Re: Stiglitz and Krugman - comment on Davidson and Poirot re defi

["Niggle, Christopher" <Christopher_Niggle@xxxxxxxxxxxx>]

 Paul, others interested.  The Fed can of course probably keep short rates
low no matter what happens to government finances or trade flows, but it
would be more difficult to keep longer rates low if portfolio managers, etc.
thought the dollar might depreciate or the Fed might be effectively
monetizing large government deficits with reserve creation, right?  Don't
you think that expectations re inflation and/or depreciation has an effect
on long rates in many situations?

Paul's examples of low rates in the US during WWII and Japan's current
situation despite large budget deficits are easy to understand: the US had a
planned economy, low private demand for loanable funds.  The Japanese
economy is stagnating, low domestic demand for loanable funds and no
possibility of inflation in the near future.  So rates stay(ed) low despite
deficits.

Chris


-----Original Message-----
From: pdavidso
To: Clifford Poirot
Cc: pkt@xxxxxxxxxxxxxxxx
Sent: 9/15/2003 7:05 AM
Subject: Re: Stiglitz and Krugman
Importance: Low

>===== Original Message From Clifford Poirot <cpoirot@xxxxxxxxxxx> =====
>From: pdavidso [mailto:pdavidso@xxxxxxx]
>.
>
>>The question of high or low interest rates on dollar assets -- has
nothing
>really to do with the volume of dollars printed -- it depends almost
>entirely
>on what former Saint Alan (Greenspan) and his colleagues decide to
do--- !
>
>I do not believe that Greenspan can set the interest rate that banks
charge.
>The most he can do is make it easier or harder for banks to make loans.
>
>

Well then how come Roosevelt was able to fight World War II at an
interest
rate below % while engaging in huge annual deficits that by the end of
the
War that was over 120% of the GNP?

Ands look at Japan in recent times with interest rates near zero --
andhuge
deficits that make the annual debt more than 100% of the GDP. -- an d
tghat is
without a Yen "hegemony".  How come?


>
>>>A point that I have tried to have answered from the deficit
proponents on
>>>this forum for several years, and which I have never really seen
answered
>is
>>>"do you really believe the US can run huge **structural** deficits
year,
>>>after year, after year, without paying some price **IF** US dollar
>hegemony
>>>is not maintained?
>
 The answer is in brief is "yes" it is possible!  The idea of a balanced

budget over the business cycle (or even a alanced budget at full
employment --
is merely classical captrap that got embedded in neoclassical synthesis
(i.e.,
classical) Keynesianism.


>>And Cliffr , my answer to your "when did you stop beating your wife"
>question
>is I do not beat my wife.
>
>Paul, have I misunderstood you and mistaken what you have said for what
>other people have said? If so, my apologies. Perhaps you can clarify
your
>position on deficits. I recall you quipping at the PKT conference a few
>years ago that Hyman Minsky once said you (Paul Davidson) had never met
a
>deficit he didn't like. Frankly, you convey that impression and that is
the
>understanding I have formed from much of what you have said and
written.
>When you say (or at least imply) that the US can run any amount of
external
>debt it wants, and get rid of it just by printing dollars, that is what
I
>think you are saying. So, please clarify for me.

If the alternative is significantly less than full employment if the
government were to balance its budget, then yes I never saw a deficit I
did
not like.


>
>There are people on this list who have been quite clear that they
believe US
>deficits should be as much as two to three times their current size and
>blame the 01 recession on the budget surpluses of the last Clinton
years.
>There are those on this list arguing for even larger tax cuts.

Hey the Clinton surpluses wsere clearly a brake on an economy that had
economists has just begun to realize that the natural rate of
unemployment
(often referred ti as NAIRU) in those days) was less than 6%!

And Gore's garbage about "lockboxes" was more of the same.

BYW, have you seen Krugman's Syunday NY Times magazine on the Bush Tax
cut--
The early pages are about a great conspiracy of supply siders,
conservatives,
etc. to cut the size of government.  But that was no secret conspiracy
as
Milton Friedman and others plunkiung for the early Reagan tax cuts
explicitly
said that Congress was like a spoiled child -- and if you cut the
child's
allowance they will have to spend less!!

Krugman does not get to the real issue until the last page of his
article --
namely could we get mrore jobs for the same (or less deficit) by some
programs
such as government spending on highways, hospitals, clean water,
education,
etc.  That is the only economic question of real importance when
economists
are discussing the Bush Tax cuts

>
>I recall way back when, discussing the surplus. I pointed out that
surpluses
>were just estimates, we miscalculated, and would rapidly disappear.
Were it
>not for dollar hegemony the US would have to pay higher interest rates
in
>order to get people to buy its bonds.

Hey! The Chinese are glad to buy government bonds at this price-- And
having
given a talk last year at the Central Bank of Ecuador on "What is the
role of
a Central Bank under Dollarization?" -- it was obvious that Ecuador when
it
dollarized had to surrender US Treasuries that paid a return equall to
over 1%
of Ecuador'ss GDP to purchase Federal Reserve Notes (that pay a zero
percent
interest rate)to Ecuador to be used for hand-to-hand currency!

If another crisis occurs in Argentina or Brazil will they dollarize and
thereby make us  perpetual interest free loans?
>
>The world does not have to "suddenly" abandon the dollar standard. It
merely
>needs to slowly start drifting towards other currencies in order to
require
>the US to raise rates to attract capital flows to its debt obligations.



To what other currency?  The Swedes have rejected the Euro-- and there
is
indication of big dissent within Euroland -- so that the Euro, despite
its
recentexhange rate rise, is not a great candid.  And the Yen is not
likely to
be one either-- So I guess you mean the Chinese Yuan which is suppose to
rise
rfelative to the dollar somewhere in the next decade!!


>
>But an announcement by the US government in response to mounting
deficits
>and fiscal pressures that it is going to simply print more greenbacks
to pay
>back bondholders, rather than fixing the tax structure that a certain
frat
>boy from Texas ruined, could be the event that led to the collapse of
dollar
>hegemony. This would indeed throw the world into a crisis.

Lets not get politics mixed in with economics -- one may not like Bush -
but
do you think congress would have spent more (in the absense of a tax
cut) to
stimulate the economy -- except perhaps after 9/11 for homeland defense.

When Reagan was proposing his tax cuts -- most liberal economists were
fiecely
opposed --despite the biggest recession since the Great Depression.
(Barry
Bl;ustone did a sinulation study comparing where the economy would have
been
had Carter been reelected and followed gthe same budget formula as in
Carter's
first term vis-a-visReagan's first four years. The result was that tghe
economy in terms of employment, real economic growth and the rate of
inflation
was better off under the Reagan huge deficits programm that it would
have been
under the Careter structural budget program.  In those days, I would say
at
public meetings that Reagan was the greatest Keynesian in the White
House
since Roosevelt!

>
>But we've been there before as Kindleberger points out in "The World in
>Depression": the collapse of British hegemony, and its unwillingness
and
>inability to continue its role as international lender of last resort
left
>the world in a liquidity crisis. I think the US is in danger of
traversing
>the path of the late British Empire.

Hey remember that (1) monetary and fiscal policy during that period was
dominated by  what Keynes called "the Treasury view" and (2) Britain had

suffered tremendously in a four-year war where a significant portion of
its
labor force was decimated and (3) there was an alternative nation who
did not
suffer much War damages to its population and was already a growing
industrial
power that was made more powerful by the  war!



Paul

Paul Davidson
Editor, Journal of Post Keynesian Economics
University of Tennessee
SMC 503
Knoxville, Tennessee 37996-0550
office phone #;(865)974-4221; office fax# (865)974-1686 or (865)974-4601
home phone and fax # (865)692-0802
email pdavidson@xxxxxxx
http://econ.bus.utk.edu/davidsonextra/Davidson.html