ShcShc11

As the WSJ, IMF, S&P and many many others already wrote about Europe’s austerity program: “As Europe scrambles to find a solution to a debt crisis that’s threatening the world economy, it’s crucial to understand what actually happened in countries like Spain. Otherwise, policymakers will end up prescribing the wrong medicine, with disastrous results.” ... If you (or anyone else) want to look at the numbers more closely about Europe, you can look at this site: http://www.voxeu.org/index.php?q=node/7491 including these two (if people want a summary of it): http://www.voxeu.org/sites/default/files/image/FromAug2011/CafisoFig1(1).gif http://www.voxeu.org/sites/default/files/image/FromAug2011/CafisoFig2.gif It essentially decomposes the whole Debt/GDP ratio for Greece, Ireland, Spain, the United Kingdom and Italy. If you don’t want to look at the numbers and just want a SUMMARY of the link above: Countries that spent beyond their means: Greece, Portugual and the U.K Countries that spent WITHIN their means: Spain, Ireland and Italy. So no, the European crisis is much more than “countries ran up debts for far too long”. Europe has a far deeper structural problem. It tries to act like a country when it is not. Remember that whenever a state faces a deficit in the past, the Federal Government would help transfer money and Americans could freely go work from one state to another (without too much trouble). Europe cannot and is not willing to do that. Germany opposes any “transfer union” and workers are far less mobile. Another link about the whole “PIIGS debt going out-of-control” myth: http://www.cepr.net/index.php/blogs/beat-the-press/spain-did-not-run-up-high-public-debt?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+beat_the_press+%28Beat+the+Press%29 And here’s another chart about GIPSI/PIIGS debt ratio (see bottom of post). [SEE CHART PIIGS] Maybe I’m blind, but I do quite believe their debt was diminishing up until the 2008 shocks. ... I’m going to cover about another countries: Ireland Why Ireland? It spent within their means yet still got into the crisis. The Government subsequently underwent severe austerity. [SEE CHART IRELAND] One reason why things like Quantitive Easing, monetary policy at zero bound and spending is important is because internal devaluation is a far far more difficult thing to achieve. In order for austerity to truly work (without any sort of QE), the country must become more competitive by cutting workers pay. It is a substantially difficult task to do. It’s easier to depreciate/de-evaluate a currency for everyone (thus making the country more competitive) than for EVERY firm of a nation negotiate every worker pays and wages. So how is the austerity working out for Ireland (praised by Cameron as being a “model” to Europe). Ireland is well at 14-15 percent unemployed... [SEE CHART IRELAND 2] Very slow and sluggish recovery for so much pain. New York Times article on Ireland’s austerity: http://www.nytimes.com/2011/12/06/business/global/despite-praise-for-its-austerity-ireland-and-its-people-are-being-battered.html?_r=2&hpw&gwh=220AD0387D8A777B7010D6114726611E “Nearly 40,000 Irish have fled the country this year alone in search of a brighter future elsewhere; the trend is expected to continue.” ““This is still an insolvent economy,” said Constantin Gurdgiev, an economist and lecturer at Trinity College in Dublin. “Just because we’re playing a good-boy role and not making noises like the Greeks doesn’t mean Ireland is healthy.”” From the article: http://www.project-syndicate.org/commentary/orourke1/English “August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009” “A second, related lesson is that it is difficult to cut nominal wages, and that they are certainly not flexible enough to eliminate unemployment.” “...where tax revenues in November ran 1.6% below target as a result.” A more complete guide about Ireland is found here: www.bruegel.org/download/parent/663-a-tale-of-three-countries-recovery-after-banking-crises/file/1534-a-tale-of-three-countries-recovery-after-banking-crises Summary: Ireland’s austerity experiment doesn’t look so good so far. So in spite of 14-15% unemployment rate, the IMF says that Ireland has “room for further progress on improving competitiveness”. In other words, Ireland is not out of the ditch at all. IMF report: http://www.imf.org/external/pubs/cat/longres.aspx?sk=25438.0 My question is: Do you really expect the American public to accept their country to go well into double-digit unemployment rate? People want to cut the deficit, but want to see their economy recover/unemployment recover. Choose one. But I like the fact that StreetScooby at least acknowledged that “it would cause pain”. Far too many people seem to live in fantasy where they can cut the deficit and unemployment recovers. Anyway, it’s a lengthy post, but I do think there are important myths to demystify and lessons from Europe over what not to do. I want to continue the post talking about the Bank of England...

They've all been over-spending for too long. That depends upon how much of the economy is dependent on government spending. Granted, where we are now, government austerity is going to be contractionary . I assume you're aware that Hayak and von Mises actually lived through this. It wasn't just a theory on their part. No doubt their personal experience with hyperinflation was significantly related to the Versailles treaty. My point, again, is that most western governments have been over-spending for too long. Their approach is not sustainable. If "normal" market forces were in play, I could agree with this statement. The fact of the matter is, "normal" market forces have not been in play for a while now. The Fed has been buying up every piece of paper in sight. They've actually turned into a profit center! Thanks for posting the site. I have a new web site to check out So, his model is advocating inflating our way out of the problem? Is that a fair read on this? You're faith in Keynesian economics is noted. ================================================================== For those following along in the conversation, googling some of the information found in ShcShc11's web links dredged up some very interesting stuff: ------------------------------------------------ 1) Wikipedia's description of liquidity trap: http://en.wikipedia.org/wiki/Liquidity_trap This is a pretty good description, with links (as usual) to key words. ------------------------------------------------ 2) A New York Fed in house article describing the theoretical justification for the Fed's policy of announcing future interest rates (...i.e., this is why they told everyone they're going to keep interest rates low). No where does it discuss the fact they don't have any choice in the matter because as soon as rates start going up US govt debt service requirements are going through the roof... http://www.newyorkfed.org/research/economists/eggertsson/palgrave.pdf Some fascinating stuff in here. Pure Keynesian thinking applied. Some points of note from this article: I've taken liberties here in cutting and pasting. Hopefully, I haven't done so in such a way that skews the context. That's not my intent.. I quickly read through the article a few times. Several things jumped out at me, and stuck with me... pt 1) The basic equation (the Euler equation) targets a "household". No where did I get the impression they were attempting to model how a company would maximize its utility, which is very different from how a household would maximize it's utility. That's a gaping hole because in a capitalistic society you must have companies to have households. I believe this is one of the major differences between Hayak and Keynes. Reading Hayak is way more difficult than reading Keynes. Keynes very much focuses on a macroeconomic view, while Hayak prefers a microeconomic view and all of the ensuing myriad details. Hayak does this by emphasizing "intermediate levels of production", which I'm now viewing as modeling how a company maximizes its utility, instead of just modeling "household" utility. pt 2) The Fed has been reduced to managing expectations. On the street, there's a widely known phrase that says "perception is reality". It's a piss poor way to live your life, IMO. It's down right frightening the Fed is bringing that philosophy off the street and applying it to the economy as a whole. I'm taking some liberties in making this leap, but just wanted to share my "OMG, WTF!" shock at this. pt 3) Uhm, government setting prices, or even thinking about that... never works. Properly functioning markets set prices. pt 4) In managing expectations, the Fed is admitting that government credibility is an essential part of what they're dealing with. I've seen for some time now that Geithner and Bernanke are not truly independent of Obama, and now I understand why. The problem, and it's beyond their control, is that private capital is expecting Obama to continue to make a mess of things (he's gotten pretty much everything he's asked for in his time in office, and things are worse, not better). The Fed is facing a losing proposition. I could be missing somethings here, but I have even less confidence in Geithner and Bernanke now. ------------------------------------------------ Philadelphia Research Intertemporal Stochastic Model (PRISM) The Philadelphia Research Intertemporal Stochastic Model (PRISM) is a medium- scale economic model being developed by the Philadelphia Fed’s Research Department. OMG!!! 40 equations??? MATLAB??? This is the best they can do? ------------------------------------------------ I'm going to close out this post with a quote from today's WSJ article that I posted earlier: Bottom line: Keynesian theory is not going to solve our problem for us. Good to see you again.

do you expect to pitch this over and over again and get any serious response other than "holy crap, your only comment is to destroy the entire freaking world economy?" the US can't print our way out of debt and expect to survive, or to even get out without seriously hurting the rest of the world's economies as well you are in jeopardy of being made into Dreamdancer's roommate if you keep this up har har. The reason why I have to constantly re-explain the liquidity trap is because people need to understand that concept before understanding why it is important to spend. In economics, everything DEPENDS on the situation. -spending can be a good thing or an evil thing DEPENDING on the situation. -raising or cutting taxes is nor a good thing or an evil thing DEPENDING on the situation. -Inflation is neither a good thing or an evil thing DEPENDING on the situation. etc... A lot of you guys seem to bring old re-hashed stuff like the Reagan years, the Clinton years, the Bush years when CLEARLY, this isin't anything like any of those years. We can, for example, compare the Clinton bubble vs let's say the Bush household bubble. But a lot of the argument seems like: "Oh, Bush was bad therefore cutting tax is bad... or Reagan is good therefore cutting tax is good.. or Clinton didn't cut tax and we were fine". It just becomes an argument of "I remember the good old' time when it was..." So why not go into the numbers more... See what's happening and why its happening. I think it was Truman who said "Bloody hell, give me an economist that is one handed!" Cheers!

http://www.businessinsider.com/fed-balance-sheet-vs-cpi-2011-11 I also want to point out to that article about the EU situation and Germany's "cut & slash" austerity policies. The summary being: Quantitive Easing is not necessarily inflationary. Also: if spending is a politically impossible thing to do, then yes, tax cuts should be done. Its not as effective and it has a much lower multiplier effect (and it cost more)... but its better than nothing or slashing. And I think we should all remember that the original 2009 stimulus had a significant amount of tax cuts and that recent "economic propositions" involved mainly tax cuts (since stimulus is now considered a dirty word). Cheers

Here is the mistake people keep on making. Austerity measures are not necessarily “short-term”. There is this false notion that the “pain is only temporary”. There is an enormous waste of resources by not applying the ones we have now. By doing nothing (or worse, by contracting the economy), there is a sacrifice in the output where we could be producing in which we have the capacity, but are not due to a lack of demand. See the attachment from CBO who tends to be conservative in their estimates. We’ve wasted about 2.8 trillion $ by not doing enough. We think we are “saving money” like a normal household family do when in reality, we are wasting a good 1T$ or so every year by engaging in this austerity policy. The Government does indeed need to fix its long-term budget especially as 2030 is fast approaching (where entitlements are predicted to cause problems). However, doing this process now is highly irresponsible. It’s all understandably counter-intuitive (The “how can saving money is irresponsible and spending responsible”?). … I want to point back to the U.K austerity measures [[Deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. "The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010."]] (look at BDO) Yes, I (or we) heard them all. It makes sense on the outside, but its not how the economy works. Cheers!

The issue at the moment is for the United States to get out of the current liquidity trap. That is what the spending and the printing money purpose is. ONCE we have returned to a more adequate economy and out of the liquidity trap, then the debt issues should most definitely be handled. But do this too early, and you end up making the same mistakes in the 1930 U.S when America went into austerity too fast and contracted their economy far above any economists estimates at the time. You previously wrote: “How's this working out for Greece, and the rest of the PIGs?” Then do explain me how the Greece situation (+ PIG crises) is any way a good comparison to the current American situation? You’re taking countries whose currencies aren’t controlled by their respective Government and compare it to the United States. What’s worse is that the PIG strategy is expansionary austerity (cut and slash their debts), which many institutions including the IMF and S&P, is impeding their growth. Austerity is actually contractionary after all. If you want to compare countries, then bring examples that are more relevant to the situation. Otherwise, I can’t take it that seriously. It comes down to the same league as Austrian economics where they keep predicting/predicted hyper-inflation of the likes of the 1920-1930 Weimar Republic and Zimbabwe. …so the military is responsible of scaring away the bond vigilantes! Fed rates are near zero and it was previously announced that it will stay near zero up until 2014. Hopefully you’re not advocating to raise the rates in the hopes of “calming” and appeasing the market. Remember when the ECB raised the rates in 2011…twice? http://www.guardian.co.uk/business/2011/jul/07/ebc-raise-interest-rates-debt-crisis I think we can both agree at how disastrous such a policy was to the EU and how the ECB backtracked from this decision. “The rest of the democratic world” (i.e: Europe) is in worse shape because of decisions like these… Germany and the EU is facing a possible catastrophic deflation yet Merkel is adamant in preventing hyper-inflation. Fact is, the low rate is indicative of a stagnant American economy (i.e: lacking growth) and people are more than willing to park their money into the U.S. Yes absolutely. The bond world currently regards the U.S as a safe haven due to its ability to control its money (which is a big contrast to Europe)… The Fed’s rate is at near 0 and is not sufficient to bring the economy running again. Open-market operations lost traction because short-term rate is at 0. In normal recessions, lowering the rate should be enough. This is not the case for the Great Recession. http://www.crossingwallstreet.com/wp-content/uploads/2012/01/fredgraph011012.png This is from Professor Greg Mankiw’s interest rate model. By his calculations, The Fed’s rate in late 2008-2009 should be at -5% if he wanted to bring U.S economy back to full employment. Of course, in real life, the Fed’s rate cannot go below zero. If it cannot restore normal employment at zero, then we have a classic case of liquidity trap. That is why events such as the 1930s are very relevant. Spending should not be used in every recession, but most definitely so in a major recession involving liquidity trap. In order to remedy the liquidity trap, the Federal Government is needed to make up from the fact that the Fed can’t go below zero. The model given by Mankiw demonstrates that things have been better and that we’re getting out of the liquidity trap… but we’re still in it. If unemployment goes down to about 8.3%, the model can signify a positive rate (we’re at about 8.6%). I understand the general public being worried about the debt… 785B$, 1T$, 14T$ are all scary numbers. I understand it sounds counter-intuitive to “add debt to solve debt”. But this is the situation we are living at the moment. Having a half-assed stimulus in 2009 only made the public more confused. I remember when Ben Bernanke was looking down at Japan (back in his 2000 writings) because Japan was self-inflicting its own wounds. Not necessarily. Greece most definitely outspent itself though a lot of other European countries should not be narrowly be categorized in this section. I will bring out the stats once I'm at home. This is the Merkozy stance at the moment (Germany + France). We’l see where it will go… Cheers

That's a bogus argument, pushed by economists who have their head in a place that doesn't provide sufficient vitamin D (e.g. Krugman). How's this working out for Greece, and the rest of the PIGs? The fallacy of the argument is it's used to justify short term actions without fully considering the consequences in the long term. As long as there is private capital in the world, debt will be debt, period. Once private investors see governments thinking they can somehow short change their obligations, the cost of capital will increase for that government. If we ever get to the point where we no longer have private capital, then bonds simply become pieces of paper, and the system will collapse. And how did we get here? By governments spending too much in the first place, for a very long time. Now, they're between a rock and a hard place. The only solution is to reduce the size of government. Is it going to be painful? Yes it is. Western democratic governments cannot continue spending more than they have. IMF's recent analysis: As Carlo Cottarelli and Laura Jaramillo of the IMF note in a related analysis, this is surprising. In theory, investors should see long-term growth as most important for solvency. The fact that instead they are focused so much on short term growth has troubling implications. Tighter fiscal policy, by hurting the near term growth outlook, could actually lead to wider, rather than narrower, spreads. They note: The fact that markets are focusing in 2011 on short-term growth developments may reflect strong risk aversion after four years of market turmoil. The unpleasant implication of this short-termism is that a tightening of fiscal policy may raise rather than reduce spreads if it is accompanied by a decline of GDP (with respect to the baseline). Indeed, the estimated coefficients imply that this would happen for a fiscal multiplier higher than 1.2-1.3 (in this case the primary balance would improve, but the debt to GDP ratio and the CDS spreads would increase). Got that? Cut the deficit too aggressively, and the negative impact on growth and the rise in the cost of debt service from higher spreads could result in a higher, not lower, debt-to-GDP ratio. [B] http://www.imf.org/external/np/speeches/2011/111811.htm#P62_19593 Cheers Shc Two good points brought by this article... about the U.K and the so called "debt is taking away from our children" mentality. http://www.project-syndicate.org/commentary/skidelsky49/English "deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010." "the national debt is not a net burden on future generations. Even if it gives rise to future tax liabilities (and some of it will), these will be transfers from taxpayers to bond holders. This may have disagreeable distributional consequences. But trying to reduce it now will be a net burden on future generations: income will be lowered immediately, profits will fall, pension funds will be diminished, investment projects will be canceled or postponed, and houses, hospitals, and schools will not be built. Future generations will be worse off, having been deprived of assets that they might otherwise have had." When the monetary policies taken by the central bank is near 0 and the economy is still slugging, then you must realize that we in a liquidity trap and that intervention is and must be needed. Hopefully, these are a bit of the summaries of the CS and hopefully broadened your understanding of the debt and the economy. Cheers Shc

That's a bogus argument, pushed by economists who have their head in a place that doesn't provide sufficient vitamin D (e.g. Krugman). How's this working out for Greece, and the rest of the PIGs? The fallacy of the argument is it's used to justify short term actions without fully considering the consequences in the long term. As long as there is private capital in the world, debt will be debt, period. Once private investors see governments thinking they can somehow short change their obligations, the cost of capital will increase for that government. If we ever get to the point where we no longer have private capital, then bonds simply become pieces of paper, and the system will collapse. And how did we get here? By governments spending too much in the first place, for a very long time. Now, they're between a rock and a hard place. The only solution is to reduce the size of government. Is it going to be painful? Yes it is. Western democratic governments cannot continue spending more than they have. IMF's recent analysis: As Carlo Cottarelli and Laura Jaramillo of the IMF note in a related analysis, this is surprising. In theory, investors should see long-term growth as most important for solvency. The fact that instead they are focused so much on short term growth has troubling implications. Tighter fiscal policy, by hurting the near term growth outlook, could actually lead to wider, rather than narrower, spreads. They note: The fact that markets are focusing in 2011 on short-term growth developments may reflect strong risk aversion after four years of market turmoil. The unpleasant implication of this short-termism is that a tightening of fiscal policy may raise rather than reduce spreads if it is accompanied by a decline of GDP (with respect to the baseline). Indeed, the estimated coefficients imply that this would happen for a fiscal multiplier higher than 1.2-1.3 (in this case the primary balance would improve, but the debt to GDP ratio and the CDS spreads would increase). Got that? Cut the deficit too aggressively, and the negative impact on growth and the rise in the cost of debt service from higher spreads could result in a higher, not lower, debt-to-GDP ratio. [B] http://www.imf.org/external/np/speeches/2011/111811.htm#P62_19593 Cheers Shc S&P's comments over Merkozy's expansionary austerity and how is that going for Europe? http://www.forbes.com/sites/steveschaefer/2012/01/13/sp-downgrades-france-to-aa-maintains-negative-outlook/ "S&P said the outcome of the Dec. 9 EU summit, and subsequent statements “lead us to believe that the agreement reached has not produced a breakthrough of sufficient size and scope to fully address the eurozone’s financial problems.” Even worse, S&P said, European leaders are still partially in denial of the the real cause of the crisis, focusing on “fiscal profligacy at the periphery of the eurozone,” rather than the consequences of “rising external imbalances and divergences in competitiveness between the eurozone’s core and the so-called ‘periphery.’” Reform based chiefly on fiscal austerity, which comprises the bulk of Europe’s response to date, “risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.” France was not the only eurozone country to feel S&P’s ax Friday. Austria was cut to AA+ from AAA; Cyprus to BB+ from BBB; Italy to BBB+ from A; Malta to A- from A; Portugal to BB from BBB-; the Slovak Republic to A from A+; Slovenia to A+ from AA-; and Spain to A from AA-. S&P left the AAA ratings of Germany, Finland, Luxembourg and the Netherlands unchanged. Unlike its view on most of the region, S&P has a stable outlook on Germany’s credit rating" For some reason, people keep on demanding for expansionary austerity when it had and still is a very counter-productive thing to do. What makes you think it will work in the U.S? Cheers

That's a bogus argument, pushed by economists who have their head in a place that doesn't provide sufficient vitamin D (e.g. Krugman). How's this working out for Greece, and the rest of the PIGs? The fallacy of the argument is it's used to justify short term actions without fully considering the consequences in the long term. As long as there is private capital in the world, debt will be debt, period. Once private investors see governments thinking they can somehow short change their obligations, the cost of capital will increase for that government. If we ever get to the point where we no longer have private capital, then bonds simply become pieces of paper, and the system will collapse. And how did we get here? By governments spending too much in the first place, for a very long time. Now, they're between a rock and a hard place. The only solution is to reduce the size of government. Is it going to be painful? Yes it is. Western democratic governments cannot continue spending more than they have. IMF's recent analysis: As Carlo Cottarelli and Laura Jaramillo of the IMF note in a related analysis, this is surprising. In theory, investors should see long-term growth as most important for solvency. The fact that instead they are focused so much on short term growth has troubling implications. Tighter fiscal policy, by hurting the near term growth outlook, could actually lead to wider, rather than narrower, spreads. They note: The fact that markets are focusing in 2011 on short-term growth developments may reflect strong risk aversion after four years of market turmoil. The unpleasant implication of this short-termism is that a tightening of fiscal policy may raise rather than reduce spreads if it is accompanied by a decline of GDP (with respect to the baseline). Indeed, the estimated coefficients imply that this would happen for a fiscal multiplier higher than 1.2-1.3 (in this case the primary balance would improve, but the debt to GDP ratio and the CDS spreads would increase). Got that? Cut the deficit too aggressively, and the negative impact on growth and the rise in the cost of debt service from higher spreads could result in a higher, not lower, debt-to-GDP ratio. [B] http://www.imf.org/external/np/speeches/2011/111811.htm#P62_19593 Cheers Shc

That's a bogus argument, pushed by economists who have their head in a place that doesn't provide sufficient vitamin D (e.g. Krugman). How's this working out for Greece, and the rest of the PIGs? The fallacy of the argument is it's used to justify short term actions without fully considering the consequences in the long term. As long as there is private capital in the world, debt will be debt, period. Once private investors see governments thinking they can somehow short change their obligations, the cost of capital will increase for that government. If we ever get to the point where we no longer have private capital, then bonds simply become pieces of paper, and the system will collapse. And how did we get here? By governments spending too much in the first place, for a very long time. Now, they're between a rock and a hard place. The only solution is to reduce the size of government. Is it going to be painful? Yes it is. Western democratic governments cannot continue spending more than they have. Since you mentioned about Europe, let's look at how expansionary austerity worked for our good friends in the U.k More on the Euro (its a very fascinating subject to mention since its very current-event): See Italian 10 years bond: http://www.bloomberg.com/quote/GBTPGR10:IND Italy's economy is sustainable yet it is constantly attacked by the market. Same principles with the banks. If it is believed that they will fail, then they will fail. Right now, ALL european nations are under austerity (aka cut cut cut spending) and even the most optimistic economists are forecasting a European recession. The more they try to balance the budget through "budget cuts", the more they'l end up missing growth target and have the very possibility of getting into a catastrophic deflation. This will be a lesson to the U.S too who are also looking to "cut and slash" their budget in the name of expansionary austerity. I'l try to find graphs again in regards to Cameron's cut & slash methods and what that did to overall U.K business confidence (hint: It does not look good). http://www.bloomberg.com/news/2011-03-27/u-k-business-confidence-index-falls-to-lowest-in-two-years.html "U.K. business confidence declined in March to the lowest in two years, suggesting the economy may struggle to gather strength in the second quarter. A gauge of sentiment, which aims to predict economic developments four months in advance, fell to 1 from 3 in February, London-based Lloyds Banking Group Plc (LLOY) said in an e- mailed statement today. The share of companies that were less optimistic about economic prospects increased to 44 percent from 36 percent in the previous month." http://www.aei.org/404 AEI paper on austerity: "there is a great deal more controversy concerning the impact of successful consolidation on GDP growth. Although empirical studies have found many consolidations coupled with expansion, the degree to which consolidation drives rather than merely accompanies expansion is disputed. Various mechanisms have been proposed through which consolidation may spur growth, including credibility effects on interest rates and the effects outlined under the expectational view. However, the literature has identified endogeneity issues in many of these studies that may cause them to overstate expansionary effects." Cheers Shc

I'm curious. Being from Canada, what do you think happened? Where do you want me to start? I guess we can start with a small summary about the banking situation. Consider this, from an article titled “Liquidity Crises – Understanding sources and limiting consequences: A theoretical framework,” by Robert E. Lucas, Jr. and Nancy L. Stokey: In studies conducted by Nancy Stokey and Robert Lucas, the WHOLE banking system held approximately 50 billion $ in cash by August 2008. The banking system was clearing about 2.9 to 3 trillion $ PER DAY. This wouldn’t be so bad if the contracts said “We’l pay IF we have money”. No, most of the trades involved the promise to pay somebody in hard cash based on the contracts given. Banks would therefore have to rely heavily on the repo market to pay them back in these hard cash. If a certain bank or financial institution cannot pay back and this becomes public information, then the bank will go under through a bank run. Having 50 B$ for 3 trillion $, there is no margin for error. Even the slightest doubt in the quality of the collaterals traded in the repo market could break the system. Guess what? 2008 was it. SOME GRAPHS/NUMBERS GRAPH 1 http://av.r.ftdata.co.uk/files/2011/12/NomuraChart1.png GRAPH 2 http://av.r.ftdata.co.uk/files/2011/12/NomuraChart2.png The basic summary: Having basic good capital wasn't the sole problem behind the 2008 crisis. Lehman and Bear Stearns fell because brokers who had the power over their short-term financing started to worry about the collateral that was promised to them. When confidence over the banks went poof, then financial institutions as old as Lehman will fall easily. If the whole financial institution is put in doubt then all the large banks will become exposed to bank runs. Point is, when confidence fell out of flavour, the Obama administration took the major steps necessary to restore this confidence. The Government was the back-stop in the relation. This is debt that is being used for good use. What do you think is going to happen if the Government said "no, we'l step back and cut our way out of this"? The Government realized this situation and took the appropriate steps with TARP/Stimulus. This is what economists mean when they say the administration stopped the economy from a freefall. Its not big enough to bring unemployment to 4%, but it is big enough to have it stabilized in the 9-11%. anyway... cheers again.

Your argument about "debt will be debt" because other investors will raise the interest rate is self-defeating. The U.S, in spite of all the quantitive easing, is still considered one of THE most safest place to park your money. http://www.bloomberg.com/apps/quote?ticker=USGG10YR:IND That is the 10 years Bloomberg at an absolute historic low. You seem to have a very narrow understanding of debt when you try to compare U.S situations with Greece rather than Japan 1990 lost decade or the U.S 1930 crisis(es). The PIGS in fact shows that when you don't own your own currency (i.e: unable to print your money), the Government has little to no flexibility over its debts while Americans do have control of their currency. anyway, see for yourself: http://www.bloomberg.com/apps/quote?ticker=USGGT10Y:IND -0.025 Negative Interest Rate. The U.S is far from bankruptcy. What matters now is the sluggish economy and they need to get the American economic engine running again. They can borrow money with little to no repercussions while the additional money will help the U.S get out of its liquidity trap. Just needed to bury this notion that the "U.S have no money left to borrow/ America is bankrupted / we must cut deficit NOW!".

see graph below: Let's take for example two bubbles under two different Presidents: Here is the public + private debt in comparison to the GDP. In the chart, you can visibly see the tech bubble during the Clinton era and the housing bubble during the Bush era. In general, most people didn't buy dotcom with burrowed money where it contrasts to the housing bubble because the private sector did in fact burrow an outstanding amount of money. When the bubble burst due to the housing crisis, the private sector had to immediately reduce their debt and undergo deleveraging. The economy was put at a stop. The 2008-2009 shock is just that much bigger than any of the other recessions the U.S has experienced previously (up until the 1930s). ... Another thing that people should look up is the liquidity trap. The monetary policy is at near 0 bound, which means people can borrow at a very very very (historically low) cost. If the economy is lagging in spite of the 0 bound rate, then we have a liquidity trap. The other time where there was truly a major liquidity trap was in the 1930s with the Great Depression. Read: http://www.voxeu.org/index.php?q=node/4227 Outside of the U.S, Japan 1990 lost decade provides a good example too. They too focused heavily by cutting spending and the 90s are now dubbed as the "lost decade" for Japan. Cheers Shc

Then why the huge difference from other recessions? Because by comparing the 2008-2009 crisis as being any similar to previous recession shows a lack of understanding what truly happened. When 3 out of 4 major banks are in crisis mode and they hold [B] SEVENTY-PERCENT of American assets, then you are in crisis mode. I'm sure that even you, mr. Mike, would have realized that. And that crisis mode was mostly over by the end 1Q 2009, after TARP and the first bailouts. Well no. 1) End Q1 2009, the banks were probably in their make-it or break-it stage. We have to remember citi hit 1$ (from 50$) April 2009 and is still doing it fairly pitifully 2) The American banks, even to this day in 2012, are still extremely vulnerable to any shocks (the most obvious and deadly one would be Europe's situation). That said, you have to look at the 6% output gap that was caused by the housing bubble and by Lehman Brother's bankruptcy. You can't fill that 6% output gap by slashing spending.

let's look at the inadequacy of the stimulus I'l bring my charts. The 2008 crisis had two distinct effects on spending. 1) It was obviously the housing bubble during the "Bush boom" where housing investment went down big time. 2) Consumers increased their savings ... dramatically thus reducing and slowing the economy (see the picture) The difference was approximately six percent of USA's GDP. In terms of ACTUAL spending contained in the stimulus bill, it was approximately 1.3 to 1.5 percent of GDP. Its like getting a squirt gun out to take out the fire.

Then why the huge difference from other recessions? Because by comparing the 2008-2009 crisis as being any similar to previous recession shows a lack of understanding what truly happened. When 3 out of 4 major banks are in crisis mode and they hold [B] SEVENTY-PERCENT of American assets, then you are in crisis mode. I'm sure that even you, mr. Mike, would have realized that.

Way to play the ball and not the player, Mr. "Moderator". I'm just curious. What are your thought processes behind this? Do you not know that the stimulus 2009 consisted in large-part of tax cuts? Are you willing to bring any numbers? Cheers! Shc

The stimulus enacted by Obama in 2009 were inadequate to plug a U.S output gap of 3 trillion+ $. The comment was in response to government spending creating jobs - care to respond in light of that? The stimulus stopped the hemorrhagic economy from freefalling, but too small to bring anything near to full-employment.

The stimulus enacted by Obama in 2009 were inadequate to plug a U.S output gap of 3 trillion+ $. A 700B$ stimulus that consists a major part of ineffective tax-cuts is hardly anything considering at how big the financial crisis was in 2008. Oh and don't forget most States slashed their budgets?

No, it's not fair. To boot, Obama and people like him think they can cover the hole being produced by his policies simply by taking even more. They clearly haven't done the math. Debt isin't the same as your household / company debt. Remember: Even the smallest country will sell 70% of what they produce to themselves. The USA, despite "Made in China" products, sells approximatley 85-90% of their work to themselves. Not even the biggest companies sell as much to themselves... not even close! ... Deliberately cutting the deficit is not the best way for a government to balance its books. Deficit reduction in a depressed economy is the road not to recovery, but to contraction, because it means cutting the national income on which the government’s revenues depend. This will make it harder, not easier, for it to cut the deficit. Let's look at what's happening with our good friends in Britain who advocated: "SLASH NOW! DEBT IMMINENT!" "The British government already must borrow £112 billion ($172 billion) more than it had planned when it announced its deficit-reduction plan in June 2010." http://static.bdo.uk.com/assets/documents/2010/12/BDO_business_trends_-_December_2010.pdf https://lh5.googleusercontent.com/_VgJQTp0Bsf0/TW_RZtr7uxI/AAAAAAAAAR8/Lk8tqJcxdGM/bdo.jpg Emphasis on the chart. Business confidence at an all-time low due to austerity measures (aka slash now!) plans.

http://www.cbo.gov/doc.cfm?index=12316 According to the TPC analysis, if we reverted the taxes on the rich (the higher brackets), it will raise about 78 billion $, approximately half a GDP percentage. 78 B$ is an OK amount, but its still a fairly small dot of the overall picture. All this political fighting/discourse for only 78B$ is like nitpicking over a few bucks ...

shah is a socialist communist marxist leninist anti-capitalist anti-profit leftist-extremist hippie!

http://www.newyorker.com/reporting/2012/01/30/120130fa_fact_lizza?currentPage=all Its a tad long, but its a very interesting read. It has its fair share of well-deserved critiques along with the well-deserved praises. I see a lot of heated debates that honestly seem to be about nothing. A lot of random distractions for nothing...so it's good to see some acknowledgment on the severity of the 2009 economic situation. Cheers Shc

Nice. Btw, I heard there was a documentary that was coming by Phoenix-fly in early 2012? Anyone heard about it?

Good one.