G-20's Toothless Deficit Reduction Goals

Eric said on June 29, 2010

"neither made any of the choices necessary to avoid this."

I should correct this. This bust could never have been "avoided", but the bubble extremes could have been reduced by pulling back on credit. We were always going to have a bust, but the bust would be much smaller without so much debt in the system. Consider the actions of the 90s that BOTH parties signed off on, such as extending home loans to people who cannot afford them (so-called "sub-prime" loans), and you can understand how they made things much worse by extending credit to areas that were bound to collapse.

Only going back to a real currency, such as gold, can reduce these extremes going forward. When a currency has intrinsic value, the central banks cannot take money from you without your consent. Currently they do this with fiat currency by printing new currency or extending "credit", increasing the money supply and diluting the value of the dollars you hold in your hands. In essence, the new money that they create only gets its value by taking some of your value away, making the banks richer and you poorer. Meanwhile the politicians talk out of both sides of their mouths, attack one another, and divert your attention away from the legalized theft they have created through taxation and money manipulation. It's brilliant up until the point the check is due, so their policies are meant to delay payment as long as possible. Meanwhile they just keep getting richer. Notice recent bank bonuses, wall street bailouts, ridiculous clauses for special interests in recent legislation, "special" benefits for Congress such as retirement plans and health care, exemptions for Congress from almost every law it passes...you get the drift. Unfortunately, while they continue their looting, they have the partisans pointing fingers at each other, living in fear, believing that the only answer to prosperity is more government. We are just about to find out how flawed this "more government" thinking was when this balloon deflates and people realize their tax dollars funded a government that did not prevent any of this.

Eric said on June 29, 2010

I don't want to get into a partisan argument because at this point none of that matters. I blame both parties for where we are, and I think that anyone who does otherwise is operating with blinders on, trying to find some "tribe" that is not their own to blame for the current situation. What matters is the here and now. And in the here and now, Keynesian stimulation is not working, and no amount of stimulation will work. And if the Japan lesson, with greater than 2x debt to GDP, doesn't prove that Keynesian spending cannot get you out of a deflationary depression, I don't know what will suffice as proof. The reality is the market goes through long term cycles, created mostly by the massive extension of credit from central banks through fiat currencies that have no intrinsic value. As long as you have central banks trying to inflate their way to growth, you are going to have big boom and bust cycles. But instead of accepting this truth and embracing the fixes necessary, bankers and politicians make things worse by creating even BIGGER imbalances with every ounce of debt they create. All the while the politicians and bankers are getting rich while you point fingers at the other "tribe".

This credit bubble was 60 years in the making, but in the last 2-3 years it has accelerated beyond control as the "pain" has been avoided again and again. Now I expect the Fed to use quantitative easing in even greater extremes to avoid a collapse, meanwhile they will just be making the inevitable collapse worse. And if you want to blame someone, blame human nature which is always responsible for booms and busts. Politicians and bankers can tinker and make things much worse with their worthless currencies, but they ultimately only respond to what the voters tell them, and the voters tell them they want huge growth without any pain or consequence. It never works that way. It did not work that way in the 1920's and it won't work in the 1990's-2000s either. The bill is due and the payment is going to be extreme. And before you turn this into a partisan discussion, consider that both parties have had absolute control of the legislative and executive branches at different times in the last 35 years, and neither made any of the choices necessary to avoid this. At any time, they could have undone the actions of their predecessors, but politicians are interested in winning elections, not busting bubbles. They give us exactly what we want and then we blame them for it.

Steppenwulf said on June 28, 2010

Keynes never suggested we should run deficits all the time. He only said that we need deficits during business downturns.

The other part is that we should have surpluses during upturns, which will naturally reduce inflation without need as big other fixes such as interest rate hikes.

If I recall, Clinton was actually running budget surpluses in his 2nd term, after inheriting a huge deficit. Unfortunately, Bush pushed the whole thing down the toilet with this tax cuts that set up a huge deficit, and left very few options when the great recession hit.

Eric said on June 28, 2010

Daryl,

I dunno if you saw the NY Times opinion piece by Krugman today, but it's interesting that perhaps the leading Keynesian of the day is throwing in the towel. His argument is, of course, that we are not spending ENOUGH, that massive spending was needed to avoid a depression, and that we missed the boat and the depression is here. This is surprising considering he is a liberal and a strong supporter of Obama. I think they are setting the stage for "the great excuse" once things crash down: "We could have fixed this but you wouldn't let us" thus somehow preserving the central idea the Keynesian economics works in any situation and if practiced properly can avoid depressions. Also allows Obama to push for a roadmap of continued spending since obviously this should help from their perspective.

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