[jeffkrol]

Really liked this:
billy blog Blog Archive Some neighbours arrive

The introduction of the next door neighbours should also dispel any notions that the “closed economy” version of this model was hiding something important. It was not. The sectoral balances are very clear when you add the external sector.

Further, you should be able to clearly understand that the China Family is not funding the public spending in this model. How can it? I issue my own business cards and they issue their cards. I spend in my cards.

Further, I don’t need to sell any bonds. All that would be different is that the bond holdings rows (local and external) would be zero and the cash holding rows would record the asset accumulation. Should either the local kids or the China Family kids not want to hold this cash then they could spend it in various ways and this would reduce my deficits anyway and help support growth and income generation.

I have also conducted this in real terms. It wouldn’t make much difference if I did it in nominal terms with a price level incorporated. In the growth phase as long as capacity was growing then inflation would not have been an issue and in the recessionary phase, deflation would likely occur and make matters worse.

But the underlying sectoral relationships and the budget-driven dynamics shown here would all still occur.

Most of the so-called experts who care to wax lyrical about exit plans and national debt never reveal they understand anything about these sectoral relationships or budget dynamics. Most of what they say would never “add up” nor is it stock-flow consistent.

What this simple model allows you to do is see the basic relationships clearly and how the spending, income and saving flows in each period impact consistently on asset stocks held. You will find very few mainstream economists who will entertain that level of consistency in their analysis.

[jeffkrol]

UK and austerity.........
Economics - Economics Q&A: Will the Government spending cuts affect inflation?

The government has announced £81bn of planned spending cuts over the next few years. Assuming that these cuts are actually carried through (this is clearly open to doubt) the biggest risk seems to me to be that deep cuts in spending will bring about a double dip recession - driving UK inflation lower because of falling demand and extra spare capacity. There are good grounds for thinking that growth rates in the UK economy will be slower than in previous recoveries and the fiscal contraction will be a key factor behind this. The Office for Budget Responsibility has a GDP growth forecast of just 2.1% for 2011 whilst the Paris-based Organisation for Economic Co-operation and Development believes the UK economy will grow by just 1.7%.

As with most questions in macroeconomics, there are so many other factors that are unlikely to remain constant over the same period! We have seen consumer price inflation well above the 2% target in much of the past two years but the causes have in the main come from external events in the world economy - notably the steep increases in the prices of foodstuffs, oil and gas and many other primary commodities.

Much of the inflation that we experience in the UK is determined by global economic forces beyond the control of the government and the Bank of England.

At least the Brits. UNDERSTAND the US monetary policy is not the be all end all of inflationary forces.
BUt what I find interesting is Mr. Riley's post is in comparison to earlier ones:
Macroeconomics - Supply-side Policies
http://www.tutor2u.net/blog/index.php/economics/comments/qa-what-is-a-keynes...-will-it-work/
http://www.telegraph.co.uk/finance/comment/rogerbootle/3264845/We-now-face-K...solutions.html
for those suffering from short term memory loss..........

But what they can do is prevent an international banking collapse, a catastrophe that would have both deepened the downturn and made the recovery from it virtually impossible. This is not the 1930s.

But it was governments that had to do it. We live in a world where the failures of government are pretty obvious. We read all the time about their inefficiencies and, in Britain. we have had a huge increase in government spending alongside falling productivity in the public sector. Governments are seen as slow-moving bureaucracies, having to build support before they push a policy into action – a contrast to the nimble, effective private sector. Co-operate internationally on major issues? No one thought it possible, which of course was one of the reasons why the markets were so spooked.

Well, it hasn't been like that in the past few days. Governments have shown themselves to be swift and effective and they really deserve credit for that. Sure, the near-collapse of the world banking system was in part a failure of regulation and of monetary policy. But the primary failure was in the private sector and it is government that has saved it.

That is going to change things. It is going to redefine the relationship between government and finance in the years ahead, certainly for a decade, maybe a generation. It is far too early to see any detail but we can catch a feeling for what might change.

If you look at what monetary authorities have done so far there are really two main elements. One has been for central banks to flood the world with liquidity, to lend to the banking system without limit. The other has been to offer partial nationalisation to banks if they need it. In the first the central banks have been carrying out their traditional role, dating back to the 19th century, of being lender at last resort to the banking system. In the second the governments have taken on a newer, but not unprecedented role of being investor at last resort in individual banks.

The first is textbook stuff. Because banks borrow short-term but make long-term loans, there has to be some mechanism to enable them to repay depositors in extreme situations. It is just that, this time, the lender-at-last-resort role had to be on a global scale.

The second has happened before when governments have felt that national interest requires them to invest in commercial enterprises and when other investors did not want to do so. This happened in a dogmatic way with nationalisation and that model clearly does not work. It worked particularly badly when the company being taken over was in some structural trouble, such as British Leyland. But there are much more encouraging examples going back 150 years and more: the government investment in the Suez Canal, or in BP. We tend to forget now that the government once had effective control of the company that, more than any other, discovered the North Sea oilfields.

So one should see the partial nationalisation of British banks as part of a continuum; it is radical but it is not absolutely unprecedented. What is clever is the optional element – we are there if you need capital but if you don't that is fine too – and that now seems to be a model for the rest of the world. It is not as important an intellectual export as privatisation itself, but it is an idea initiated here that will become a new norm in the future.

http://www.independent.co.uk/opinion/commentators/hamish-mcrae/hamish-mcrae-...do-961303.html
for fun:

Not so funny.......

http://www.tutor2u.net/blog/index.php/economics/comments/inequality-and-soci...tion/#extended

But does the graph show correlation or causation? The authors of the study, in their book “The Spirit Level” make a convincing argument that it is a causal factor and one of the main reasons is that greater inequality breeds anxiety about how we compare with others - both about rising in the scale and keeping one’s status. These stresses lead to social trouble, such as young men who lack status often react violently when shamed or humiliated and people who belong to a perceived underclass do poorly at school. Educational success “can be profoundly affected by the way we feel we are seen and judged by others”

http://www.equalitytrust.org.uk/resources/slides
http://www.slideshare.net/equalitytrust/the-spirit-level-slides-from-the-equality-trust
sorry to pile on but this is funny.......
http://www.tutor2u.net/blog/index.php/economics/comments/economics-in-2010-d...nds1/#extended

Mary is the proprietor of a bar in Dublin . She realises that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronise her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans). Word gets around about Mary’s “drink now, pay later” marketing strategy and, as a result, increasing numbers of customers flood into Mary’s bar. Soon she has the largest sales volume for any bar in Dublin. By providing her customers’ freedom from immediate payment demands, Mary gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Mary’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognises that these customer debts constitute valuable future assets and increases Mary’s borrowing limit. He sees no reason for any undue concern, since he has the debts of unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders figure a way to make huge commissions, and transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. ............ ect.........