Galbraith: The danger posed by the deficit ‘is zero’

[sMiLeYz]

http://voices.washingtonpost.com/ezra-klein/2010/05/galbraith_the_danger_posed_by.html

EK: That does it for my questions, I think.

JG: I have one more answer, though! Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets.

The way people suggest they can cut spending without cutting activity is completely fallacious. This is appalling in Europe right now. The Greeks are being asked to cut 10 percent from spending in a few years. And the assumption is that this won't affect GDP. But of course it will! It will cut at least 10 percent! And so they won't have the tax collections to fund the new lower level of spending. Spain was forced to make the same announcement yesterday. So the Eurozone is going down the tubes.

On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience.

 

[ElFenix]

deficit spending where the money is borrowed at a rate of return lower than what is gained is good.

in fact, due to the dead weight loss of taxation you could probably still come out net better off even if the rate of return is slightly below the borrowing rate (as you would incur less dead weight loss than in a balanced budget situation).

 

[rudder]

Sure deficits don't matter.... but when you hit $1.4T/year you better hope other countries keep purchasing our debt.

 

[werepossum]

This man is appallingly stupid. Greece cannot pay its debts. Even the lowest moron capable of writing or speaking a coherent sentence should be able to see that the only threat from deficits is not a rise in interest rates. That isn't even the main threat. When you routinely run a deficit, each year you must fund your needs PLUS the money to service your debt. Every year you run a deficit, that debt grows, as does the money required to service the debt. At best, when growth in GDP outruns growth in the deficit, you have a drag on the increased standard of living that would be produced by the new production. At worst, the increase in debt servicing costs crowds out everything else in your budget. Japan's debt and associated debt servicing have crowded growth out of its GDP. Japan's increased productivity is now consumed by debt servicing, not increased societal wealth.

Greece has run deficits to the point that it can no longer pay its obligations; THAT is why it is being asked to cut its deficit spending. If this man's theory had an ounce of credibility, Greece would be prospering.

 

[nick1985]

I think he's joking guys...

 

[sMiLeYz]

You know the US isn't Greece right?

Little differences like population size and growth, gdp, not being part of the eurozone. It's actually cheaper for the government to borrow than ever. Imagine that.

 

[sMiLeYz]

Greece has run deficits to the point that it can no longer pay its obligations; THAT is why it is being asked to cut its deficit spending. If this man's theory had an ounce of credibility, Greece would be prospering.

The biggest problems with Greece is simply the Euro, their labour markets are inflexible, their GDP was inproportional to their spending.

Spain on the other hand, ran surpluses all the way up to 2008 but is fucked like Greece because of the nature of the Eurozone.

 

[her209]

China is running budget surpluses.

 

[Narmer]

China is running budget surpluses.

And China has a growing deficit. Having a stimulus package equivalent to 16% of your GDP does wonder for red ink. Even worse when that money is wasted on property and the stock market.

 

[werepossum]

China is running budget surpluses.

And China has a growing deficit. Having a stimulus package equivalent to 16% of your GDP does wonder for red ink. Even worse when that money is wasted on property and the stock market.

You two need to discuss this. You can't both be right, she can't run a deficit and a surplus.

 

[Narmer]

You two need to discuss this. You can't both be right, she can't run a deficit and a surplus.

I meant debt. Sorry.

http://www.2point6billion.com/news/2010/03/04/china-debt-96-percent-of-gdp-by-2011-4261.html

 

[piasabird]

The only way to keep increasing the defeceit is either to cut back on programs and government empolyees or raise taxes. Eventually you get to a point where no one will lend you any more money.

 

[Narmer]

In fact, with China's strict capital controls, their debt may rise to the level of Japan or the UK without so much as a whimper since it will be paid for by Chinese citizens and corporations who have their money taken hostage by the government. Despite it not having capital controls, this is exactly how Japan is able to have such high debt and low yields. However, once the citizens and corporations can no longer provide the money, expect the yield to sky rocket.

http://www.nakedcapitalism.com/2010/04/chinas-debt-bubble-when-will-the-ponzi-unravel.html

 

[werepossum]

I meant debt. Sorry.

http://www.2point6billion.com/news/2010/03/04/china-debt-96-percent-of-gdp-by-2011-4261.html

Huh, maybe you CAN both be right, sorta maybe. China the nation runs a surplus while Chinese provinces and cities run deficits.

Have we exported the hopey changey thing to China?

 

[Rebel44]

You know the US isn't Greece right?

Little differences like population size and growth, gdp, not being part of the eurozone. It's actually cheaper for the government to borrow than ever. Imagine that.

Thats only temporary.

IMO USA will lose its AAA rating in less than 18 months. When that happen your cost of borrowing will significantly go up.

 

[Narmer]

Huh, maybe you CAN both be right, sorta maybe. China the nation runs a surplus while Chinese provinces and cities run deficits.

Have we exported the hopey changey thing to China?

Well, that does make sense. By law, the taxes are divvied up between the central government and local government by a 60/40 split. By law the local governments are not allowed to offer tax incentives to businesses and taxpayers but they do so in a roundabout way. So, yeah, it is definitely possible for the locals to be in deficit.

 

[LegendKiller]

Thats only temporary.

IMO USA will lose its AAA rating in less than 18 months. When that happen your cost of borrowing will significantly go up.

Bookmarked.

I love gloom and doomers.

 

[Rebel44]

Bookmarked.

I love gloom and doomers.

Do you think that nation with over 100% debt to GDP ratio deserve AAA rating?

 

[sMiLeYz]

Do you think that nation with over 100% debt to GDP ratio deserve AAA rating?

What's safer than US treasury bonds right now or in 18 months?

 

[sandorski]

I totally disagree. Deficits do matter and a Nation most certainly does not need a Deficit in order to grow. That last part of Galbraith's points is especially stupid.

 

[zephyrprime]

Because the government needs to run a deficit, it's the only way to inject financial resources into the economy. If you're not running a deficit, it's draining the pockets of the private sector. I was at a meeting in Cambridge last month where the managing director of the IMF said he was against deficits but in favor of saving, but they're exactly the same thing! A government deficit means more money in private pockets.

Well, this is true but it is also a false dilemma. We have a debt based economic system so the only way to increase the money supply so that it expands with population growth and per capita GDP growth is to go into more debt. So I guess that means we MUST go into more debt, right? WRONG! It's a false dilemma. The dilemma only exists because we have a debt based money supply. If we simply abandoned the debt based money system, then we would not have this problem. Money can then be created without accruing a debt.

 

[ElFenix]

I meant debt. Sorry.

http://www.2point6billion.com/news/2010/03/04/china-debt-96-percent-of-gdp-by-2011-4261.html

In comparison, the United States’ debt to GDP ratio is 94 percent, the United Kingdom is at 380 percent, Japan at 227 percent, Greece at 115 percent and Spain at 70 percent.

holy fsck!

 

[zephyrprime]

On the other hand, look at Japan. They've had enormous deficits ever since the crash in 1988. What's been the interest rate on government bonds ever since? It's zero! They've had no problem funding themselves. The best asset to own in Japan is cash, because the price level is falling. It gets you 4 percent return. The idea that funding difficulties are driven by deficits is an argument backed by a very powerful metaphor, but not much in the way of fact, theory or current experience.

This is true but Japan has a higher savings rate than anywhere else in the world. And their economy has been terrible to show for it. He's correct that high savings are directly linked with high borrowing. But both are bad. High savings is bad. High borrowing is bad. Low savings is bad. Low borrowing is bad. All things in moderation.

Honestly, if Japan had just had a meltdown in their economy they would have been better off than dragging things out for 18 years. Total aggregate GDP over the last 18 years in Japan would have been higher if they had a melt down in my opinion. History shows that meltdowns can be resolved in only about ~6 years (look at the Eastern Bloc, GDP now higher than during communism.).

 

[zephyrprime]

Quote:
In comparison, the United States’ debt to GDP ratio is 94 percent, the United Kingdom is at 380 percent, Japan at 227 percent, Greece at 115 percent and Spain at 70 percent.
holy fsck!

The reason this Britain's number is so high is because Britain is major financial center. Much of that debt is bank debt. So a lot of that debt is matched by banks assets so things are not as bad as they seem. However, a lot of those assets are plummeting in value because of the world financial crisis. A lot of those assets were subprime mortgages, loans to dubai, loans to Greece, loans to the Eastern Block, etc.

 

[zephyrprime]

I think he's joking guys...

He is not joking. His opinion is actually one of several accepted and orthodox schools of economic thought.