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« The Debate Continues: Keynes, Pigou, & co. vs. Hayek, Robbins, & co. | Main | Cheating vs. Rational Rule Breaking »


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Have you had time to look at Toby Baxendale's plan for moving Britain to 100% reserves?

I've written an article pointing out the problems with it here:

What do you think?

I have made this point before, not to much notice here, but if you are going to go on about Greece, Steve, is it possible to ask if it makes any difference that the Greeks were massively lying about their budgetary situation and that we do not do that here in the US? Or do you think that we are, especially in comparison to what the Greeks were doing?

I think that if the issue is the 60-80% debt/GDP ratio, the problem is small. Belgium is a success story in this because it turned a 130% ratio into a 80% ratio in a decade.

Greek "failed" because mass democracy corrupts massively and needs limitations to avoid a flight into demagoguery.

Greece from this point of view is atypical even with respect to a corrupt and inefficient country like Italy: more than a canary in the coalmine, it looks like a caricature of the worst of the political process in its purest form.

Thus, Greece shall not be taken more seriously than Venezuela: it is true that many Latin American democracies are as unstable as European democracies were in the '20s, but the western world has outgrown the '20s, at least as long as the welfare state will deliver its promises.

However, it's the 400-700% ratio of unfunded liabilities (over GDP) that strikes me as much more dangerous.

Greece promised 700% in GDP in future social benefits. Germany is the most virtuous country in the developed world, scoring only 400%. The UK and the US may be worst than most Europe, even Italy.

Now, I don't know if this data make sense or are correct: surely there will be a lot of liabilities to pay with medicare, medicaid, obamacare, maybe postwar reconstruction and veterans (I normally consider war a short-term expense and the welfare state a long-run drain, but Iraq may be proving me wrong), retirement of baby boomers, and the costs, of course, of saving the financial system from the consequences of past economic policies.

A 400-500% unfunded liability may mean a 10-15% annual increase in the public expenses/GDP ratio, something that would kill private investment and consumption, and create large economic costs and probably social upheaval. The alternative, leaving old people without pensions or working till 100 years of age (I'm exagerating), are financially sustainable, but even more likely to create social turmoil (however, it shall be noted that old people are poor combatants in a civil war: we - the young - can win single-handedly :-D).

So, my case for the economic feasibility of the present welfare state rests on the relevance and correctness of the alarming unfunded liability data. A 100% debt/GDP ratios can reduce growth, hamper economic liberty, create corruption and inefficiency, but it doesn't kill societies. Multiply by four or five and this optimism may be unwarranted.

The US already has the most irresponsible and least defensible monetary policy in the normal world (i.e., excluding Zimbabwe). I wouldn't be surprised to become pessimistic for what concerns fiscal issues. At the moment, the path may be already unsustainable: if it is so, the welfare state need to be downscaled, or the economy will be chocked by a much higher burden of taxation, or in a not-too-distant future the awakening may be very rude.

Regarding the US "welfare state," 1) it is smaller than most in Europe, and 2) we have far better demographics in terms of supporting progams for older people in the future than does every country in Europe, plus Japan. All the hysteria we hear about social security coming out of the Deficit Commission is just that, hysteria.

Yes, Barkley, the lying does matter. But don't do a "Road to Serfdom" on me. I wasn't suggesting we are "inevitably" headed down that path; I was simply providing a warning (hence, a canary in a coal mine) that we need to be careful not to make the mistakes Greece and others have made.

Pietro's point about unfunded liabilities is well-taken.

Actually, Barkley, the US looks like France when one factors in off-budget liabilities. France is acknowledged to have a serious debt problem. We have better demographics than Europe, but the US cannot grow its way of its public debt burden. That is not hysteria, but fact.

The US policy toward banks (keep the zombies open) replicates the policy failure of Japan that gave them a lost decade (some would say two lost decades).

In effect, you are arguing "this time is different." If you believe that, I have a book to recommend.


What do you have against medieval "doctors"?
They might have been quacks, but they weren't Keynesianiac quacks!

Jerry, I am always open to book suggestions. Of course it is well known that I am full of kinds of weird ideas.

I assumed he meant the stock character from commedia dell'arte.

Read your Freeman article. My short remark: You can't compare the US with Greece. The US government is the monopoly issuer of a non-convertible free-floating FIAT currency the US$. The same is obviously not true for Greece since it entered the EuroZone. To conflate two very different monetary arrangements renders your article meaningless.

The bond market knows this otherwise the Treasury could not issue 10 year bonds with 2.90%. Some economists seem to have a problem to grasp the implications of a non-convertible free-floating FIAT currency. Greece faces a solvency risk. The US per definitionem NOT.

Stephan: an economy can inflate its way out of a debt problem only as long as prices are stable (a goal the financial crisis is helping achieving, but may not last forever), lenders are willing to lend (which won't occur if they are defrauded). Devaluation helps defrauding old creditors, not finding new ones. Besides, it shall be noticed that Iceland's krona wasn't pegged, and the economy collapsed anyway: devaluation is a myopic (keyenesian) policy, and sometimes it doesn't even avoid the problem (besides creating more in the long run).

Pietro: Thanks for your comment. I think we must differ on the issue of solvency and inflation. No serious economist can claim that there's a solvency risk for the US given the current monetary settings. Statements like "we're out of money" and "we're broke" are utter nonsense. US government checks don't bounce today, tomorrow and (nothing changed) also not in 50 years. The fact that the US government issues bonds $:$ for debt is a voluntary constraint. This institutional setting is a relict of Bretton Woods. But Bretton Woods is dead since 1971.

Granted! With a non-convertible free-floating FIAT currency comes the risk of inflation. But inflation must always be seen in context with real resource utilization. And with 10% unemployment and idle output capacity there's no risk of inflation in the near future.

I think this article is framed the wrong way. It is a political and ideological article arguing that society would be better off doing things another way. Fine. I'm not that opinion. But to present the authors political opinion as some inescapable economic logic is simply wrong.


"Inescapable economic logic?" Did you actually read the piece? Here's my own words in the first paragraph: "Greece’s problems, and those of other European countries, might well represent a possible future for the U.S. economy if we cannot get our fiscal house in order."

"might well represent ... if..." does not sound like "inescapable economic logic" to me. It sounds like a warning to not go where they have gone.

Where exactly did I say "we're broke" or "we're out of money"? I said no such thing.

And the article recognizes the differences between the two banking systems, or did you not read that part?

The Freeman is not a scholarly journal. It is a place for opinion pieces, which is what I wrote. Nowhere is it suggested there's some inescapable economic logic there. What it is, however, is a warning about mistakes we might make that uses economics to indicate why those might be mistakes. That seems to me to be what a good *opinion* piece should do - use social science to provide informed opinion.

You're welcome to disagree of course, but at least recognize the context of the publication and the point of the article.

Now I know how Hayek felt reading people who said *The Road to Serfdom* was a prediction rather than a warning.

The government of a country with a fiat currency have four options if they are in a difficult financial situation. Firstly, they can borrow more at higher rates or interest, that can delay the issue, but doesn't remove it longer term. Secondly, they can raise taxes. Thirdly, they can print money and pay of borrowers. Fourthly, they can default.

Stephan's argument is that printing money to pay off debt during a recession is not a problem. Certainly, if there is a demand for more money then creating more will not be inflationary, rather it will prevent deflation. But, it doesn't follow from this that any amount of debt can be paid off by printed money. Also, the situation after the recession must be considered. After the recession the demand for money will fall once more. In that situation in order to avoid inflation the government must withdraw money.


Thank you for answering! My apologies for my delayed reply. I'm a European and thus soccer addict. Glued to the TV ;-) Still have a hangover about Ghanas missed historic chance in an epic game. My original comment wasn't meant as an ad hominem attack.

Yes I've read your article. And I do understand the context of the publication and the point of the article. That is exactly what disturbs me. This fear-mongering of the public about sui generis meaningless numbers like deficit/GDP or debt/GDP. Austrian economists seem glad to join the neo-classical hysteria?

I'm not an "Austrian" believer although an Austrian citizen. But Hayek ranks very high on my 20th century most important economist list. And I think Hayek would not be very happy about his contemporary apologets. Too much ideological seal (government is bad!) and less economic reasoning.

I would suggest an alternative approach to the current malaise from an Austrian perspective. First remove the word "Keynes" from articles. This is a red-button issue for certain cohorts of the public. Second introduce the public to Catchings and Foster, their book "Profits" which was published 10 years before the GT of Keynes. Next tell the story of the challenge in regard to "Profits" and Hayeks response. Especially "The Paradox of Savings". Finally replay the whole debate in the light of modern monetary arrangements, i.e. a non-convertible free-floating FIAT currency.

I think going down that road is the more sensible way than mindlessly repeating neo-classical myths and fairy-tales. Just my humble 2-cents! OK. Now I must put on my azure gear and prepare the Argentine T-Bone-Steak for Argentina:Germany. Hasta la Victoria. Sempre.


Have you read my Routledge book? I'd be interested to know how well you think that deals with the narrative you've suggested here.


No I have not. I'm following only occasionally contemporary Austrian/US economics. To be honest: You GMU guys (i.e. Cafe Hayek, ...) are too much of zealots for me. Some sort of "Austrian" Taliban ;-) Thinking about economics I prefer to wear a Schumpi Google. But I've ordered "Microfoundations and Macroeconomics" now. For a textbook it's a really bargain? 25€ is OK.

Then I'm particularly curious what you think about the book! :)

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