Quantitative Easing misses the point

Compared to the drivel that the Keynesian party among the economics tribe perpetrates, the doctrines of the mercantilists must sound like the epitome of logic and rationalism. Who really thinks that helicopter money is the solution to the economic woes the commentators diagnose for the United States? During the quite intense recession of the mid-1970s there was no question of QE, the politicians (and the media) did not panic. Today anything less than growth a l'outrance seems to be simply unacceptable. But is a decline of 5 per cent in someone's annual income (from a level higher than ever seen in human existence) really a disaster calling for extreme (and ultimately futile) measures? What magnifies the real or perceived economic problem faced by the US is rampant militarism and extreme inequality exacerbated by a dysfunctional political system that is hopelessly dominated by special interests and checkbook politics. As more and more parts of the population slide towards the fate of becoming an underclass the urgency of trying anything (apart from sensible economic and political reform) to stem this tide is at least understandable - even if it will ultimately fail.

Are Governments more risky than some banks?

Until the full force of the credit crunch hit the investment landscape during 2007-2009 this question would have been brushed aside with a quick No! At least this was the situation in the 'developed world'. But during the past year the cost of insuring against the default by the state in many a 'developed' country has regularly surpassed the cost of insuring against the default by a large commercial bank.
After the mini-panic of May 2010 when a default by an EU member state suddenly looked more than likely the markets have calmed down. The pricing of government debt allows investors to make a rational analysis of the likelihood of future default and this has calmed the markets - for the time being.
We think that the burden of excessive and unproductive debt carried by many governments will eventually be whittled down by inflation. The resulting loss in purchasing power will be the involuntary contribution made by savers and investors to finance the politician's pet spending projects.

Quantitative Easing - Economics of the Stone Age

There is no way one can say something nice about the growing consensus among the 'experts' that QE (Quantitative Easing) is the only solution to the lacklustre growth experienced in many 'Western' economies. The momentum behind this consensus originated in the Anglo-Saxon economies, the US and the UK, and these two countries are so far the leading practitioners of this dubious strategy to solve their real or perceived economic problems. (see Fed mulls new bond approach) The curious aspect is that growth is not even negative in the United States and Britain. But it seems that it is just not large 'enough' to satisfy the never-ending aspirations of the politicians for more growth. For decades now governments tried to satisfy more and more real or perceived needs among their electorate. Spending and Taxation was on a relentless upward trajectory since the mid-1970s and I have always predicted that this trend line at some stage would hit a wall. Well, the wall has been well and truly hit and the community of economists does not have the guts to tell the populace and the politicians the truth: employment growth will not resume unless structural problems (distorted markets) are tackled. To promote the use of 'Helicopter Money' is utterly devoid of imagination and while it is not easy to predict the ultimate consequences of this policy I have the uneasy feeling that an act of this crudeness will not lead to a happy ending.

Deadly Debt Spiral - Phoney War before the Storm?

The only people concerned about the economy seem to be analysts and commentators - and the unfortunate minority of those who have lost their jobs. The working majority seems to be oblivious of the fact that the ship of state is continuously getting closer to the rocky cliffs of insolvency. A recent report in the UK warned that total public debt may actually be as high a £4.84 trillion! How many ordinary people can deal with that type of number? It took even me longer than expected to figure out that this is around £80,000 per man, woman and child in the realm. Or put another way: total debt may be as high as £4,840, 000, 000, 000!! Shopkeepers in the UK and elsewhere report that customers have returned....we wonder how long this phoney economic war can continue

US Debt Service and Defense Budget out of control

When Niall Ferguson warns about the level of US debt service surpassing the defense budget in 6 years time he fails to account for the fact that the US defense budget is out of proportion with what any reasonable government would spend on defense. Not only is it grotesquely over-sized but the spending is also woefully misdirected and a gift to the military-industrial complex that produces ever-more sophisticated (and expensive) toys for the generals. In any case, it does not need the 'hottest deficit hawk' to make us aware that the US budget spending needs a severe pruning and that gloating about real or perceived problems in the Eurozone is no substitute for proper housekeeping in the USA.

Simple solution for deficits

A heated debate rages in most countries: where should governments cut spending? where and how shall taxes be increased or introduced? Most commentators reject the lawnmower method as too crude. This would mean that all spending and/or taxes are adjusted by the same amount, without any exception. As everybody benefits from certain spending measures every expenditure has a natural constituency that fights tooth and nail to preserve that spending. People in favor of the lawnmower are therefore thin on the ground. In addition, no one wants to be branded 'cruel or inconsiderate' or (in academia) a simpleton. Much better to dream up elaborate - and complicated - schemes that hurt no one but miraculously slay the deficit dragon.

But is the lawnmower method really so crude? Cutting spending by 5 per cent and increasing taxes by 5 per cent cannot really be called brutal. After all, a few years ago everyone got perfectly by on an income that was, on average, about 10 per cent lower than it is today.

Introducing new taxes such as VAT or carbon taxes create just more red tape and are a dead weight on enterprise and future employment. They do nothing to reduce spending - and that is what got most countries into the deficit mess in the first place.

Tax Burden: the limit may be close

The steady rise in the share of government spending since the early 1970s was a trend that was inexorably moving towards a level that was bound to create tremendous tensions. No longer would it be possible to bribe and pay off various segments of the voters and thus paper over conflicting aspirations in the various parts of the population. It is mathematically impossible for the state to command more than 100% of GDP and breaking point is reached at a much lower level. High tax levels will ultimately sap the willingness to work in those individuals milked by the state for the benefit of the lazy. They may then throw in the towel and happily consume what they have already earned. Why should a well-off professionals or entrepreneurs who have done well and are in mid-life continue to work hard just for the privilege of having half of their income confiscated? In reality his tax burden is much higher as the remaining half is also subjected to additional taxes and fees – above all VAT levied by the government. Once a large part of the producers of wealth starts to live a rentier’s life the whole edifice of the welfare state – and even government – would stand on exceedingly shaky ground.