I don’t usually agree

with George Osborne, but when he announced that he wanted the UK to run budget surpluses, I had to agree that this would make my ideas much easier. If the UK reduces its national debt, the idea of getting rid of all commercial debt becomes much easier.

Even selling off Royal Bank of Scotland would help as changing the nature of banks primarily from lenders to holders of assets is easier if it does not affect the value of a government owned asset.

But

I am not sGeorge Osborneure that there is any economic justification for George Osborne’s stance. The UK was very badly affected by the 2008 banking crisis but the UK is a major financial centre with a significant number of international banks and what is more many banks (including those based in the UK) were involved in the sub-prime lending at the route of the crisis.

I am not sure that changing the country’s underlying financing would have made a major difference to the crisis – the banks would still have needed significant help and it was the downturn in the banks which lead the economic downturn – because our economies are based on debt and the banks stopped lending.

For most countries the route out of the crisis was for governments to lend money effectively replacing bank lending and run deficits and, despite government rhetoric, the last Conservative/Liberal government also ran deficits every year.

So

I don’t agree with the justification of this new economic restraint on the government but I am happy for it to go ahead.

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Steve Keen visits Solvent Land

Following on from Hyman Minsky’s visit to solvent land, I would like Steve KeenDebunking Economics book cover to visit as well.

He is known for Debunking Economics and predicting that there would be a financial crisis when so many of the world’s economists were basking in a prolonged period of growth and (as Gordon Brown put it) the “end of boom and bust.”

But what would he see in solvent land?

In his most recent posts about world economies, Steve Keen seems to have been concentrating on two things:

  1. The correct response to a downturn is for a government to run a deficit to provide a boost to the economy.  This is in stark contrast to the way in which the EU has required Greece to respond to its Euro crisis by severe austerity measures.  See his blog post on 23 June 2014.
  2. Governments should always run deficits (and not surpluses) or they will stifle economic growth (a lecture in Vienna which last a little over an hour)

These two requirements seem to say that solvent land which has no commercial debt, will not work.  A government cannot run a deficit in solvent land because it, like everyone else, cannot borrow money commercially and therefore is not able to run a deficit.

But let’s stop to think for a moment:

  1. “The correct response to a downturn is to run a deficit.”  This means you only need deficits if you have hit a downturn.  But a main reason for removing commercial debt is to avoid the cycle of debt expansion which leads to a downturn in the economy.  Minsky put forward his “theory of financial instability” which says something like (my synopsis of part of the process) –

    during the good years everyone gets used to growth and profits and expects it to go on.  So the financial institutions come up with more ways of lending money to fuel the growth we are all experiencing.

     

    Then something (possibly minor) goes wrong and we realise that assets are overpriced (because it was too easy to borrow to buy them) and we realise we are in debt and we are in a financial crisis because even if we sold the assets we bought when they were overpriced we would still be in debt.

    So if we do not have debt, we do not have something built-into the economy which will lead to boom and bust.  And if we do not have a downturn, we do not need governments to run deficits to be able to get us through them.

  2.  And so we come to the second problem, that “governments should always run deficits”, or stifle growth.  Whilst Steve Keen’s graphs are convincing, is this a price worth paying for an economic system which:
    • does not automatically lead us into recession;
    • safeguards the poorest in society from the most expensive lending;
    • avoids governments borrowing so much that they lose the ability to pay for basic services such as education and health

    Even when we have said all that, Steve Keen’s own analysis back in May 2014 (in a talk which lasts around 15 minutes) suggests that governments should avoid running permanent surpluses as this is what will stifle growth.  His “balanced government spending” scenario does not look so bad to me.

    And if we are really living in solvent land, governments will need to have doubloons in the vault (because they can only spend what they have already received in taxes).  This also means that they could build up a surplus over time which could be spent when the economy is not as strong.  In other words we would be asking governments to “save for a rainy day” rather than “borrow in the hope we will be able to afford it in the future.”

Minsky visits Solvent Land

I have now started to work my way through Book coverMinsky’s papers in “Can “It” Happen Again?: Essays on Instability and Finance” and I began to wonder what Minsky would make of “Solvent Land” – a world without debt.

If he could visit this wonderful place, would he see different economic rules at work? Continue reading

What are we trying to measure?

There was a lovely article on the news recently which said that the Italians were now including sex and drugs in their GDP figures.  I am afraid the only reference I can find at present is to an article in Bloomberg of 21 May.  But the point seems to be confirmed.  And indeed the UK GDP figures may also need to include whatever we can measure of prostitution and illegal drug sales.

This has made me wonder why this is something we are so keen to measure and get so excited about (when it goes up) or depressed with (when it goes down).  And why do we compare GDP and borrowing so much as a way of seeing if the borrowings are affordable. Continue reading

Debt 101

Aside

I am worried.

One of the blogs I watch is published by Steve Keen and he has recently (at the beginning of the month) published a three blogs looking at whether governments should run surpluses or not.  This was in response to a proposition from the Australian National Commission of Audit that the government should “live within its means.”

His three blogs are:

Should governments run budget surpluses?

Should Governments run Deficits? a Minsky Model?

Should governments run permanent surpluses? (2)

His conclusion (based on some numbers using his modelling software) is that running budget surpluses takes money out of an economy and effectively reduces growth.

On the other hand running a balanced economy (no surplus or deficit) will see public debt reducing.  But running a deficit has higher growth.

So is a deficit economy a good idea?

It matters because if we remove the possibility of debt (commercial lending) from an economy, then it must follow that a government cannot run a deficit – because it cannot borrow.

Or is lower growth a price worth paying for the advantages of taking debt out of the system?