Japan and LT Bonds

[MediumTex]

I really don't see Austrian's "calling" the years of prosperity through the 50' and some of the 60's given unprecedented stimulus, defecit spending and subsequent servicing, government intervention, a breaking of the gold standard, and astronomical tax rates and inefficient allocation of resources that happened during our recovery from the depression... whether any of those were the cause of the recovery I'll leave up for debate.

Maybe we should try things in the same order as we did during the war... massive stimulus that will effectively bring us to debt at 110% of GDP, the subsequent overemployment of our workforce and improvement of private balance sheets, and then lets cut spending when we reach that point and balance the budget and hope for self-sustaining GDP growth after that point.... do you really see Austrian making an argument that that could work?  Or does that sound more like a Keynesian argument?

When trying to explain post-WWII prosperity, isn't it also important to remember that the U.S. had a new industrial infrastructure that was more or less intact and an eager population ready to make it productive, while the rest of the industrialized world had economies in ruins and people in shock.

If I got to blow up the rest of the world's infrastructure while keeping mine intact, I would imagine that I would have a great competitive advantage for a few decades afterward as well.

[moda0306]

Sorry to hijack this thread, but this is important in my opinion.  Here is a chart showing the national debt through 1950.  http://www.treasurydirect.gov/govt/repo ... histo3.htm As you can see, the debt (and therefore defecit spending) didn't really skyrocket until the war... neither did employment rates get out of their duldrums.  Then, after the war, it really wasn't reduced a significant amount... which would signify balanced budgets, or at least relatively so.

Isn't that the Keynesian recipe?:

1) Massive stimulus and deficits in the face of recession and unemployment
2) Full unemployment is achieved, GDP is back up
3) Eliminate defecits and let the positive-feedback loop work

One may conclude from this period is that 1) defecit spending led to full employment (actually BEYOND full employment), 2) GDP growth and the subsequent self-fulfilling economic activity offset reductions in defecit spending and debt servicing was completely manageable.

And that was WAR!!... imagine if that would have been schools, roads, etc.

[TBV]

I really don't see Austrian's "calling" the years of prosperity through the 50' and some of the 60's given unprecedented stimulus, defecit spending and subsequent servicing, government intervention, a breaking of the gold standard, and astronomical tax rates and inefficient allocation of resources that happened during our recovery from the depression... whether any of those were the cause of the recovery I'll leave up for debate.

Maybe we should try things in the same order as we did during the war... massive stimulus that will effectively bring us to debt at 110% of GDP, the subsequent overemployment of our workforce and improvement of private balance sheets, and then lets cut spending when we reach that point and balance the budget and hope for self-sustaining GDP growth after that point.... do you really see Austrian making an argument that that could work?  Or does that sound more like a Keynesian argument?

When trying to explain post-WWII prosperity, isn't it also important to remember that the U.S. had a new industrial infrastructure that was more or less intact and an eager population ready to make it productive, while the rest of the industrialized world had economies in ruins and people in shock.

If I got to blow up the rest of the world's infrastructure while keeping mine intact, I would imagine that I would have a great competitive advantage for a few decades afterward as well.

You beat me to the punch, MT. I was thinking that external factors like the huge trade surpluses we enjoyed until the 60's had a big impact.  In Britain, which was more Keynesian than the US at the time, things were not so rosy.

[moda0306]

MT & TBV,

I realize that.. and I read an article regarding how our balance of trade really didn't change much after the war and therefore the reconstruction of Europe wasn't that much of a stimulus to the US.  It was pretty convincing and I'm hardly doing it justice, but I can't remember the source.  The real test would be to see if Europe/Japan were importing a lot of US produced goods at that time... and could very well be so.

I think it's overexagerated a bit the gains of "blowing everyone else up."  Do you guys really think that after the artificial stimulus (war)brought unemployment rates down that the only thing keeping the U.S. from the immediate Austrian reversion back to despair and debt service is foreign demand?  Despite reconstruction that needed to be done, I can't imagine crippled economies demanding steel and natural resources would have been better than thriving economies demanding more traditional produced goods.

Someone should take a look at the trade balance statistics of the years in question... this is interesting.

[Lone Wolf]

If you buy the idea that Japan will try to sell Treasuries and that she'll succeed in finding some buyers, the bearish prediction doesn't seem unfounded.

I don't buy it. Think this through.

Sure, I agree that it's an enormous "if".  (And certainly Japan wouldn't sell all of its Treasuries under almost any circumstance.)  I was only pointing out that even if "some other country would simply own that debt", they'd certainly demand a higher yield to do so.

On the other hand... what if a horde of Permanent Portfolio adherents needs to rebalance into LT Bonds all at the same time?  Maybe there's Japan's buyer.  

[moda0306]

Further, if trade-defecit is such an important issue (I can see it being quite important), isn't this where currency devaluation plays a large role?  Would China have exported and grown so much if it hadn't devalued its currency?

[Lone Wolf]

I don't think Keynesians would say that.  Krugman admits war is awful from a productivity/wealth point of view, but as far as getting the positive feedback loop of employment and private balance sheets back on track it had a tendency to work.  We ran up HUGE defecits during the war build ships, blow things up, and send people to die... I'm sure Keynesians would rather use that debt to build schools and infrastructure.  The thing is, we had a couple of great decades employment-wise after the war and after running up huge amounts of debt, which I doubt most Austrian's would have predicted.

This Keynesian idea of war and natural disaster being good for the economy is one of the most dangerous ideas I know of in all of economics.  I remember arch-Keynesian Paul Krugman even finding a "silver lining" just a few days after 9/11.  The statement is quite the mixture of bad economics, poor taste, and historical revisionism.

Ghastly as it may seem to say this, the terror attack -- like the original day of infamy, which brought an end to the Great Depression -- could even do some economic good.

During the war, prosperity was (of course) nowhere to be found.  World War II was a time of great sacrifice and poverty.  The only book you need to read to tell you that is a ration book.

What ultimately got us on our feet?  After the war, you saw an end to the policies of Hoover and FDR that had dragged the Depression out for well over a decade (nobody slaughtering pigs and burning crops to force prices up, as one small example.)  While much of the rest of the world was a smoking ruin, the United States had a fully intact industrial base primed and ready to go.  Women joined the American workplace for good, yielding a permanent increase in productivity.

With war winding down, the workforce expanding and terrible economic policies of the Depression dismantled, the United States was primed for economic success in the 1950s.

Consider on the other hand this idea that war brings prosperity.  If this were true, why not take all of our unemployed labor and build an enormous, unpopulated city somewhere in the Nevada desert once per year?  We could then use these same unemployed people to pilot bombers over the city and bomb the whole area back to the stone age.  It's clear (or should be) that such an act is simply a squandering of resources.  Why would we expect war to ever make us rich?

Bastiat spoke of That Which is Seen and That Which is Not Seen.  What Krugman "sees" is all of the economic activity resulting from rebuilding after a horrific loss of life and property like the Japanese earthquake or September 11th.  That which Krugman "does not see" (but nearly everyone else does) is the lives, property, and value destroyed in exchange for this "economic good".  The recovery effort just endeavors to bring us back to where we were before.

[moda0306]

I think Krugman has repeatedly stated that war is horrible for an economy on most levels.  His point was that the vastly increased spending that happened during WWII vastly decreased unemployment and increased GDP.  When that period was over, as most Keynesians call for, the defecit spending ceased.

Let's forget war for a second... the point is, massive defecit spending vastly improved unemployment and private-sector balance sheets, and when that spending stopped, the economy grew on its own.  We can try to find quotes and quips about certain opinions of war or find examples of horrible price controls (not anything keynes really pushed for is it), but that's not really relevant.  What I'm merely pointing out is the evidence that Keynesian stimulus in the form of a giant jobs program stimulated the economy to a point of being self-sustaining.

So I ask you folks, what caused unemployment to go negative during WWII if not massive government spending?  Further, if we can do the same thing now, and have a sustainable recover afterwards by then and only then eliminating the defecit spending, why don't we? 

[moda0306]

http://www.infoplease.com/ipa/A0104719.html
http://www.treasurydirect.gov/govt/repo ... histo3.htm

Follow those two... only when government spending VASTLY increased did unemployment drop into single digits.  If that drop happened then due to a giant jobs program (war), then why can't it happen today?  Please don't tell me you think it's just a coincidence that unemployment fell right as deficit spending skyrocketed.  If WWII had been a public works project, what would an austrian have argued?  My Guess: "This may decrease unemployment initially, but the accumulation of huge debt and misallocation of resources is going to decrease investor confidence in the recovery and we'll fall into the same duldrums we were in before... we're just delaying the inevitable."

Also, why, as Austrians argue would happen, did the US economy not sink under the weight of their debt at 110%?  My guess?  Increased GDP, low unemployment, and healthy private-sector balance sheets.

I'm trying to give the Austrian's a fair shake here... so please don't call the Keynesians a bunch of war-mongers... it's simply not true.

[Storm]

I don't think Keynesians would say that.  Krugman admits war is awful from a productivity/wealth point of view, but as far as getting the positive feedback loop of employment and private balance sheets back on track it had a tendency to work.

I said no nation ever got rich from a natural disaster.  I never said war.  Wars have a tendency to boost economic output by putting people to work, dropping unemployment, and getting a lot of money flowing through the system (workers have to spend their paychecks, it's their patriotic duty to help the war effort) 

[moda0306]

FWIW, I can find several Austrian quotes about how we didn't have a housing bubble due to the risks of inflation and the collapsing dollar.  Not all austrians thought that way, but many did.

I am not a Keynesian and not trying to rag on Austrianism... just trying to hold the latter accountable right now as most people here are of that religion.

[Lone Wolf]

If WWII had been a public works project, what would an austrian have argued?

They'd have probably said we'd see a much faster recovery if you simply keep burdensome and foolish regulation to a minimum, reduce government spending and the tax burden... then simply let events run their course.  This is the playbook that was used in 1920 to great effect by Harding.  The Keynesians would argue that this recovery was thanks to an injection of liquidity by the Fed, but whichever way you see it, the recovery in '21-'22 from that severe recession was extremely impressive.

Full employment in and of itself is not a useful goal.  The point is to employ people in productive work.  Killing Nazis is productive, to be sure, but you're much, much better off if the Nazis were never there in the first place and you simply follow sensible economic policies.

Incidentally, that's why I point out FDR's bad policies.  It's not because the Keynesians recommended them all but more to show how much better off the economy was without them (and why their absence greatly aided recovery.)

I'm trying to give the Austrian's a fair shake here... so please don't call the Keynesians a bunch of war-mongers... it's simply not true.

I don't think much of Krugman, but I doubt very much that he is a warmonger.  However, he is propagating an extremely dangerous misunderstanding of what war does to an economy, one that paints war as an economic benefactor.  This is false.

[moda0306]

If you want "quick" recovery take a look at the correlation of defecit spending and unemployment... and then the bridge to prosperity.  Unemployment was taken from 15% to 4% in a blink of an eye because of massive defecit spending.  Let's say we could replicate that today by taking it from 10% to 4%... but (and I agree) these people are now not being productive either improving infrastructure, or digging ditches or filling them in... well if the late 40's is any indication, once you've reached full employment, you can cut back the defecit spending (as keynes argued) and you will have a self-sustaining recovery.  Many of FDR's policy's may have been immoral and inefficient, but 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.

[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/