Forget the Debt
Sunday, 5 July 2009
A fascinating article by Will Hutton in the Observor this morning on an up and coming economist Richard Koo talking about the fiscal deficit from his perspective looking at the Japanese economy post-credit crunch talking about how the West have siply not delivered enough of a stimulus and don't get how the economy has changed.
Hutton's analysis reads that te Cameron argument of spending cuts with the repayment of debt is based on the old economics an the characteristics of the market has changed to such an extent that if we reign in spending we could still fall back into an economic depresion 1930's-style:
"Koo observed that Japanese firms in the 1990s and early 2000s had changed from profit maximisers to debt minimisers. Between 1970 and the early 1990s during the long yang ("sun" or "light") upswing, they had steadily built up their debts to finance investment and growth; from the early 1990s on they used every spare yen to pay these off.
Even as interest rates fell to zero and firms seemed to have profitable opportunities for growth, they would still pay off their debts rather than invest. Japan's $15tn collapse in asset and share prices - equivalent to three years' GDP - traumatised them, because it meant that their grossly devalued assets no longer matched their liabilities. To restore their balance sheets to health they had to reduce their debts. Demand from Japan's corporate sector dropped by 20%."
Interestingly Koo says that it is irrelevant that credit agencies could devalue GILTS as in wat he calls the 'yin' (bad) times people wil always turn to Government bonds.
The most important point within this is that as firms turn from profit maximisers to debt minimisers the gap in consumer demand continues and even worsens so there continues to be a need for Government's to kae up for the deficit with an expansionary fiscal policy and a "super-keynesianism" is needed.
It certainly puts some of David Cameron's attacks at PMQ's into some context and all the very clever Westminster journalists congratulating themselves in 'exposing' the Prime Minister for claiming that public spending can continue to rise.
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4 comments:
Rubbish.
The short term answer is to spend and not care with 2 years down the line.
Statistics can show what ever you want them to. What is not in doubt is the massive debt run up by this Government. No excuses for that. It's a fact. Deal with it.
I don't deny we have large Government debt. What I dout is that it is something we have to rectify in the short term.
Yousuf, I think you've lost the plot.
You know, you really don't need to defend Brown at every turn, he's been wrong before and it's looking like he's wrong on this too.
Labour Ministers and special advisors have asked the civil service to prepare a 20% spending cut document.
That will likely include the scrapping of the trident replacement and the curtailing of shipbuilding on the clyde. Jim Murphy should be encouraging the yards to look for commercial work over the next five years not promise them further state handouts that he can't guarantee.
Brown's 0% Growth bluster will come back to haunt him badly, your cheer leading is looking decidedly ill informed.
Why doesn't Labour understand that we want honesty above all else, not double speak lies from Mandelson and forked tongue stats from brown.
Just be honest for once.
I think the Govt is proceeding on the basis that there will be an upturn within a reasonable timescale and to that extent a start can be made on winding down public borrowing, but if the economy stagnates for years who knows what will happen?
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