Proponents of MMT tend to sound like they're saying deficits don't matter, as opposed to deficits don't matter except for the risk of inflation. To counter that perception, MMT proponents in my experience (which, granted, is limited) go out of their way to acknowledge that inflation is an issue. But while they acknowledge inflation, they don't talk nearly enough about at what point inflation would come into play.

edit: i will say i've enjoyed being exposed to MMT because I think I've learned a decent amount about finance / the economy / whatever along the way even if I remain cautiously skeptical

[alfred russel]

it was up to 3 last year but it is down again this year.
Also, CPI is just consumer prices; it doesn't take into account asset values.  Housing is just starting to turn around in the US.

The key question re multipiers is whether spare capacity exists and whether monetary policy is available to stoke demand.

Using the bls data here:
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
CPI is up this year: 2.0% over the past 12 months.

The problem with looking at asset prices the way you are: housing is generally acknowledged to have been a bubble. If we look at such asset prices as indicators of deflation, then almost by definition a post bubble environment is deflationary because prices are going to be lower.

Other asset prices: stocks and bonds, are not lower. Bonds have had significant run ups in value (obviously interest rate driven), and stocks have also appreciated quite a bit and aren't far off the all time highs despite the real impairment or bankruptcy of some previously significant companies.

[The Minsky Moment]

[Using the bls data here:
ftp://ftp.bls.gov/pub/special.requests/cpi/cpiai.txt
CPI is up this year: 2.0% over the past 12 months.

2 percent is less than 3 percent.  Hence "down" since 2011.
It is extremely difficult for a modern developed economy that lacks serious distortions in retail/distribution (i.e. like Japan) to have sustained, year-on-year declines in consumer prices.  1.5-2 percent is about as low as it can go absent formal controls.  For economies like the US or Europe that is basically zero inflation and modern central banking practice recognizes that (even the Bundesbank-influenced ECB never targeted under 2).

The problem with looking at asset prices the way you are: housing is generally acknowledged to have been a bubble. If we look at such asset prices as indicators of deflation, then almost by definition a post bubble environment is deflationary because prices are going to be lower.

Yes exactly.
Since housing is such a large part of the US economy and such a big chunk of household wealth a collapse in prices has huge deflationary impact.  The vital question becomes how to counteract that impact to allow private households to clean up their balance sheets - a massive burst of priviate business investment would be ideal but absurdly unrealistic.  Here is where fiscal policy has a key role.  The alternative is a liquidation equilibrium driven by Fisherian debt deflation dynamics.

the flip side is true as well of course.  The CPI was quite restrained during the entire periods of the housing bubble, which was the thin tissue of justification Greenspan used for explaning inaction.  Chinese policy kept consumer prices down worldwide but that didn't mean inflationary pressure went away, it just got channelled into different directions.

Other asset prices: stocks and bonds, are not lower. Bonds have had significant run ups in value (obviously interest rate driven), and stocks have also appreciated quite a bit and aren't far off the all time highs despite the real impairment or bankruptcy of some previously significant companies. 

Stocks have only managed to get back to their pre-crisis peaks.  Also the total value of US real estate (residential and commercial) is probably about double the value of the market cap of all listed US companies; and that doesn't take into account that many companies carry a significant amount of their value in terms of owned or leased real estate (listed REITs in particular).

As for bonds, biggest run up has been in the increase in the value of US government securities, which is reflective of a desperate flight to safety, not a potential dangerous overheating investment in the real private economy.

[Zanza]

Germany's federal auditors were bitten by the gold bug:

German auditor office urges central bank to control gold reserves held in US, France, Britain
By Associated Press, Updated: Monday, October 22, 8:05 PM

BERLIN — Germany's central bank has failed to properly oversee the country's massive gold reserves, which have been stored abroad since the Cold War in case of a Soviet invasion, independent auditors say.

The central bank must renegotiate its contracts to gain the right to inspect its gold bars, which are worth tens of billions of dollars and are stored in the United States, Britain and France, the Federal Auditors' Office said in a report to lawmakers obtained by The Associated Press on Monday.

The report says the gold bars "have never been physically checked by the Bundesbank itself or other independent auditors regarding their authenticity or weight." Instead, it relies on a "written confirmations by the storage sites."

Most of Germany's gold reserves — some 3,400 tons worth an estimated $190 billion at current rates — have been kept in the vaults of the U.S. Federal Reserve, the Bank of France and the Bank of England since the postwar days, when Berlin worried about a possible land war with the Soviet bloc.

The auditors maintain that the central bank must be able to at least inspect samples of its gold bars in regular intervals to verify their book value.

The report acknowledges that such inspections might be logistically complicated, but it stresses that "this cannot discharge from the necessity to carry out an inventory."

The central bank said in a reaction to the report that was also sent to lawmakers Monday that it sees no reason for a physical inspection of the bars. "There is no doubt about the integrity of the foreign storage sites in this regard," it stated.

The debate on most of the gold reserves being held by foreign authorities has caused some inevitable conspiracy theories questioning their very existence, but several German politicians have also voiced unease.

Philipp Missfelder, a leading lawmaker from Chancellor Angela Merkel's center-right party, has asked the Bundesbank for the right to view the gold bars in Paris and London, but the central bank has denied the request, citing the lack of visitor rooms in those facilities, German daily Bild reported.

Given the growing political unease about the issue and the pressure from auditors, the central bank decided last month to repatriate some 50 tons of gold in each of the three coming years from New York to its headquarters in Frankfurt for "thorough examinations" regarding weight and quality, the report revealed.

An initiative backed by some German economists, industry leaders and a few lawmakers dubbed "bring home our gold" launched in May has attracted some 10,000 supporters online so far.

But Finance Minister Wolfgang Schaeuble and others maintain that there is no reason to worry.

"I currently have no doubt about the stock and the storage of the gold reserves," said Priska Hinz, the opposition Greens top lawmaker on the budget committee. "I do not doubt the reliability of the foreign central banks," she told the AP.

Several passages of the auditors' report were blackened out in the copy shared with lawmakers, citing the Bundesbank's concerns that they could compromise secrets involving the central banks storing the gold.

The report said that the gold pile in London has fallen "below 500 tons" due to recent sales and repatriations, but it did not specify how much gold was held in the U.S. and in France. German media have widely reported that some 1,500 tons — almost half of the total reserves — are stored in New York.

[Ed Anger]

That is a lot of teeth.

[derspiess]

That is a lot of teeth.

[Iormlund]

Without looking up numbers, I think CPI in the US is around 3%, and the eurozone a point or so behind that. It isn't much inflation, but still positive (and all the central bankers seem willing to allow).

Most of the consumer prices' growth in peripheral Europe is made up of tax hikes. The core (notably Germany) is not experiencing significant inflation at all when you factor in energy prices.