[...]David Takes On Goliath and Loses: The Ferguson – Krugman Exchange | afoe | A Fistful of Euros | European Opinion[...]…

Too much information. Plus, you’re not supposed to literally EAT those Treasuries!

These debt-relief mechanisms, along with other types of programs to stimulate the economy, can give us reason to hope. Interest rates I think are not so critical so long as real rates are in the range under about 7%. In other words, perhaps we can revive the general economy by transferring bad debts onto the public, and have reason to hope for an okay outcome.

“If I read it correctly, if the Fed can keep short term rates close to zero, long term rates should not increase?”

Basically you’re near. If they commit to holding short term rates close to zero for a prolonged period of time they can bring down long term rates. It has (technically speaking) nothing to do with the amount of debt being issued next year.

The amount of debt being issued next year does come in indirectly – via its impact on expectations – since if the increase in the money supply produces inflation then Bernanke will raise short term rates (and everyone knows this). The core issue is, will the increase in the money supply (which is in part being produced by the public debt expansion, there is no increase outside base money on the private side) lead to inflation?

Clearly we all hope it will (in the sense of positive price increases rather than negative ones, NOT Zimbabwe), but this is far from clear given the mass of private sector debt to be cleared up, and the long term rates being driven up only makes negative GDP growth and price deflation more likely, as mortgage rates rise, and the housing market fails to recover.

All very complicated, I’m afraid.

“Are we in the midst of another bubble here?”

Well, lets’ go back to Izabella Kaminski.

“Of course, Ferguson might counter with the question: what happens once private borrowing begins to pick back up again?”

Now what if the private borrowing starts to pick up, not in the US, or in Europe, but in emerging economies like India and Brazil (via the so called carry trade – see my “don’t get carried away now” article on Afoe, google it). What if all that liquidity floating around simply leaks out the back door, and ends up in emerging economies where interest rates are a lot higher and currencies generally rising against the dollar (as happened in Eastern Europe in 2005 – 2008). Then yes, we could end up floating a bubble – a massive one – but not where we expect it!

On this issue I’ll foolhardily side with the losers on this … “belonging “to a “Dark Age” of economics.” as. Mentioning SUCCESSFUL economists such as Roepke or Rueff. Will be on the later’s side any time. Against an abused Keynes.

Where are the brilliant actions taken by Keynesian central bankers?

Why should economics always be poor in policy? Why should micro- and macro-economics diverge so steeply? Up to a point where you can proudly propose to “borrow yourself out of a “credit crisis”"? Proposing to creditors?

I still miss the point. I must dig harder. But won’t. The credibility is lost. Greenspan and Bernanke did the job. They lost me. And will lose the creditors anyway. Why bother then to listen to a cryptic academia in desperate support for a dying set of currencies?

- Japan high savings, households flush with cash
America high debt
- Japanese banks flush with cash, American banks bankrupt and bailed out.
- Japan export directed economy, perpetual current account surplus
America import directed economy, deficit
- Japan aging population beginning to shrink, no immigration
America growing population, high immigration
- Japan High social stability, legacy industries kept on life-support
America low stability, legacy industries going bankrupt

In the case at hand, Japanese banks could buy long term bonds or not, depending on their profitability. They had a lot of cash; the central bank was simply another bank with cash on hand, and didn’t change the situation in any fundamental matter. American banks are very short on funds; they can invest only if they are able immediately to refinance the cost of buying bonds. Oversea investments depend on political factors and economic policy; they are difficult to foresee.

A more general view:

http://brontecapital.blogspot.com/2009/05/tale-of-two-banking-crises-japan-and.html
This posts, comparing Japan and Korea, shows how far-reaching results can follow from the difference in saving level.

“The result is that the Korean banks – unlike their Japanese counterparts – were short funds. Endless funding at zero interest rates was simply not possible. Given that the banks eventually collapsed – with many becoming government property and with the government winding up as the largest shareholder in almost all banks. This was a spectacular crash – as opposed to a slow-burn malaise. Chaebol failed. In some instances their founders were imprisoned. The strongest Chaebol is the one most associated with new industries (Samsung). It survived and prospered – but others did not.

Korea had a much worse recession than Japan. Vastly worse. Japan was just low growth for a very long time. By contrast the Korean economy crashed and burned. But it also recovered very fast and at one point (1999-2000) the Korean Stock market was 1932 Great Depression cheap. It bounced.

It is my contention that the main difference between the Korean and Japanese crashes (and Korea’s case recoveries) was the funding of the banks. In this view Korea’s was so sharp because the banks simply ran out of money – and that caused massive liquidations across the economy – systemic failures.

The recovery was also sharp because the systemic failure meant that businesses that shouldn’t have failed (because they were profitable worthwhile businesses) got into deep distress. Real companies died not because they deserved to die but because the system in crisis killed them. There was a case for bailing out those companies – and the rapid recovery told you this was something systematic – not business specific. The massive upward movement in the stock market at the end of the crisis was the secondary proof that good businesses were killed. It was also probably the best investment opportunity globally in the last twenty years.

The economic decline in Japan was so gradual and so sustained precisely because there was no systemic failure and no reason to reallocate resources from bad businesses to good businesses. Zombie companies could exist for decades – and there was no renewal. A little bit of failure would have been a good thing – creative destruction. And the survival of bad businesses in Japan is part of the reason the stock market never bounced there. No investment opportunities.”

Japanese population produces more than it spends. The government and export must spend the surplus. There is no risk of inflation – there is too much stuff.

American population consumes more than it produces. A rapid decrease in consumption and therefore government income is unavoidable. There is no social need for increasing government consumption in the long term. In order to keep consumption above production you need trust; when the trust fails you can get hyperinflation.

I do not think that will happen – America has ample political tools to prevent it.