Skip to main content

In the Second Great Contraction, Kenneth Rogoff, an economist from Harvard University, writes that our national and global economies are greatly overleveraged, so we can not expect a typical business cycle recovery -- because we are not in a typical business cycle. But, unlike many others who believe this is not a typical business cycle, such as Reich, Krugman, and Stiglitz, Rogoff doesn't believe a fiscal stimulus alone will be sufficient, as he sees the problems as primarily one of too much debt. Until we eliminate the enormous over-hang, and imbalance of debt, we will not be able to recover.  

Either, we have to find ways to write-off bad debts, or inflate our way out of this current crisis, with a sustained inflation rate of 6% to 7%, which is essentially, a broad based, inescapable transfer of wealth from savers to consumers.

CAMBRIDGE – Why is everyone still referring to the recent financial crisis as the “Great Recession”? The term, after all, is predicated on a dangerous misdiagnosis of the problems that confront the United States and other countries, leading to bad forecasts and bad policy.

The phrase “Great Recession” creates the impression that the economy is following the contours of a typical recession, only more severe – something like a really bad cold. ... Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts.

But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.

Rogoff proposed that we call our situation the "Second Great Contraction." The Great Depression was the first. After a typical business cycle recession, the economy typically, catches up to past levels and returns to growth, in a year of so. But, in a Great Contraction, output, employment, debt, housing prices, and equity can take 4 or more years to recover. From studies I remember of the Great Depression, some of these variables too over a decade to fifteen years to reach original levels.

Rogoff counters Paul Krugman's analysis that the fiscal stimulus failed because it was not large enough.  Rogoff's view is that it failed because the problem was too much debt.

So how do we get out of this imbalance of debt?  We will need to use a combination of creative write-offs, and sustained inflation.

If governments that retain strong credit ratings are to spend scarce resources effectively, the most effective approach is to catalyze debt workouts and reductions.

For example, governments could facilitate the write-down of mortgages in exchange for a share of any future home-price appreciation. An analogous approach can be done for countries.  For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work), in exchange for higher payments in ten to fifteen years if Greek growth outperforms.

In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning. ...

Rogoff argues that by correctly diagnosing our current troubles as the Second Great Contraction, instead of a Great Recession, we will take our first steps towards recognizing we need more than the conventional approaches to recover.

I've advocated long-term inflation to rebalance the out-of-whack debt, and distribution of wealth. The trick is to stay below a level that might cause hyper-inflation, or other countries to no longer buy our debt.

Rogoff does not address the obvious question of why anyone would continue to buy our debt, if we announce this is our strategy.

The answer might be that they have no place else to go, as many other economies either have the same troubles, or are not as safe for investors.

But, it will be a delicate balance that will require a lot more thought than Rogoff provides so far.

I do believe he has a piece of the puzzle, that we must add to the Reich, Krugman Keynesian stimulus approach.  This is worth your time reading in full.

6:47 PM PT: This is the first diary in Keynesian Kossacks.  Rogoff is an odd choice I admit, I should have started with Reich, Krugman, or Stiglitz, but this article popped out, and raises intelligent questions at least.


Hey, anyone who wants to join and help manage this group is welcome to.


I'm already way overextended so will need help watching the diary ques, and invite and accept folks.  


I am hoping we can amp up the need for jobs and economic stimulus for infrastructure repair, and investment, and investment in sustainable energy production, to counter this terrible debt-ceiling compromise that is going to take over $2 trillion out of our economy at the wrong time.


Maybe we should discuss having a US industrial and economic strategy like many other countries do?


Originally posted to Keynesian Kossacks on Tue Aug 02, 2011 at 06:29 PM PDT.

Also republished by The Amateur Left, Progressive Policy Zone, Preserve Social Security & Medicare, and ClassWarfare Newsletter: WallStreet VS Working Class Global Occupy movement.

EMAIL TO A FRIEND X
Your Email has been sent.
You must add at least one tag to this diary before publishing it.

Add keywords that describe this diary. Separate multiple keywords with commas.
Tagging tips - Search For Tags - Browse For Tags

?

More Tagging tips:

A tag is a way to search for this diary. If someone is searching for "Barack Obama," is this a diary they'd be trying to find?

Use a person's full name, without any title. Senator Obama may become President Obama, and Michelle Obama might run for office.

If your diary covers an election or elected official, use election tags, which are generally the state abbreviation followed by the office. CA-01 is the first district House seat. CA-Sen covers both senate races. NY-GOV covers the New York governor's race.

Tags do not compound: that is, "education reform" is a completely different tag from "education". A tag like "reform" alone is probably not meaningful.

Consider if one or more of these tags fits your diary: Civil Rights, Community, Congress, Culture, Economy, Education, Elections, Energy, Environment, Health Care, International, Labor, Law, Media, Meta, National Security, Science, Transportation, or White House. If your diary is specific to a state, consider adding the state (California, Texas, etc). Keep in mind, though, that there are many wonderful and important diaries that don't fit in any of these tags. Don't worry if yours doesn't.

You can add a private note to this diary when hotlisting it:
Are you sure you want to remove this diary from your hotlist?
Are you sure you want to remove your recommendation? You can only recommend a diary once, so you will not be able to re-recommend it afterwards.
Rescue this diary, and add a note:
Are you sure you want to remove this diary from Rescue?
Choose where to republish this diary. The diary will be added to the queue for that group. Publish it from the queue to make it appear.

You must be a member of a group to use this feature.

Add a quick update to your diary without changing the diary itself:
Are you sure you want to remove this diary?
(The diary will be removed from the site and returned to your drafts for further editing.)
(The diary will be removed.)
Are you sure you want to save these changes to the published diary?

Comment Preferences

    •  I'm converting this two auto-follow buttons (1+ / 0-)
      Recommended by:
      palantir

      from, our Kosowatt and Hydrant buttons.

      But, I have not confirmed they work yet.  If anyone clicks and them and then wants to go look at their profile the old fashion way, or comment that you think you'ved followed, I'll check, I'd be greatly appreciative.

      Trying to move upscale here, but new tech is always a pain in the neck at first.

      Sometimes worse-before-before.

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 06:37:03 PM PDT

      [ Parent ]

  •  another neo-liberal talking (5+ / 0-)

    The goal is not to bring your adversaries to their knees but to their senses. -- Mahatma Gandhi

    by Mindmover on Tue Aug 02, 2011 at 06:31:53 PM PDT

    •  Yes, but in this case he is argueing to shift debt (2+ / 0-)
      Recommended by:
      palantir, CenterLeft

      off the backs of the poor, with write-downs, or sustained inflation.

      Which is the opposite of what is implied here in your Wikipedia link.

      Maybe it's a little more complicated?

      The term "neoliberalism" has also come into wide use in cultural studies to describe an internationally prevailing ideological paradigm that leads to social, cultural, and political practices and policies that use the language of markets, efficiency, consumer choice, transactional thinking and individual autonomy to shift risk from governments and corporations onto individuals and to extend this kind of market logic into the realm of social and affective relationships.[4]

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 06:40:03 PM PDT

      [ Parent ]

      •  Debt Shifted to the Public (3+ / 0-)
        Recommended by:
        HoundDog, McGahee220, Farugia

        Cramming down reductions in the asset value of loans held by banks (thereby reducing the debt of the consumer) will only be accomplished by shifting that debt to the public.  Does anyone believe such a policy can be accepted in the current toxic political environment?  Further, the Treasury has been actively trying to avoid such a policy because, once banks are forced to move from "mark to magic" for the assets they're holding to "mark to market," more than a fair number of them will be shown to be just a teensy bit more than technically bankrupt.  It's a great idea, but it's the great and powerful whose oxen will be gored and that can't be allowed to happen.  Ditto with the inflating our way out of difficulty option.  The banksters like the stranglehold they have on the economy.  Aristos usually do.

        "Love the Truth, defend the Truth, speak the Truth, and hear the Truth" - Jan Hus, d.1415 CE

        by PrahaPartizan on Tue Aug 02, 2011 at 06:58:33 PM PDT

        [ Parent ]

        •  You have very strong points. (1+ / 0-)
          Recommended by:
          Creosote

          It will be a matter of degree.

          Right now the poor and working class are getting zero.

          If we aim to spread the pain 50-50, maybe we have a chance of getting the balance ukp to 10% or 25%, which will be better than zero.

          The other point to remember, is that the rich benefit as much as anyone if we can get our economy back into a thriving, and health growth.

          We all loose in a protracted "second contraction."  Or, what Paul Krugman is calling the "lessor depression."

          The means is the ends in the process of becoming. - Mahatma Gandhi

          by HoundDog on Tue Aug 02, 2011 at 08:02:08 PM PDT

          [ Parent ]

          •  I totally disagree, that everyone will suffer (0+ / 0-)

            in any contraction, especially this particular recession/depression or whatever you want to call it....what you call spreading the pain is neo-liberal talk....and only the rich will come out smelling like a rose.....

            the point is, if you have a million dollars and I have 1,000 in the bank, any form of monetary manipulation, whatever you want to call it, effects me a lot more than you.....

            Sorry HoundDogg, you sound more like a politician every day....

            The goal is not to bring your adversaries to their knees but to their senses. -- Mahatma Gandhi

            by Mindmover on Tue Aug 02, 2011 at 09:31:06 PM PDT

            [ Parent ]

        •  this is my point, (0+ / 0-)
          Cramming down reductions in the asset value of loans held by banks (thereby reducing the debt of the consumer) will only be accomplished by shifting that debt to the public.

          and your statement that they will be gored is absolutely right on....especially that they will not let it happen...and that is why it will most likely come to this...

          http://en.wikipedia.org/...

          The goal is not to bring your adversaries to their knees but to their senses. -- Mahatma Gandhi

          by Mindmover on Tue Aug 02, 2011 at 09:42:26 PM PDT

          [ Parent ]

      •  I think he's looking for a way to keep the rich (2+ / 0-)
        Recommended by:
        Mindmover, Farugia

        from feeling austere while maintaining growth in the medium term. His idea sounds gimmicky to me. Like carbon markets.

        I do think he might have a point on debt being too high and this being a contraction, but I'm not very good at econ.

        Democracy - 1 person 1 vote. Free Markets - More dollars more power.

        by k9disc on Tue Aug 02, 2011 at 07:37:48 PM PDT

        [ Parent ]

        •  your point is well made, (0+ / 0-)

          especially when anyone starts talking about credit and debt, you can bet your bottom dollar that they are wolves in disguise....

          credit is bankers lingo for bend over......

          The goal is not to bring your adversaries to their knees but to their senses. -- Mahatma Gandhi

          by Mindmover on Tue Aug 02, 2011 at 09:33:58 PM PDT

          [ Parent ]

    •  Really? (0+ / 0-)

      Your link sort of claims neo-liberals shun inflation.

      But, never pass an perfect opportunity to toss labels around.

      •  If you read it carefully (2+ / 0-)
        Recommended by:
        HoundDog, CenterLeft

        you see that he is a neo-liberal, but one that recognizes that their own policies have limits too, and is rather gingerly and distastefully fingering inflation as the least bad viable option to what he believes the problem is.

        Now I share neither his method, diagnosis, or prescription, but I will give him credit for showing a measure of good faith and flexibility which are not characteristics often associated with the neo-liberal movement generally speaking.  It's a pretty absolutist school by and large, and being hegemonic, they get their absolutism in most cases.  Naturally self-criticism is hard when you're used to working in that sort of regime.

        Fight the Shock Doctrine--abolish the "debt ceiling"!

        by ActivistGuy on Tue Aug 02, 2011 at 07:52:21 PM PDT

        [ Parent ]

        •  I think I agree with you on this one ActivistGuy (0+ / 0-)

          I hadn't read much of Rogoff previously.

          I was only reacting to a previous commenter when I cited the Wikipedia.

          I don't really know who the neoliberals are, or how loosey-goosey this label may be.

          But, I agree with your point that Rogoff seems to sincerely be trying to come to grips with an unprecidented problems that goes beyond our traditional assumptions.

          We are all in uncharted waters here.

          I'm learning a lot, by reading and dicussing this articles so I appreciate you views.

          Thanks.

          The means is the ends in the process of becoming. - Mahatma Gandhi

          by HoundDog on Tue Aug 02, 2011 at 08:05:48 PM PDT

          [ Parent ]

      •  if you have a better one please tell me....nt (0+ / 0-)

        The goal is not to bring your adversaries to their knees but to their senses. -- Mahatma Gandhi

        by Mindmover on Tue Aug 02, 2011 at 09:37:19 PM PDT

        [ Parent ]

  •  This administration will neve do this. (1+ / 0-)
    Recommended by:
    HoundDog

    Not with the likes of Timmeh Geithner & Larry Summers in the picture. all these guys know how to do is to try and reinflate the bubble and protect the banksters & wall streeters at all costs.

  •  Yes, the US national debt is high. But, it's not (6+ / 0-)

    caused by business cycles. It was caused by an idiot that started two wars without issuing taxes to pay for them.  And then tried to keep them 'off the books'.  The same idiot also cut tax rates primarily for the more wealthy.  You just DO NOT start wars and cut tax rates at the same time.  All of the wars previously fought by the US has come with some type of tax and/or bond issue.

    Now, on personal debt levels.......  That's caused by as many reasons as there are people.  I do like that idea of a mortgage cramdown with some of the 'unexpected' gains to be split among interested parties.

    As someone that has always played by the rules - lived within my means, bought a house I could afford, saved for rainy days, if I didn't have the cash, it wasn't going to be bought (big ticket items), etc.....  This doesn't mean that there are valid reasons for forebarance (sp??) like extended unemployment or serious medical crisis where things can either be worked out or outright forgiven.  I have no sympathy for those that just have to keep up with the Jones' types.

  •  Historically, it takes a long time to recover (2+ / 0-)
    Recommended by:
    RaulVB, HoundDog

    from a financial collapse, such as the one we had.   Debt may be a contributing factor, but it's not the main one.

  •  Thank you for such a wonderful, substantive (1+ / 0-)
    Recommended by:
    HoundDog

    contribution. I'll definitely follow Keynesian Kossacks. Wholeheartedly recommended.

    No need to squabble girls. There's plenty of me to go around. - Pam from True Blood

    by fou on Tue Aug 02, 2011 at 06:53:14 PM PDT

  •  Debt is one layer in the onion. (8+ / 0-)

    The focus on debt is highly relevant, but not the end of the story.  

    All debt is an asset on somebody's balance sheet.  Saying that there is too much debt is also saying there are too many assets.

    The deeper question is, why is there so much debt, both private and public?  Under what conditions was this debt accrued?  And to whom is it really owed?

    Simply put, debt is largely owed to the rich, both here and abroad, and corporations and governments who are owned by the rich.  Since the rich own the vast majority of financial assets in the world, this is an obvious conclusion.  

    The debt was incurred by governments and individuals during Fed-engineered asset bubbles and attempts to maintain a standard of living that was outpacing real income.  And if that debt is to be extinguished without a bailout, the rich, who have largely been bailed out thus far, must suffer the brunt of the damage.

    It is true, of course, that there would be collateral damage in the process of reducing debt. Some of the assets are owned indirectly by middle class individuals through pension funds, 401ks and direct ownership.

    Of course, the political system will not allow this to happen.   What we have instead  is extend and pretend to infinity, massive backdoor liquidity infusions and Fed sponsored bailouts that flow only to the biggest players.  Simply, put, they allow the rich to bail out of toxic assets and into cash and government debt, which now is used as an excuse to impose austerity!  A bigger heist, a bigger scam, can scarcely be imagined or conceived of.

    Meanwhile, the rest of the economy staggers underneath the debt load.   Under these conditions, stimulus will never work for very long; injected money leaks out of the U.S. economy due to the trade deficit and into the hands of export partners to help create bubbles abroad.  At home, the banks are propped up long enough for several more rounds of looting.

    So debt may be closer to the core of the problem, but it is only one layer.

    •  The creation of the derivative (1+ / 0-)
      Recommended by:
      HoundDog

      was a means by which all economies could be dominated by debt concerns.

      Ordinary political process is dead. The Supreme Court killed it. In Chambers. With a gavel.

      by Publius2008 on Tue Aug 02, 2011 at 07:08:56 PM PDT

      [ Parent ]

    •  Excellent comments Justin. I agree with much of (2+ / 0-)
      Recommended by:
      Fire bad tree pretty, nchristine

      what you say here.  

      But, remember the bailout we've done so far have been to make the rich whole, a the expense of the tax payers, and the poor.

      Now we are talking about reducing CPI for SS, Medicare, etc.

      Sustain 6% inflation will be a fairer and more orderly transition.

      And, yes, working-class pensioners will be this as well, however, my idea, is that we can address this separately with expansions of Medicare, Medicaid, and Social Security.

      And, expansions of fiscal and job stimulus.

      Exactly the opposite of what we are doing now.

      Bailing out Goldman Sachs, is not more progressive debt relief, but less.

      How many working class people have deriviatives?

      Whether through general inflation stimulated by massive Quantatative Easing, or more created, and politically difficult targeted mortgage write downs, we need to redistribute wealth, which is way to concentrated in the top 2%, or even 1%. or top 1000 families, to a fairer, more prosperous balance.

      Bailouts designed to keep the super-rich whole are not solving our problems, but only delaying them, or in fact, making them worse.  

      I'm open minded.

      And, realize we will need to get rid of the Teabaggers in the House, and at least 10 Republicans in the Senate.

      And, improve our President's understanding of traditional Democratic economy policies.

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 07:12:10 PM PDT

      [ Parent ]

      •  Indiscriminate inflation (1+ / 0-)
        Recommended by:
        Roger Fox

        can only destabilize the situation further. Right now, the U.S. exports its inflation.  It runs persistent trade deficits greater that $700 billion a year, money that turns into foreign ownership of U.S. treasury debt, financial assets, and companies.  A lot of this trade deficit is due to the imported oil, of which the U.S. imports greater than 50 percent of its consumption.

        Whether through general inflation stimulated by massive Quantatative Easing, or more created, and politically difficult targeted mortgage write downs, we need to redistribute wealth, which is way to concentrated in the top 2%, or even 1%. or top 1000 families, to a fairer, more prosperous balance

        QE will not cause inflation of the sort that benefits debtors.  It provides liquidity to big players, lowering the cost of borrowing, but it does not filter down into helping individuals shed debt by itself.  The effects of QE are much disputed, but there is no evidence that it will allow wages to inflate.

        Bailouts designed to keep the super-rich whole are not solving our problems, but only delaying them, or in fact, making them worse.  

        Sure, I agree all that has really been done up until now.  This is, I agree, the most disastrous part which the Paulson/Geithner/Bernanke axis has engineered, propping up stocks and bonds while the middle class' assets (housing) has been crushed.  Yet attempting to sustain real estate prices at inflated levels is clearly counterproductive and ultimately a bailout of banksters and creditors.

        There is no easy solution with the global system set up the way it is:
        - Inflation will increasing the price of imported oil and spike commodities in general relative to dollars. It will increase the rate of drain of money out of the economy, and hence cannot provide a permanent solution.
        - Deflation will crush debtors, resulting in massive asset deflation across the board.  The rich, having been bailed out first, will simply scoop up all the cheap assets.

        The only solutions that I think will work are  so far off the neoliberal screen right now that they cannot possibly be considered until we are in far worse a situation than now.  I think that they must involve a permanent revamp of the global trade system, U.S. energy policy, a comprehensive cleansing of the financial system, a defusing of the derivatives timebomb, and numerous other "radical" changes.

  •  Tipped and rec'ced for provoking thought (3+ / 0-)
    Recommended by:
    eXtina, HoundDog, fou

    I'm still not sure how inflation causes wealth transfer from savers to consumers. Anecdotally, during the Carter years, inflation was hell on consumers. Home prices escalated dramatically, interest rates for mortgages were around 15%, and prices at the supermarket were up every week. And, I don't recall wages inflating at the same pace. Conversely, I remember interest on savings was paying 17% !!

    •  Those are not the good parts. (3+ / 0-)
      Recommended by:
      nchristine, fcvaguy, fou

      Inflation means current debts are paid off with cheaper dollars in the future.

      Like remember when you parents bought their houses for $20,000?  And, had mortgage payments of $200/month.

      But, this only works if we allow wages, Social Security, Medicare, Government Pension to grow at this inflation rate or higher.

      Instead of this chained CPI, the wiser proposal, that I am making her for the first time, to test it out, is exactly the opposite.

      We should announce that from now on the Social Security CPI will be calculated as we do now, and then we will add 1% ot 2% for the next 30 years.

      People who now have $100 billion in bonds. will see their real value fall by over half in 30 years.

      Bringing the the distribution of wealth back into allignment.

      We return the estate tax back to 50% or more.

      And, we increase the minimum wage by the same rate as this higher inflation.

      Rogoff is slightly overly optimistic that we can do this at 6% without kicking off hyper-inflation, and a crisis with our Treasury Bonds.

      This will require more thought.  

      I'm trying to stimulate creative thinking here, fcvaguy.

      The idea of letting the poor carry this burden for the rich, in 10 to 20 years of stagnation, or decline, shouldn't be our best-cast scenario.

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 07:20:31 PM PDT

      [ Parent ]

    •  You should go back and study some history (1+ / 0-)
      Recommended by:
      HoundDog

      of the gilded age and the original Progressive Movement.

      It's a bit counterintuitive, but deflation is bad for debtors. Inflation is bad for creditors. Why do you think Inflation has been such a no-no, even though interest rates have been near zero for a decade?

      Democracy - 1 person 1 vote. Free Markets - More dollars more power.

      by k9disc on Tue Aug 02, 2011 at 07:46:49 PM PDT

      [ Parent ]

  •  The only way out is to print a massive... (1+ / 0-)
    Recommended by:
    HoundDog

    ...new amount of money and get it into circulation by creating massive new jobs programs.  Get a hundred trillion out there for starters.

    There really is no other way out.

    I didn't care for math, but when I first understood the concept of finding the slope of a curve at a point, I wanted to grab the first girl I saw and kiss her with wild abandon, just like in that WW II photo.

    by dov12348 on Tue Aug 02, 2011 at 07:00:30 PM PDT

    •  I'd be happy to start with a more modest (2+ / 0-)
      Recommended by:
      k9disc, dov12348

      $4 to $6 trillion and ramp up more cautiously as need, dov12348.

      But, I'm with you on the basic idea.

      We, then also raise the Social Security CPI by an extra percent each year, beyond the current calculation.

      Essentially, maintaining and stimulating consumer demand in every way we can think of.

      Then business investment will follow suit.

      Everything float up.  

      And the albatrous of current debt get's less.

      For those that think this is extreme, consider that the alternative may be forclosures on another 20% of the mortgage base, or have millions of homeowners struglle underwater.

      Inflation gradually reduces these burdens, so consumer can spend again.  

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 07:24:53 PM PDT

      [ Parent ]

      •  The thing is... (0+ / 0-)

        ...if it isn't big enough for starters people will just hold onto it.  Then if it's incremental people will forget about the first and hold onto the second.

        Etc......

        I didn't care for math, but when I first understood the concept of finding the slope of a curve at a point, I wanted to grab the first girl I saw and kiss her with wild abandon, just like in that WW II photo.

        by dov12348 on Tue Aug 02, 2011 at 10:56:54 PM PDT

        [ Parent ]

    •  Well if you do that (1+ / 0-)
      Recommended by:
      dov12348

      Then you can expect the dollar to lose its status from being the global currency and its already in jeopardy as it is.  What that would me is we would have to use real money to pay for things just like other countries do.  

      We could no longer print our way out of trouble because our dollars would be worthless if we did, subsequently we would be downgraded and nobody would want to buy our debt anymore, which might actually be a good thing since we would be forced to manufacture stuff here rather than China and India.

      Ultimately it would probably lead us to a default out of shear necessity not unlike what the USSR went through...it would be horrible at first but like most bankruptcies it would give us a fresh slate to build from and just as Russia is sitting pretty well now, our economy would follow a similar path.

      •  If we rebuild the economy (1+ / 0-)
        Recommended by:
        netgui68

        Doesnt that mitigate the fact theres lots of dollar floating around?

        Lets expand the economy from 15 trillion a yr to 19 trillion and see what happens.

        I think so.

        FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

        by Roger Fox on Tue Aug 02, 2011 at 10:54:52 PM PDT

        [ Parent ]

      •  I would agree with you... (1+ / 0-)
        Recommended by:
        netgui68

        ...if this were not an emergency of the highest order.  If we don't do an enormous jump-start right away there will be no future to see if you were ultimately right or not.

        I didn't care for math, but when I first understood the concept of finding the slope of a curve at a point, I wanted to grab the first girl I saw and kiss her with wild abandon, just like in that WW II photo.

        by dov12348 on Tue Aug 02, 2011 at 10:59:05 PM PDT

        [ Parent ]

  •  Isn't that two sides of the same coin though? (1+ / 0-)
    Recommended by:
    HoundDog

    the massive overhang of debt prevents spending, therefore there is no demand, and we're right back where we started from?

    "I'm sculpting now. Landscapes mostly." ~ Yogi Bear

    by eXtina on Tue Aug 02, 2011 at 07:04:29 PM PDT

    •  Yes, I see them as linked. And, I'm more of a (2+ / 0-)
      Recommended by:
      fou, eXtina

      follower of Robert Reich, and Paul Krugman.

      But, think Rogoff has important thoughts to add about debt, and the possible use of a limited amount of inflation to move us in the right direction.

      We will never get tax policy to accomplish the same thing through Congress.

      But, we could do Quantative Easing without their consent if we convince the right folks.

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 08:12:34 PM PDT

      [ Parent ]

  •  sir... (5+ / 0-)

    you called this the first diary in your Keynesian series but this gentleman you quote isn't offering a Keynesian solution. If our problem is too much debt we need to tax the rich to pay off the debt and put money back into consumers hands.

    There is not a lack of money, there is a lack of spending, and when money sits stagnant it starts to stink up the economy. We need to get the money moving again.

    Only when all hope is lost does shit get really funny.

    by jbou on Tue Aug 02, 2011 at 07:05:16 PM PDT

    •  Yes, I acknowledge this in the update. I should (3+ / 0-)
      Recommended by:
      jbou, Roger Fox, fou

      have chosen a name more like Kossack interested in economic theory.

      But, Rogoff helps make the point that this is not a typical business cycle recession.

      But, notice this jbou, while we will not get a redistribution of wealth tax through this, or probably the next several Congresses-- inflation accomplishes the same thing, with no exceptions, and on a much wider scale.

      Unfortunately, a report today, indicates inflation has fallen to zero.

      We should be aiming to get it up to 4% per year, for the next 20 to 30 years.

      If we combine this with the turbo-charged CPI increases to maintain liquidity for the poor, retired, and working class, we essentially float ourselves to the same place you are trying to get to, but in a politically more viale way.

      Quantative easing, is what we need more of.  

      It's a monetary stimulus.

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 08:17:55 PM PDT

      [ Parent ]

  •  You tax derivatives at 1% (1+ / 0-)
    Recommended by:
    nchristine

    of their face value per year.  

    That results in the unwinding of the vast amount of leveraging pronto.

    Ordinary political process is dead. The Supreme Court killed it. In Chambers. With a gavel.

    by Publius2008 on Tue Aug 02, 2011 at 07:06:41 PM PDT

  •  Indeed. Stimulus measures have failed precisely (2+ / 0-)
    Recommended by:
    k9disc, fou

    because of the negative equity position most households have found themselves in.  When they do get extra money, they use it to shore up their own capital position rather than buying consumer goods.

    Of course, the FRB will never allow his solution.

    "[R]ather high-minded, if not a bit self-referential"--The Washington Post.

    by Geekesque on Tue Aug 02, 2011 at 07:22:01 PM PDT

  •  Unfair? (1+ / 0-)
    Recommended by:
    HoundDog
    Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors.

    Seriously?

    Unfair and Arbitrary?

    When is the last time we had 'inflation'? Or more rightly, when is the last time 'they' have had inflation?

    Regular Americans have plenty of Inflation - Gas, Food, Energy, median Home prices.

    I thought the market was infallible. What happened to the Hidden Hand?

    What a fucking bunch of bunk. Absolute inability to see reality. That really pisses me off. It's one of the reasons that I can't stand economists and Economics. It's just so divorced from reality and couched in pleasantries.

    Outside of that fairly major quibble, I think he's probably right about debt, but I doubt the scheme he's laying out would be very helpful. It just seems like he wants to ameliorate the austerity that the uber-rich would feel.

    Thanks for sharing HD. Tipped and Rec'd.

    peace

    Democracy - 1 person 1 vote. Free Markets - More dollars more power.

    by k9disc on Tue Aug 02, 2011 at 07:35:07 PM PDT

    •  Thank k9disc. Transfering wealth from the rich to (1+ / 0-)
      Recommended by:
      k9disc

      poor, is no more arbitrary than the other way around which statistic indicate we've been doing for the last 30%.

      But, when wealth becomes this concentrated, it damages economy growth and becomes unsustainable.

      Rather than bail out Goldman and Sachs, we need to help the millions of Americans who are underwater with their mortgages.

       

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 08:21:00 PM PDT

      [ Parent ]

  •  We already have a economic and Industrial strategy (2+ / 0-)
    Recommended by:
    HoundDog, Brooke In Seattle
    Maybe we should discuss having a US industrial and economic strategy like many other countries do?

    Our Industrial policy is to both grow our businesses and create as many jobs as we can in other countries.

    And our economic policy is to transfer more and more of whatever remains these days of the nation's wealth to the top few percent.

     No changes coming on the horizon in this formula. Neither political party is willing to do more than just talk about the great transfer of jobs overseas , and the with no new taxes ever for the rich philosophy going strong and austerity programs a plenty for the rest of us coming down the pipeline, I expect the wealth transfer to quickly grow even more pronounced--maybe one day the top few percent will own over 90% percent of the country's wealth instead of the 50 plus percent they own now--now that's a strategy.

    Wonder why we are always at war with some nations or groups. "War is a necessary tool for the Party because it keeps the standard of living in check, maintaining the inequalities essential to a totalitarian state." George Orwell,1984

    by GeeBee on Tue Aug 02, 2011 at 08:08:18 PM PDT

    •  You may be right. But, I'm going to do everything (2+ / 0-)
      Recommended by:
      GeeBee, nomandates

      I can to fight for American jobs and the American middle class, poor, retired, and needy.

      I"m one of those old school Democratics you may have read about in the history books GeeBee.

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 08:22:34 PM PDT

      [ Parent ]

  •  We need to fight club the banks. (1+ / 0-)
    Recommended by:
    HoundDog

    This comment may not be reproduced or excerpted on other sites without my express written permission.

    by psilocynic on Tue Aug 02, 2011 at 08:10:36 PM PDT

  •  Rogoff and Krugman (2+ / 0-)
    Recommended by:
    HoundDog, netgui68

    They're not as far apart as you portray.  This is a household balance sheet recession.  Household debt grew large (relative to income) over the past ~30 years; this was (apparently) offset for a while by rising asset prices, primarily housing but also stocks.  When the housing bubble burst, households saw the values on the asset side of their balance sheets decline by about 7 trillion dollars; a similar amount was lost in stock price declines (stock ownership is more narrowly concentrated among the wealthy, but a lot of middle class people are counting on 401k's and mutual funds for their retirement).  That's a lot of money lost from the asset side of household balance sheets.

    So what do you do if you're a household planning to retire in 5 or 15 or 25 years, and suddenly your balance sheet takes a huge hit as your most important assets decline in value?  You decide to save more -- to spend less than you earn.  But everyone's income is someone else's spending; we can't all save at the same time.  Hence, a failure of aggregate demand.  More people want to save than want to borrow, and not even 0% interest rates are enough to make borrowing sufficiently attractive.

    So yes, it's about debt levels (specifically households; corporations are actually sitting on piles of cash).  It's also about aggregate demand, which is depressed because households want to save rather than spend.

    This mess could be solved by the public sector taking on more "debt" (read: run a larger deficit to allow the private sector to accumulate net financial assets; public "debt" is functionally very similar to money; a deficit creates more financial assets for the private sector to hold). An extra trillion dollars per year for the next 2 or 3 years, maybe 4, should do it, directed so that it reaches indebted households and/or supports employment (unemployed people are forced into dis-saving to make the macro equations balance by having their income destroyed; this happens when the public sector fails to borrow enough to support the private sector's desire to save).  The people who need to improve their personal balance sheets would be able to, and they could return to contributing to aggregate demand, leading to the re-employment of millions of people who want to work.

    Krugman's point is that aggregate demand is deeply depressed, and unemployment could be relieved by fiscal policy that supported aggregate demand.  Rogoff's point is that households are deeply indebted, and their spending vs. saving preferences aren't likely to change until those debt levels come down.  These arguments work together, not against each other.

    If we could just give rich people even more money, then everyone would be better off.

    by lilnev on Tue Aug 02, 2011 at 08:13:36 PM PDT

    •  Very well said, lilnev. I agree with everything (0+ / 0-)

      you said.

      This is what I spotted at an intuitive level, I'm just not quite as articulate a you are.

      But, I suspect you are an academic economist, and probably a professor, eh?

      What name would you give to this strategy?

      This is why I started this Keynesian Kossacks, but including the Rogoff article even though he's not really a Keynesian.  

      But, we need a high-level economic strategy, that stimulates aggregate demand, jobs, and helps ease the debt-burden.

      Hopefully, without a complete collapse of the financial system, collapse or failure of the dollar on one end, not a grinding 15 lost years of austerity, as seems to be the current tragectory, or even plan.

      I like the Krugman, Reich, analysis better, and this Rogoff analysis adds ideas on the debt, and inflation as a more political vialble tool for wealth redistribution than taxation, which we are several Congresses away from still I fear.

      Even, if we have a collapse.

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 08:29:39 PM PDT

      [ Parent ]

      •  Thanks (0+ / 0-)

        I am an academic, though economics is not my field.  I just think macro is interesting, and important, and I wish that the people making decisions understood it better.  I'd say my views are Keynesian, plus a Modern Monetary Theory understanding of fiat currency.  I don't necessarily agree with all the MMTers' policy ideas -- in particular I think monetary policy to stabilize aggregate demand is, in general most of the time, a good idea.  It has currently lost traction at the zero lower bound, and we need fiscal policy; but some MMTers would say fiscal policy should be the primary policy tool for regulating aggregate demand, and I don't agree with that.  Anyway, I learned a lot from Bill Mitchell's blog about very simple questions that most people get very wrong, e.g. what is money and where does it come from, what is it's relationship to Treasury bonds, what do taxes accomplish, etc.  I'm also a subscriber to the "trickle up" theory, that if the broad majority is doing well economically, then the people at the top will also do well.  30 years of trickle-down hasn't worked, can we please try the opposite now?

        Unfortunately, none of my economic ideas seem to be share by those in power.  We're going to stay economically depressed for another 5 or 10 years.  I'm hopeful that demographics will eventually relieve us, as the boomers retire one way or another, and switch from being net savers to net spenders.

        I'm not sure what I think about the inflation idea.  Frankly, I'm not convinced you could get 5% inflation if you tried.  Inflation comes from either cost-push (maybe oil, but otherwise higher energy/material input costs won't rise without a robust world economy), or demand-pull -- and the latter ain't happening until aggregate demand recovers.  What would you do policy-wise that would generate inflation, and how is that different from a policy to stimulate aggregate demand?

        If we could just give rich people even more money, then everyone would be better off.

        by lilnev on Thu Aug 04, 2011 at 09:02:51 AM PDT

        [ Parent ]

  •  I have been at this conclusion for a long time (1+ / 0-)
    Recommended by:
    HoundDog

    Yes when the rich get all the assets you have to shake it up and start over.  Just like a game of Monopoly where someone owns all the properties, its game over,

    And such is the state of the Global economy, all the wealth is consolidated between a small percentage of the population so naturally  there is little demand because everyone is broke.  

    The only way to fix this is to share the wealth...yeah really I went there.  We need to break the large companies up again, they are hanging right below Monopoly status so we have collusion rather than Monopoly, that is bad for you and I.

    Face it the billionaires need to pay a great share so money really trickles down.

    And folks if you are luck enough to have a job this is the great recession, if you are without a job, this is a Depression.

    •  I agree netgui68. (1+ / 0-)
      Recommended by:
      netgui68

      But, notice how much more American, and palitable Quantative Easing, or 4% sustained inflation sounds, compared to taxes on the rich to "redistribute wealth."

      The means is the ends in the process of becoming. - Mahatma Gandhi

      by HoundDog on Tue Aug 02, 2011 at 08:32:00 PM PDT

      [ Parent ]

      •  I don't disagree with you at all (0+ / 0-)

        However I do find it appalling how the privileged class feel they should be immune from helping and how unpatriotic that mentality is.

        I guess I do not understand them and that is why I am not rich, I am blessed with a better than average salary, not great, but not horrible, I never resent paying more than people making less than I do, sure I would like a tax decrease and if we can get those debts down then I would expect one...simple and reasonable expectation.

        oh well so much for common sense :)

  •  The article states (0+ / 0-)

     Rogoff counters Paul Krugman's analysis that the fiscal stimulus failed because it was not large enough.

    yet

     For example, rich countries’ voters in Europe could perhaps be persuaded to engage in a much larger bailout for Greece (one that is actually big enough to work)

    Is there a reason big is good for greece but not US?

  •  I think Rogoff is definitely wrong (0+ / 0-)

    about why the stimulus failed.

    1) Scale of Breadth. Appropriations were all in one year. The CCC was started in 1933, 250k enrolled to start. Not counting 1938..... 1934 to 1937=4 yrs, 1939 to 1941=3 yrs. Total=7+ yrs of stim.

    2) Depth of stim. Conventional wisdom says we should spend 5 to 6% of GDP on infrastructure alone=750b+. My guess is 10% of GDP, 1.5 trillion a year total stim.

    SO its clear the stim didnt continue for long enough, and its clear there was never enough money even to cover normal infrastructure investments.

    My guess was 1 trillion a year for 3-4 yrs, starting 2 yrs ago, coupled with tax changes, regulatory reform etc.

    Except I then considered that a dollar spent in the Us in 1936 pretty much stayed in the US, thats no longer true. SO I now think that at this late date we need to spend 1.5 trillion a year for 5-7 yrs. And we need to act as leaders and get other major countries to stop austerity and go with stim spending.

    Another factor, in the 1930's we had lots of cheap easy to find oil and resources, again this is no longer true.

    In optimal conditions, by 2018, we could be seeing 3 to 3.5% GDP growth, thats as good as it will get.

    FDR 9-23-33, "If we cannot do this one way, we will do it another way. But do it we will.

    by Roger Fox on Tue Aug 02, 2011 at 10:41:27 PM PDT

Subscribe or Donate to support Daily Kos.

Click here for the mobile view of the site