Keynesians say it’s No Problem to owe Money to Ourselves even though they’d be Miffed if we Defaulted

Posted by PITHOCRATES - January 8th, 2012

Week in Review

Keynesians have all sorts of ways to justify deficit spending.  One of their favorites is to note that the additional amount of interest owed on new debt is so mall in the big picture that we’d be fools not to borrow more.  So the government can use that new debt to stimulate the economy.  Or so they say.

Another thing they love to say is that a high level a debt is not a problem because we owe it to ourselves.  And therefore it doesn’t really exist.  Because it’s just for all intents and purposes money moving from our left hand to our right hand (see We Refuse to Lend to Us by Don Boudreaux posted 1/2/2012 on Cafe Hayek).

Like the mid-20th-century economists whose reasoning in terms of unwisely chosen aggregates led them to argue that public debt owed “to ourselves” is not much of a problem…

All that today’s government need do when faced with the need to raise marginal tax rates today in order to pay off yeterday’s [sic] debts is to default.

Insofar as we owe the debt to ourselves, default simply means that we choose not to repay ourselves.  Right-hand owes left-hand; right-hand refuses to pay what it owes to left-hand – no big deal: the entity to which both hands are attached possesses the same amount of money with default as it would with payment.

If the Keynesians are right in their theory that owing money to ourselves is not a problem then they shouldn’t mind a default from the U.S. taxpayer.  But they would mind a default.  And wouldn’t allow one.  Which can mean only one thing.  Owing a large debt to ourselves is a big problem.

It’s not the same as borrowing from your savings account.  You can default on that.  You just have less in the bank.  And earn less interest.  Public debt is more like borrowing from a credit card.  The more you borrow the more you pay in interest.  And defaulting has consequences.  The difference?  In one we borrow from ourselves (our savings account).  The other we borrow from someone other than ourselves (the bank holding the credit card).  Who expects to get their money back.  Just like sovereign debt holders.


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The Scottish National Party is talking about Independence from the United Kingdom

Posted by PITHOCRATES - January 8th, 2012

Week in Review

Scotland is part of the United Kingdom.  It has been for some 300 years.  But that may change (see UK to say if Scots’ independence vote result binding by Adrian Croft posted 1/8/2012 on Reuters).

The pro-independence Scottish National Party (SNP) won a majority in Scotland’s devolved parliament in an election last May – 304 years after the English and Scottish parliaments were united – and pledged to hold a referendum on independence within five years.

Some great people came from Scotland.  And great thinking.  Which greatly influenced and shaped the United States.  Just look at some of these Scots.  Adam Smith who influenced modern politics and economics.  Robert Dinwiddie, Lieutenant-Governor of Virginia, who helped a young George Washington to prominence.   James Watt who improved the steam engine that launched the Industrial Revolution.  And Andrew Carnegie who’s steel empire built America.  To name just a few.

That said independence may not be in Scotland’s best interest.  As the Eurozone clearly demonstrates.  An economic union does not work without a political union.  The point of the Eurozone was to produce a large economic zone.  Like the United States.  Which has survived for 235 years and counting.  Whereas the Eurozone is barely 12 years old and desperately struggling to survive.  In large part because there is no political union.

Economically speaking, being part of the United Kingdom will probably benefit Scots better than independence.  At least, based on what’s happening in the Eurozone.


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Britain sending some Serious Firepower to Prevent the Iranians from Blockading the Strait of Hormuz

Posted by PITHOCRATES - January 8th, 2012

Week in Review

Britain is sending its state of the art destroyer to send a message to the Iranians.  Telling them that they will not stand by and let the Iranians blockade the Strait of Hormuz (see Royal Navy sends its mightiest ship to take on the Iranian show of force in the Gulf by Thomas Harding posted 1/6/2012 on The Telegraph).

Iran has threatened to block the Strait of Hormuz, which served as the conduit for 17 millions barrels of oil every day last year.

Naval commanders believe the deployment of HMS Daring, a Type 45 destroyer, will send a significant message to the Iranians because of the firepower and world-beating technology carried by the warship.

Philip Hammond, the Defence Secretary, has publicly warned Iran that any blockade of the Strait of Hormuz would be “illegal and unsuccessful”…

Iran completed a 10-day naval exercise in the sensitive waters near the Strait of Hormuz on Tuesday, staging manouevres which included firing three anti-ship missiles understood to be the Chinese-made C-802.

Yesterday, Tehran said that another exercise would be held in the same area next month. Admiral Ali Fadavi, commander of the naval branch of the Revolutionary Guard, warned that this would be “different” from the most recent one.

Speaking earlier, Mr Hammond said that “our joint naval presence in the Arabian Gulf” was “key to keeping the Strait of Hormuz open for international trade”.

No one likes a recession.  Europe may be limping into another one thanks to the Eurozone sovereign debt crisis.  The United States can’t shake off their recession.  Capital is fleeing China because their export markets aren’t buying like they once were.  And if you think these economic times are bad you ain’t seen nothing yet if the Iranians blockade the Strait of Hormuz.  And shut off that Middle East oil.  The life force of the world’s economies.

There will be blood for oil if the Iranians interrupt the flow of oil at market prices.  Because they will put the world now struggling in a world-wide recession into a full-blown depression.  It will be a humanitarian crisis of the first order.  With scenes from the Great Depression in first-world countries.  And worse in the third-world countries.  As they will be utterly on their own.  An easy prey for totalitarian regimes.  Like Iran.  Whose own people will suffer along with the rest of the world.  But Tehran won’t care about that.  As they haven’t yet.

The Strait of Hormuz is a vital British national security interest.  It’s a vital U.S. national security interest. As it is for modern economies everywhere.  Yes, oil is that important.  Because it’s a part of the price of everything we buy today.  And if oil becomes scarce the prices of everything will increase.  From the electronic toys we buy that cross the oceans on ships burning oil.  To the food in our grocery stores that are delivered to market by planes, trains and trucks burning oil.  So whatever happens in the Strait of Hormuz will impact everyone everywhere.  Whether you’re buying a smartphone.  Of the weekly groceries.


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The Americans free Iranians held Hostage by Somali Pirates

Posted by PITHOCRATES - January 8th, 2012

Week in Review

After receiving threats from the Iranian government not to return to the Persian Gulf the Americans do.  And save Iranian fishermen from Somali pirates (see For Iranians Held by Pirates, U.S. to the Rescue by C. J. CHIVERS posted 1/6/2012 on The New York Times).

In a naval action that mixed diplomacy, drama and Middle Eastern politics, the aircraft carrier John C. Stennis broke up a high-seas pirate attack on a cargo ship in the Gulf of Oman, then sailors from an American destroyer boarded the pirates’ mother ship and freed 13 Iranian hostages who had been held captive there for more than a month…

This fishing vessel and its crew, provided fuel and food by the Navy, then set sail for its home port of Chah Bahar, Iran.

Do you think the Iranians would have treated American hostages held by Somali pirates the same?  Probably not.  They would probably have held the Americans on trial for espionage.  You see, that’s the difference between Iran and the U.S.  Our governments may not get along.  But it ends there for the United States.  The Americans don’t hate the Iranian people.  And will help them whenever it’s within their power to help.  As they did in the Gulf of Oman.


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Chinese Exports are Falling and Foreign Investors are Taking their Money out of China

Posted by PITHOCRATES - January 8th, 2012

Week in Review

Exports tumble and foreign investors pull out their capital.  Could it be that the great Chinese economic juggernaut has run its course?  Perhaps (see China seen suspending open-market operation posted 1/4/2012 on MarketWatch).

China’s central bank suspended its regular open market operation Thursday, thereby injecting funds into the market in Beijing’s latest attempt to provide support to the country’s slowing economy, people familiar with the situation told Dow Jones Newswires.

The unexpected move boosted investors’ expectations that the People’s Bank of China might lower banks’ reserve requirement ratio later this month, after Premier Wen Jiabao warned Tuesday that the first quarter may be a difficult one for the country, as profits are being squeezed by slumping demand for China’s exports and Beijing is focused on fine-tuning both monetary and fiscal policies…

Moreover, recent capital outflows have made it less necessary for the central bank to drain excess liquidity from the banking system via its open market operations, said a Shanghai-based trader at a local bank.

China saw a net CNY24.89 billion of foreign exchange outflows in October, the first net monthly foreign exchange outflow since 2007, signaling that global investors are pulling money out amid fears of a global downturn and reduced expectations of future gains by the yuan.

The Eurozone debt crisis has hurt Chinese exports.  Foreign investors see that the good times may be over and they are pulling their money out of China.  This will drain excess liquidity and possibly raise borrowing costs.  Which is why some are hoping that they lower banking reserve requirements.  Which will inject more money into the economy.  To help them build more exports.  That are selling less and less.

Expanding capacity during times of shrinking demand may not be the best course of action.  What it can do, though, is build up an asset bubble.  That will pop.  Which will bring a round of deflation the likes of which they have never seen before.  Sort of like the decline of housing prices in the U.S.  Which hasn’t helped the U.S. economy.  As it won’t help the Chinese economy.


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The Eurozone Debt Crisis is Starving Small Business of Cash

Posted by PITHOCRATES - January 8th, 2012

Week in Review

As nations borrow themselves into financial crises small businesses suffer (see As chances for bank loans shrink, Britain’s small firms struggle by Henry Chu posted 1/1/2012 on The Los AngelesTimes).

Last month, the European Central Bank surprised many economists with its announcement that it would be doling out a record amount of money in special low-interest three-year loans to the region’s struggling financial institutions. More than 500 banks signed up to borrow a staggering $640 billion, evidence that many are having trouble drumming up cash.

The hope is that they’ll hand out some of their new funds from the ECB as commercial loans and buy up bonds of financially troubled nations such as Italy and Spain. But economists say it’s also likely that many banks will hoard the extra money to beef up their reserves in the event of an emergency.

That would be bad news for business owners whose own reserves are running low and who need the banks to help tide them over, for example, shopkeepers who traditionally require a boost through lean winter months…

The funding freeze is largely caused by the reluctance to lend on the part of Britain’s mainstream banks, such as Barclays and Lloyds. Just five of the big banks account for 85% of the credit extended to small and medium-sized firms, which can’t issue bonds or go directly to financing markets the way big businesses can.

Sales are a funny thing.  They don’t come in equal weekly amounts.  Even if they did customers don’t pay in equal weekly amounts.  Sometimes they pay 90 days after being invoiced.  Not the same with payroll.  Or other business costs.  That do come in equal weekly amounts. And have to be paid weekly.  Which is why business needs to borrow money.  For those times when sales are slow.  And when customers are taking longer to pay.

This is not as big a problem for the big businesses.  Who can sell bonds and have access to other financing.  But for small business, the number one employer in most countries, it’s a big problem.  And it’s a big problem for the economy in general.


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