[jolepp]

This was the month the confidence fairy died.

For the past two years most policy makers in Europe and many politicians and pundits in America have been in thrall to a destructive economic doctrine. According to this doctrine, governments should respond to a severely depressed economy not the way the textbooks say they should — by spending more to offset falling private demand — but with fiscal austerity, slashing spending in an effort to balance their budgets.

Critics warned from the beginning that austerity in the face of depression would only make that depression worse. But the “austerians” insisted that the reverse would happen. Why? Confidence! “Confidence-inspiring policies will foster and not hamper economic recovery,” declared Jean-Claude Trichet, the former president of the European Central Bank — a claim echoed by Republicans in Congress here. Or as I put it way back when, the idea was that the confidence fairy would come in and reward policy makers for their fiscal virtue.

The good news is that many influential people are finally admitting that the confidence fairy was a myth. The bad news is that despite this admission there seems to be little prospect of a near-term course change either in Europe or here in America, where we never fully embraced the doctrine, but have, nonetheless, had de facto austerity in the form of huge spending and employment cuts at the state and local level.
...

http://www.nytimes.com/2012/04/27/opinion/krugman-death-of-a-fairy-tale.html

[Winder]

How would Spain, Italy, or Greece spend more money? What I mean by that is: Since they are broke where does the money come from? It sounds good, but if you have no more money, and nobody will lend you any (nobody has confidence in your ability to repay) where do you get the massive amount of money that people like Krugman say you need to spend in order to generate growth? The traditional Keynesian response is that you deliberately inflate and devalue your currency. If you make your currency worthless you make your debt worthless. Greece, Italy, & Spain have a problem in that they can not turn to monetary stimulus without leaving the EU. Austerity inspires confidence in foreign investors. If foreign investor are going to buy treasuries (from Spain, Italy, or Greece) they need to have confidence that those countries can repay and that they are not going to resort to monetary stimulus. Nobody with money wants to invest in these countries. Without long term investment in productivity there is no growth. Short term stimulus is not long term productivity.


Austerity is a bitch. I don't know of any serious economist that says it is an easy thing for a country to go through. That is not the point.

But back to the original question. How does a country that has no money, and can't borrow any more money afford to spend massive amounts of money? These countries are only going through austerity because they have already begged, borrowed, and stole every penny they could. I really hope France goes on one last stimulus binge. Like an alcoholic who drinks to avoid the hangover. They wind up like Greece with nothing left, nobody left to borrow from, and nobody to blame but themselves.

[jolepp]

Krugman's prescription (from this and other NYT op-eds) would seem to boil down to Keynesian stimulus (instead of austerity) and allowing modestly higher inflation (in the previous op-ed in the other recent thread he mentions 3-4%) for both the Eurozone and the US. In practice inflation is the price of the former and also has the effect of diminishing the principal of debt, public and private (as well as an effective paycut all round).

My understanding is that within the existing system (where the governments cannot tap to central bank funds directly) this would mean more central bank operations like 'quantitative easing' (i.e. buying [government] bonds from the market) and the ECB's standing offer for cheap loans to banks, the idea apparently being inflating the monetary base with the intent that the new money finds its way to new government bonds making it easier (cheaper) for governments to issue new bonds so that existing debt can be rolled over, budget cuts and/or tax hikes can be avoided in the middle of a recession (depression) and (possibly) enabling some outright stimulus spending.

Originally the ECB has been set up to implement a monetarist policy (i.e. 2% inflation target as its primary concern) and the governments of the Eurozone have renewed their pleges to adhere to or at least get back on track with the 'Stability and Growth Pact' (1997) with limits on budget deficits (3% GDP annually) and public debt (60% of GDP): for the Eurozone austerity is the official policy.

[jolepp]

A nifty recap of the Eurozone crisis (dated 22DEC2011): BBC News - What really caused the eurozone crisis?

[jeffkrol]

How would Spain, Italy, or Greece spend more money? What I mean by that is: Since they are broke where does the money come from? It sounds good, but if you have no more money, and nobody will lend you any (nobody has confidence in your ability to repay) where do you get the massive amount of money that people like Krugman say you need to spend in order to generate growth?

again you do not accept what is real.. EU (and all it components) are beholden to private banks and are literally broke (along w/ the banks if they default)

US can and will never be (except by choice) broke.. Fiat money, floating exchange rate, sovereign nation status, worlds largest economy, high resources both physical and labor

They can return to their own currency

EU can form the "United States of Europe" and create it's own mirror system to us (sans the useless parts such as debt bonding)

ONLY 2 choices... yet "the banks" are fighting for their lives.. people be darned.........

Austerity is a bitch. I don't know of any serious economist that says it is an easy thing for a country to go through. That is not the point.

It is also cruel,inhumane and contrary to a moral, caring society.. especially when UNNECESSARY......

Personally you "know" serious people .. Economist's??? questionable.. Most are equivalent to the phlogiston school in the dark ages...........................

http://en.wikipedia.org/wiki/Phlogiston_theory

Do you need that explained??

[Winder]

Krugman's prescription (from this and other NYT op-eds) would seem to boil down to Keynesian stimulus (instead of austerity) and allowing modestly higher inflation (in the previous op-ed in the other recent thread he mentions 3-4%) for both the Eurozone and the US. In practice inflation is the price of the former and also has the effect of diminishing the principal of debt, public and private (as well as an effective paycut all round).

My understanding is that within the existing system (where the governments cannot tap to central bank funds directly) this would mean more central bank operations like 'quantitative easing' (i.e. buying [government] bonds from the market) and the ECB's standing offer for cheap loans to banks, the idea apparently being inflating the monetary base with the intent that the new money finds its way to new government bonds making it easier (cheaper) for governments to issue new bonds so that existing debt can be rolled over, budget cuts and/or tax hikes can be avoided in the middle of a recession (depression) and (possibly) enabling some outright stimulus spending.

Originally the ECB has been set up to implement a monetarist policy (i.e. 2% inflation target as its primary concern) and the governments of the Eurozone have renewed their pleges to adhere to or at least get back on track with the 'Stability and Growth Pact' (1997) with limits on budget deficits (3% GDP annually) and public debt (60% of GDP): for the Eurozone austerity is the official policy.

Quote from Mr. Krugman:
For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.

Krugman is saying is that inflation would create incentives to invest, but this is false. In the 80's when inflation reached double digits we saw the reverse. People are less willing to invest as inflation rises. Every inflationary period we have had has resulted in reduced investment by the private sector. During inflationary period we see people shelter money or invest into foreign economies where inflation is not a threat.

Quote from Mr. Krugman:"the private sector (like much of corporate America) are sitting on large hoards of cash" If that is a true statement why did we just spend over a trillion dollars on bailouts for corporate America? Nobody was sitting on hoards of cash. That statement is absolutely false. People were leveraged to the hilt. People were sitting on paper assets that were actually worthless. In one sentence Krugman says "the private sector continue to be crippled by the overhang of debt accumulated during the bubble years." and in the next he says "the private sector (like much of corporate America) are sitting on large hoards of cash". These are two very contradictory statements.

If we had large hoards of cash we would not be in a recession. GM would not have been on the verge of bankruptcy. People would be paying their mortgages. AIG would not have been bailed out.

[jolepp]

One aspect of inflation is that simply keeping money as such is a losing proposition. It is hard to see how this is not an incentive to investment (or using the money for consumption).

As for some parts of the private sector sitting on hoards of cash while some other parts thereof are debt ridden I don't see a contradiction; quoting for context:

... would a rise in inflation to 3 percent or even 4 percent be a terrible thing? On the contrary, it would almost surely help the economy.

How so? For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.

In short, far from fearing that more action against unemployment might lead to an uptick in inflation, the Fed should actually welcome that prospect. ...

(http://www.nytimes.com/2012/04/06/op...inflation.html)

Since there is already a separate thread on the article quoted above further discussion pertaining to the same should ideally go there.

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Last edited by jolepp; 04-28-2012 at 01:15 PM.

[Winder]

One aspect of inflation is that simply keeping money as such is a losing proposition. It is hard to see how this is not an incentive to investment (or using the money for consumption).

As for some parts of the private sector sitting on hoards of cash while some other parts thereof are debt ridden I don't see a contradiction.

Exactly who is hoarding cash?

There are a couple of select companies like Apple & Google who are sitting on a significant amount of cash. There are no industries that I am aware of that are hoarding cash.

[jolepp]

Exactly who is hoarding cash?

Krugman doesn't say. I don't happen to know. Somebody must be though: since the beginning of the current crisis the M2 money supply has grown substantially (http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt) and all that money, currently about $ 9.8 trillion, is somewhere. (In late 2007 M2 was around $ 7.4 trillion.)

[Winder]

Krugman doesn't say. I don't happen to know. Somebody must be though: since the beginning of the current crisis the M2 money supply has grown substantially (http://www.federalreserve.gov/releases/h6/hist/h6hist1.txt) and all that money, currently about $ 9.8 trillion, is somewhere. (In late 2007 M2 was around $ 7.4 trillion.)

Since M3 is no longer reported, M2 is the broadest measure of money reported by the Fed. It has risen 28% in just 2 years. M2 happens to be the best indicator we have of an inflation of the monetary base.

From a 2010 article:
The Federal Reserve's monetary base currently stands at $1.9851 trillion and is projected to rise to $2.5851 trillion by mid-2011 due to the Fed's upcoming $600 billion in quantitative easing. The U.S. M2 money supply rose over the past week by $22.4 billion to $8.7862 trillion. This represents a $1.1648 trillion annualized increase, which would equal 13.25% monetary inflation over the next year. The M2 multiplier, or M2 divided by the monetary base, currently stands at 4.426, compared to a long-term average of 10. Based on a projected monetary base of $2.5851 trillion and a long-term average M2 multiplier of 10, the M2 money supply has a chance of rising as much as 194% to $25.851 trillion over the next few years.

The massive amount of money that has been injected into the system by the government is the key reason for the rise in M2. There is lots of money in the system waiting to be borrowed, but who wants to borrow it? There is no demand. The only borrowing we have seen from industry has been to refinance older loans. Companies typically borrow money to expand and make capital purchases. The problem we have now is too much capacity, so there is no need to expand. The rise in M2 is money injected by the government (inflation). Money nobody wants to touch even at rock bottom interest rates. If the government pulls that money back out then M2 will fall.

[jeffkrol]

WASHINGTON, April 23, 2012 /PRNewswire/ -- Companies increased their cash and short-term investment balances in the first quarter, according to the AFP Corporate Cash Indicators™ (AFP CCI), a quarterly study that measures recent and anticipated changes in U.S. corporate cash balances. Quarter-to-quarter, 40 percent of reporting organizations had greater cash balances at the end of 1Q12 than they had at the end of 4Q11.
Meanwhile, companies reported that their investment selection for cash and short-term investments had become marginally more aggressive, with a net 3 percent of respondents indicating a more aggressive investment selection.
Year-over-year, cash hoarding increased, with 40 percent holding larger balances at the end of 1Q12 than they had at the end of the 1Q11.
Looking ahead, 32 percent expect to add to cash and short-term investment balances during 2Q12 compared to 24 percent that expect to reduce balances.

AFP Corporate Cash Indicators™
------------------------------------------

+13 1Q12 v. 4Q11
+13 1Q12 v. 1Q11
+08 Expectations for 2Q12

Corporate Treasurers Report Higher Cash Balances in First Quarter | SYS-CON MEDIA

IndustryWeek : Large Companies Hoarding Cash

One reason the companies have this much cash on hand is that revenue for the top 1000 companies improved by 11.5% in 2010, after declining by 12.1% in 2009.
High profits are not the only reason for this buildup as borrowing is also a significant factor. For AAA-rated companies total debt has increased by more than 30% over the past five years. According to the research, companies may be borrowing to get cash on their balance sheets simply because the cost of borrowing is low.
Improvement in working capital management is not a major factor in rising cash levels. Companies' ability to collect from customers, pay suppliers, and manage inventory improved by only 2% in 2010, on the heels of a major deterioration in 2009.

In an interview with Business Finance, he said that now " is a great moment to sort of arm up and raise some capital. I think it's more incumbent on boards and CEOs and CFOs to have a conversation now than to have it one year or two years from now.
"If you can, raise the capital now, because fortunately for many companies, there's been a lot of capital made available at quite low interest rates because some of the policies of the central banks.
Many of the central bank rates are at close to historic lows. It's not likely that can be sustained over a period of time. If that changes, the cost of capital will go up.

[Winder]

The question is still: Who? What sectors of the economy are hoarding cash? How much cash are we talking about? If companies are trying to raise capital, then they question is why? Banks are trying to raise capital because they know they have to cover future losses.

40 percent of reporting organizations had greater cash balances at the end of 1Q12 than they had at the end of 4Q11.

Which means 60% did not have greater cash balances.

Who these companies are and what industry they are in is very important to the idea that "the private sector is hoarding cash". Different segments of the economy have been effected differently by the recession. Opportunity for growth is not the same across all sectors. A company building cash reserves for a major acquisition (Google buying Motorola) is not a negative indicator.

[jeffkrol]

The question is still: Who? What sectors of the economy are hoarding cash? How much cash are we talking about? If companies are trying to raise capital, then they question is why? Banks are trying to raise capital because they know they have to cover future losses.


Which means 60% did not have greater cash balances.

Who these companies are and what industry they are in is very important to the idea that "the private sector is hoarding cash". Different segments of the economy have been effected differently by the recession. Opportunity for growth is not the same across all sectors. A company building cash reserves for a major acquisition (Google buying Motorola) is not a negative indicator.

Who cares.. your splitting hairs and not seeing the big picture..
Fed fiat.. it's not how much you spend but where you spend it......
Consumers aren't buying, profits up, surplus forms.. no expansion without a market.. pick an industry..............

[Winder]

As for some parts of the private sector sitting on hoards of cash while some other parts thereof are debt ridden I don't see a contradiction; quoting for context:
.

Mish's Global Economic Trend Analysis: Cash Cow Liquidity Comparison: Where's the Cash and Where's the Debt? A Look at the Top 50 Companies

Hussman Funds - Weekly Market Comment: July 10, 2006 - There's No Such Thing as Idle Cash on the Sidelines

[jeffkrol]

Mish's Global Economic Trend Analysis: Cash Cow Liquidity Comparison: Where's the Cash and Where's the Debt? A Look at the Top 50 Companies

Hussman Funds - Weekly Market Comment: July 10, 2006 - There's No Such Thing as Idle Cash on the Sidelines

2006?????? anything more current???