Fiscal cliff lessons from the '30s

Steve, if BNP was the trigger for the credit crisis of 2008, would you care to speculate on the most likely trigger for the 2012/2013 credit crisis which many opine will make 2008 look like a sunday picnic. After all the reasons or causes are well in place (Fiscal cliff lessons from the '30s, November 26)!

Talking to friends on both sides of the political divide in the US the issue is rather like the situation in Brussels and the UK (Fiscal cliff lessons from the '30s, November 26). Those in state employ are demanding and getting increases, have safe pensions and good medical... and are earning a lot more than those of similar training and possibly more ability in the private sector. That is fueling the fury and may be the major difference between 1930 and now in state expenditure. At that time private sector workers - if they could get work - could still earn more than state employees - who had security, perks and... lousy pay. Now, particularly with the hollowing out of private employment, resentment is a huge factor. I wonder - if hard times hit Australia - how this will play out here?

Steve, agree with some of the theory (Fiscal cliff lessons from the '30s, November 26).
Give the collective Public Service or an Australian politician the option of going to the Olympics to get a Gold medal for coming first. Or last.
Guess what they would opt for? The same in the USA or anywhere.
They will take the medal having jumped over the lowest hoop. And then demand more pay, for the state to hire their family members irrespective of competence.
We the taxpayer are funding this sad bunch of the community.
I suggest there used to be a pathos and ethos; their collective thinking process. No longer. It is to take and take and take.
Now back to the economics:
1. Given the option of not having to put too much effort into reducing debt; being more efficient; looking at the remuneration packages of Public Service; looking at what we get for our money, etc.. Will Government/the Public Service do anything? Do nothing?
2. You are advocating that the least efficient part of the economy/an economy get fatter and lazier. On my money/our money;
3. I do agree that cutting back can/may cause some countries’ economies to contract; that is part of an economic cycle, and the federal spend can cushion a downturn, but target that money better? One can get it to filter/circulate back into stimulating the wider economy. None better than via SME sector;
4. Micro economic reform.
So back on the family home; assuming it was a Government. How much debt can it take on. Well until it is sold up as a bad debt.
I completely disagree with socialising debt. Who is better off? The person or organisation that operates without debt? Or with debt? Or as little debt as possible?
Say no more.

Steven always impresses. I keep wanting to not agree, but always do (Fiscal cliff lessons from the '30s, November 26). There seems no doubt now about why we got here - the 1920's mistakes again. But where to now? Steven - US Fed debt is rising $1trillion a year. This is the new 'steady state', and it's not steady. Surely, massive inflation in the US and fall in the USD is the 'solution', if you could call it that. They could never pay this back otherwise.
Deliberate suspension of disbelief in the US and Europe seems to be part of the official plan. There's a point when that can't hold and I'm guessing that's close. Even if Congress agrees on yet another fudge (to increase its own credit card limit - what else?) the problem remains.
WHAT ABOUT THE DEBT?

The sole basis for Ben Bernanke being in the position he is in, is his thesis on what should have been done to avoid the mistakes leading up to 1937 (Fiscal cliff lessons from the '30s, November 26). He has done different things, without changing what appears to be a similar result.
The fundamental difference is that in 1937, there was a stockpile of Gold at a Military base in Kentucky which secured the debt they had run up.
I can guarantee that Fort Knox has nowhere near the Trillions of Dollars in Gold that they have run up in debt over the past 4 decades.

Debt financed spending only works if the money can be raised by debt financing - lenders are prepared to lend (Fiscal cliff lessons from the '30s, November 26).
Private bond holders already burnt in Greece will be unlikely lenders to high debt countries in future.
Once Greece defaults on public debt - a very likely scenario despite what Messrs Merkel and Hollande claim - financial markets and central bank lenders may be reluctant to lend to high debt countries in future.
Then theories about possible future debt financed spending will be irrelevant, as lenders dry up.

This analysis seems valid, but it ignores the fact that the debt problems from the 1930s were never solved and are now far worse. Sure, going further into debt might work in the short term, to grow aggregate demand, but you can't keep "solving" the problem like this forever. "Aggregate demand" is surely not the final goal of society? (Fiscal cliff lessons from the '30s, November 26).

The path to sustainability needs to be learned. The sooner we all start learning how to save, the sooner we will arrive at our goal.
It is too late for a "nice" solution to the world's debt problems. Sure, a deflationary depression kills debtors and especially leveraged financial institutions but more government spending ultimately leads to a hyperinflationary bust which kills savers.
Which group do you represent? (Fiscal cliff lessons from the '30s, November 26).

So Prof Keen is now a full fledged and MMTer and once again fails to deal with any Austrian theories of the depression (Fiscal cliff lessons from the '30s, November 26).
He, like Krugman, offers what the polticians want - i.e. "a flimsy evidence base to DO SOMETHING".
Keen also ignored Japan and how their last 20 years should show everyone the perils of trying to reflate a private sector bust using public sector funds and printed money from central banks.

There is an extremely simple solution to the US (and Australian for that matter) sovereign debt problem (Fiscal cliff lessons from the '30s, November 23).
If the United States government (and Australian government) created new money to cover deficits by issuing it directly via the treasury instead of having to issue bonds (which require repayment plus interest via our bogus central banks), the world would be a beautiful place.
Obviously the strength of a nation's currency under such a system would still require a competent government not racking up outrageous deficits, but even the effect of inflation from a decade of printing money directly to cover outrageous deficits would be nothing compared to damage of racking up enormous sovereign debt via the issuance of bonds to cover the same deficits.
Alas, this would not suit the banking cartels that set up our economic system so this idea will never see the light of day.

America's apparent prosperity is built upon cheap energy and a huge pile of debt (Fiscal cliff lessons from the '30s, November 23). Highly leveraged thus risky and not sustainable. When people feel safe and prosperous and confident they somehow became complacent of the risk of the environment they live in. Risk is very difficult to be visualized quantitatively like return which we can assign a percentage figure. Even worse that on many occasions we simply not aware of the risk out of ignorance. Many elements that affect our lives are simply not within our control.

There is a glaring hole of math in Professor Keen's model (Fiscal cliff lessons from the '30s, November 23). If aggregate demand is greater than GDP, then something must be making up the difference. (It happens to be the CAD). If debt change falls to zero, then aggregate demand is equal to GDP, and a country's CAD is also zero. It doesn't mean that the GDP is necessarily altered in anyway.

Avoiding paying debt back just burdens the future even more (Fiscal cliff lessons from the '30s, November 26). Why is that such a good idea? Is avoiding a recession always a good idea if it means the future even worse?
We shouldn't look only at the level of spending today (and making it sure never drops) but also at its sustainability. Consumption backed only by counterfeited money or debt is unsustainable as opposed to increased spending paid for from increase productivity.
Liquidiations like the earlies 20s in the US did well as did cutting spending by 66% and taxes by 33% like Eisenhower did post-WW2.
Also, this ignores the asset side of the corporate and otherwise private balance sheet. Having said that, in the case of many households/governments it's probably quite safe to say that a large part is foreign-held and hence repayment equals an opportunity cost to domestic consumption.