It’s the NGDP, not the interest rate

Lot’s of news articles on the eurocrisis focus on the sky-high interest rates now being paid by the Spanish and Italian governments, roughly 6%.  But I rarely see people pointing out that until a few years ago 6% interest rates on government bonds were completely normal.  As was the 70% ratio of public debt to GDP that you see in Spain.  So why is this interest rate now such a crushing burden?  Simple, in the old days 6% interest rates were accompanied by much more robust NGDP growth rates.  The problem today in the periphery is that NGDP growth has collapsed.

If structural problems prevent a return to normal real growth rates, then the living standards in those countries must take a hit.  If you continued the normal pre-2008 NGDP growth rates, then the burden would be shared by both debtors and creditors.  If you have near zero-NGDP growth and keep paying 6% interest to creditors, then the entire burden falls on debtors.  Indeed creditors would be receiving a much greater share of GDP than they anticipated—a windfall.

Of course that assumes no default—the holders of Greek debt obviously took a huge hit.  I’m calling for a public policy of no default and faster NGDP growth.  Avoid the Greek option, but also avoid the other extreme of never defaulting despite paying a huge interest penalty, accompanied by very low NGDP.


Tags:

 
 
 

50 Responses to “It’s the NGDP, not the interest rate”

  1. Gravatar of TallDave TallDave
    6. July 2012 at 11:13

    That’s a great point, 6% was no big deal with strong NGDP growth, but it is a crushing burden in a deflationary recession.

  2. Gravatar of Morgan Warstler Morgan Warstler
    6. July 2012 at 12:04

    I’m calling for a policy of Greece living on its tax revenues and dismantling the regulatory hurdles for entrepreneurs.

    If they do that, THAT we can call for Scott’s thing.

    Me goes first.

  3. Gravatar of Major_Freedom Major_Freedom
    6. July 2012 at 12:42

    Never reason from an NGDP change.

  4. Gravatar of D.Gibson D.Gibson
    6. July 2012 at 12:51

    Good point MF! I think we can agree that paying an 8% real interest rate is more of a burden than a 2% real rate.

  5. Gravatar of RebelEconomist RebelEconomist
    6. July 2012 at 13:10

    It is really the devaluation rate – against items like the consumption basket for eurozone residents and against foreign currencies for the rest. In short, inflation. High interest rates were sustainable for Spain and Italy because they would devalue from time to time and reduce the real debt burden. That prospect went away for a few years, and now it is returning. There is no need to pollute that insight by combining it with real GDP. It is not clear that the chaotic process of eurozone exit would boost a country’s real GDP.

    Be honest, Scott; you are calling for inflation.

  6. Gravatar of Doug M Doug M
    6. July 2012 at 14:23

    Can the Spain target NGDP growth and remain in the Eurozone?
    Can the ECB target Spanish NGDP growth?

    The best that I can see is that the Eurozone can target NGDP growth, but that does not mean that that growth is in any way uniform. Suppose the ECB targets and achieves 5% NGDP growth. That doesn’t mean that Spain is not still contracting on both real and nominal terms.

    Regarding 6% yields on Spanish Treasuries, if Spain were to leave the Euro does anyone think that Spanish Treasury yields would be less that double the current rate?

  7. Gravatar of Doug M Doug M
    6. July 2012 at 14:25

    Ohh, chunked up the grammar there…

    The best that I can see is that the ECB can target NGDP growth for the entire Eurozone, but can not target NGDP with any country.

  8. Gravatar of ChargerCarl ChargerCarl
    6. July 2012 at 15:58

    Good post as usual scott. Whats sad is that this obvious point seems so lost on policy makers and mainstream pundits.

  9. Gravatar of ssumner ssumner
    6. July 2012 at 17:38

    Thanks TallDave.

    Rebeleconomist, You said;

    “Be honest, Scott; you are calling for inflation.”

    I am honest, the problem is that you aren’t a good listener. NGDP and RGDP are highly correlated. It’s absurd to treat them as unrelated.

    Doug, That’s obvious, but there’s no reason to think faster NGDP growth would be concentrated in the non-crisis countries–if anything I’d expect the reverse, as the crisis countries have more unemployment.

    Thanks ChargerCarl.

  10. Gravatar of Saturos Saturos
    6. July 2012 at 18:53

    How to abolish the liquidity trap: http://marginalrevolution.com/marginalrevolution/2012/07/markets-in-everything-durable-goods-monopoly-edition-add-urgency-to-your-reading.html

  11. Gravatar of joe joe
    6. July 2012 at 19:35

    Sumner,

    Do you believe that any independent central bank from any nation, first world or otherwise, has the ability to achieve perpetual five percent NGDP?

  12. Gravatar of Saturos Saturos
    6. July 2012 at 20:09

    I hope everyone has seen this: http://www.piie.com/blogs/realtime/?p=2986

  13. Gravatar of Saturos Saturos
    6. July 2012 at 20:31

    http://economistsview.typepad.com/timduy/2012/06/a-long-wait-to-the-next-fomc-meeting.html

    “I dissented on this decision because I do not believe that further monetary stimulus would make a substantial difference for economic growth and employment without increasing inflation by more than would be desirable. While the outlook for economic growth has clearly weakened in recent weeks, the impediments to stronger growth appear to be beyond the capacity of monetary policy to offset. Inflation is currently close to 2 percent, which the Committee has identified as its inflation goal. A significant increase in inflation could threaten the Fed’s credibility and make it more difficult to achieve the Committee’s longer-run goals, including maximum employment. Should a substantial and persistent fall in inflation emerge, monetary stimulus may be appropriate to ensure the return of inflation toward the Committee’s 2 percent goal

    - New FOMC appointee Jeffrey Lacker

  14. Gravatar of Saturos Saturos
    6. July 2012 at 20:55

    From the Gagnon article:

    The view that unconventional monetary policy will lead to inflation is commonly held on Wall Street.

    Aren’t the people on Wall Street the same ones participating in the TIPS market, producing low yield spreads?

  15. Gravatar of RebelEconomist RebelEconomist
    7. July 2012 at 00:27

    Of course NGDP and RGDP are correlated, Scott, as NGDP is essentially RGDP plus inflation. However, RGDP is desirable, and inflation is, from a point of view of economic efficiency, not desirable, so it is no good raising NGDP if most of the rise is accounted for by inflation. Within the economy, however, inflation is desirable to some (debtors and those who think that it is appropriate to trick people to achieve adjustment to lower wages and asset prices) and not to others (creditors). It is therefore reasonable question the motives of those in the US and UK who want to change the monetary policy framework to NGDP targeting at a time when their economies are indebted, uncompetitive and carrying unrecognised bad assets.

    My views might be in a minority, especially in this fanzone, but there will be many who hold them, so instead of brushing criticism like mine off with glib remarks like “inflation does not matter”, you ought to make an effort to seriously answer or even make concessions to such objections, like reducing your suggested NGDP rate to 4%. It is because you don’t that I suspect that you are an inflationist.

  16. Gravatar of Benjamin Cole Benjamin Cole
    7. July 2012 at 01:17

    Many superb posts by Sumner of late; great stuff.

    Yes, better to be roughly right—spur the economy through aggressive NGDP targets—than exactly wrong, and feebly fiddling and dithering, as the Fed is now.

    Really, if we obtained robust growth, but inflation ran a couple percent high, would that be such a disaster?

    Meanwhile, the number of people applying for, and obtaining, SSDI (disability) is soaring.

    A social welfare state and a prolonged recession is the worst of both worlds.

  17. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. July 2012 at 02:38

    Rebeleconomist, With so much unused capacity, how much of a risk is inflation generally? Surely not much; at least the markets don’t think so. 2% inflation is about what we have had on average for quite a long time now, and it is the Fed target. So, unless you think RGDP growth has moved to a lower long term rate, 5% is simply continuing the historical pattern. And I really don’t see the point of fussing over 5% or 4% NGDP growth when unemployment is where it is and debt burdens which should be bearable are not because the level of transactions is so much lower than it could be.

    This just another version of 1930s redux; fussing over completely illusory inflationary “dangers”.

  18. Gravatar of Lorenzo from Oz Lorenzo from Oz
    7. July 2012 at 03:04

    Rebeleconomist: Marcus Nunes, with his gift for graphing, puts it well here
    http://thefaintofheart.wordpress.com/2012/07/06/more-illustrated-stories-how-stabilizing-ngdp-makes-for-a-better-economy/

  19. Gravatar of Lorenzo from Downunder Lorenzo from Downunder
    7. July 2012 at 03:38

    A general request: I have drafted an essay for posting on the origin and use of money, a companion piece to my Easy Guide to Monetary Policy. But it would be helpful to have other people look at it before I post it. If people would be kind enough to look over a copy and comment so I can post as good an effort as possible, I would be grateful. Leave a comment on the above post, and I will send you a copy.

    The more I look at monetary history, the more it seems to matter to encourage clear thinking on the subject. But I am wrestling with quite a lot of material, so other eyes looking at whether I am clear, consistent, etc would be helpful and appreciated.

  20. Gravatar of Mike Sax Mike Sax
    7. July 2012 at 05:39

    Lorenzo sounds look a great idea! I certainly can use a primer.

  21. Gravatar of Mike Sax Mike Sax
    7. July 2012 at 06:34

    Rebel is inflation honestly a concern right now? Sumner is actually on the high end among the Market Monetarists-some like Woolsley and Lars Christensen are down around 3 or 2.5-which to my mind is way too low, though the MMers seem to think the actual number agreed on is less important than that the Fed sticks to the agreed upon number-whatever it is.

    I don’t get it to be sure-how the target doesn’t matter. I’d want a high target of say 7% or so like in Australia. But you’re argument for 4% to me would suggest that we’re already near or getting near an optimum rate. Looking at the economy I don’t see how you can think this.

  22. Gravatar of ssumner ssumner
    7. July 2012 at 07:27

    Saturos, That liquidity trap solution would appeal to Gesell.

    The Gagnon piece is great, as usual.

    And Lacker thinks we are hitting the inflation target despite 1.1% inflation over the last 4 years, and 1% inflation expected over the next few years?

    Joe, Every central bank that is not part of a currency union can target 5% NGDP growth forever.

    Rebeleconomist, I might take you seriously if instead of throwing personal insults at me you actually responded to my arguments, or even showed signs of understanding my arguments. A NGDP targeting regime does not produce higher inflation that an inflation targeting regime. If you think it does, then blame your lack or reasoning skills, don’t accuse me of being dishonest.

  23. Gravatar of curiouseconomist curiouseconomist
    7. July 2012 at 07:59

    Scott, this is slightly off-topic, but I thought it might make you laugh and/or cry:

    “David Kern, chief economist at the British Chambers of Commerce, said falling inflation was now the most important single factor underpinning consumer demand in the UK in the face of tough fiscal austerity and problems in neighbouring economies. He urged policymakers not to risk further price rises by printing money.

    “These figures indicate consumer price inflation is likely to continue falling, which will ease pressures facing businesses and individuals and boost consumer spending,” he said. “Nothing should be done to limit the fall in inflation.””

    http://www.scotsman.com/business/economics/petrol-price-dip-raises-hopes-for-uk-inflation-rate-1-2397808

  24. Gravatar of RebelEconomist RebelEconomist
    7. July 2012 at 09:13

    Lorenzo / Mike Sax

    I am not saying that inflation is a danger now (although I do think that excessive QE could lock in an inflation overhang to be realised if and when the economy ever recovers, but that is another subject), in the US at least. But if inflation is not a problem, then inflation targeting gives just as much leeway as NGDP targeting for further easing, so why change? The obvious reason is that you are indifferent between inflation and RGDP growth.

    Actually, I fear that trend growth may indeed have fallen, and if it has, trying to drive NGDP up against a low RGDP ceiling is going to result in higher inflation than has been previously considered tolerable. That is why I favour a conservative NGDP target, to ensure that, if the idea is adopted, it is adopted for the right reasons, rather than that it justifies a spurt of inflation (if it can be achieved of course). I suspect that NGDP targeting will be adopted in the UK for precisely that wrong reason – to provide intellectual cover for the authorities to cast off the presently binding constraint of their inflation target.

  25. Gravatar of RebelEconomist RebelEconomist
    7. July 2012 at 09:31

    Lorenzo, I am not sure what I am supposed to get out of Marcus Nunes’ graph, except that the present downturn has been bad for stocks and employment. However, I do think that his choice of a stock index as a concern is interesting – note my remark about bad assets on 7. July 2012 at 00:27 above.

    I suspect that one reason why easist policies like NGDP targeting are attracting so much support from the commentariat is that many of the commentators are middle aged, middle to high income, relatively financially sophisticated types, who tend to invest more in stocks and property than bank deposits, and are frustrated with the performance of their investments. They would be quite pleased to see monetary policy pump up risky assets a bit.

  26. Gravatar of RebelEconomist RebelEconomist
    7. July 2012 at 09:55

    Scott, I am sorry if you got the impression that I am accusing you of being dishonest. To be precise, my view is that, when it comes to inflation, you are being economical with your honesty. You could say more clearly that, if the assumption of potential RGDP growth embedded in the NGDP target proves to be optimistic, then NGDP targeting will mean higher inflation. And you could say more clearly that you are indifferent between RGDP growth and inflation in NGDP growth because, as you sometimes irritably remark here, you don’t think inflation matters, or something like that.

  27. Gravatar of Mike Sax Mike Sax
    7. July 2012 at 10:33

    Rebel I guess I see long term stagnant growth as a bigger worry than slightly higher inflation-my assumption is that there’s still a great deal of output slack so that inlfation will not soon be a worry.

    Indeed if demand side inflation became a worry it would be a sign of tremendous success in demand stabilization. We only wish this were our only worry.

    I also am skeptical that QE has much effect on inflation despite all the worry about it.

  28. Gravatar of Becky Hargrove Becky Hargrove
    7. July 2012 at 11:19

    RebelEconomist,
    One does not have to be what you described as the only likely supporters of NGDP targeting. There are also those of us who are not financially savvy and who have not had a job in too long to expect to get one now. However, we do not want to see those who have contractual obligations of all kinds unable to get the jobs that can keep them solvent. That just makes things worse for all of us. NGDP targeting puts the people who need it the most, back into the marketplace.

  29. Gravatar of RebelEconomist RebelEconomist
    7. July 2012 at 14:18

    @Becky, what about those who depend for their income on debtors fulfilling their contractual obligations, in money no more depreciated than the authorities’ inflation target promised?

  30. Gravatar of Becky Hargrove Becky Hargrove
    7. July 2012 at 14:48

    RebelEconomist,
    Precisely the point, because things are in much worse shape if the debt cannot be met at all. Yes, a certain amount of depreciation happens when further growth is injected into the marketplace. However, that growth is what could stop the potential tipping point where more defaults destabilize the process even further. Minor depreciation is indeed a small price for creditors to pay, compared to the bailouts that happen on massive scales when too many default, not to mention more money than ever needed by the Fed to fix the situation. In other words, minor depreciation for the creditor can be the least risk of all, when debtloads are almost beyond the abilities of income.

  31. Gravatar of RebelEconomist RebelEconomist
    7. July 2012 at 23:51

    No Becky, let’s have the defaults (as per contract and law). That way, it is the more reckless creditors that lose, not all of them. Not Mellon-style liquidation; by all means help the defaulters, and bankrupt creditors if they need it, but AFTER the reckoning. In my opinion, the commentariat have taken totally the wrong lesson from Japan. The lesson that should have been taken is that an economy will not recover as long as the zombie assets remain.

    This is not moralising. For example, I heard a fascinating story this week on BBC radio business news about a shopping centre in relatively properous southern England which is decaying and dragging down the image of its town. Backed by the other shopholders of the town, the local authority want to buy the shopping centre and invest, but it is owned by a property fund which is apparently in breach of its loan covenants, and neither the fund nor its banks want to sell the shopping centre at its present market value of about one quarter of its 2007 peak, because if they did they would have to realise the loss. Of course, re-inflating the UK economy enough will probably bail out the property fund and the bank concerned, but is that really the way you want to resolve the present mess? And, if you do, what would be the consequences for the future behaviour of such funds and banks?

  32. Gravatar of RebelEconomist RebelEconomist
    8. July 2012 at 00:34

    By the way, a bit more information.

    The fund concerned markets itself as providing a means for tax-sheltered pension funds to “participate in the higher yielding sector of the UK commercial property market”. To be a bit rhetorical, greedy tax-dodgers!

    This is not an isolated example. According to the report, one fifth of such shopping centres (malls to American readers) are in breach of their loan covenants, and one in seven shops in the UK is presently unoccupied. If this kills off town centres, who will be the winners? Probably the major supermarket chains with out of town stores, like Tesco and Walmart (Asda in the UK).

  33. Gravatar of Saturos Saturos
    8. July 2012 at 02:54

    “Lacker thinks we are hitting the inflation target despite 1.1% inflation over the last 4 years, and 1% inflation expected over the next few years?”

    And that’s not the worst of it: http://online.wsj.com/article/SB10001424052702304050304577378062023792808.html
    (Read the whole piece before you start making any excuses for him.)

    Sorry, it’s Powell and Stein that are the new appointees, isn’t it?

    Gagnon is on Twitter now, btw. As are you, in a way: http://twitter.com/MoneyIllusion

    Rebeleconomist, I think you are being highly disingenuous. Where has Scott suggested that he doesn’t think that RGDP growth is what really matters (I can remember him saying that he does)? If you think trend real growth has fallen, then why not just lower the NGDP growth rate in your favored target path? Scott thinks that it is hard to measure the price level, so excessive NGDP growth is a better way of defining loose money than excessive price inflation. Obviously if trend RGDP growth doubled then Scott would change his definition of excessive NGDP growth.

    Lorenzo, I’d love to see that.

  34. Gravatar of Saturos Saturos
    8. July 2012 at 02:56

    The public has no clue about inflation, #1061

    Dudley was criticized for remarks over food inflation in 2011 where he argued that you have to look at all prices when looking at inflation. He noted that some prices like the iPad were effectively falling as the next generation was twice as powerful at the same price. A member of the crowd shouted “I can’t eat an iPad”.

    http://en.wikipedia.org/wiki/William_C._Dudley

  35. Gravatar of dwb dwb
    8. July 2012 at 05:36

    @rebelecononomist,

    There are so many items wrong with your comment i do not know where to begin. Lets start with the fact that BBC news is usually a very bad place to learn about bankruptcy and insolvency law and loan covenants. Tell me the name of the actual fund that is in breach so i can look up the details.

    First, liquidation and administration are very complex and i do not think the law is the same in England, Scotland, Wales, and Ireland. Its different at the state and federal level in the US. Japanese law is different too of course. By “liquidation” i mean the winding up of a businesses. By “administration” i mean reorganization. In the US for example, a company can abrogate out of the money contracts, while honoring valuable contracts, in a reorganization. Debt can be converted to equity, and so on, and the company emerge intact. Lots of examples i could cite (lookup General Growth Properties – a REIT which got bought out a few years ago, they went into bankruptcy in 2009 in order to gain leverage over their creditors, they were not technically insolvent, emerged strong and intact).

    Lots of companies put assets into smaller bankruptcy remote subsidiaries for just such a purpose. English and US lawyers are very efficient about that, so i am highly skeptical that you have all the facts here about so-called zombie assets.

    Second, accounting standards in the US and UK generally require the recognition of impaired assets if the projected cashflows do not support the book valuation.

    Third, you need to distinguish between “idiosyncratic” and “systematic” events. 1 mall going under is an idiosyncratic event. Even if its because of the increase in internet shopping which reduces mall traffic and makes them more like big showrooms. That’s an idiosyncratic event in that industry

    Fourth, you are wrong, “systematic” events are caused by monetary policy which cause demand slowdowns across all industries at once. that causes a redistribution of wealth, but its not clear to whom.

    Fifth, you have to define for me what you mean by “reckless” because it sounds as though you are doing bible-belt bootstrap economics. moralizing lending standards are what they are based on projected future cashflows. All projections are wrong, they will come in higher or lower.

    Sixth, proponents of NGDP targeting (generally) are not supporting it because of any of the silly reasons you mention. Generally there is a very long history of economic research into ngdp targeting, and whether you prefer “price level tartgeting” or “ngdp targeting” depends wholly on the types of nominal rigidities you think cause recessions.

    here is a piece from 1989 that summed it up pretty well:

    “Stabilizing nominal GNP is not a desirable goal in and of itself; instead, it is desirable because of its implications for stabilizing output at the full information level. In this sense, nominal GNP targeting actually represents an intermediate target of policy. An intermediate target is one that is adopted because, by achieving it, one also achieves the ultimate policy goals.”

    http://research.stlouisfed.org/publications/review/89/11/Understanding_Nov_Dec1989.pdf

    different assumptions about the relative strength of supply shocks, labor market rigidity, nominal debt and financial markets, will lead to different evaluations about the optimal policy.

    ok, enough commenting for a Sunday morning. id rather be fishing but i am hiding out in the AC its already 95 degrees.

  36. Gravatar of Becky Hargrove Becky Hargrove
    8. July 2012 at 07:02

    dwb sorry about your fishing trip. I wanted to respond to rebel’s argument but he pulled out about a dozen talking points for my argument when he only needed one or two!

  37. Gravatar of CA CA
    8. July 2012 at 10:22

    Selgin has just posted a critique of ngdp targeting.

    http://www.freebanking.org/2012/07/08/a-question-for-the-market-monetarists/

  38. Gravatar of Major_Freedom Major_Freedom
    8. July 2012 at 12:19

    CA:

    Selgin has just posted a critique of ngdp targeting.

    FTA:

    “U.S. NGDP was restored to its pre-crisis level over two years ago. Since then both its actual and its forecast growth rate have been hovering relatively steadily around 5 percent, or about two percentage points below the pre-crisis rate.The growth rate of U.S. average hourly (money) earnings has, on the other hand, declined persistently and substantially from its boom-era peak of around 4 percent, to a rate of just 1.5 percent. At some point, surely, these adjustments should have sufficed to eliminate unemployment in so far as such unemployment might be attributed to a mere lack of spending.”

    FWIW, I’ve been saying that exact same thing.

  39. Gravatar of RebelEconomist RebelEconomist
    8. July 2012 at 12:36

    “Tell me the name of the actual fund that is in breach….”. I can do better than that. You can listen to the report yourself here (start from 48.00 in):

    http://www.bbc.co.uk/iplayer/episode/b01k9vgr/Today_03_07_2012/

    I am no insolvency expert, but I think that is not the point. The point is that the authorities are trying to make the losses go away rather than have the losers face up to them. Anything that gets around the inflation target to allow further easing of monetary policy will do. NGDP targeting offers such a way out.

    And spare me the crap about morals etc – when I get that, I presume that the commenter knows that their argument is weak. Fairness and incentives are laudable objectives, but the final target is economic performance. Bail people out and you get a bigger mess.

  40. Gravatar of dwb dwb
    8. July 2012 at 15:01

    @RebelEconomist

    What i got from that is that:
    - “these are simply a commercial asset to the banks (well these are not commercial assets to us).” 49:50

    -the price for this shopping center dropped from 47 Mil pounds 5 years ago to 10 mil now (a guess made by a town councilmember not a real estate appraiser).

    -That the banks “dont want to sell to crystallize the losses that they made” is a quote from some policy person not a bank accountant or regulator who will tell you real estate assets have to be carried at the lower of cost or market value. If you think otherwise, look it up.

    -I hear a lot about social responsibility and the owner does not want to sell at today’s market values (they do not say who that is).

    - the total market value of properties subject to potential administration is 10 Billion pounds. sounds pretty small to me. the vacancy rate is 1 in 7.

    all i get from this sound bite is that some town wants to rebuild the shopping center to eliminate some blight. rebuilding the shopping center does not magically bring tenants. Of course the property owner does not want to sell, a 78% drop in value from 47 MM to 10 MM sounds absurd to me under any circumstances, you would need to know what the rental market was like to know what the appropriate valuation was.

    one thing is for sure, if the owner was in breach of financial covenants and had negative cashflow that would not persist indefinitely.

    sounds to me as though the town wants to buy some property cheap to fulfill a (perceived) social mission and the owner does not want to sell at a lowball price. thats got nothing to do with inflation, ngdp targeting, or anything else.

  41. Gravatar of dwb dwb
    8. July 2012 at 15:12

    oh an its pretty clear what the town actually needs is more aggregate demand, which would fill the space (at some price). whether its more valuable as residential or commercial, or what valuation rentals would support is another matter. all i can say is what towns typically think is the “social good” for property is often orthogonal to what is actually profitable, so no shocker the town can’t convince the buyer to part company with the property.

  42. Gravatar of Major_Freedom Major_Freedom
    8. July 2012 at 16:19

    dwb:

    oh an its pretty clear what the town actually needs is more aggregate demand

    That is not clear at all. For by that logic, I could argue that the problem with my fake dog poop factory’s low revenues, my factory’s idle resources, and my inability to pay my workers a sufficient wage, is not anything to do with my investment choices, or the connection between my investments and the value of my investment that consumers place on it, as if I cannot ever make bad investment choices, but rather the problem is allegedly that “people in general have not enough money to spend”, such that they will come into my store and load up on fake dog poop if only the benevolent money printing Fed comes to the rescue and prints money to coax people into buying my fake dog poop.

    See, the problem with you monetarists is that you force yourselves into an ideological box. You view economic problems as not enough money printing and spending, when in reality the problem is on the side of the real economy. Bad fiscal policy, bad investment choices, bad coordination between investment and consumption, and so on.

    The town doesn’t need more money printing from unproductive parasites. It needs more production and more competition, so that its output will attract existing revenues, rather than currently non-existing revenues.

    Why not have the central bank print enough money to make EVERYONE’S investments profitable, no matter what people have invested in?

  43. Gravatar of RebelEconomist RebelEconomist
    9. July 2012 at 00:17

    dwb, I find your desperation to rubbish this anecdote telling. Even then, you seem to have missed a couple of key points. What the district councillor is saying is that the shopping centre needs investment, not more demand to fill the tired old units at some price. And they do say who the owner is: http://www.glanmore.com/ – when you look at their investment performance (they had actually suspended reporting their NAV until recently), you know why they cannot find the money to invest.

    Of course, enough reflation would, for a while at least restore even their losses, and refill the shops, but is that really the best way to solve micro problems like this, as opposed to taking the least line of resistance (from the business and financial lobby that we ought to have learned to discount)?

    While you can quibble about the details of this anecdote, you surely cannot deny that this type of response to the problems of the financial crisis is widespread. Remember this: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=agfrKseJ94jc Arguably, the whole eurozone crisis is of this nature, but the easists constantly call for the ECB to act as the “lender of last resort to governments”, a concept that I never heard of before the crisis.

  44. Gravatar of The eurozone’s new Iron Curtain — and impending economic disaster | AEIdeas The eurozone’s new Iron Curtain — and impending economic disaster | AEIdeas
    9. July 2012 at 05:11

    [...] the latest bailout efforts — and is at dangerous levels for economies that are shrinking, making their debt burden even more unsustainable. And what might happen next will affect economies on both sides of that “invisible financial [...]

  45. Gravatar of ssumner ssumner
    9. July 2012 at 12:05

    curiouseconomist, Talk about reasoning from a price change!

    Rebeleconomist. You throw out a lot of wild charges and then back off. I hope we can agree I am not advocating a high inflation policy, or indeed any policy aimed at higher than the current 2% target.

    Saturos, The problem isn’t that they’ll raise rates with unemployment above 7%, it’s that they do it with high unemployment AND low inflation.

    I believe the problems that people associated with inflation are actually related more closely to fast NGDP growth. So I see no reason for the government to even measure inflation.

  46. Gravatar of RebelEconomist RebelEconomist
    9. July 2012 at 12:43

    Scott, I think that, at the least, you are advocating a policy implying agressive near-term easing which runs the risk of inflation (not to mention moral hazard as discussed in the comments above). I don’t suppose that many will be swayed by my opinion, but they can draw their own conclusions about your concern with such risks from your remarks like “I see no reason for the government to even measure inflation”. I can have no complaint about your openness with such views here.

  47. Gravatar of Does the euro zone have a debt crisis or a nominal GDP crisis? | AEIdeas Does the euro zone have a debt crisis or a nominal GDP crisis? | AEIdeas
    2. August 2012 at 08:58

    [...] me end with a comment by Scot Sumner on this very issue: Lots of news articles on the eurocrisis focus on the sky-high interest rates now being paid by the [...]

  48. Gravatar of The one chart that shows America is not Greece — yet | AEIdeas The one chart that shows America is not Greece — yet | AEIdeas
    14. December 2012 at 07:52

    [...] Scott Sumner also made a good point on this topic and the importance of NGDP growth to debt sustainability: Lot’s of news articles on the eurocrisis focus on the sky-high interest rates now being paid by the Spanish and Italian governments, roughly 6%.  But I rarely see people pointing out that until a few years ago 6% interest rates on government bonds were completely normal.  As was the 70% ratio of public debt to GDP that you see in Spain.  So why is this interest rate now such a crushing burden?  Simple, in the old days 6% interest rates were accompanied by much more robust NGDP growth rates.  The problem today in the periphery is that NGDP growth has collapsed. [...]

  49. Gravatar of Does Japan have a debt problem or a nominal growth problem? | AEIdeas Does Japan have a debt problem or a nominal growth problem? | AEIdeas
    23. April 2013 at 11:13

    [...] Better a strategy of faster growth in nominal GDP and higher inflation to whittle down that massive debt-to-GDP ratio. Consider: What if the Japanese economy, 4% smaller in nominal terms than in 1994, had grown as fast as America’s over that span? US NGDP grew by 120%. In that case, Japan’s debt/GDP ratio — all else equal — would be roughly 110% of GDP — high but obviously far more manageable. In other words, the Japanese continue to have a big NGDP problem. And they’re not the only ones. As Scott Sumner wrote last summer: [...]

  50. Gravatar of Does the Fed really have a ‘hidden agenda’ to hide the cost of US debt? | AEIdeas Does the Fed really have a ‘hidden agenda’ to hide the cost of US debt? | AEIdeas
    25. September 2013 at 12:39

    [...] What explains bigger debt but a smaller debt burden? An economy growing faster than the debt. Slow or falling nominal GDP growth is what creates debt problems. As Scott Sumner wrote about the euro crisis: [...]

Leave a Reply