4 ms·

Negative savings rates are fine, as long as capital is created and the price of goods produced by that capital is falling due to efficiency improvements. Where

Negative savings rates are fine, as long as capital is created and the price of goods produced by that capital is falling due to efficiency improvements. Where you get the boom/bust is when increased investment and loans creates a feedback loop with the money multiplier causing prices of assets to increase in value even as the supply of those goods increases. Production is encouraged to become wasteful and inefficient because inflation and production taking place over time takes care of the profit margin. When the credit runs out, interest drags the prices back to their non-inflated money supply value and you get debt deflation and doom and gloom covers on The Economist. China fixes debt deflation by printing the money and handing it to the banks in exchange for their bad loans. In the west, the way things are set up, for better or for worse, we have to borrow it into existence and pay it back with interest, further burdening the tax payer and forcing government austerity. China can take care of the moral hazard that comes with printed money bank bailouts because the government has political control of the financial sector. The government routinely tells banks to stop lending to certain sectors and slaps very specific regulations on to what kind of people and on what terms bank can lend to borrowers. In the west, we like to let the "free market" run things which is why we got rid of Glass/Stegal, etc.

jasonwatkinspdx 14y ago
I don't see how what you're saying addresses anything in the article. What am I missing?
- crdoconnor 14y ago
  It sounds like "kleptocracy is fine provided it doesn't cause a boom/bust cycle".
- jasonwatkinspdx 14y ago
  To elaborate: I can understand how temporarily forcing a negative nominal savings rates on a population might be beneficial in the short term in the Keynesian sense. But a forced, regressive negative real savings rate? I cannot think of a moral justification for that.
- nikcub 14y ago
  Having a country being run as a Mafia state is better than living in a real estate bubble?
maratd 14y ago
> Negative savings rates are fine, as long as capital is created and the price of goods produced by that capital is falling due to efficiency improvements. Plain English: Theft-level interest rates are OK, as long as you have deflation. China is not experiencing deflation, so it is not OK. > China fixes debt deflation by printing the money and handing it to the banks in exchange for their bad loans. To make sure that inflation occurs, yes, China prints money. This is a fine balancing act, as the article implies. Print too little, deflation takes place and all the SOEs collapse. Panic + revolution. Print too much, you get a high inflation rate. Also panic + revolution.
cynicalkane 14y ago
In the west, the way things are set up, for better or for worse, we have to borrow it into existence and pay it back with interest, further burdening the tax payer and forcing government austerity Not only is this opinion not right, it's not even wrong. When you say "we", are you talking about the Fed? Banks? Consumer debt and credit? Since you're talking about "burdening the tax payer and forcing government austerity", I'll suppose you're taking about Treasury-backed Federal Reserve currency. Now, the Fed remands almost all of its profit back to the Treasury, so we're actually talking about the opposite--Federal Reserve printed currency is seignorage, it's very close free money to the government. The taxpayer pays almost nothing for as long as the debt-backed money exists. A lot of this narrative seems to depend on popular, but bad, memes of armchair economics, so I'm just picking out the worst one.
- jkn 14y ago
  Your mistake is to consider the Fed profits instead of the profits derived by the private sector from money lent to the government. The government is running a deficit, but the law (treaties in Europe) forbid it to fund itself by printing money. So it needs to reduce expenses and/or increase taxes, but in the meantime it has to borrow from the market (whether that happens through the central bank like in the US is irrelevant). Borrowed money is not free at all as you say, it comes with an interest that is paid to the private lender, not to the Fed. The interest adds to the deficit, increasing the drive for higher taxes (hence the burdening of the tax payer) and lower expenses (hence the austerity). This mode of funding often amounts to a tax on the poor (through spending cuts in social programs for example) and to a lesser extent a tax on the rich (through tax hikes). A government funded directly through printed money is more of a tax on the rich, due to the loss of value of their savings and assets. It also makes it much easier to run an irresponsible budget.
- narrator 14y ago
  Why do we have the treasury market at all with the government paying interest to private individuals who do nothing and have no risk when the government could just print the money like China? People who own government bonds (the ones that are not the fed) are getting paid an enormous amount of risk-free interest courtesy of the taxpayer.
RockyMcNuts 14y ago
Negative savings rates? China has one of the highest savings rates in the world. Did you mean negative real interest rates? Even so, still gibberish. Building see-through buildings, palatial headquarters for SEOs and vanity projects is as wasteful as anything we see in the West, if not more so. Some impressive modern architecture and engineering, though. Boom/bust economics don't apply to China because there isn't a free capital market (legitimately anyway, there is a shadow underground financial system in some parts, not sure how big). It's not really a market economy, it's selective application of market principles in a primarily top-down government-run economy. Government directs SEOs to build apartments, high-speed rail etc., banks to lend for it, and bails everyone out if it doesn't make money. Result is massive resource misallocation. (Not that the West doesn't misallocate resources, build see-through buildings, Pets.com, etc.) Another good read on China is here - http://www.ritholtz.com/blog/2012/05/a-different-way-of-looking-at-china/ http://www.ritholtz.com/blog/2012/05/a-different-way-of-look...

jasonwatkinspdx 14y ago

I don't see how what you're saying addresses anything in the article. What am I missing?

crdoconnor 14y ago
It sounds like "kleptocracy is fine provided it doesn't cause a boom/bust cycle".
jasonwatkinspdx 14y ago
To elaborate: I can understand how temporarily forcing a negative nominal savings rates on a population might be beneficial in the short term in the Keynesian sense. But a forced, regressive negative real savings rate? I cannot think of a moral justification for that.
nikcub 14y ago
Having a country being run as a Mafia state is better than living in a real estate bubble?

maratd 14y ago

> Negative savings rates are fine, as long as capital is created and the price of goods produced by that capital is falling due to efficiency improvements. Plain English: Theft-level interest rates are OK, as long as you have deflation. China is not experiencing deflation, so it is not OK. > China fixes debt deflation by printing the money and handing it to the banks in exchange for their bad loans. To make sure that inflation occurs, yes, China prints money. This is a fine balancing act, as the article implies. Print too little, deflation takes place and all the SOEs collapse. Panic + revolution. Print too much, you get a high inflation rate. Also panic + revolution.

cynicalkane 14y ago

In the west, the way things are set up, for better or for worse, we have to borrow it into existence and pay it back with interest, further burdening the tax payer and forcing government austerity Not only is this opinion not right, it's not even wrong. When you say "we", are you talking about the Fed? Banks? Consumer debt and credit? Since you're talking about "burdening the tax payer and forcing government austerity", I'll suppose you're taking about Treasury-backed Federal Reserve currency. Now, the Fed remands almost all of its profit back to the Treasury, so we're actually talking about the opposite--Federal Reserve printed currency is seignorage, it's very close free money to the government. The taxpayer pays almost nothing for as long as the debt-backed money exists. A lot of this narrative seems to depend on popular, but bad, memes of armchair economics, so I'm just picking out the worst one.

jkn 14y ago
Your mistake is to consider the Fed profits instead of the profits derived by the private sector from money lent to the government. The government is running a deficit, but the law (treaties in Europe) forbid it to fund itself by printing money. So it needs to reduce expenses and/or increase taxes, but in the meantime it has to borrow from the market (whether that happens through the central bank like in the US is irrelevant). Borrowed money is not free at all as you say, it comes with an interest that is paid to the private lender, not to the Fed. The interest adds to the deficit, increasing the drive for higher taxes (hence the burdening of the tax payer) and lower expenses (hence the austerity). This mode of funding often amounts to a tax on the poor (through spending cuts in social programs for example) and to a lesser extent a tax on the rich (through tax hikes). A government funded directly through printed money is more of a tax on the rich, due to the loss of value of their savings and assets. It also makes it much easier to run an irresponsible budget.
narrator 14y ago
Why do we have the treasury market at all with the government paying interest to private individuals who do nothing and have no risk when the government could just print the money like China? People who own government bonds (the ones that are not the fed) are getting paid an enormous amount of risk-free interest courtesy of the taxpayer.

RockyMcNuts 14y ago

Negative savings rates? China has one of the highest savings rates in the world. Did you mean negative real interest rates? Even so, still gibberish. Building see-through buildings, palatial headquarters for SEOs and vanity projects is as wasteful as anything we see in the West, if not more so. Some impressive modern architecture and engineering, though. Boom/bust economics don't apply to China because there isn't a free capital market (legitimately anyway, there is a shadow underground financial system in some parts, not sure how big). It's not really a market economy, it's selective application of market principles in a primarily top-down government-run economy. Government directs SEOs to build apartments, high-speed rail etc., banks to lend for it, and bails everyone out if it doesn't make money. Result is massive resource misallocation. (Not that the West doesn't misallocate resources, build see-through buildings, Pets.com, etc.) Another good read on China is here - http://www.ritholtz.com/blog/2012/05/a-different-way-of-looking-at-china/ http://www.ritholtz.com/blog/2012/05/a-different-way-of-look...