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Thursday, September 09, 2010

Is the OECD insane?

The OECD (Organization for Economic Cooperation and Development) is saying that the global economic recovery is slowing down, but that there is no evidence of another looming recession. The international body is uncertain what is causing the slow down, but there is a fear that there may be an underlining weakness in the economy.

The OECD is proposing a possible solution if the weakness proves systemic:

“[I]f the slowdown reflects longer-lasting forces bearing down on activity, additional monetary stimulus may be needed in the form of quantitative easing and commitment to close-to-zero policy interest rates for a long period,” he said.

This brings me to the question on hand, is the OECD insane? Basically what they are saying is that it is possible that the “stimulus” plan may not have worked, and in the event that it didn’t work they should do it again. One definition of insanity is doing the same thing over and over again and expecting different results. Really if the first trillions of dollars spent by the various governments didn’t do anything (and there is zero evidence that it did do anything) what makes the OECD think that the next trillion will be better?

OECD’s insanity goes deeper than this. Every industrialized country in the world is facing a financial crisis. Governments everywhere are trying to figure out how they can reduce their deficits before they become another Greece. Then here comes the OECD calling for even larger deficits.

The OECD tries to cover up this insanity by saying that new spending should only take place where this is “space,” but this is so ambiguous that it is meaningless. How much more debt can countries such as the UK or the US really afford? They can’t even afford the debt that they have now.

So I have to conclude that: yes, the OECD is indeed insane.

Posted by Hugh MacIntyre on September 9, 2010 | Permalink

Comments

Hugh,

You sound surprised. You really shouldn't be. These clowns are going to "stimulate" and inflate until they destroy their currencies. Given our current economic structure (and the fact that most people don't want it changed), "stimulating" and inflating is the only real politically feasible option.

Posted by: Charles | 2010-09-09 7:57:37 AM


Any good college course in Money and Banking will teach you that it is a false assumption that the Federal government has limited financial resources and at some point will be unable to service its growing debt, in short that it will become bankrupt. Responsible fiscal policy is viewed as requiring a balanced budget. Individuals and firms can indeed borrow their way into bankruptcy. There is no such danger for the government when it borrows in the same currency that it creates. In a fiat money system the government has just as much money at its disposal under a budget deficit as with a budget surplus.

When we adopted a monetary base of intrinsically worthless paper money in the mid-20th century, we created a new paradigm that is still widely misunderstood. The imperatives are quite different from those of the earlier gold-based system. The key to maintaining the purchasing power of money is to control the price of credit. That means controlling the cost to banks of acquiring the reserves they need to cover their depositors' transactions. The Fed has the primary responsibility, but the Treasury plays an indispensable role.

The choice between government taxing and borrowing, i.e. fiscal policy, is entirely at the discretion of Congress. That choice has economic consequences which can be either good or bad. Unfortunately fiscal policy is often governed by the belief that deficit spending is ipso facto bad. The real economic consequences are seldom considered in that decision.

Deficits represent no financial risk to either the government or the public. All too often the focus has been on irrelevant accounting issues. Indeed, attempts to balance the budget can easily be counterproductive, especially during recessions. Conversely when the economy is sluggish or in recession, deficit spending helps support aggregate demand needed for recovery.

Treasury securities are valuable assets for the holders. They can readily be sold for money or pledged as collateral for loans. Together with the monetary base created by the Fed, they comprise the net financial wealth of the private sector. By contrast, bank lending cannot change the net financial wealth of the private sector because bank credit is matched by an equal amount of borrower debt.

The value of Treasury securities to the private sector as a whole is in the principal, not in the interest payments they shed. The interest payments are matched by tax revenues, and are therefore a wash in the aggregate. Some fear that as the national debt grows it will create an ever increasing inflation rate. That fear is not supported by the historical record. The debt/GDP ratio reached an all-time high at the end of World War II, yet the inflation rate during the next two decades averaged only 2%. In the following decade the debt/GDP ratio fell to a long-term low, while the inflation rate averaged about 8%. If there is an upper limit to the debt in terms of its effect on the inflation rate, it has yet to be experienced.

Posted by: Frank | 2010-09-09 8:31:17 AM


What an outrageous posting by Frank. Unfortunately, his kind of thinking is typical of mainstream economics.

"Treasury securities are valuable assets for the holders. They can readily be sold for money or pledged as collateral for loans. Together with the monetary base created by the Fed, they comprise the net financial wealth of the private sector."

Not necessarily. Treasury securities can be a terrible investment if a central bank is engaged in monetizing that debt. Basically, if you lend the government money and they pay you back in currency whose value has depreciated over time, how is that "valuable"? Under the present inflationist regime, the monetary base is essentially nothing more than monopoly money, whose quantity can be increased and decreased at the whim of politically-directed central banks. How can this be considered "wealth" at all?

If inflation is the path to prosperity, how is it that Zimbabwe is not the richest nation on earth? How did Weimar Germany get it so wrong?

It all comes down to this: you cannot create capital out of thin air. Multiplying the quantity of the medium of exchange does not create wealth; all it creates are multiple claims on the same asset.

Inflation is no less fraudulent an activity than trying to sell one house to several buyers at the same time.

Posted by: Dennis | 2010-09-09 9:38:17 AM


The only 'good' course in money and banking is the one Frank hasn't taken and is taught by an Austrian disciple. America didn't have post-WW2 inflation because it paid a tremendous amount of that debt off. It later experienced higher inflation because of irresponsibly generous central banking policy. And this idea of supporting the economy with aggregate demand is bullshit. Production creates wealth. Please google "Greece".

Posted by: Cytotoxic | 2010-09-09 9:44:39 AM


Frank,

"Any good college course in Money and Banking will teach you that it is a false assumption that the Federal government has limited financial resources and at some point will be unable to service its growing debt, in short that it will become bankrupt."

It's not the federal gov't that will become bankrupt, but its citizens.

"The key to maintaining the purchasing power of money is to control the price of credit."

So. How about we control all prices Frank? How about we control the price of cars or wheat for example? Why should credit be any different?

"Deficits represent no financial risk to either the government or the public. All too often the focus has been on irrelevant accounting issues. Indeed, attempts to balance the budget can easily be counterproductive, especially during recessions. Conversely when the economy is sluggish or in recession, deficit spending helps support aggregate demand needed for recovery."

So racking up debt never presents any risks? Seriously? I guess screwing over savers doesn't really matter then. Furthermore, since a central authority can't possibly know what consumers wish to purchase, gov't is essentially destroying capital through its public works.

"Treasury securities are valuable assets for the holders. They can readily be sold for money or pledged as collateral for loans. Together with the monetary base created by the Fed, they comprise the net financial wealth of the private sector. By contrast, bank lending cannot change the net financial wealth of the private sector because bank credit is matched by an equal amount of borrower debt."

Ummmm ... so savings don't consist of wealth for the private sector Frank? When banks create money out of thin air, and lend it out, who do you think will be able to purchase all that stuff that will be produced?

"yet the inflation rate during the next two decades averaged only 2%."

Oh well ... only 2%. Let's compound that over 25 years ...

Posted by: Charles | 2010-09-09 10:02:30 AM


In answer to the question, "Is the OEDC Insane?" the answer has to be yes. If you continue employing a tactic that has never worked and hope for different results, you are demonstrably insane. So there.

Posted by: B | 2010-09-09 10:03:59 AM


I don't know if insane is the best term but how about: stupefied, zombie-like, non-sentient, crooked, ponzi-driven, or simply morally and ideologically bankrupt.

Posted by: John Chittick | 2010-09-09 11:05:37 AM


You can't eat money, no matter how much of it you print. Without production of the goods and services we need to live, and want to be happy, the dollars used to buy nothing would be worth nothing.

Frank is using "inflation" to refer to prices increasing. However, the injustice of inflation comes not in the change of prices, but in the stealing of a percentage of the dollar supply (by added dollars to it...by "inflating" the money supply). Were government not able to inflate the money supply, its ability to accumulate debt most certainly would be limited and I fully expect that the dollar would continue a downslide in purchasing power as the government - which is a non-productive, consumptive entity - increased the percentage of everyones income that it seized and spent on civil servants. Nobody needs a civil servant to issue drivers licenses to people too poor to buy a car.

Posted by: Paul McKeever | 2010-09-09 11:14:46 AM


OECD is a UN type funded organization and like the World Bank, the Atomic Energy Agency etc must make deep pronouncements no one will follow just to stay in the news.

Fire them all.

Posted by: The LS from SK | 2010-09-13 11:37:38 AM



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