Latvia Is No Success

Anders Aslund of the Peterson Institute is fairly certain that austerity during depressions works:

After five years of financial crisis, the European record is in: Northern Europe is sound, thanks to austerity, while southern Europe is hurting because of half- hearted austerity or, worse, fiscal stimulus. The predominant Keynesian thinking has been tested, and it has failed spectacularly.

The starkest contrasts are Latvia and Greece, two small countries hit the worst by the crisis. They have pursued different policies, Latvia strict austerity, and Greece late and limited austerity. Latvia saw a sharp gross domestic product decline of 24 percent for two years, which was caused by an almost complete liquidity freeze in 2008. This necessitated the austerity that followed.

Yet Latvia’s economy grew by 5.5 percent in 2011, and in 2012 it probably expanded by 5.3 percent, the highest growth in Europe, with a budget deficit of only 1.5 percent of GDP. Meanwhile, Greece will suffer from at least seven meager years, having endured five years of recession already. So far, its GDP has fallen by 18 percent. In 2008 and 2009, the financial crisis actually looked far worse in Latvia than Greece, but then they chose opposite policies. The lessons are clear.

The notion that Latvia is somehow a success story is just absurd.  Latvia has shed some ten percent of its workforce during the economic turmoil — that would be like more than 20 million people emigrating out of the USA, or 4 million people emigrating from Britain. This is why the unemployment rate has fallen somewhat.  And Latvia’s economy is still deeply depressed, far, far below its pre-crisis peak. Would we be calling Britain and America success stories if millions and millions of people were leaving and output was still far, far, far below its pre-crisis peak?

This video from last year shreds the notion of Latvia as some kind of austerity-driven paradise:

The truth is that the binary choice between stimulus and austerity is false. The real decision is how best to produce productivity, creativity, entrepreneurship and growth. It is possible to do this without any debt-fuelled stimulus, and without any immediate fiscal contraction, by (for example) attracting more foreign investment, using bailed-out banks to provide business finance to the unemployed, and deregulating small businesses and entrepreneurs.

The fiscal trick is in learning to cut spending during the boom — something which very few governments have ever mastered, but which is necessary for long-term fiscal sustainability. In the United States during the mid-2000s, tax revenues were high, and growth was moderately strong. This gave the Bush administration a false sense of leeway that allowed them to embark on massive debt-fuelled spending at precisely the wrong time, starting two wars, and creating large-scale domestic spending programs like Medicare Part D and No Child Left Behind. If the Bush administration had cut spending during the boom, not only would it have offset some of the potential for bubbles in housing and stocks, but it would have left the American government in a much stronger financial position come the downturn.

Yesterday’s prosperity didn’t last forever (leaving us with collapsed tax revenues, and massive budget deficits) and today’s depression doesn’t have to last forever either, so long as we have the courage to create the environment for small business and entrepreneurs to thrive, and then to cut, cut, cut during the next boom. Trying to balance the budget in the way Anders Aslund seems to endorse is a road to deeper depression, extreme unemployment, and potentially to millions and millions of people leaving to look for work elsewhere.

103 thoughts on “Latvia Is No Success

  1. If I had wings I would…
    The theory sounds great, however politicians do not care about sustainable and balanced growth, but about re-election and will spend whenever they can, regardless of underlying macro. Becasue politicians are so unreliable, some legal institution need to limit their desire to make themselves likeable to votes – maybe the ceiling aint that stupid after all.

    Also on the thriving companies being the solution – these companies have now access to virtually free credit, what else do they need to start investing, employing and grow… Or maybe their propensity to invest in the situation of highly indebted consumers (hence low capacity to increase consumption much furher) and highly indebted govt (hence likely higher taxes in tuture) it makes little sense for them.

    Pls let me know if I make any sense

    • The vast majority of the general public does not have access to zero interest credit. In Britain, bank lending is very severely depressed, in spite of the government spending billions and billions stabilising the banks. Zero interest credit today is only for the big financial institutions and large corporations. There are many, many unemployed people who have no access to credit, but ideas to start businesses. So, I am talking about startups, not big companies. We need many, many more. Most of these new businesses will fail, but that’s capitalism. Some of them will succeed, and create lots of future employment and growth.

      Certainly consumer debt is a big problem too, as well as the future probability of tax rises. Those are definitely two real problems, but strong business and entrepreneurial growth can reduce debt ratios and significantly help both. I don’t think austerity can fix either.

      • well maybe not zero, but the credit rates are low by any standard, the lowest in decades, if not anytime – so I would guess the willingness to invest should be greatest ever also.

        But put yourself in position of corporation or small business owner – you can borrow cheaply (by any standards comparing to historical rates) and do virtually any growth project at the lowest cost in decades – why don’t you. If I were a business owner I’d look around and I’d see:
        – low capacity utilization rates (hence high competition and low ability to raise prices),
        – indebted consumers (hence limited ability to either raise prices or volumes)
        – indebted govt (if my project is long term I need to be forward looking – hence what is more likely will govt tax me more or at least the same given debts and starting class warfare).
        I’d think twice and have serious doubts whether my project is really worth the effort.

        Re ppl with business idea and no access to credit – they really face the same issues listed above, but also if the idea is really good and innovative they’ll do regardless of access or the cost of credit e.g. they’ll find business angels or whatever Mark Zuckerberg did.

        I do agree strongly that “strong business and entrepreneurial growth can reduce debt ratios” – but can we really expect growth achieved in any way if we’re in the current depression… If there were normal times, I’d support such debt reduction the most strongly…

        • You have a point regarding corporations failing to invest. Corporations’ cash balances are at historically unprecedented levels, and as you rightly point out, large corporations and creditworthy SMEs do have access to credit at very low rates. Aziz is also correct that bank lending in the UK is severely depressed, which is starving less credit-worthy businesses and startups, but that’s not the whole story. Corporate hoarding is a considerable issue.

        • corporations hoard – hence have excess cash and do not need to borrow hence lending is depressed, but why do they hoard – my answer is they do not see viable projects in current conditions (indebted consumer hence low future demand for potential products of the project).
          Also lending is depressed cuz banks also see these conditions and given overall indebtness the risk to lend seems high relative to margin they can squeeze out of the client given the scale of competition in banking with all free money served by central banks – I guess it makes more sense to invest with much lower risk in some sovereign bonds (with the assumption central bankers will bail you out every time anything goes wrongly) than do hard work and maybe risk rising NPLs – why do that if govt bonds are better option …

        • I totally agree with you. Corporations failing to invest is the reason why we are seeing a lack of growth. Do they recycle cash with stock buy backs, and allow investors to use cash to fund start ups? or do they hoard cash hoping to win some big Government contract?

          Cash is locked up in the big corporations i.e. the 1%’s wealth is not being recycled.

    • Agree. The companies with cash on the sidelines will be focusing on the 95% that are employed. Property values have risen in affluent areas, stockmarket has risen, so these are the demographics that will be targeted. If you are wealthy it is a Recession. If you are unemployed it is a Depression.

      • I thought that we all pretty much agree that growth/prosperity is based on demand — starting with the consumer level? Or is that just an elusive ideal — an “ought’ not an “is”?

        • Demand is manufactured. You develop a product after Market Research. You build it, you advertise it. They come. Look for PMI (Purchasing Managers Index) surprises to the upside. This will indicate an Investment lead recovery.

          Basle 3 standards have been relaxed after pressure from the Banking Industry. This will enable Banks to lend to Consumers.

          I am seeing a upturn in the economy (And the Main Stream Media is promoting it), so is China’s stock market (They must be getting increased orders)

          If Bonds collapse due to a rotation out of stocks, US Government debt servicing will get more difficult, but it won’t hurt the stock market which is private.

          Tomorrows generation will pay.

          The best thing would be for the US to split, the democrats can have D.C. and like the Soviets they can eventually pay back the loans. Russia is payig back Soviet era debt. Not Ukraine’s problem!

    • “Pls let me know if I make any sense” Answer: not a lot.

      If politicians were as grossly irresponsible as you suggest, we’d have Mugabwe type inflation, and very few countries have problems of that scale (perhaps Argentina, Greece being two of the exceptions).

      “Maybe the ceiling aint that stupid after all”. The answer to that is that ASSUMING stimulus is funded by government debt there is no sense whatever in restricting debt. As Keynes put it, “Look after unemployment and the budget will look after itself”.

      However, there are good arguments for a zero government debt regime. Milton Friedman and Warren Mosler argued for that. Also I explained why government debt is pointless here:

      In other words there are good arguments for abolishing government debt and funding any deficit with new money. In fact Keynes said that it doesn’t make much difference whether a deficit is funded by debt or new money (or monetary base to be exact). Monetary base and government debt are little different in nature, but like Friedman and Mosler, I regard new money as better.

      • “If politicians were as grossly irresponsible as you suggest, we’d have Mugabwe type inflation, and very few countries have problems of that scale (perhaps Argentina, Greece being two of the exceptions).”
        Being irresponsible doesn’t mean being crazy and didn’t write politicians are crazy. I wrote they will do whatever it takes to be reelected and making situation as in Zimbabwe or Greece doesn’t really fit my argument.

        “The answer to that is that ASSUMING stimulus is funded by government debt there is no sense whatever in restricting debt. As Keynes put it, “Look after unemployment and the budget will look after itself”.”
        I guess Latvia’s success was not based on stimulus and I really was making an argument about private sector’s issues with recovery.
        And limiting governement through debt ceiling is of course an argument so that no govt stimulus srews up the economy though badly allocated resources/zombie corporaties that lobby for favourable to them regulations – if you believe govt can create good jobs, revive economies and central planning in general is good idea then please make that argument based on the history of Soviet Union… I’m all ears

  2. a true keynesian believes state finances follow different rules than that of private sector. I see you really believe that too, John 😛

    The fiscal trick is in learning to cut spending during the boom

    yeah and the monetary trick is in learning to cut-n-raise interest rates properly, the regulatory trick is in learning how to regulate properly… etc. the whole central planning trick is in learning how to do it well, this is what The Great Experiment is about from the begining.

    Central and Eastern Europe is a great example of why fiscal austerity is crucial to sustainable growth – after years of communism, large parts of economies are tightly coupled with gov as their main customer and they struggle to escape that legacy. gov takes resources away from the economy so businesses cannot develop. e.g. if IT companies deliver IT projects for the gov, the do not do it for private sector. if they did, brivate business would increase productivity. and it’s not only about IT: the same applies for everything else.

    you want to spare jobs and businesses that cannot and should not be spared. sustainable development cannot be based on tricks.

    • a true keynesian believes state finances follow different rules than that of private sector.

      First, Austrians in general (I am loosely an Austrian, I think) do not believe in austerity. They believe it is merely a scam to enrich banksters. Rothbard, like me, recommends debt repudiation:

      But the idea that individuals and governments are different is not a matter of belief. I can tell you what the difference is between government and individual finance. In individual finance, it is possible to cut your expenditures without affecting your income — I can easily choose not to buy that computer, or take that vacation, etc. With government, it is not possible to cut expenditures without effecting your income — that is true even during the boom, when I think deep, deep cuts should be made to ensure future fiscal sustainability, and because I am basically a small-government guy who believes that government has a tendency to misallocate capital.

      Central and Eastern Europe is a great example of why fiscal austerity is crucial to sustainable growth – after years of communism, large parts of economies are tightly coupled with gov as their main customer and they struggle to escape that legacy.

      I am not making an argument about austerity in general. I am making an argument about austerity during depressions. I am all for austerity during expansionary periods, unlike very many governments during the last 10-20 years who believed that rising revenues were an excuse to spend like crazy.

      • Yes, John — “governments … BELIEVED that rising revenues were an EXCUSE to spend like crazy”, but only if “believed” and “excuse” are interpreted to mean “seized opportunities to commit crime* and get away with it”! A better interpretation is in willembrau’s post of Jan 08 @16:34: “politicians do not care about about … growth, but about reelection, and will spend whenever they can”.

        * To justify calling it “crime”, I should invoke the venerable “Ignorance of the law is no excuse”. Politicians much prefer “If ignorance is bliss, ’tis folly to be wise”, for themselves and especially for the electorate!

      • I will say it again. Hitler followed Keynes rules to a T. Spent big on infrastructure, and was the envy of the worlds economists at the time. Do the research on it. People don’t follow Hitlers model because of the Holocaust etc. This is wrong thinking.

        Obama should have done this at the start of his term, instead he focused on Health reform. He missed a big opportunity to modernise Ports, road rail to export to make business efficient in exporting shale gas.

        • I don’t personally like to play up the Keynes-Nazi connection (although Keynes was an avowed eugenicist, which I think is fundamentally nutty) but he did say his ideas were more amenable to a command economy in the German edition of the General Theory.

        • Buddy, [@ Jan 08 20:08]:you give Obama undeserved “benefit of the doubt” on his goals for the American economy. I suggest that, if you look at his (1) pre-presidential actions and statements* and (2) his governance as president, you will see that he does not want PRIVATE economic/jobs growth, especially in energy. Obamacare was not designed to improve health, but rather to advance government socialism.

          * Even more than most politicians, Obama’s stock-in-trade is false statements and promises, so it’s private, unguarded, un-telepromtered that reveals.

      • difference is between government and individual finance

        but it was about public sector and private sector.

        With government, it is not possible to cut expenditures without effecting your income

        the same goes for private businesses. but – contrary to case with gov – cuts and lay-offs are widely considered needed. so why is it bad for gov and good for private sector?

        Austrians in general (I am loosely an Austrian, I think) do not believe in austerity.

        austrians encourage spending cuts but not taxation. also note that debt repudiation implies outright spending cuts in uncontrolled manner. how’s that supposed to affect gov income? 😛

        what actually do we want to achieve after all? avoid restructuring the gov? avoid painful social reordering? not let the greedy bankers have their stupid money back? return resources to the economy? put the situation on recovery path ASAP? keep GDP print high? keep everyone busy until things get better?

        BTW, I think the problem with discussion about austerity is similar to discussion about inflation: its exact definition.
        people argue about inflation without having first agreed if they are talking about price increases or money supply.
        similarly, some of us define austerity mostly as spending cuts, and some throw taxation in it too.

  3. I feel like I’m reading John Maynard Aziz here.

    I’m not sure I follow your appeal to Rothbard for debt repudiation while at the same time advocating for increased debt-fueled spending as a courageous act. Either acquiring more debt and kicking the can is the path to go, knowing full well that NO cuts will occur during the hoped for future boom; or debt repudiation and government returning to actually being limited. You can’t say that both are the way to go. Even the suckers born every minute aren’t going to lend to someone who states an intention to repudiate. But I don’t think what you are advocating is really repudiation so much as vanilla default.

    The neo-classicals seem to be getting to you.

    • Here is Rothbard on repudiation. The effect would axiomatically be a smaller government, not more spending to get out of the depression. You really have to pick one.

      Also, don’t think a government is going to debt-spend it’s way out of a depression and then during the booming high times repudiate their debt. Never, ever, ever going to happen… ever.

      • You really have to pick one.

        There are lots of different possible paths. I’m definitely not entirely on the same page as Rothbard, etc, but I think they (Wenzel, Sanchez, etc) are exactly right about austerity as advocated by the Peterson Institute (supported by Henry Kissinger, Paul Volcker, Madeleine Albright, Robert Gates, Zbigniew Brzezinski, the guy who wrote the article I am quoting from and various other such types — being a form of paying tribute to banksters.

        I am categorically not advocating more debt-fuelled spending, i.e. stimulus (although if we had run surpluses in the boom as we should have done, and if we had government leaders who could be trusted to not just send out checks to cronies then that might have been a good idea). I am just advocating avoiding fiscal contraction until there is growth to offset it, and strong pro-business, pro-entrepreneurship measures until we get to that place. In America this probably includes significant new infrastructure spending and tax cuts, offset against cutting militarism and imperialism (which is purely the misallocation of labour and capital). In Britain there is less military spending there to cut in the first place, but the same strategy could be used to a lesser extent.

        I am actually pretty keen on the idea of debt repudiation in general, both public and private. If it’s unsustainable and broken it needs to go, either by liquidation or even in a more controlled manner. I am not exactly on the same page as Rothbard. But even if I was as ideological as Gary North and Rothbard and Lew Rockwell, I would be very, very wary of cutting government spending during a depression brought about by a financial sector collapse. Because, ultimately, nothing seems likelier to bring socialists like Syriza (and indeed national socialists like Golden Dawn) to power than a depression in unemployment and output worsened by a voluntary fiscal contraction. It happened in the 1930s in multiple countries.

      • Your linked Rothbard essay clarifies a LOT of current confusion. How prescient — written in 1992 when US national debt was ONLY $9 Trillion ($35,000 +/- per capita)!

        • CORRECTION: hawks5999’s above-cited article shows the national debt @ $9 T in 2007-8, NOT as of the 1992 date of Rothbard’s essay. Another case of “It ain’t as bad as you thought — it’s worse!”

  4. I think it’s very beautiful, Aziz, that you take time to remember “less able” people as you did in your previous post, while reminding us all that creativity is first and foremost the way to produce prosperity! Your uniquely holistic approach reminds me of the learned Rudolf Steiner

  5. Pingback: Latvia Is No Success | My Blog

  6. If a patient comes into the ER with three issues, a case of poison ivy, an upper respiratory infection, and just happens to be bleeding-out through a lacerated femoral artery, which problem must you address initially?

    Analogous to the above, we have a global economy that is very sick. Although unemployment and deficit spending are worrisome, it would seem as if dealing with a system where the money/interest rates are being counterfeited/manipulated might be the priority of the triage exercise.

    Until you identify the correct etiology, nothing is really going to get better. Running the world with play money is not going to work for anybody but the bankers and those they must pay-off in government. Eventually, it will not even work for them.

    Stimulus/austerity is different sides of the same coin. Both are attempting to make a play money monetary system work. Both feed the same people, one directly, the other indirectly.

    • I used to swap Monopoly money for kids play lunches when I was at Primary/elementary school . hahahah

      That’s a joke 🙂

      • Stimulus/austerity is different sides of the same coin. Both are attempting to make a play money monetary system work. Both feed the same people, one directly, the other indirectly.

        Excellent point.

    • Imp: Your use of precise terms “triage” and “etiology” suggests one way in which economic/political/social discussions can be upgraded!!!!!!!!!!!!!!!!!!!!!!!!!!!!

      • Not really, because nobody wants to deal with the truth of the matter, not even among the people here.

        Who on this list would be willing to live in a world where you actually have to make it on your own? I don’t see any hands out there.

        It’s like people in the U.S. who perfectly understand that we have had what we had mostly because we have taken it from/ripped-off other people [through war, inflation, corporate stealing, market manipulation, so on and so forth], just like every other empire did, albeit, none better than the British!

        The British were [are] exactly the opposite of their civil demeanor/appearance…complete and total barbarians!! The Chinese had right at the turn of the last century when they saw the British as sub-human low-life.

        • My mother said you always put your best face on when out in public. It is good manners!

          Human Psychology and group psychology are critical tools we should all possess if we are to be safe from human nature.

  7. language, traditionally defined, is no longer a barrier to the communication required for business, and in an information revolution that really opens up a whole new world for opportunities that were previously unimaginable. 21st century children will never associate themselves with a particular national flag, we are all human

  8. I don’t know anything about Latvia other than they build military grade fuel containers. I bought one recently to carry benzene/petrol/gas in and it met international standards for the transportation of flammable liquids. It was cheap too.

    Must be from Soviet era production standards or something.

    It is hard to judge austerity methods when comparing countries with different export models. Perhaps the reason why I am seeing it in Australia is the price is competitive with China.

    • Do an internship (No money at all) at the best place you can find. Work at night (Pizza delivery etc) to pay the bills.. You will survive and have the chance to work with great minds. If you are bright and industrious you will get chosen by Seniors to assist them to work on Projects. Eventually they will offer you a job, you will be promoted etc.

      Choose what you are good at and enjoy doing, it won’t seem like work, you will be excited and think clearer with a passion that gets you promoted.

      No one gave me this advise, and I took the first job that paid (Had education bills!) which set me up on a career path to be an Accountant. However I love Markets and Geopolitical forecasting this is my hobby. I like to see where I predict and why I was wrong.

      When people look at your resume they pigeon hole you based on previous work.

      Despite the gloom over the last 4 years I think ZIRP has set up a bubble which we are currently see the beginning. Are we 4 -2 years away from the top????

      • Budddy: Attaboys for your internship, “follow your bliss” advice. This is a good response to impermanence’s pessimistic post of Jan 08 @23:47. When young, I was only a generation or two from those “making it on their own” in the southwest US; Australia is, I hope, closer to the frontier state than the US — you certainly are!

        • Australia is frontier country 200 km from major cities. After that people respect each other, give each other a hand when in need, possess basic human manners, have disdain for Canberra (Our D.C.) and its Politicians.

          I found Australian culture and US culture to be very similar when I got out of big cities.

          In the centre of cities you have the Yuppies (Libtards) who think they are educated and sophisticated but are not. Then in the outer suburb you have Joe 6 Pack and new migrants who frequent malls and home improvement centres, then the outer fringe is the wealthy retirees or wealthy urban commuters wanting land space but amenities, then you have the Country people (Rednecks?) who you can rely on to have good old fashioned values and hospitality.

          Australia’s culture is 100% the same in the outer Country areas. A very cohesive nation.

          We don’t have International Satelite TV so ethnic children watch the same Anglo based TV shows. Culture harmonises after a few generations.

          This is why we have the most expensive real estate per average wage in the world. All the activity is centered in the capital cities.

          Without our mineral boom, we would not be the success we are. The money being poured into the country to build plant, and pay workers is on average $100,000 per mining worker.

          If there is a collapse in mineral prices our housing market (And the Bond holder financing) will collapse. We don’t have non recourse loans, but still when you can’t pay you can’t pay.

        • DG wrote:

          “This is a good response to impermanence’s pessimistic post of Jan 08 @23:47.”

          DG, all things knowable are relative in nature; therefore what might seem pessimistic to you might be quite optimistic to another [or even to to you, at another time].

          This is why the following advice has made it through the ages, pretty much intact:

          “Do not judge [others].”

  9. BIS Working Papers
    No 395
    The financial cycle and macroeconomics: What have we learnt? by Claudio Borio
    Monetary and Economic Department December 2012

    Click to access work395.pdf

    “Understanding in economics does not proceed cumulatively. We do not necessarily know more today than we did yesterday, tempting as it may be to believe otherwise. So-called “lessons” are learnt, forgotten, re-learnt and forgotten again. Concepts rise to prominence and fall into oblivion before possibly resurrecting. They do so because the economic environment changes, sometimes slowly but profoundly, at other times suddenly and violently. But they do so also because the discipline is not immune to fashions and fads. After all, no walk of life is. The notion of the financial cycle, and its role in macroeconomics, is no exception. This in all probability means moving away from equilibrium settings and tackling disequilibrium explicitly. In many respects, all this takes us back to previous economic intellectual traditions that have been progressively abandoned in recent decades. If policy is unable to constrain the boom sufficiently and the financial bust generates a serious balance sheet recession, policies need to address balance sheet repair head-on. The overarching priority is to structure them so as to encourage and support the underlying balance sheet adjustment, rather than unwittingly delaying it”

  10. jeffrey gundlach should be treasury boss, listening to him know, genius. disagree on certain points, obviously, but his team’s walk & his personal walk through is thoroughly impressive

  11. Let me to try to point out an obvious principle commonly overlooked in discussions of economics and other complex human activity. It has sometimes invaded even the orderly discipline of mathematics [See “Is God a Mathematician?” by math historian Mario Livio, in which this principle is foolishly, in my opinion, presented and debated as a puzzle*].

    Theories, models, concepts, ideas, etc. are human attempts to understand reality, whether sub-atomic particles, the cosmos, “the miracle of” life, or the infinite variety of human behaviors. Supernovas and DNA molecules do their thing, following what we call laws of science and mathematics, in total disregard of of human understanding. So do human beings. Does the brightest economic theorist do a better job of ordering lunch or buying a shirt?

    Maybe it’s best expressed by a poet: “Poems are made by fools like me, But only God can make a tree”!

    * Livio: “Are we merely DISCOVERING mathematical verities, just as astronomers discover reviously unknown galxies? Or, is mathematics nothing but a human INVENTION?

    • Wise advice. God gave us creativity, and man made regulations, suffocate that creativity.

      Freedom equals a bountiful world. Choice, imagination, expression, taste, sight,smell, touch.

      An example. How many foods have not seen the light of day because Grandmothers secret family recipe remained hidden away. Regulations were too onerous for her to try and sell her foodstuffs.

    • ” Or, is mathematics nothing but a human INVENTION?”

      All things intellectual are a human invention. How can it be any other way?

      Who else could come up with a concept like, “God,” but a human being?

    • Print Print Print. Give to your cony mates. Before the Poor find out the deception and theft!

      The game is up for the elites, the internet is spreading this style of theft like wildfire.!!

  12. Argentina provides the US a global rationale for legally defaulting on “the Chinese debt” overnight whenever it wants because it would serve to highlight the point that it’s not really okay for one or a group of politicians you never met to sign you or your family up onto a bloc of debt for a program you may not have personally approved of (even if you did vote for said politician). Indeed, as Aziz wisely counsels:

    “ultimately, nothing seems likelier to bring socialists like Syriza (and indeed national socialists like Golden Dawn) to power than a depression in unemployment and output worsened by a voluntary fiscal contraction. It happened in the 1930s in multiple countries”

    In other words, to paraphrase Anthony de Jasay

    “State and society [necessarily] interact to disappoint and render each other miserable”. This sublime illumination is higlighted by this recent NYTs article — Only a tiny minority get to avoid tax. THE ANSWER IS NOT TO TAX MORE BUT TO MAKE YOUR JURISDICTION A GIANT TAX HAVEN FOR WHOEVER AGREES TO PLAY BY YOUR RULES.

    For a more rigorous approach to this question of scholarship, see:

    Click to access An_Austrian_Approach_to_Law_and_Economics.pdf

    • Excellent points, and great link.

      In Victoria Australia, the People are on the hook for billions to pay a water dedsalination plant we did not need. The previous government signed the “Commercial In Confidence” contracts so we can’t see the deal. New Government wants to cancel but is worried sovereign default risk would scare away future investment. DECISIONS DECISIONS.

      The people have no contract with companies that dealt with Politicians that did not have the people’s best interest at heart.

      Perhaps they won’t do unethical deals in the future!!!

      • Even if Politicians do have “people’s best interest at heart” (and, while I trust that Politicians like all people care first and foremost for themselves and their own family vis a vis their incomes and living standards/reputation), you cannot just arbitrarily sign up people onto debt for a project you believe may serve their interests better than any other. THAT IS CHAOS, not order. Admittedly, I once attended Vic Parliament for an internship while I was studying at Uni. Alas, I lasted all but a few days before I realised I had no chance of successfully completing my work, which, by the way, I never really understood to begin with, quite frankly.

        • The great irony, of course, is that the overwhelming majority of transactions in global commerce are voluntary

  13. basically it’s a STOP-GAP measure to gradually and in an ORDERLY fashion disinter-mediate government employees from financing public investment, with a view to finally landing in a peer-to-peer world

  14. ps jeffrey gundlach is relative bullish on the hard money side this morning saying he expects silver to push $100 if Gold is allowed to tick up

    • Let’s modify this fight-peace/screw-virginity non sequitur so that it makes sense: the ability and willingness to fight prevents rape.

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  16. I’d like to make a point about the kind of economy that we currently live in. We live in a credit/debt based economy. In a modern economy, most all economic growth comes about as a result of the expansion of credit. If the private sector is not creating credit and facilitating growth, the government can come in and do the exact same thing. The problem comes in when government debt gets too large. However, we have a handy tool called the printing press. Therefore, we can run 10% fiscal deficits and monetize the entire deficit to finance these massive deficits. There is a risk of inflation, but in an economy with excess unemployment, lots of slack, and a situation where the private sector isn’t creating money inflation won’t be very high. Therefore, running massive deficits can be a possible way out if you can monetize them in such a way where the government debt doesn’t build up. The key thing is to stop printing money/running deficits when the private sector starts creating credit again.

    • “but in an economy with excess unemployment”

      With respect, I would say the models developed in the past don’t apply to the current economy as most workers are skilled (Operate plant and equipment etc) so with high unemployment you still have high wage inflation. It is OK if you are skilled, but try competing with demand for goods etc when you are not skilled.

      These older models must be reworked.

  17. “Trying to balance the budget in the way Anders Aslund seems to endorse is a road to deeper depression, extreme unemployment, and potentially to millions and millions of people leaving to look for work elsewhere.”

    But Latvia and Estonia did it, and they have shrunk their unemployment whilst the Keynesian countries have done the opposite ?

    I dont really believe balancing budgets are some kind of magic pill, without sound money and a proper financial system the “wage fund” is permanently hampered, and sustainable full employment is basically impossible.

    • Latvia and Estonia still have massively elevated unemployed, even after huge chunks of their workforce left the country.

      This kind of austerity will just end up bringing more socialists to power. To get toward a truly libertarian state we need to proceed in a different way.

  18. Empirically speaking, people can never do “the exact same thing”. But leaving science aside, don’t assume that more credit is (necessarily) “facilitating growth”, particularly if said credit is of a heavy handed nature so that it was effectively imposed onto people without their consent. Discerning between public/private debt is less about the intelligence of either group and more about whether said debt/credit was imposed OR voluntarily absorbed.

    “The problem comes in when government [or private] debt gets too large”, but private debt is crucially more sensitive to market forces so as to calibrate itself more effectively vis a vis the particular economic environment concerned.

    Therefore, running massive deficits can be a possible way out if you can monetize them in such a way where the government debt doesn’t build up? What?! That’s just like saying creating heaps of debt without care for the overall economic environment is okay so long as you do it in secret.

    Bitcoin is already emerging, and if the US leads the world in this way I am convinced that a huge turn around will occur.

  19. Aristotle – “The whole is greater than the sum of its parts”

    The notion of citizenship is being redefined as we speak, in global terms, away from a central point towards a new dimension the American Aristocracy will signal:

    “There are too many ideas and things and people, too many directions to go. I was starting to believe the reason it matters to care passionately about something is that it WHITTLES THE WORLD DOWN TO A MORE MANAGEABLE SIZE”

    It is not the strongest of the species that survives, nor the most intelligent, but rather the one most adaptable to change.

  20. It’s not a coincidence that the individual who uploaded this short clip titled his channel ”

    What soon becomes apparent is that the richest 1000 families on Earth share strong, common interest to promote the natural bond that exists not just between themselves and the poorest, but also between all humans on Earth, if we are to accept what John Locke once said – that a (private) property exists in each person; the only difference being that with the 1000 those properties include property external to their immediate persons, whereas the poorest simply have only their own selves.

    Niccolò Machiavelli wrote: “With a people equally controlled by Law, as those Kings were, we shall find in that multitude the same good qualities as in those Kings, and we shall see that such people neither obey with servility, nor command with insolence”.

    The world will not end! Things will get better! After all, something’s wrong when you regret things that haven’t happened yet!

  21. In Latvia and Lithuania, loose fiscal policy aggravated the pre-crisis boom, as detailed in the next chart. True, the budget deficits were small in absolute terms, well within the EU’s 3 percent limit. However, the Baltic economies at that time were seriously overheated, with borrowing and building far above any reasonable estimate of what could be sustained in the long run. Under those conditions, their budgets should have been strongly in surplus, both to moderate the boom and to accumulate fiscal space for future contingencies. Estonia did manage a modest budget surplus and had very little debt, but even so, it was unable to get through the crisis without fiscal tightening.

  22. There are two things you need to know about that experience. First, Latvia had a massive bubble financed by massive foreign borrowing, with its current account deficit hitting a mind-blowing 22 percent of GDP in 2006-07 before the debt music stopped following Lehman’s bankruptcy. And second, Latvia didn’t do anything to cushion its subsequent crash. It didn’t devalue its currency, and it didn’t increase government spending. Instead, it kept its currency pegged to the euro, and actually gashed its budget. Now, it didn’t have much of a choice when it came to austerity — that was the condition for its €7.5 billion IMF-led bailout — but it could have chosen depreciation over deflation. It did not. As Matthew Yglesias of Slate points out, Latvia chose so-called internal devaluation over actual devaluation, because it didn’t want to derail its euro entry out of fear of Russia. This calculation may well have been in Latvia’s best geopolitical interests, but certainly not its economic ones. The combination of tight money and tight budgets took Latvia’s economy from “calamity” to “historical calamity”; its GDP fell by over 17 percent in 2009 alone. That’s Great Depression territory.

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