Can someone help me out here?

[Person Man]

I have heard that we have record deficits and that prices are falling everywhere. What would happen if we tried to print more money to pay off the deficits and to stabilize spending power? Will that work? Will we just scare people? Will we just encourage them to be lazy?

[Beet]

It will only work if our foreign creditors continue to hold dollar assets despite those assets depreciating due to our printing. There are a couple reasons why some of the larger foreign entities (e.g., govt. and quasigovt. entities) might do this. First of all, if they have a stake in preventing a dollar crisis and the consequences that entails that is greater than the capital loss they would take by pulling out; for example, in my estimation, the Chinese dependency on holding down their currency has marginally more to do with the domestic employment situation than the nominal yuan value of its dollar holdings, and similar for the rest of Asia. Right now all the main actors of the world have a stake in the current system not unravelling. Secondly, (and this applies to more than the govt. and quasigovt. entities) if the world is filled with risks and the dollar, despite being depreciated, is still safer than anything else. We saw something of that last year. Thirdly, I have argued that if you're holding a lot of dollars and really want to extract value from them rather than just have them looking nice and pretty on a balance sheet, depreciation of the dollar isn't an unmitigated bad because it makes US assets and goods cheaper to acquire; as long as there is not domestic inflation in the US, you're not necessarily worse off from a buyer's perspective. Keep in mind that printing causes some domestic inflation in the US due to rising import prices, even if it doesn't create an overall increase in CPI.

Still, the Fed clearly doesn't want to (1) test whether these reasons will hold up, because if you're wrong, you just potentially blew up the world [although I suspect that's a remote scenario], and (2) it's basically immoral, because you're defaulting in a sense obligations to others, and others clearly won't like it and may not stand for it. Again, you don't want to test that.

Printing money I think won't necessarily result in a collapse but it's also not cost free. Probably what is going to happen is a continuation of debt liquidation and also the Fed has already done some monetization, but together these two things still don't add up to a solution. You may see a reflation of the debt circle in the short or medium term and some real crisis about 5-30 years down the road.

By the way, I'd be curious to see how jmfcst thinks the debt crisis will be resolved, and what Sam Spade thinks would have happened if we had just let everything fail.

[Person Man]

Yeah, me too. Somehow we have to reverse deflation as it would be immoral, on the same token, for creditors to basically increase what we owe to them. On the other hand, perhaps if we went back to just moderate inflation of just 1-2% we could continue to encourage some borrowing destroying a willingness to lend or sell goods in the United States. The point is- how do you get people to start hiring people even if they are making more. Is this a market failure (so many people were irresponsible, that basically to hold anyone responsbile would be tantamount to punishing people for revenge, rather than for rehabilation) or will this soon pass as well?

[Swing low, sweet chariot. Comin' for to carry me home.]

By the way, I'd be curious to see how jmfcst thinks the debt crisis will be resolved, and what Sam Spade thinks would have happened if we had just let everything fail.

americans have figured out how to raid the treasury, so I don't think it is going to be resolved.  And, seeing that my global outlook is religiously based upon end-time events, I don't particularly hold to an economic end-game, rather I think war will overtake these economic issues.

If i were running the country, my long-term economic policy would be to dismantle the entitlement system that is 60 Trillion dollars underfunded...though I would spend money making preventative care a priority (immunize every child, etc, etc,).

The whole notion of Social Security has killed the savings rate in this country.

As far as health care goes, we can't afford it when Americans live unhealthy lifestyles and are only getting fatter.  Maybe giving everyone a tax credit to but a treadmill would help, along with banning non-whole wheat flour and the like.  I hate to go that rout, but unless we motivate people to live healthier...we're all gong to go broke.

[opebo]

I have heard that we have record deficits and that prices are falling everywhere. What would happen if we tried to print more money to pay off the deficits and to stabilize spending power? Will that work? Will we just scare people? Will we just encourage them to be lazy?

It would work perfectly, weasel.  There would be no reason for creditors to fear a proper 'quantitative easing' which would set us back on reasonable 'inflation' of say 1-5%, instead of the current severe deflation.  They only need worry if we would get considerably higher than that, which is I'm afraid a pipe dream in our current slack economy.

It wouldn't make anyone 'lazy' - the rich are already lazy of course, as is their function, and printing money to get the economy back into growth would have no effect on the hard working poor - they have no choice but to work hard or starve.  All a 'good economy' means to them is they are allowed to work (in other words used up).

By the way, some pretty sickening right-wing garbage in the couple of posts above, eh?

[TeePee4Prez]

By the way, I'd be curious to see how jmfcst thinks the debt crisis will be resolved, and what Sam Spade thinks would have happened if we had just let everything fail.

americans have figured out how to raid the treasury, so I don't think it is going to be resolved.  And, seeing that my global outlook is religiously based upon end-time events, I don't particularly hold to an economic end-game, rather I think war will overtake these economic issues.

If i were running the country, my long-term economic policy would be to dismantle the entitlement system that is 60 Trillion dollars underfunded...though I would spend money making preventative care a priority (immunize every child, etc, etc,).

The whole notion of Social Security has killed the savings rate in this country.

As far as health care goes, we can't afford it when Americans live unhealthy lifestyles and are only getting fatter.  Maybe giving everyone a tax credit to but a treadmill would help, along with banning non-whole wheat flour and the like.  I hate to go that rout, but unless we motivate people to live healthier...we're all gong to go broke.

Better- A tax credit for a gym membership!

[ag]

I have heard that we have record deficits and that prices are falling everywhere. What would happen if we tried to print more money to pay off the deficits and to stabilize spending power? Will that work? Will we just scare people? Will we just encourage them to be lazy?

If you "just print money" (well, in a way you do it already, though, apparently, with the intention of destroying it if things start getting out of hand - I just hope Dr. Bernanke knows what he is doing) with the clear intention of "paying off the deficits" that way you are going to get two things:

1) high inflation (this beast is very hard to control once it is out)
2) great difficulty in borrowing (and likely loss of dollar's position as the world's major reserve currency)

Neither is going to be particularly pleasant. No, people aren't going to be lazy. They will likely work more, consume less, loose whatever savings they have and be, generally, rather unhappy.

[Beet]

In order to have high inflation you need to have a wage- price cycle. Labor has to have some bargaining power politically to say "Raise my pay to meet standard of living adjustments!"

Absent this, you have inflation in imported goods, but not wage inflation and not necessarily asset inflation, which means prices go higher up to a point, but no vicious cycle as we've seen in Latin America where there were much more populist governments in power that made sure wages rose.

As for people working more and consuming less-- we want people to work more. Not enough people are working right now, which is part of the problem. And people will have to consume less, to build up their savings and start paying down debt. That is already happening and is not necessarily a bad thing in the long run.

[ag]

In order to have high inflation you need one and only one thing: print more money. In the long run (not that long: a matter of a couple of years, really, not likely to be much more) this is a necessary and sufficient condition.  The rest is just a lot of baloney. It's been tried over and over again historically - the result is always the same: you print money you get inflation, you don't print money you don't get inflation. You may want to try again: I am not wishing you good luck, as you aren't going to have any (you might also see what happens if you drop a heavy boulder on your head or if you spill gas all over your house and light the matches - I am not wishing you luck in those activities either).

The only reason why this is not quite working out that way right now (in the "short run") is that printing money is, actually, harder than it seems. Most of what passes for money these days is, normally, bank loans. If banks don't give out loans, the government might be trying to print money, but the actual ammount of money in circulation isn't growing. That's what we are having now: there isn't that much money out there, but more of it has been printed by the Fed and less by the private banks.  Fed has a plausible argument that had it not done anything we'd be in bad deflation - it's, probably, right.

Still, it doesn't mean it is going to be all right.  At present, Fed is hoping to be able to get the moment right and destroy all the money it has printed right at the moment that the banks start lending again. I sincerely hope they are right there - if they are wrong, all of us are going to be deep in stinky excrement for a long time to come.

[ag]

As for people working more and consuming less-- we want people to work more. Not enough people are working right now, which is part of the problem. And people will have to consume less, to build up their savings and start paying down debt. That is already happening and is not necessarily a bad thing in the long run.

Sure. Work more (forever), earn less (in real terms, forever), consume less (forever) - if that makes you happy (in the long run), I am happy for you. But, overall, your country (and, given its role in the world - the entire world) will be a poorer and more miserable place. If you like that, I am not the one to judge your preferences. It is not my definition of a good thing, though.

[Beet]

As for people working more and consuming less-- we want people to work more. Not enough people are working right now, which is part of the problem. And people will have to consume less, to build up their savings and start paying down debt. That is already happening and is not necessarily a bad thing in the long run.

Sure. Work more (forever), consume less (forever) - if that makes you happy (in the long run), I am happy for you. But, overall, your country (and, given its role in the world - the entire world) will be a poorer and more miserable place. If you like that, I am not the one to judge your preferences. It is not my definition of a good thing, though.

Working more is bad? So you want the unemployment rate to stay at 9.5% and the broader measures of unemployment to stay at 16%, and the average workweek to stay at 33 hours or less? I think we must be talking about different things. America would not be a poorer and more miserable place if Americans worked more than they are today. We were working more a year ago and we were a happier place.

On the consumption side, I am not calling for reduced consumption, but I do not see how Americans can consume more in the short to medium term than it has been in recent years. If you have a plan for how this could be accomplished, I'd love to hear it.

[Beet]

In order to have high inflation you need one and only one thing: print more money.

We mostly agree, but not entirely. I see a difference between different kinds of inflation. Some kinds, are asset driven. Some are commodity driven. Some last for a period of time, and can be high in that period of time (e.g., Indonesia 1998) but quickly go away. Others last for years and gradually accelerate. Yet others only reverse deflations, as you hinted. What distinguishes different kinds of inflations has to do with the conditions surrounding those inflations. I am saying not all inflations lead to a cycle of higher prices, causing demands for higher wages, which lead to higher prices, forcing the government to print more and more and more to keep up-- hyper-inflations. That is the kind that will really screw you-- other kinds have winners and losers, and are generally things to avoid as well, but they have to be compared to the alternatives.

[ag]

As for people working more and consuming less-- we want people to work more. Not enough people are working right now, which is part of the problem. And people will have to consume less, to build up their savings and start paying down debt. That is already happening and is not necessarily a bad thing in the long run.

Sure. Work more (forever), consume less (forever) - if that makes you happy (in the long run), I am happy for you. But, overall, your country (and, given its role in the world - the entire world) will be a poorer and more miserable place. If you like that, I am not the one to judge your preferences. It is not my definition of a good thing, though.

Working more is bad? So you want the unemployment rate to stay at 9.5% and the broader measures of unemployment to stay at 16%, and the average workweek to stay at 33 hours or less? I think we must be talking about different things. America would not be a poorer and more miserable place if Americans worked more than they are today. We were working more a year ago and we were a happier place.

On the consumption side, I am not calling for reduced consumption, but I do not see how Americans can consume more in the short to medium term than it has been in recent years. If you have a plan for how this could be accomplished, I'd love to hear it.

No, that's not the "working more" I have in mind. What will happen is that you'd be working longer ours in crappier jobs for a lower (real)wage to make ends meet: you'd need to work longer ours to buy necessities. Leisure would become too expensive. Of course, that doesn't mean you'd be able to find the job - high inflation is, generally, not very condusive to high employment (and, eventually, when they start fighting it, you'll have another very nasty recession with high unemployment). But conditional on finding the job you'd make sure you work your ass off.

Savings - yeah, savings wouldl grow, out of necessity (nobody would lend you, so you'd need to save). And, given that you'd have destroyed the dollar you'd be giving it to those Europeans with their euros, so that they'd have better lives.

[Beet]

As for people working more and consuming less-- we want people to work more. Not enough people are working right now, which is part of the problem. And people will have to consume less, to build up their savings and start paying down debt. That is already happening and is not necessarily a bad thing in the long run.

Sure. Work more (forever), consume less (forever) - if that makes you happy (in the long run), I am happy for you. But, overall, your country (and, given its role in the world - the entire world) will be a poorer and more miserable place. If you like that, I am not the one to judge your preferences. It is not my definition of a good thing, though.

Working more is bad? So you want the unemployment rate to stay at 9.5% and the broader measures of unemployment to stay at 16%, and the average workweek to stay at 33 hours or less? I think we must be talking about different things. America would not be a poorer and more miserable place if Americans worked more than they are today. We were working more a year ago and we were a happier place.

On the consumption side, I am not calling for reduced consumption, but I do not see how Americans can consume more in the short to medium term than it has been in recent years. If you have a plan for how this could be accomplished, I'd love to hear it.

No, that's not the "working more" I have in mind. What will happen is that you'd be working longer ours in crappier jobs for a lower (real)wage to make ends meet: you'd need to work longer ours to buy necessities. Leisure would become too expensive.

A lot of people are already doing this, and more of them will as the economy continues to lose jobs, and I don't see any inflation.

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Not in itself, but if the exchange rate is more competitive, the benefits to employment will exceed the costs of higher imports.

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I'd take a 1982 style recession any day to what we saw during the Great Depression-- which incidentally was cured through inflation.

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You're assuming a currency crisis of some sort-- that is not inevitable.

[Sam Spade]

Well, if you print money without engaging in the process of creating some sort of debt instrument (you know, Treasuries) sold to obtain the ability to print money, then you stand the great change of creating the type of scenario ag describes, probably quicker than you might imagine.

You see, creditors of governments do not generally like the idea that their investment (i.e. in the debt instrument) is being debased and will either demand a higher interest rate to purchase such an instrument or sell off their holdings altogether.  This is *bad*.

Interestingly enough, this type of "nightmare scenario" would either 1) be deflationary and result in a "currency collapse" and sudden devaluation of your currency (most likely result if you stopped printing once everyone abandoned you or demanded higher interest rates) or 2) create some type of runaway (hyper)inflation that destroys your government (memories of Argentina 1980s).

You can try to "hide" that you're actually printing money, and I'm personally convinced some countries (like China) have been playing this game, but if you get caught.  Well, China doesn't really care anyway - the last thing they want is deflation (of course they could get the hyperinflationary bugaboo with enough prodding - certainly is possible).

[Sam Spade]

what Sam Spade thinks would have happened if we had just let everything fail.

Thought I told you before on this front:

1) I would have examined the books of every troubled institution before deciding whether they failed or were backed up by government (akin to what FDR did), so that we actually knew what we were playing with (which, btw, we still have no idea - that makes confidence in the system "impossible").

2) If their were "immediate" problems, such as with the money markets that nearly blew up, I would use government to back up those things. (but only temporarily)

3) If, after examination of all of the troubled institutions and determination that certain institutions must fail, there would not be, for example, enough lending capacity to handle the economy or other typical banking issues, I would have used the government money to create "banks" to handle these problems.  These banks would only make quality loans to businesses and individuals, but would cover these impending failures.  Over a certain amount of time, the lending institutions would be sold off privately.

You see, one of my biggest concerns is that, down the line, when the next wave hits, at some point government is not going to be able to back up everything and because of its prior actions, will be unable to create safety nets for the collapse of all of these highly questionable institutions.  That would be bad, really bad.

As for the result, it would have been quite ugly, I don't disagree.  Worse than what actually occurred.  But it would have been much better than what I suspect is awaiting us.

[Person Man]

So, you all are in agreement with my assesement to a degree, correct? However some predicate action based on simply trying to dismantle the current situation like a defunct nuclear plant. The advantage of that is that we will be prepared for future problem, but it may be too cautious of an approach to create any long term stability.

[opebo]

It's been tried over and over again historically - the result is always the same: you print money you get inflation, you don't print money you don't get inflation.

No, that's not the case, as Japan shows.

You have to remember that you're speaking from a historical understanding that is within the Keynesian period, which presupposes reasonable capacity usage in an economy.  Neoliberalism has eliminated a lot of what used to be thought of as normal in an economy, and in the new deflation and dearth-of-demand economy (or rather the return to the 19th century) that we live in today, printing money is only going to slightly counteract deflation.  To create inflation in the current system is very, very difficult.

[Beet]

...

My worry is that every time one of these large 'interconnected' banks fails, it drives a ton of other financial institutions not only illiquid, but insolvent, for two reasons. First, they're holding as assets a ton of paper from said failed bank. Second, the damage to the real economy caused by one of these guys going down deteriorates the value of the assets of all financial institutions, no matter how well run.

It's like a stack of dominoes. Bank A is insolvent and goes down. This accrues enough loss to Bank B to render it insolvent. This causes Bank C to be insolvent. Bank C could have survived the loss of just Bank A, or just Bank B, but not both A and B. And so on.

Wouldn't this stack of dominoes just have kept going on until eventually the entire financial system- the banks, the hedge funds, the "vehicles", and everything else delevered to death? Even if you wanted to backstop a bank that was just having a liquidity problem, investors would still dump everything on the government if they felt that a bank's liquidity problem might soon turn into a solvency problem, or if they simply weren't sure. The whole thing ($52 trillion) would have quickly unraveled, and if the taxpayer didn't end up with the whole tab, interest rates would go sky high as all kinds of assets were dumped.

Using government money to create banks might work, but keep in mind that the government does not have the manpower or expertise to create these huge banks. And the bank would be operating in an impossible environment. No one would be wanting to take out loans for legitimate purposes such as investment.

Basically, you get a deep, deep depression. The government would end up running trillion dollar deficits anyway, as tax revenues collapsed. International capital flows would dry up, and so would international trade, and you would have an instant 1930s. You go from 1929 to 1933 not in 3 1/2 years, but more like 6 months. Living standards would fall 20, 30, 40 percent, especially in economies heavily dependent on trade.

And you think this would not have had a gargantuan human and political toll? That recovery from such a catastrophe would be easy? It could easily take decades. So when you say that the bailouts make it "far worse", it's really scary. Allowing a systemic crisis in the private sector-- these big banks to go bankrupt-- and trying to avoid a taxpayer loss- would have caused something as bad as the Great Depression, and at a far quicker pace. And it would have failed to prevent taxpayer loss. Taxpayers would be taking it up the ass, not only from the government, but from their own employers, as they lost jobs in mass numbers.

If there's even a small chance of escaping this, wouldn't it be worth it to try? Wouldn't it be far better to spread out the loss over a long period of time, and try to re-adjust the economy towards where it needs to go slowly, over many years, as Japan did? Japan is in crap shape, but it never had 25% unemployment or a 30% drop in output. Its society remained stable. They slowly worked off their bad loans over time.

[opebo]

The whole thing ($52 trillion)

The 'whole thing' is only $52 trillion?  That's only like four times GDP.

[Person Man]

The whole thing ($52 trillion)

The 'whole thing' is only $52 trillion?  That's only like four times GDP.

That's about the GDP of the Planet Earth...or close.

[ag]

It's been tried over and over again historically - the result is always the same: you print money you get inflation, you don't print money you don't get inflation.

No, that's not the case, as Japan shows.

You have to remember that you're speaking from a historical understanding that is within the Keynesian period, which presupposes reasonable capacity usage in an economy.  Neoliberalism has eliminated a lot of what used to be thought of as normal in an economy, and in the new deflation and dearth-of-demand economy (or rather the return to the 19th century) that we live in today, printing money is only going to slightly counteract deflation.  To create inflation in the current system is very, very difficult.

I am sorry, but I can't understand a word you said here: to my taste it's just gibberish, noise devoid of any distinguishable sense. Keynesian/neoliberal/ancientmarsian - these are all just theories about how the world works (well, the first two, at least), not the world itself. There has never been a "keynesian period", nor there is a "neoliberal period"  (in fact, if I were to listen to your "neoaustrian" friends the world is now run by keynesians - not that I can understand what they mean by it, nor that it matters at all here). If you print money you get inflation: there is full agreement on this point between neoliberals, keynesians or whatever: you won't find an economist who disagrees.

Now, as I myself said, it's not that easy to print money in a world, where most money isn't printed by the government but issued by the banks: if banks don't want to lend, major increases in "monetary base" (that's what the government "prints") won't do much to increase the money supply. So, the Fed is increasing the base by staggering ammounts, and there is no inflation - yet. However, this is only so because the economy is still in deep sh**t: the moment banks start lending the Fed will have to start reducing the base ("destroying money") - or else. And one just hopes they do it at the right moment: if they do it too early, there will be another recession, if they do it late - inflation will rear its head (and to kill it they will get into another recession). They hope they will do it right - so do I (I have nothing else to do but hope: my wage is fixed in dollars). But they aren't planning (hopefully) to "pay the debts off by printing money" - if they do, you guys are all badly screwed.l

[Person Man]

Well, that's pretty much what we have to do, then. When do you think this increase in monetary base start to help us that are now first trying to obtain the economic franchise after college.

[opebo]

If you print money you get inflation: there is full agreement on this point between neoliberals, keynesians or whatever: you won't find an economist who disagrees.

Well, I disagree.  It is far from as simple as you suggest.  If we have, for example, the capacity in auto factories to build 10 million cars per year, but the 'private consumers' are buying only 5 million, it will not cause any inflation if the State prints enough money to buy another 2.5 million cars and throw them in the ocean.  Its all about capacity usage, which even in the best of times over the last 3 decades has been poor.

But surely as a right-winger you worship at the alter of supply-and-demand, and most particularly supply.  Doesn't the assumption that printing money always leads to inflation focus entirely on supply (of dollars) and not at all on demand (stuff to be traded for dollars)?

[Beet]

It is easy to print money, it's not that easy to expand the money supply. Expanding the money supply and printing money are not the same thing. When a bank expands the money supply, it is not printing money-- it is creating an interest bearing instrument. In the United States, only the reserve bank has been granted a monopoly right on the issuance of legal tender. Other banks can expand the money supply-- and it's hard for policymakers to coax them to expand it at any given pace, true, but that is not "printing money." The Fed can, and does, print money at will, quite easily.

What you're assuming is that there is some "point" where the money supply will start stretching again like a rubber band and if the Fed contracts the monetary base at that time, then it's not really printing money to pay off debts. Very well. I think the Fed has very similar thinking. The problem is, without defaulting on the debts somehow, either through monetization or outright default, these debts will continue to act as a drag on the economy forever, potentially sinking the country into a prolonged debt-deflation. Therefore, I predict the Fed will be very cautious in reversing its extraordinary moves and may not do so for a long, long time. And even when it does, the problem will not be solved because the debts will still be there in another form.

Only by fixing the exchange rate-- and allowing the US to work off its debts by production and saving over a long period of time-- in other words allowing the demand of the world economy to come from somewhere else for once, can the US pay off its debts humanely.