“Not all government debt is created equal. We have bad deficits and good deficits. Good deficits are used to fund investments that will have a positive rate of return, properly determined. Those contribute to GDP.”
Tag: Austrian Economics
According to an analysis by Reuters, small and medium-sized banks in the US have started to take on risk as the squeeze in net interest margins is beginning to hurt profitability. The goal is to boost returns despite the low-interest rate environment by increasing risk and/or leverage.
QE is an asset swap. No new net financial assets are introduced into the private sector in contrast to when the government deficit spends and does add new net financial assets. So for it to have all of those seriously beneficial effects everybody says it has, you need it to shift what people are buying and selling and doing in the financial markets and private credit system. Otherwise, it’s not going to work.
Raghuram Rajan has an interesting post now up on Project Syndicate. The overall tone of it has an Austrian feel as it stresses the failure of stimulus to allow developed economies to attain higher GDP growth a full five years after a financial crisis because of supply side problems. I would like to add a few comments to what Rajan says.
Spiegel, a widely-read German magazine, has published a trilogy of articles on inflation in German that it has also translated into English. The theme is “How Monetary Policy Threatens Savings” and I see this as a must-read for those interested in a German framing of the present debt crisis. This post is my extended commentary on the view expressed by Spiegel, including my own thoughts on the correct framing of the crisis and present policy solutions.
One thing Austrians harp on is the misallocation of resources caused by heavy handed and persistent interest rate market intervention. They are right that the industrial organization and the structure of investment capital priorities is critical to longer-term growth. What we are seeing now is a skew into high risk activities.
Yesterday, John Carney at CNBC had a nice little post comparing Hyman Minsky’s Financial Instability Hypothesis with some of the thinking by Friedrich von Hayek behind Austrian Business Cycle Theory. John rightly points to this passage as “a theory about banking as an endogenous destabilizer of the economy.” And this certainly fits with the Minsky view of the world. von Mises takes the view that it is in having “bank notes without gold backing or current accounts which are not entirely backed by gold reserves, the banks are in a position to expand credit considerably”. Nevertheless, whether you believe the genesis of the credit expansion is Federal Reserve interest rate policy, animal spirits, fiat currency or fractional-reserve banking, what should be clear is that it is the lower rate of interest that creates the credit growth. The question is whether this lowering of rates is beneficial over the long-term. Von Mises argues it is not.
Last August, the Fed went for what I call “rate easing”. If the economy weakens this year what will it do? I am not convinced it will be quantitative easing. In general, I think the Fed, while looking to support the growth side of its dual mandate, wants to look to the data before acting since monetary policy acts with a lag. This post is about those policy concerns and about what Fed policy has already done. Private portfolio preferences have shifted considerably. An article in today’s Wall Street Journal “Junk Bonds Feed a Hungry Market” shows the way, with a lot of quotes about people reaching for yield because Treasury yields have been suppressed.
We (also) do not want black helicopters flying around dropping bags of cash; and we (also) oppose government “pump-priming” demand stimulus—the libertarians and Austrians and even Milton Friedman are correct in their argument that this would generate inflation. Come to think of it, MMTers have more in common with Austerians than with “military Keynesianism” that supposes that high enough spending on the defence sector will cause full employment to “trickle down”. Most MMTers believe we’d get intolerable inflation before the jobs trickle down to Harlem. But can we “afford” full employment?
I would bet on near-systemic collapse before the Fed starts either asset purchases or Congress resorts to fiscal activism. But eventually, the Fed is going to purchase more than just treasuries. They will purchase a lot of financial assets and probably some real assets as well.
Below is a framework that delineates the ideology and economics of two groups of economic thought that are much talked about in the wake of the Credit Crisis: the Chartalists and the Austrians. These two groups are considered outside of the mainstream and this is important because many economists and market pundits in both camps predicted the global credit crisis while almost no mainstream economists did. The questions are why and what separates them from mainstream Keynesians and Monetarists and from each other?
Austrians and MMTers should be on the same side. After all, both camps understand the relationship between money and credit, and both understand the full ramifications of having fiat money. They should be on the same side arguing against economists who argue that demand can be created by flooding the banking system with reserves, and both should be on the same side arguing against those who think that increasing inflation expectations is an effective way to get an already over-indebted economy to take on more debt.