17 responses

  1. hbl
    1 October 2009


    Thanks for the detailed update on your macro outlook — one of your blog’s strengths is intelligent non-ideological perspective written in a very clear way.

    Your outlook is very close to mine. One of the only places I disagree is on points 5 and 6 at the end with respect to money printing driving inflation. We may have periods of asset inflation or selective price inflation (like the last six months), but I think it will be based on the market’s current outlook, rational or otherwise, not the amount of printed money. In the context of unchanged broad money measures, the printed base money argument sounds to me suspiciously related to the “money on the sidelines” fallacy regarding what drives stock prices.

    Just as you argue that continuous government deficit spending is politically infeasible, I think printing enough money to blow out broad money supply measures is just as politically unattractive. Both government actions could occur, but are not the most probable given political realities unless a lot changes first.

    It was interesting timing to see Marshall Auerback introduce modern monetary theory on your blog — there has been an enourmously lengthy dialog recently (which I’m still not done reading!) initiated by Steve Keen and Bill Mitchell regarding the circuitist and chartalist camps of post-keynesian theory. I’m still struggling to understand some of the intricacies of chartalism (modern monetary theory) but it is very compelling with respect to possible positive outcomes if it works as advertised (I’m still making up my mind but the case seems strong) and if it could become politically feasible. A bit complex to wade through but well worth a look for anyone interested in government’s appropriate role in all this: here, here, here, here, here, etc.

    UPDATE: For me there are TWO big unknowns that dictate the depth of this depression… the second (other than size of government deficit spending) is how quickly and effectively emerging markets can decouple and sustain growth without crashing. A serious crash could be additional trigger point for collapsing global prices and debt deflation, and for China in particular, the possibility is frighteningly feasible.

    • Edward Harrison
      1 October 2009

      hbl, wonderful to hear from you! Thanks for the kind words. As for your criticism, I haven’t fully fleshed out my thinking on the money supply issue, but the wording I use is probably a bit stark. What I am trying to intimate is that money printing will have no effect on consumer prices as long as the increase in the demand for credit is in a secular weak phase. The only way printing money can have an effect is through currency depreciation vis a vis other currencies or hard assets.

      That won’t preclude us from potentially having high cyclical levels of inflation due to those effects. But, I don’t see how increasing the monetary base will feed through to broader money supply without an increase in credit demand growth. So we are probably in greater agreement than my comments suggest. It’s just that I generally have a fairly stark anti-inflation bias that is showing up in my wording.

      But, asset prices are a different thing for me. The money will not just sit on banks balance sheets earning nothing or even being penalized by negative interest rates as in Sweden. That money must earn a return – at a minimum, the risk free rate, one reason Treasury yields are plummeting back to 3.19% last I saw. Moreover, with yields lower across the board and balance sheets still bloated, that means return on assets is low and it also invites people to reach for yield and/or risk. SO if I am making the liquidity argument here that Rosenberg rejects, I do think it is valid. Let me know what parts of that you take issue with.

      Your comments on China and emerging markets are the right ones. I don’t think China can decouple but they can develop a more vigorous internal demand dynamic. So over time they might be more insulated. For now they are not.

      • hbl
        1 October 2009

        I agree that money printing won’t raise consumer prices when demand for credit is weak (though I think its absence could lower consumer prices). On depreciation of currency versus other currencies or hard assets… I could imagine some effect along these lines but still think of it as secondary to the relative valuations determined by market sentiment.

        On asset prices, my reasoning is basically the same as the above paragraph. Sure, many will reach for yield, and that could for example have an effect on relative valuation of bonds versus cash, as in the example you cite, but that is an expression of relative valuation preference not liquidity. For ALL asset prices to be lifted together simply as a result of money printing, I think broad money would have to be growing a lot more than it is as shown in MZM and excess reserves, both of which have been sort of flat this year. So since the printed money isn’t destroyed just because it buys bonds, it must just be offsetting contracting credit so far. Still, the biggest argument I could see in favor of the liquidity driving asset prices thesis is an increased concentration of money in the hands of those most likely to bid assets higher (e.g., banks?)… So maybe the thesis is correct in that context.

        Or I could easily be wrong on this reasoning (you or anyone can feel free to tell me why if you think so!)

        Interestingly the chartalists (as best I can tell so far) are only worried about consumer price inflation if demand exceeds capacity… EVEN IF the government deficit spends WITHOUT taxing or issuing bonds as a source of the money.

  2. Jo
    1 October 2009

    Excellent post – best I’ve read in the past month.
    There is so much with which I agree.
    There is so much with which I disagree.

    Once, just once I crave to hear a commentator say ‘forget economic theory – we have to change the way we live, from top to bottom’.

    My quest continues.

  3. Brian
    2 October 2009

    Edward, you said, “I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the trauma of the lost decade in the U.S. and the U.K..” It’s not just your memory that writes that, but also your clarity and watchfulness.

    I can empathize with both leaders and voters taking the stump of the 80s believing that over many previous decades we’d overlooked every rational economic policy but pulling government hands out of our pockets, 1700 taxes on an egg trumpeted Ronald Reagan. But I condemn the jingoists that since convince us good government is doing nothing. Neither of these positions were true or are true.

    Quickly to follow these short sighted and oddly desperate political policies to induce macroeconomic vigor out of confusing stagflation, (debt and credit and new product and and a’ that), is that lingering pseudo-sophisticated trust in game theories and the magical math of self-interest in unbridled markets. Greenspan was damn right to apologize. The invisible hand has come back to smack us very very hard.

    Because we know it’s not so simple to build an economy by disrobing a government and gilding eager pirates, what’s better now is we can read long articles, eagerly and willingly, that will honestly and honorably help us understand where we are and how to slog ourselves forward.

    Those slogans about free and untethered markets put chains on us. Pundits have been false and leaders terribly easy to sway. We cannot gamble again on silly laissez-faire, but we can study where to find our balance.


  4. aitrader
    2 October 2009

    So I guess this piece is a rather long way of saying, “we’re screwed” with data backing up as to just how much and how deep, yes?

    I’ll reiterate my prediction of a November 2009 ’round-the-world stock market sell-off that will probably be called the crash of the century. And I am backing it up by taking a large position (for me, anyway) in SPY puts expiring in March 2010.

    Beyond the market crash I see a couple of years of desperate straits as debt levels adjust to historical norms and things finally hit the bedrock of economic reality where supply, demand, debt, and spending swing well under historical norms and begin to consolidate upwards again.

    My bet is that anything “green” (no, not shoots – I mean manufacturing) and “clean tech” will fuel a new boom as things start improving. It will likely resemble the Internet boom but with substance behind the products and profits produced. This will be a great time to be an entrepreneur in battery technology, smart electronics, Internet tied power usage and flow optimization, smart products that turn themselves off when not in use, yada, yada. I see the design and core technology coming from the developed countries with the actual product manufacturing done in Asia (including India, who I see as an upcoming manufacturing rival to China).

    In short, the near term future looks very bleak. But the longer term in five years time looks quite good IMHO.

    Any thoughts that far out Edward?



    “Moreover, with yields lower across the board and balance sheets still bloated, that means return on assets is low and it also invites people to reach for yield and/or risk.”

    The money floated out into the system is leveraged. This is what caused the first ‘hiccup” of this ‘small d’ depression. It has also sought returns in equities so far. Not to state the obvious, but leverage in a rising market means massive profits and leverage in a shinking market causes, well, October 2008 and 1929 (and probably November 2009). If you want to analyze why the market will crash and how much, do a back-o’-the-napkin calculation of the current leverage ratios of capital to assets in the remaining investment banks and large derivative holders.

  5. Zac
    2 October 2009

    nice post and I like your blog (more then other that I read) because you are neutral and you are looking at both sides of same medal.
    You and hbl (from my opinion) have identified problem and it is emergin markets especially BRIC – China. GS have made analysis and they say that by 2025 China will become NO. 1 world economic superpower (btw, Im neutral about GS) so if GDP of US will grow in next 15y avg. 2% an, it will reach near 19T$, + 4-5T$ and China will grow 10% an. that implies +14T$ from current lvl of 4T$ and there are rest of em. mrkts. + frontier mrkts. To point out : China and the rest of BRIC just cannot grow at the rate of 7% or above in just 15 yrs (either they stay export driven eco. or internal consuption based eco.). Well they can grow at 10% or more but it wll bring great disturbances in global eco.
    But, sadly, it is political not economical problem.

  6. Anonymous
    3 October 2009

    Good article. I don’t think government will be able to run deficits and stimulate the economy. In the old days, it has worked, because America invested in it’s production capacity to produce goods that the rest of the world wanted. America came out of the WWII with debt but with a huge manufacturing capacity as well. What do we invest in now? Granite countertops? Any mindless government spending will add to our future pain now since the money is not being allocated effectively. Depression continues unchecked:


    The article mentions that the FED and the government should have seen the crash coming. I believe they knew very well that it was coming. They knew it long ago. They made it possible to deduct mortgage interest from income for tax purposes. That was precisely to create more and bigger mortgages so that money supply could be further inflated. When prime borrowers were done, they allowed sub-prime, again specifially to continue to inflate the money supply. They danced as long as the music played. They needed a big crash to be able to convince the government to save their banks, or armageddon would wipe us out. They also had the black sheep “sub-prime” to put the guilt on. Had they done something earlier, they WOULD NOT get the green light from the congress. They had to allow the crash to be big and scary!


    These people know everything very well, and they do not care about the American public. As long as wall street is bailed out they are happy.

    If creditors feel that the FED intends to print substantial amount of money, I am afraid they will stop lending at these low rates, and that will cause interest to go higher, effectively taking away the benefit of low rates. If FED insists, then the treasury will NOT be able to borrow in USD. That will freeze the credit markets and cause deflation right away for the short term. If the FED prints even more money, we go into hyperinflation, Zimbabwe style. Therefore, FED may have to be content with deflation.

  7. Anonymous
    3 October 2009

    Good stuff, Ed. Thank you very much. Just curious, would it not be preferable to have a fierce, quick deflationary unwind than trying to support the broken system, efforts which will probably fail anyway? It may be painful but would could be very brief, and enable the economy to return to true health.

  8. David
    4 October 2009

    Edward… as always your analysis is interesting. If nothing else it captures an important point completely missed by all mainstream media. Recessions, Depressions and Recoveries don’t just begin or end over a period of several quarters. They are sometimes years in the making and years in the un-making. Unfortunately this reality doesn’t suit the two greatest criminal organizations of the last 50 years the RNC and the DNC, who have election cycles that take precedence over the health and well being of the US economy and it’s citizens.
    Beyond that though, I think the weakness of your analysis, none of which I disagree with is that it’s built on obvious, observable and widely reported facts. Robert Anton Wilson once wrote ” if you can see Them it’s not Them”. I would extrapolate from that. Even if everything that’s known is not wrong, it’s still more likely to be misleading and obscurius then it is likely to lead one to logical conclusions.
    To quote Bob Dylan” There’s something going on here and you don’t know what it is. Do you, Mr. Jones”

  9. Element
    9 October 2009

    Your analysis is rather compelling (and secular deflation, for now). The problem is of course (as you pointed out) falling tax revenue and the unavoidable

    nature of on going government deficits (funded via printing plus borrowing) needed to prop-up economic activity.

    I recommend John Mauldin’s archived e-letter of July 10, 2009, titled; “Buddy Can You Spare $5 Trillion?” Mauldin convincingly points out that most deficit

    countries are looking to massive credit for deficits for years to come—simultaneously. He also makes the point that you can only get away with so much

    currency printing before the NET effect becomes counter-productive. Which ends with deficit governments relying on increased taxes (double-dip almost

    assured) and much greater emphasis on borrowing from the available pool of global credit. But Mauldin asks; how much will wee need, and how much is

    actually available? The global credit pool is rapidly going to deplete and creditors, already spooked, are going to balk at some point.

    Bottom-line; there’s not near enough credit available, globally, to meet both the (“essential”) global public credit demand, for years to come, plus to

    provide for growing private credit demand, from individuals and actual productive businesses, globally.

    The ‘Great Recession’, now ending, was a bad cold—hardly fatal and recovering already. The coming ‘d’-depression is a nasty flu after a bad cold—we’ll

    almost certainly recover with treatment, care and time. But insufficient credit combined with the implied intensification of printing presses to provide

    for this (“essential”) government stimulous (i.e. 18 to 36 months out), amounts to viral double-pnemonia, on top of a serious flu, after a bad cold. The

    credit supply is the antibiotic—good luck getting some!

    Yes, what Government(s) do matters most right now, and maybe for a year or three, but the implied re-intenified use of the printing press in the event that

    global credit is sucked dry is the real bogeyman. Metaphorical ‘category-five’ Depression?

    So I’m asking myself; am I really foreseeing a logical trajectory here, or am I reading too much into the shadows cast on the back wall of my cave?

    So Edward, what happens if (more likely when) the public credit pool is sucked dry. Isn’t that considerably worse than withdrawing Government support in a

    year or two, especially if there’s a double dip, which you say you’re now satisfied is very likely?

    How will that play out?

  10. jomama
    17 December 2009

    Nice analysis.

    If what some say that debt is ~90% of the money supply is true, I don’t see any way of printing ourselves out of the debt destruction to produce inflation. I also suspect much hanky-panky puffing of bank balance sheets. I also suspect I’m not alone in this. If true, confidence drops to near zero. If more folks go on the unemployment lines each month that zero confidence increases.

  11. Duric Aljosa
    13 January 2010

    At this point, it is more than obvious that we need an alternative economic system to the current one.
    Here’s one example: Crom Alternative Exchange


  12. Anonymous
    22 February 2010

    I agree with how debt is the problem. All $58 Trillion of it.

    But the CAUSE of this debt is obviously I-N-T-E-R-E-S-T.

    Look, if the banking system creates $100 out of thin air, and
    lends this money out at 5% interest, then how could there be
    enough money in cerculation to pay the debt?

    And if we have 100 gold-dollars the problem remains.

    Here is what happens when you borrow $100,000 from a bank:

    (1) The Federal Reserve System, a private for-profit printing-house,
    which is NOT a part of the government, spends 85 cents printing
    the $100,000.

    (2) The Fed lends that money to the bank at interest.

    (3) The bank tacks on a point or two of interest for their income.

    (4) As you pay the loan back, the portion (or %) of your loan
    payment which are dedicated to principal are given back to the
    Fed and RETIRED from the circulation.

    (5) But the money to pay the interest comes out of the general

    Thus, the percentage of money borrowed to pay debt is always

    Hey, the Treasury Deparptment can print IOU’s—that’s what
    money is—for NO INTEREST at all!

    So the issuing of our promises-to-pay is an extremely profitable

    And that right there IS the problem.

    • Marshall Auerback
      Marshall Auerback
      22 February 2010

      Who is the recipient of that 5% interest payment? You can’t just look at
      one side of the balance sheet.
      Note that during WWII the government’s deficit (which reached 25% of GDP)
      raised the publicly held debt ratio above 100%– much higher than the ratio
      expected to be achieved by 2015 (just under 73%). Further, in spite of the
      warnings issued in the Reinhart and Rogoff book, US growth in the postwar
      period was robust—it was the golden age of US economic growth. Further,
      the debt ratio came down rather rapidly—mostly not due to budget surpluses
      and debt retirement (although as we discuss below, there were small surpluses
      in many years) but rather due to rapid growth that raised the denominator
      of the debt ratio. By contrast, slower economic growth post 1973,
      accompanied by budget deficits, led to slow growth of the debt ratio until the
      Clinton boom (that saw growth return nearly to golden age rates) and budget
      surpluses lowered the ratio. We will return to the relation between deficits
      and growth below.
      When US federal government debt is held by the American public, the
      government’s liability is exactly offset by the US nongovernment sector’s asset.
      And interest payments made by the government generate income for the
      nongovernment sector. Even on the orthodox understanding that today’s deficits
      lead to debt that must be retired later, tomorrow’s higher taxes used to
      service and pay off the debt represent a “redistribution” from a taxpayer to
      a bond holder. This might be undesired (perhaps bondholders are wealthier
      than taxpayers), but at least it is taxing one American and paying another
      American. Note also that the “redistribution” takes place at the time the
      payment is made. While it is often claimed that our deficit spending today
      burdens our grandchildren—as if we got to party now, and they get the
      hangover later—in reality we leave them with the government bonds that are net
      financial assets and wealth for them. If it is decided to raise taxes in, say,
      2050 to retire the bonds, the extra taxes are matched by payments made
      directly to bondholders in 2050.

      In a message dated 2/22/2010 00:00:56 Mountain Standard Time,

      Look, if the banking system creates $100 out of thin air, and

      lends this money out at 5% interest, then how could there be

      enough money in cerculation to pay the debt?

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