You Cannot beat a Recession by Cuts

[onq]

People like Organ Kelly and Lo! Varuka! seem to have deeply misunderstood the nature of the catastrophe we are all caught up in. The current economy creates money from debt using the fractional reserve banking system. For such a system to work the world economy and all its component parts need access to affordable lines of credit.

Normally interest rates are used to control inflation that might result, but where there is next to no consumer confidence, this is unsupportable. Higher taxes are not needed to keep inflation down - there is little or no inflation

Long story short - you cannot "cut" your way out of a recession. You must spend.

This counter-intuitive solution is similar to how benefits arise from a low tax economy. At a certain point, when you lower taxes, your total tax take begins to rise, people people are more willing to work in a low tax economy and because the economy can support itself better by being "leaner" on taxes.

Similarly we need to grow an economy to better shoulder the burden of a large public service bill. And to do that we need to spend money.

I don't need the Masters of Dom and their Negativity Diet trying to poison my good humour.

We need to put the world economy back on a positivity diet - today!

 

[Superman]

You can't spend your way out of a depression.

 

[Purple]

It took 10 years to get us this far into this mess. It will take years to get us out.
Everything that happened in this economy after 2003 was a lie.

We need to make/grow/develop stuff that people in other countries want and sell it to them. That's the only way to have a sustainable economy.

Now that property prices are starting to get to a realistic level we should do everything we can to keep them low. That way we have some chance of standing still and waiting for inflation in other countries to make us competitive again.

 

[dahamsta]

You can't spend your way out of a depression.

FDR would tend to disagree.

 

[horusd]

A counter cyclical policy would probably help in the long-term but how would we pay for it? The Euro is very inflexible, and no aid to us at all now. Rates will rise, we've already done a bout of internal deflation ( wage cuts etc), we probably need to do more, further impacting on the domestic market. Germany will probably need higher rates to stop inflation in the short term, so loosening monetary policy isn't an option.

Nice idea, but not a runner in my opinion.

 

[Superman]

A counter cyclical policy would probably help in the long-term but how would we pay for it?

A counter cyclical policy only works if you start it in the good times (e.g. China can do it, as it built up a war-chest, as can Chile which did similarly)

We followed the "when I has it, I spends it" school of economics, this is merely the consequence of that.

 

[onq]

It took 10 years to get us this far into this mess. It will take years to get us out.
Everything that happened in this economy after 2003 was a lie.

We need to make/grow/develop stuff that people in other countries want and sell it to them. That's the only way to have a sustainable economy.

Now that property prices are starting to get to a realistic level we should do everything we can to keep them low. That way we have some chance of standing still and waiting for inflation in other countries to make us competitive again.

In general I agree, but there are lessons from this that everyone needs to learn.
Property portfolios comprise a huge chunk of any business.
People need space to sell or produce.

I suspect we are well on the way to becoming competitive again, or so it seems.
Leases that were negotiated on an upward only basis by the bloodsuckers in the Estate Agents office have simply been dropped, business have folded and now the Lessors are seeing some harsh reality.
I advised recently on two leases which were offered in the 30-40K range on properties where when the project turnover and cost of goods sold were looked at simply couldn't support anything over the 15-20K range.
That will be the offer that goes in and I see no-one else beating them away with a stick offering more.

As for how long it takes us to become competitive, that depends, but its going to be sooner rather than later.
Ireland Inc is struggling, but it seems to be turning away from the credit fueled binging economy that followed in 2003 and later years.
Businesses that were badly burnt by sharp practice and defaulting debtors are demanding cash payments, up-front payments, payments in advance and people and businesses are responding.

The "slack" in the economy which saw chancers get work done for nothing is being taken up.
People who appointed professionals to act for them and then walked away from completions are getting e-mails and solicitors letters through their doors seeking payment.
Many, many people are angry as hell with their business neighbours at treating them like that and they're not going to take it going forward - they are going to stick it to them publicly.
The good time that was enjoyed by chancers who used other offices and firms credit terms as short term loan facilities is well and truly over and people who want to do business like that are not even getting the time of day anymore.

So competitiveness also means paying your dues.

And being a small, open economy able to trade on the world markets has its benefits.
If the local businesses are unwilling to pay reasonable prices for goods and services, we can do business elsewhere.

ONQ.

 

[onq]

You can't spend your way out of a depression.

What dahamsta said.

Restrictive practices make recessions worse.

The size of an economy depends on both the size of transactions and the numbers of transactions.

The more transactions and the more broadly based the players are in terms of sectors and product variation, in general, the healthier the economy, because it is more flexible and more able to take a hit.

Therefore looking at all available niche markets and seeking alternative outlets for all our products is what we should be doing in Ireland, while at the same time spending our discretionary income at home to help support and stimulate local businesses and job creation at home in Ireland.

ONQ.

 

[Chris]

You can't spend your way out of a depression.

100% correct. If it was possible to spend your way out of a recession/depression then there would be no problem. Nothing is simpler than spending money whether it be saved or borrowed.

FDR would tend to disagree.

Would that be the FDR who's entire policies resulted in a depression (multiple recessions) lasting 17 years? The US did not recover until government spending was cut long after WWII ended. Hoover's and FDR's spending policies, as "cures" for the depression, are a perfect example of the damage that spending does.

Restrictive practices make recessions worse.

The size of an economy depends on both the size of transactions and the numbers of transactions.

The more transactions and the more broadly based the players are in terms of sectors and product variation, in general, the healthier the economy, because it is more flexible and more able to take a hit.

Therefore looking at all available niche markets and seeking alternative outlets for all our products is what we should be doing in Ireland, while at the same time spending our discretionary income at home to help support and stimulate local businesses and job creation at home in Ireland.

This is nonsense and you are also contradicting yourself. First to the contradiction. You say that government and people need to spend more, but also claim that government should tax less and more private investment is needed in some "niche markets". Governments can only spend what they ultimately take out of the economy through taxation, and private investment can only increase if people and organisations spend less.

The size of an economy is solely dependent on how much is produced, the number of transactions is an illusive argument. If you had an island with two people and they each produced 1 widget per annum, then they could transact a trillion times per annum, but not be any better off. Total production financed by real savings is the only thing that increases economic wealth.

Ireland is per capita one of the most indebted countries in the world. It is fractional reserve banking, monetary inflation and extremely low interest rates that created the mess Ireland is in. Ireland spent too much and has to pay down debt and the only way that is possible is by cutting public and private spending. There are no valid premisses that can support a conclusion that cutting spending does not help an economy.

 

[Superman]

What dahamsta said.

Restrictive practices make recessions worse.

The size of an economy depends on both the size of transactions and the numbers of transactions.

The more transactions and the more broadly based the players are in terms of sectors and product variation, in general, the healthier the economy, because it is more flexible and more able to take a hit.

This isn't a recession, also counter cyclical policies must begin in good times - not in bad.
Thirdly, the state is spending a huge amount of money - money it doesn't have. That is why bond yields are where they are and why we will need Leo Varadakar's "second bailout". To keep spending we will be increasing taxes by c. €7000 per worker over the next 4 years. How much more do you want the state to increase taxes? Where do you want the state to borrow this money? How many more bail outs do you want the state to take? And from whom? And why should they do us the favour?

 

[Protocol]

It's true that cutting spending (any type) causes the recession to get worse.

After all, a recession is a fall in income/output, usually caused by a fall in demand / spending.

But unfortunately due to the size of the fiscal deficit, the Govt must cut Govt spending.

You would hope that other types of spending take up the slack.

 

[Chris]

It's true that cutting spending (any type) causes the recession to get worse.

After all, a recession is a fall in income/output, usually caused by a fall in demand / spending.

But unfortunately due to the size of the fiscal deficit, the Govt must cut Govt spending.

You would hope that other types of spending take up the slack.

No it is completely untrue that spending cuts make recessions worse. A recession is a fall in production, and only the private economy can produce. The reason Ireland is in a recession is because it did 20 years worth of spending in 10, predominantly based on credit not savings, resulting in huge malinvestments.

An economy grows when it produces more, and the only way it can produce more is by investing in production, and the only way you can sustainably invest more in areas that are actually in demand (and not artificially) is by people and organisations saving large amounts of their income to invest in production.

People cannot spend until the goods have been produced AND until they have the money to spend. Now there are two ways of getting the money to spend: (a) credit (b) being productive through work. We all know when option (a) has lead to. It is not a chicken and egg question, production comes first, spending is the result of production, not the cause.

 

[Protocol]

Chris, to be specific,

GDP = income / value of production

But GDP also equals sum of all expenditures (C + I + G + X - M)

INCOME = EXPENDITURES

GDP = consumption spending + investment spending + govt purchases + exports minus imports

What I am saying is that any fall in demand/spending on the right-hand side (for whatever reason) causes a fall in production / income on the left-hand side.

 

[Protocol]

Chris, you seem to be suggesting a GDP with a lower proportion of C spending and a higher proportion of I spending and exports.

If so, I agree.

The UK and USA have higher proportions of C spending,and they have negative contribution from exports.

 

[jhegarty]

FDR would tend to disagree.

Adolf had far more to do with than FDR.

 

[Chris]

Chris, you seem to be suggesting a GDP with a lower proportion of C spending and a higher proportion of I spending and exports.

If so, I agree.

The UK and USA have higher proportions of C spending,and they have negative contribution from exports.

Yes, that is what I was trying to point out. It is so often stated that a country in trouble would be better off if there was simply more spending, be it government or private. However, the exact opposite is true. Just like a family spending all its income, plus some more on credit, and not saving anything doesn't increase its wealth, a country that spends more becomes less wealthy.
What is also generally ignored when it comes to advocates of government spending, is that in the equation you posted, in order for G to go up, C and I will ultimately be forced down through taxation. This is one reason that GDP is a deeply flawed way of measuring economic productivity. You mentioned the US, and it is a perfect example. It's GDP is "increasing", but only because government spending has been put on steroids based on borrowed money. At the same time unemployment is still high and in the manufacturing area it is still increasing. That can hardly be seen as increasing economic wealth.

Adolf had far more to do with than FDR.

Actually WWII also had nothing to do with bringing the depression to an end.