Sovereign debt bubble thread

[Admiral Yi]

Almost any argument that relies on "X can't grow indefinitely" without any further qualifiers is undercut by the fact that GDP is assumed to grow indefinitely.  And if GDP doesn't grow indefinitely, then economics becomes a zero-sum game, which changes the rules dramatically.

Don't be a nitpickinig semantic ass.  We've been talking about debt/GDP ratios.  Debt/GDP is not an infinite resource.

[Sheilbh]

Then I don't understand what you mean.

The bailouts are only cheaper if they work out.  Given the situation in Greece and the likelihood of disorderly exit, with all of those economic costs I'm far from convinced.

A bazooka addresses market confidence in the Euro, at the cost of moral hazard.  The current approach has, in my view, got lots of moral hazard but done nothing to address confidence.

[PJL]

I shall also be voting to leave the EU when we get our referendum on the matter. In principle I am in favour, but the execution has been abysmal.

The polls are something ilike 51% against vs 28% for right now, so such a referendum would likely win. Also UKIP are consistantly polling as much as the LibDems at the moment.

[MadImmortalMan]

Also UKIP are consistantly polling as much as the LibDems at the moment.

Wow.

[Admiral Yi]

The bailouts are only cheaper if they work out.

The bailouts are cheaper if Germany gets back 50 cents on the dollar.  If the bazooka doesn't work out it's not terribly cheap either.

[alfred russel]

part it's a milder crisis because of the automatic stabilisers in the economy.  Without that social spending this would have been a far worse and more painful recession.

As I've said before I think the thing with Spain (and Ireland) was that they had this massive amount of credit, in part because of the single currency.  Because they were in the Euro their currencies didn't really appreciate as much as they should have, there wasn't any central bank to raise rates based on their situation or to impose credit controls or anything like that.  It reminds me of reading about the early post-war when you've got the Breton Woods system.  From what I understand the only way they could have deflated that bubble was by hugely deflationary budgets.  That's a flaw in the Eurozone system that I don't think was known about and needs addressing, though I could be wrong.

I also think you're wrong to point out progressive taxation, I'm not sure about Spain but I know Ireland which is similar,  a big problem in the revenue side was that they lifted lots of people out of paying tax at all (about as many as in the US) and really over-depended on property taxes.  Also Spain's not got a great welfare state, from what I understand it's like other Mediterranean systems, so very strong on pensions but not so great for things like unemployment.  The costs are always high, but don't fluctuate as much with the economy.  The other side of this is that I think Mediterranean countries have far more family dependence and support than Northern Euro countries, so often a person on a pension will be helping support their unemployed kids or grandkids.

I think you are misinterpreting what I was getting at. It isn't that we should get rid of automatic stabilizers, but that if we were rather irresponsible prior to the crisis.

Also, I think you are taking a narrow view of progressive taxation. I would classify property taxes as a form of progressive taxation, as well as removing the less well off from the tax rolls. As for the liability side, I'm not saying Spain was unusual.

[Sheilbh]

Also, I think you are taking a narrow view of progressive taxation. I would classify property taxes as a form of progressive taxation, as well as removing the less well off from the tax rolls. As for the liability side, I'm not saying Spain was unusual.

I think raising the personal allowance so less people pay tax is 'progressive' and wrong.  I'm not sure that I'd say property taxes are a form of progressive tax though.  Like all taxes they're useful in a tax mix but you can be far too reliant on them because they're comparatively painless.  I think that happened in some US states as well as Ireland.

[DGuller]

Almost any argument that relies on "X can't grow indefinitely" without any further qualifiers is undercut by the fact that GDP is assumed to grow indefinitely.  And if GDP doesn't grow indefinitely, then economics becomes a zero-sum game, which changes the rules dramatically.

Don't be a nitpickinig semantic ass.  We've been talking about debt/GDP ratios.  Debt/GDP is not an infinite resource.

I'm not being nitpicking, though may be I may be not understanding your point.  Are you saying that you can't run debt/GDP to infinity, or are you saying that you can't keep debt/GDP constant indefinitely?  If you mean the first thing, then duh, but I don't know what it has to do with anything.  If it's the second thing, then you're saying exactly what I thought you were saying.  Maybe there's a third way?

[The Minsky Moment]

Yeah like Keynesians. Yi has a point. They tend to be all over the Keynes when it's stimulus time, but even when it's not stimulus time, they think it's stimulus time.

As is often the case, this is a definition of Keynesianism that excludes Keynes.

[Tamas]

Maybe. But, if there is a ruling economic theory governing our world, and that is based on the works of Keynes, and this allows the politicans the irresponsibility they are showing, their errors are the errors of "Keynesianism" even if Keynes himself would disagree with them. It is interventionalism, and the public's acceptance of that, which puts this great power in the hands of the few, to abuse and fuck up freely.

[The Minsky Moment]

Well so far the bailouts of Greece, Ireland and Portugal have hit around €400 billion.

That's 400 billion in credit.  The bazooka is a gift.  Alms.  Charity.  A handout.  Free money.

Yes.
I think a real gift that gets the job done is better than a bailout that costs twice as much, with strings that don't in fact stay intact, and which doesn't get the job done.

Moral hazard can be addressed in the manner I discussed and in other ways as well.  Would it be totally effective?  No.  Is it a good solution?  No.  The time for good solutions passed a long time ago.  This analysis is about looking for the bad solutions with the least amount of warts on them.

[The Minsky Moment]

I'm not trying to call out Spain--certainly the US went into the crisis in worse shape and the lack of their own currency doesn't help. But this is certainly a mild crisis in the US compared to the Great Depression and our balance sheet is in awful shape after just a few years.

But the US issues its own currency, and even better it issues the world's dominant reserve currency. A big part of the problem for the Eurozone periphery is that they can't benefit from exchange rate adjustment and their lack of control over the currency makes fiscal constraints hard.  Spain (and Portugal and Ireland and Italy etc.) simply have a lot less room to manuever than the US.

[The Minsky Moment]

It's a little dishonest.  Keyenes himself can't be faulted for endemic deficit spending.  But by the same token modern Keynesians haven't raised many objections.

Some US Keynesians in the mid-oughts advocating dumping the 01/03 tax cuts and cut back on war expenditures, with an attempt to get to fiscal balance oncer the economy recovered in 04.  On the same theory that some Keynesians supported going to a balanced fiscal position in the late 90s.

[The Minsky Moment]

Maybe. But, if there is a ruling economic theory governing our world, and that is based on the works of Keynes, and this allows the politicans the irresponsibility they are showing, their errors are the errors of "Keynesianism" even if Keynes himself would disagree with them. It is interventionalism, and the public's acceptance of that, which puts this great power in the hands of the few, to abuse and fuck up freely.

I don't think there is any ruling economic theory that in the real world drives fiscal excess.  In the US at least historically since 1980, key driving factors have been domination of the Hill by interest groups -- think Mancur Olson more than JM Keynes -- and the mystical hold of the Laffer curve.  The supply-side sheen has gotten duller, but the intrest groups have grown more powerful than ever.  The 01 tax cuts were justified in part on bastard Keynsian grounds and obviously ARRA had Keynsian boosters, but that is only part of the story.

[alfred russel]

I'm not trying to call out Spain--certainly the US went into the crisis in worse shape and the lack of their own currency doesn't help. But this is certainly a mild crisis in the US compared to the Great Depression and our balance sheet is in awful shape after just a few years.

But the US issues its own currency, and even better it issues the world's dominant reserve currency. A big part of the problem for the Eurozone periphery is that they can't benefit from exchange rate adjustment and their lack of control over the currency makes fiscal constraints hard.  Spain (and Portugal and Ireland and Italy etc.) simply have a lot less room to manuever than the US.

I agree (and was trying to allude to that).