The case for deflation

[mjdgreg]

So you don't have a contingency plan. What if I'm wrong (chance would be a fine thing) and we get high inflation? After all, my deflation view is the minority one. What would be your contingency plan then?

Your tester question is a red herring. I deal with the here and now which is unlike anything we've ever faced before. You won't find a comparable situation in your history books.

It's very simple. Bond rates could quite easily go up. Even you have to concede that this is a possibility. If it happens what is your solution? It's totally naive and simplistic in the extreme to discount this possibility, which is all you ever seem to do.

[BillyStubbsTears]

So you don't have a contingency plan. What if I'm wrong (chance would be a fine thing) and we get high inflation? After all, my deflation view is the minority one. What would be your contingency plan then?

Your tester question is a red herring. I deal with the here and now which is unlike anything we've ever faced before. You won't find a comparable situation in your history books.

It's very simple. Bond rates could quite easily go up. I am certain they will. Even you have to concede that this is a possibility. If it happens what is your solution? It's totally naive and simplistic in the extreme to discount this possibility, which is all you ever seem to do.

Mick

It's amazing how often in the last few years we've heard "ah but it's all different now" when people who have made every economic call wrong have the theoretical basics and the empirical record pointed out to them.

They keep saying "Yeah but the things that used to apply, no longer apply in the current situation."

They never explain why. They simply use this argument to dismiss any prediction that conflicts with their own world view. Even when their predictions are consistently wrong. And the predictions based on simple theory and understanding of historical precedents are right.

You say, "what if the bond markets change their minds?"

I say:
The bond markets have done EXACTLY what basic economic theory predicts they should have done. Why should I base my ideas on your worst nightmares when you have been consistently wrong so far? Especially when following your ideas would have horrific consequences.

Specifically, you want to go through the catastrophe (and it really WOULD be that bad) of default on a whim because you think the bond markets MIGHT turn against us. Yet you refuse to even consider a tried and proven way out of the crisis. That is through demand stimulation, generating gentle inflation and depressing the debt through this combination of growth and inflation over 30 years or so.

Intellectually vacuous Mick. You have a half-baked idea based on some bullshit you have read on a swivel-eyed right-wing blog. And it doesn't even have any logical connection with the previous half-baked bullshit that you have posted.

3/10 for ideological pontificating
1/10 for logical discussion

Must try harder (unless you are taking the piss like you do with your grammar, in which case, the act is coming on nicely, do continue).

[BillyStubbsTears]

Mick

I do not have to concede that bond rates will go up. There is no historical or theoretical reason why they should. So there is no logical reason why you, I or anyone else should build a policy on the assumption that they will.

You don't get it do you? Your ideas are entirely predicated on the principle that the worst case in the bond markets WILL happen. Doing what you say we should would be sensible IF the worst turned out to be true. But it would be madness if the worst did not happen,

Imagine a man saying "I have a pain in my toe. I know that it is theoretically possible that toe nails can get infected, leading to gangrene and death. So I will cut off my leg."

If his toe pain DOES turn out to be undiagnosef gangrene then he may have saved his life. But if it turns out to have been something else, he has f**ked his life up for no sensible reason. THAT is the logic of what you are saying.

[mjdgreg]

So as I thought, no contingency plan and not even prepared to consider one. Not even prepared to consider the possibility that bond rates could rise. You display all the dogmatic tendencies of your typical leftie. Your view is the only one that is right and everyone else is is a swivel-eyed right winger. Why am I not surprised.

In case you hadn't noticed, things are different this time. Our debt is 900% of the economy. It will eventually overtake that of the Weimar Republic. We have never been so indebted as a nation. Your simplistic laws of economics no longer apply.

[mjdgreg]

More on why our economy will inevitably have to default on its loans.

When the coalition government took charge, thanks to Labour we had a £700 billion national debt. Despite an 'austerity' budget, tax rises and so-called 'cuts' our national debt is continuing to grow exponentially.

By the time this government leaves office they will have added an estimated £700 billion to the national debt in just five years. This is more than every British government of the past 100 years put together.

For all this talk of austerity, the government isn't cutting anything. State spending is going up, our national debt is going up and our interest payments are going up. By the time of the next election our national debt will be almost £1.4 trillion.

Britain is now officially one of the most heavily indebted countries in the Western world. Our total debt now stands at more than five times what the economy is worth. FIVE TIMES!!!!

Proportionally, we have more debt than Spain, Italy, Portugal, and nearly twice as much as Greece! We all know what is currently happening to those countries. It won't be long before we start to be affected in a similar way. 

There are only two countries that have more debt than us. Japan and Ireland. Japan's economy has stagnated for 20 years and the stock market has crashed by 75%. Ireland's housing market has crashed 50%, and the government has been forced to accept a bailout.

Our debt is much larger than almost every other nation’s. Incredible I know, but that isn't even the full story. When all of Britain’s unfunded obligations such as  public sector pensions are included, our debts swell to 900% of our economy. When this is all added up we owe ten times what the economy is worth.

In recorded economic history, every single country with debts as big as ours has suffered a devastating economic collapse. There are NO exceptions.

It's plain to see we are totally broke and are unable to pay back our debts because they are just far too large now.

If I can work it out why won't the bond markets eventually realise the error of their ways? Trust me, it is only a matter of time before they do, and then life will never be the same again.

[BillyStubbsTears]

Mick.

You say "we" have a debt 900% that of our GDP. Where do you get that data from?

[Dagenham Rover]

More on why our economy will inevitably have to default on its loans.

When the coalition government took charge, thanks to Labour we had a £700 billion national debt. Despite an 'austerity' budget, tax rises and so-called 'cuts' our national debt is continuing to grow exponentially.

By the time this government leaves office they will have added an estimated £700 billion to the national debt in just five years. This is more than every British government of the past 100 years put together.

For all this talk of austerity, the government isn't cutting anything. State spending is going up, our national debt is going up and our interest payments are going up. By the time of the next election our national debt will be almost £1.4 trillion.

So thanks to the Coalition at the end of this Parliment the national debt will have doubled from the position Labour left it in   

[mjdgreg]

So thanks to the Coalition at the end of this Parliment the national debt will have doubled from the position Labour left it in

No, it's not thanks to the coalition. It's thanks to Labour. They were the ones that set the wheels in motion. The coalition have been trying to stop the runaway train with very little success because by the time they were handed the controls, the train was moving so fast that it had become impossible to stop. All they've managed to do is slightly slow down its speed.

If Labour had remained in power, I reckon the debt would have trebled.

[mjdgreg]

mjdgreg.

You say "we" have a debt 900% that of our GDP. Where do you get that data from?

I've worked it out myself from various websites. If anything, I've been conservative in arriving at that figure.

[BillyStubbsTears]

Can you point me to them? Only I have a healthy skepticism for "facts" unless I see them myself. Nothing personal. It's a professional thing. In my line of work, when we see someone passing off something as "fact" without giving a reference to where the "fact" can be independently verified, we tend to ignore it. As I've said before, in my line of work, if we work on "facts" that turn out to be wrong, people tend to get killed. It kind of focuses the mind to weed out "fact" from "bullshit"...

[mjdgreg]

Sorry I haven't got time. I have relied on my photographic memory for the most part, but it only allows me to compute data and not remember superfluous things like the web address of each site I have visited. Trust me, I know what I'm talking about.

[The L J Monk]

Was it this one Mick: http://smashabanana.blogspot.co.uk/2012/01/socialism-is-destroying-nation-states.html

The title of the article suggests it'd be right up your street.

[wilts rover]

According to that great arbiter of facts, wikipedia', gov dept was 63% of GDP in Nov 2011, then again that was taken from ONS figures so probably reliable. Hell of a jump from Nov 2011 to Nov 2012 then to reach 900% - how many months in that period were Labour in power?

[BobG]

That hike must be down to the half baked policy and thus forecasting idiocies of this wonderful Coalition then Wilts!

Come on Mick. if you're data is right, you have just singlehandedly proved how miserably incompetent these buggers are. Let's at least hear you admit they got it wrong, and are continuing to do so.

BobG

[mjdgreg]

According to that great arbiter of facts, wikipedia', gov dept was 63% of GDP in Nov 2011, then again that was taken from ONS figures so probably reliable. Hell of a jump from Nov 2011 to Nov 2012 then to reach 900% - how many months in that period were Labour in power?

You make the same classic mistake that Billy always does and are only considering government debt. You are not taking account of all the other debt that goes to make up the total of 900%. You really must read my posts more closely. I include financial sector debt, government debt, personal debt and corporate debts in my 900%.

[BillyStubbsTears]

Sorry I haven't got time. I have relied on my photographic memory for the most part, but it only allows me to compute data and not remember superfluous things like the web address of each site I have visited. Trust me, I know what I'm talking about.

No probs Mick. I'll file under "bullshit" then.

[BillyStubbsTears]

According to that great arbiter of facts, wikipedia', gov dept was 63% of GDP in Nov 2011, then again that was taken from ONS figures so probably reliable. Hell of a jump from Nov 2011 to Nov 2012 then to reach 900% - how many months in that period were Labour in power?

You make the same classic mistake that Billy always does and are only considering government debt. You are not taking account of all the other debt that goes to make up the total of 900%. You really must read my posts more closely. I include financial sector debt, government debt, personal debt and corporate debts in my 900%.

Right. We're getting somewhere.

I'll ignore the fact that no-one but swivelled-eyed right-wing ideologue bloggers really thinks that the combined debt of the UK is remotely close to 900% of GDP. The But I'll accept your central premise that the UK overall is heavily indebted and it can't go on like that. (It would have been far, far better had Thatcher not deregulated the City back in the 80s and started the whole mad-cap debt spiral, but we'll let that pass for now because I know you don't take lessons from History. Except when you do.)

Now, something like 85% of the total debt is owed by UK companies and householders. What is the mechanism for a default there then Mick? How do you instigate a default of these debtors? What is the consequence of this default? And, crucially, who is their debt owed to (i.e. who will end up out of pocket when this default occurs)?

[mjdgreg]

I've never said the coalition has got it right. All I've said is that they are better than the Labour alternative. Politicians of all parties have got it spectacularly wrong ever since the creation of the welfare state. They all allowed it to get far too big and we are paying the price now and will do in the future unless it is cut back dramatically. We simply can't afford it and haven't been able to for a long time.

[wilts rover]

You appear to have totally ignored the fact that much of the UK economy is controlled by international companies, who are making large profits whilst posting accounts that show they are in debt.

The UK business of Starbucks reported sales of £398m and paid no tax because it made a £32.9m loss.
http://www.telegraph.co.uk/finance/personalfinance/consumertips/tax/9671576/Starbucks-is-leeching-tax-revenue-from-UK-Lord-Myners.html

You ought to get their accountants for your businesses which I am sure you have recorded and pay the approriate taxes on.

[mjdgreg]

Billy, you must also try to read my posts properly. I'm only talking about the government defaulting on its debt. The other information I have posted is purely to demonstrate how bad a situation we are in.

[mjdgreg]

You appear to have totally ignored the fact that much of the UK economy is controlled by international companies, who are making large profits whilst posting accounts that show they are in debt.

You appear to be going off at a tangent and posting irrelevant information in the context of this debate.

[BillyStubbsTears]

Billy, you must also try to read my posts properly. I'm only talking about the government defaulting on its debt. The other information I have posted is purely to demonstrate how bad a situation we are in.

Righto. So, with absolutely no pressure whatsoever from international markets, with interest rates at the lowest they have been in history, with interest payments on Govt debt lower than they were throughout the entire 20th century, you would elect to default on our debt, with all the nightmarish consequences that this would entail.

Have I got that right Mick?

[mjdgreg]

Righto. So, with absolutely no pressure whatsoever from international markets, with interest rates at the lowest they have been in history, with interest payments on Govt debt lower than they were throughout the entire 20th century, you would elect to default on our debt, with all the nightmarish consequences that this would entail.

Have I got that right mjdgreg?

No as usual, you haven't. For example you say, 'with interest payments on Govt debt lower than they were throughout the entire 20th century'. Interest rates might be lower but our payments are definitely not. Our interest payment this year alone will be about £45 billion.

I'm not advocating defaulting overnight. We need to be crafty. We need to cut back on government spending so that we don't need to borrow any more then we gradually start to default.   

[BillyStubbsTears]

Mick. As a ratio of GDP (which is the only thing that matters) our interest payments are lower than at any time in the 20th Century. Fact. Go and check.

Default gradually? I've just nearly choked on me coffee Mick. That is your best one yet. We, as a country say to one creditor "Psst! We're not going to pay you what we owe you. But keep it to yourself, because we're going to do this gradually. We don't want everyone else knowing that we're not going to pay them as well!"

Good one Mick. Really, really good funny one, that is. You've surpassed yourself.

[mjdgreg]

mjdgreg. As a ratio of GDP (which is the only thing that matters) our interest payments are lower than at any time in the 20th Century. Fact. Go and check.

Default gradually? I've just nearly choked on me coffee Mick. That is your best one yet. We, as a country say to one creditor "Psst! We're not going to pay you what we owe you. But keep it to yourself, because we're going to do this gradually. We don't want everyone else knowing that we're not going to pay them as well!"

Good one mjdgreg. Really, really good funny one, that is. You've surpassed yourself.

What matters is the amount of money, not the ratio to GDP (these figures are from cooked books anyway, with many liabilities missed off the balance sheet). As usual you ignore all the other debt in the economy only focusing on what the government owes. This interest payment alone costs us as a country £725 per year for every person in the UK based on a back of a fag packet calculation. This is going up exponentially.

I can see that you are not as crafty as me. I would default gradually by introducing round after round of QE whilst pretending that I wasn't going to keep doing it. This would gradually erode the debt as our currency became worth less and less. Sorted.

[BillyStubbsTears]

Mick.

1) If you really, truly think that the absolute magnitude of a cost is the crucial thing, not the relative value of a cost compared to income, then you've lost the plot entirely. But of course you don't really believe that. You've just reverted to your standard approach of bluster and bluff whenever you are shown to be wrong.

2) So you'd have unlimited QE? But if the result of that is to debase the currency, it will lead to inflation and hence cause the bond markets to up the rates. Self defeating. The whole point about bond rates (for monetarily sovereign countries) is that they are set at a level that produces an expected return for the investor  over and above the level of inflation in the country in question. That is why there is absolutely no danger of bond rates increasing while ever our economy is flat. Once we finally come to our senses, take the inevitable decision to use fiscal stimulus to get things moving,  the economy will starts to perk up and the spectre of deflation will be removed. Bond rates will then rise gently in response to the prospect of mild inflation in the future due to the growing economy. Our interest payments will then increase, but the economy will be stronger so we will have more capacity to pay.

It really is very, very simple if you're prepared to look at the underpinning economic principles and not base your ideas on unsubstantiated opinions.

If you disagree, fine. In that case, substantiate your argument. I've asked you to give a single example of a monetarily sovereign country that has ever faced bankruptcy through raised bond rates in the absence of inflation. You'll not find one because there isn't one. Anywhere. Ever.

So, your argument comes down to this, as far as I can see. Feel free to correct me if I have misinterpreted you.

 "I think we should implement a policy that will do ferocious and long-term damage to the economy, keep millions out of work for years and permanently depress our economic growth. I think we should do this because I am worried that if we don't, the bond markets might turn nasty. There is absolutely no theoretical or historical argument why the bond markets should do that. None whatsoever. But I think they will anyway. Trust me. I know what I am saying."

[Glyn_Wigley]

I would default gradually by introducing round after round of QE whilst pretending that I wasn't going to keep doing it. This would gradually erode the debt as our currency became worth less and less. Sorted.

Talk about not learning from history. 1923, No more clues.

[mjdgreg]

So you'd have unlimited QE? But if the result of that is to debase the currency, it will lead to inflation and hence cause the bond markets to up the rates.

You are forgetting my deflationary view. QE will not change that no matter how much we do. Deflation not inflation is going to be the order of the day. Why hasn't the already large amount of QE not already meant we've got high inflation?

You also forget that I only want to introduce this policy when we no longer need to borrow any more money due to cutting back the welfare state. You just can't ever envisage us not needing to borrow money can you. Wouldn't it be nice if one day we actually lent money to other countries.

[mjdgreg]

Talk about not learning from history. 1923, No more clues.

 

You'll be waiting a long time if you expect a correct answer without any more clues from this lot. I'll put everyone out of their misery.

Weimar crisis. Sorted.

[mjdgreg]

The whole point about bond rates (for monetarily sovereign countries) is that they are set at a level that produces an expected return for the investor  over and above the level of inflation in the country in question.

In that case they are missing the point. Yields are currently less than the rate of inflation. Why are they accepting losses? Because they think we are are headed for deflation.