Japan and LT Bonds

[MediumTex]

Maybe the problem is that in the post WWII world that part of Keynesian economics where you cut government spending when the economy recovers has been increasingly ignored.  Thus, when the next recession comes along it has become harder and harder to ramp up deficit spending because it was already at such a high level to start with.

I think that Japan will provide some good lesson in this area in the months and years to come--how helpful is it to do deficit spending in an emergency when you are already deficit spending like crazy to start with?

What is the mechanism for all of that debt to be paid back (or even serviced) beyond a certain point?

[moda0306]

To clarify, I'm not saying that unemployment is the only gauge of economic health, but if 1) you can take unemployment down that incredibly fast with a massive jobs program (even doing unproductive things), and 2) that jobs program's "malinvestment" doesn't upset the future positive feedback loop and prospects for economic growth and continued low unemployment actually doing productive things, then I would argue that as a victory for Keynes, not Austrianism.

The price controls and gold confiscation may have been a disaster morally, but that's just bad government, not Keynesianism.

[moda0306]

Agreed, MT,

But absent any kind of gold standard, I believe that's where Keynesianism stops and modern monetarism comes in saying that since we have a sovereign currency that isn't tied to anything, debt is but a monetary tool, doesn't need to be paid down, and servicing it is but a push of a button... but that's obviously our other discussion that we may or may not agree on.  Keynes lived in a gold standard world and probably realized that debt DID need to be paid back for fiscal reasons.  Now we live in a world of fiat currencies that play a completely different ballgame.  The ability to print money really does change the game completely when one's aloud to think about it.

Though, I will agree, I don't like living in a world where ever-expanding GDP is a must for currencies to function in their current form, and therefore our government perpetually attempts to artificially expand GDP.

One of my BIG questions is, to what degree does misallocation of resources affect the future efficienct allocation of resources and economic health.  WWII's effect on the depression would indicate to me it doesn't have that much of a negative effect.  The housing bubble, however, offers some different evidence.

[Lone Wolf]

when you look at the numbers, REAL stimulus (the kind Austrians would have been crapping their pants about) brought down unemployment EXTREMELY fast, and then when unemployment was low, defecits were reigned in, and the economy was "fixed" and moved to what we'll both agree are more productive uses.

Ha ha ha... I think that the Austrians would have been crapping their pants at everything going on during the entire 1930s.    But quite right on the sheer size of World War II making any Austrian feel faint!

We're agreed that via deficit spending you can always achieve full employment.  We're probably in rough agreement that such jobs are often not very efficient use of scarce resources.

I believe we also agree that afterward you're left with a large debt that must be serviced.

Where we probably don't agree is whether the transition into a productive economy once the stimulus is removed is guaranteed to go very smoothly (or even happen at all.)  We disagree as to whether a recovery will take place naturally absent these very high levels of spending.  I say yes, given the countless natural recoveries pre-Depression (that occurred much more quickly.)  It's normal that there's disagreement about this -- we're working with a limited set of data here, complex economies, and lots of moving parts.

I do contend that the moment you remove Hoover and FDR's policies and allow the economy to reorganize on its own, you're looking at a couple of years adjustment before you're back at very low levels of unemployment and high productivity (without a big debt to service.)  Could I be wrong?  Absolutely.  I do it all the time. 

The price controls and gold confiscation may have been a disaster morally, but that's just bad government, not Keynesianism.

Yes, I agree that this was simply bad governance.  I doubt Keynes thought these things were a smart idea.

[moda0306]

LW,

That's the real question isn't it... what happens if you take the hands off the wheel?  I am torn on this.  Part of me thinks the biggest risk is that the institution and reinforcement of private property within our legal system would be completely crushed by the rate of claims on collateral by debtholders.  I'd love to see housing prices adjust, millions of bankruptcies, and balance sheets made whole through default again, but could that really even happen? 

Maybe our only stimulus should have been hiring bankruptcy judges!!

Thanks for the great banter.  I love "arguing" with you guys.

[MediumTex]

If we do find out that in reality "deficits don't matter" then the world will actually turn out to be a far simpler place than I have been thinking all this time.  

I'm going to feel pretty dumb for investing all the mental effort in untangling this stuff if I find out that there really is a Wizard behind a curtain somewhere who is influencing events and determining outcomes and for whom debt and deficits are simply meaningless abstractions.

That line of thinking just strikes me as so patently absurd that I have trouble keeping the thought straight in my mind.  But I may be wrong.  

The trouble I have with the concept of debt not mattering is that I don't understand the outer boundary of this logic.  

But if debt really doesn't matter, I think I am going to write my congressman and encourage him to sponsor a bill providing public funding for unicorn safaris.  This has long been a pet cause of mine, but previously I always felt sort of guilty asking for taxpayer funding.

In fact, to celebrate my liberation from what I previously thought of as reality, after returning from my first unicorn safari, I think I will buy a new Cadillac Escalade (on credit, of course) and take the horn from the first unicorn I bagged while on safari and mount it on the hood of my Cadillac.

[moda0306]

MT,

I think the "defecits don't matter" argument only applies to governments like the U.S. and Japan (not Greece) and peope with counterfeit operations in their basement, so I may hold off on the Escalade... but if you do nab a unicorn that horn may be better placed in your safe as a VP play.  I don't think it would last too long on your hood.

[TBV]

There's an easy way to find out if deficits don't matter.  Keep Federal Reserve notes for the time being, but eliminate its status as legal tender.  States already have the constitutional right to coin their own gold and silver money.  Let's see how people react when their right to choose is restored.

[moda0306]

TBV,

Huh?

[TBV]

TBV,

Huh?

Deficits increase the potential for inflation.  Inflation lowers the value of currency.  We are required to buy and sell in federal reserve notes because they carry the status of legal tender.  States, such as Utah, are considering coining their own gold and silver money, which they are entitled to do under Article I, Section 10 of the Constitution.  This would give citizens a choice as to which currency they would use in their daily affairs.  If people lost confidence in federal reserve notes, they could simply refuse to use them.  That would answer the question of whether deficits have repercussions.

Offering a choice of money is the way the country was originally run.  In fact, until the middle of the 19th century, Americans often used foreign coins (Mexican or Spanish) because they trusted them as a store of value.

[MarcV]

There's an easy way to find out if deficits don't matter.  Keep Federal Reserve notes for the time being, but eliminate its status as legal tender.  States already have the constitutional right to coin their own gold and silver money.  Let's see how people react when their right to choose is restored.

The opposite is true.  Please reread Article 1, Section 10 of that constitution.

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

[TBV]

There's an easy way to find out if deficits don't matter.  Keep Federal Reserve notes for the time being, but eliminate its status as legal tender.  States already have the constitutional right to coin their own gold and silver money.  Let's see how people react when their right to choose is restored.

The opposite is true.  Please reread Article 1, Section 10 of that constitution.

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

You're right.  I misconstrued what several states are contemplating.  Utah, South Carolina, et al are pursuing legislation to allow the use of federal gold and silver coins (some are including foreign gold coins) in payment of debts.  The idea is to return to citizens their right to choose which money to use, paper or specie.  Considering the injunction against states accepting anything but "gold and silver coin (as) a tender in payment of debts", I wonder how federal reserve notes have passed constitutional muster.

Link: http://goldcoinsecrets.com/utah-on-the- ... rd/263884/

[MarcV]

 Considering the injunction against states accepting anything but "gold and silver coin (as) a tender in payment of debts", I wonder how federal reserve notes have passed constitutional muster.

Link: http://goldcoinsecrets.com/utah-on-the- ... rd/263884/

It never got to the Supreme Court.  And never is longer than you might think.

See http://www.fame.org/PDF/Holzer%20Henry% ... 20Gold.pdf

[AdamA]

The price controls and gold confiscation may have been a disaster morally, but that's just bad government, not Keynesianism.

Isn't this always the case?  It's not usually the "ism" that causes the problem, it's the cheats that each system inadvertenty encourages that do most of the damage.
That's why things tend to work best when there's some sort of compromise in place to check extremes, although this is often not apparent at the time.