Charlie Rose

IRISH  07/08/2010 12:57 PM Report

As a Canadian I lived and worked through and experienced the 4 years during mid to late 1990's of the Liberal government of Chretien reduce the federal deficit and use our own VAT tax to pay down debt. I fondly recall the Wall St Journal in 1995 calling Canada a "banana republic". Now we have the USA in dire economic crisis wrt deficits and debt and no real political resolve to attack the problem. It is the political and ideological environment of America that prevents action. The wealthy are not prepared to accomodate for USA survival in this crisis...the hubris is astounding in this case. Our prime minister in a parliamentary government has more effective power than a president in a republic to get action once the electorate are educated on the need for action.

REMant  01/12/2010 10:31 PM Report

Altho their book has just come out, Rogoff and Reinhart were interviewed by Newsweek back in March and a summary of their work was available a whole year earlier, a copy of which is online: http://www.economics.harvard.edu/files/faculty/51_This_Time_Is_Different.pdf It seems the original research stressed govt debt, probably because there is more data regarding it, but they have compiled data on the role of domestic debt, as well, and it doesn't seem the emphasis on the former is due to any monetarist predilections. Some of the related papers are also available free online, or from the NBER. The idea that we were in a new economic age was rampant in the 20's, and continues today when ppl say we are "depression-proof." The subject has been treated before, of course, by Frederick Lewis Allen, Galbraith, Rothbard, Kindleberger, and Edward Chancellor, among others. With respect to the reason for our failure to face facts, I wrote the following in the past week, which altho slanted differently may be of interest.

1. The currency carry traders, currently driving the market, believe that if they can borrow a low interest rate currency and buy a higher interest rate currency, that interest rates will either remain the same or go in their favor, rather than as parity theory expects, to level out, as a result of their borrowing. Probably they feel the way they do because they believe govts will step in to keep rates low as the Fed is now doing. But also because they view the currency mkts as a struggle for supremacy, which they bet they will be on the right side of. Carry trade is nothing more than what banks do when they pay depositors less than they charge borrowers, or make if they buy assets which appreciate. But of course assets ought not appreciate, and the rates charged depositors and borrowers ought to be equal, because the so-called time value of money is a fiction created by inflation. Indeed what banks do is run a pyramid scheme, which is always vulnerable to collapse, and that is also why traders view things as a matter of mkt trends rather than fundamentals. For instance traders prior to last yr had been borrowing yen and buying Australian dollars, expecting to pay back the loans by continued appreciation of the latter due to the trend, itself. It's the same thing that happened when ppl bought real estate at almost any price expecting to be able to flip it and make money on the appreciation, or in the operation of the pools which drove up stock prices in the 1920's. It is said by ppl like Greenspan, following Arrow's theorizing, that this kind of trading helps stabilize mkts by removing risk due to incomplete information, but clearly what it does in practice is to destabilize them, made possible by banking policy, which by lengthening the "float" period makes the arbitrage possible, which in turn widens further the gaps between values. If you want mkts to clear, there must be a fixed currency. This is assumed by the welfare economists, but is never the case. At the present time, thanks to the Fed, traders are betting against the dollar in the same way, creating bubbles in gold and other assets. With returns to the carry trade running around 50 to 70 percent, the likelihood of a collapse seems inevitable especially as the dollars are being returned to buy US treasuries and other equities here. The question is whether the lower dollar will stimulate exports to other countries to make up the difference, tho there seems to be no way that it could if at the same time needed imports rise in price, and China continues in its way, however if it does rise it will provoke a rush to cover short positions such as happened last October. Too, all of this is adding to the govt's indebtedness as it historically has, esp when as now those govts have attempted to shore up these financial shenanigans, and this is bound to result in significant inflation across the board or a repudiation of the debt and likely the dollar.

2. The fact that the dollar is lower against other currencies now, does not therefore make our goods cheaper if the Fed continues to print them. Printing money is not undertaken for devaluation, rather it is an attempt to maintain prices in the face of pressure to lower them. This is what the British did when trying to get back on the gold standard in 1925; they were refusing to devalue (as, BTW, they had done 100 yrs earlier in the famous bullion controversy). This kept their wages too high and consequently the prices of their goods overseas. Like the British then, the Fed is trying to avoid devaluation and the necessary deflation consequent on it. In the late 20's the British tried to avoid contracting credit while trying to stop gold outflows. In our case we are selling off not gold, but the country. It is hard to avoid the conclusion that the later 20's were in most countries a period of very high inflation as a result of the debts and dislocations of the world war. In the US, atlho we had the gold, we had no markets abroad. But Britain at the time was much of the world's banker, just as we are today, and while this business was profitable, it was, under the circumstances, precarious. As Robbins noted, when the banks began to fail, the general movement out of London could not be arrested because "for years, Continental opinion had been coming to the view that the British system was dying of ossification. The inflexibility of the wage-level, the drain on the Government finances of the colossal expenditure on unemployment relief, the incessant propaganda for cheap money, were widely noted....Ever since the war, British financial experts had been travelling round Europe saying to distressed Governments: 'You must put up your bank rate and you must limit your fiduciary issue. Anything else is bad finance.' And now when the British crisis arrived we were observed to do neither of these things. The bank rate was kept low and we raised the fiduciary limit. It is said that the circumstances were different, that the functioning of English institutions is exempt from the criteria which Englishmen frame for the judgment of other people's policy. But it is scarcely to be wondered at that other people do not understand this; and that the foreigner, still smarting from the lessons of domestic inflation, thought that what was sauce for the goose was sauce for the gander, and continued to withdraw his money." During the whole period Britain never raised its bank rate, which would have no doubt stemmed the crisis. And it is also clear as Robbins pointed out, that the gold standard was not responsible for what ensued, but the failure to accept its dictates and to recognize Britain's lessened status. When ppl print money they expect it to be accepted at face value, but it cannot be. We are doing the same thing here today. Japan did the same thing. And so did Robert Mugabe. In 1931, when gold had been abandoned, the British raised the bank rate out of the fear of inflation, and balanced the budget, but that was shutting the barn door after the animals were long gone. The abandonment of gold worldwide resulted in huge deflation and that, in turn, by governments still unwilling to face facts, resulted in trade barriers, and this, discouraged investment. When the US offered to write off a lot of Britain's WWI debt in return for a return to the gold standard at a reasonable parity in 1932, it was refused by the paper money advocates, Keynes, et al, then in power. The continued slide overseas led finally to the 1933 US banking crisis and with it dominance of inflationists here, so that by the mid-30's everyone around the world was attempting to shore up its own position through fiat money rather than to face the consequences of deflation to re-establish workable trading arrangements that would have employed ppl. To do that, in the end, they resorted to war. However in 1934, FDR seeing a temporary inflationary boom became more resolute against a return to gold, and besides how would the alphabet soup be possible under free trade? The Obama admin pleads that the govt did not have the "tools" to "wind down" big financial firms without "blowing up" the system. I think it likely we have only begun to see the present story unfold.