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"Fascinating how the meaning of the word 'austerity' has drifted away from the meaning of 'austere'. A balanced budget doesn't seem very 'austere' to me." But

"Fascinating how the meaning of the word 'austerity' has drifted away from the meaning of 'austere'. A balanced budget doesn't seem very 'austere' to me." But it is. Money is used to do productive things. Money is created when a bank issues debt. If no one is spending money, and paying down their old debts due previously reckless lending and borrowing, you have a depression, where lots of people want to work, but can't, because no one is buying anything. The only people making money are the lenders - until people start defaulting. Who is to kick start the engine? Well, you've got four choices; - the government, which works well if it is quality spending, ie. it's channeled towards infrastructure and/or consumption (see the U.S. vs Europe). but it is politically unpopular among the rich because it is theoretically inflationary. - Or the central bank can buy up debt on the market (quantitative easing), but with everyone paying down their debts, this doesn't actually help the economy as much. Also not popular with the rich because it's inflationary. - Wait it out, ie. Stop spending money and make everyone pay down their debts. This is the "austerity" plan, where a generation of people will be unemployed because of the supposed sins of the past - a cleansing ritual approach to the economy. Popular with the rich because they can afford to sit back and wait. - Option four is a debt jubilee where creditors get a haircut and we all feel spurred to spend money again because we aren't so far in debt. This is popular with the masses and (obviously) unpopular with the rich. This is what happened to some degree in Iceland. And this is in effect what Greece is asking Europe to do as the most realistic outcome from the 2008 crash. "But it's a false dichotomy that these are the only choices" Actually, no, it's a real dichotomy. Either you believe in balanced budgets at all times, or you believe that deficit spending is justified sometimes. Similarly for occasional debt jubilees vs the sanctity of the bond holder. These are stark choices as they have major implications on entitlements like medical and social insurance in a crisis. "Then there's the economists, who will pull out some toy model and claim xyz is good/bad. Too me it seems more like religions (being a Keynesian, Austrian, etc), where people search for facts that confirm their positions." A model is just a consistent logical argument. Because economics is so tied to politics, the logical arguments get religious fast. That's kind of human nature. Searching for facts to confirm (or contradict!) your position is usually a good thing - we call that empiricism. I'd note that not all economic traditions believe in empiricism (the Austrians do not, for example - they believe their system is axiomatic). "The problem with most macroeconomic theories is that they ignore too many important details." The point of a model is to have predictive power without being so complicated that it's impossible to use. There's some subjectivity as to what is "important" in making an argument. "So for example, you can borrow money to invest in the future which is usually good in the long run, or you can spend it on things you don't need ..... In the words of Warren Buffet, we don't talk about 'quality' of GDP enough." That would be because we are still stuck in debating whether government spending helps at all, which is anathema to a large number of property holders. Among those that want stimulus - look at the Econ blogosphere! - there have been endless debates circa 2008-2009 about quality stimulus vs. pork spending stimulus. Those discussions have ceased because austerity has become the political rule in Europe (and to a lesser degree but still strong in a polarized US electorate). No point debating what to spend money on if there's nothing to spend. So debates have turned to QE and debt writeoffs - two of the other four tools left that I mentioned above.

JoeAltmaier 11y ago
Hold your horses - because you're paying down debt doesn't mean 'nobody is buying anything'. That only happens if you're over your head. I pay down debt all the time (mortgage) and buy things all the time. If debt paying is increased, then buying is reduced, ok. And that means the previous level of growth is reduced. Which has a multiplicative effect because everybody is betting on increased growth, by investing in a bigger operation etc. Which leaves them struggling to pay off THEIR debt. Maybe if we all were content with reasonable growth, instead of buying lottery tickets all the time, betting on increased growth. But you'll get in trouble with your investors if you 'miss out' on any opportunity. This investment market is insane.
- parasubvert 11y ago
  I meant "nobody is buying anything" at a "macro" level. Of course the economy continues to chug, it's just not performing at its potential (ie. cheap capital, cheap labour is available and no one wants to use it). Your second paragraph basically explains the debt deflationary spiral at the core of Keynes' economics. I agree that speculative investment is a problem, but we are (in Europe / the U.S. is doing relatively fine) still talking about "unreasonably low growth" given levels of unemployment - people that are idle and want to work! An economy that isn't growing has become closer to zero sum: one persons gain is another's loss. Given the historical strength of the rich at retaining and growing their relative share, this doesn't bode well for the masses. Depressions and recessions spark revolutions when they last too long.
marcosdumay 11y ago
> If no one is spending money, and paying down their old debts due previously reckless lending and borrowing, you have a depression, where lots of people want to work, but can't, because no one is buying anything. You know, monetary theorists make me dizzy. Please explain how people were able to live before debt was defined as money? Because there was a before, and people lived by then. What monetarists often forget is that inflation (both positive and negative) exists. What's a surprising and ironic realization, because "inflation" is the thing they study. You can make any kind of shady accounting, and define any kinds of equality you want at the monetary side of the economy. In the end, the real side will distribute everything that is produced to people that want it, and set the real wealth of the economy. If you want to claim that monetary phenomena cause real problems, well, you must claim a link between them, because it's not automatic, and "money disappears" isn't one (although "prices are sticky" is).

JoeAltmaier 11y ago

Hold your horses - because you're paying down debt doesn't mean 'nobody is buying anything'. That only happens if you're over your head. I pay down debt all the time (mortgage) and buy things all the time. If debt paying is increased, then buying is reduced, ok. And that means the previous level of growth is reduced. Which has a multiplicative effect because everybody is betting on increased growth, by investing in a bigger operation etc. Which leaves them struggling to pay off THEIR debt. Maybe if we all were content with reasonable growth, instead of buying lottery tickets all the time, betting on increased growth. But you'll get in trouble with your investors if you 'miss out' on any opportunity. This investment market is insane.

parasubvert 11y ago
I meant "nobody is buying anything" at a "macro" level. Of course the economy continues to chug, it's just not performing at its potential (ie. cheap capital, cheap labour is available and no one wants to use it). Your second paragraph basically explains the debt deflationary spiral at the core of Keynes' economics. I agree that speculative investment is a problem, but we are (in Europe / the U.S. is doing relatively fine) still talking about "unreasonably low growth" given levels of unemployment - people that are idle and want to work! An economy that isn't growing has become closer to zero sum: one persons gain is another's loss. Given the historical strength of the rich at retaining and growing their relative share, this doesn't bode well for the masses. Depressions and recessions spark revolutions when they last too long.

marcosdumay 11y ago

> If no one is spending money, and paying down their old debts due previously reckless lending and borrowing, you have a depression, where lots of people want to work, but can't, because no one is buying anything. You know, monetary theorists make me dizzy. Please explain how people were able to live before debt was defined as money? Because there was a before, and people lived by then. What monetarists often forget is that inflation (both positive and negative) exists. What's a surprising and ironic realization, because "inflation" is the thing they study. You can make any kind of shady accounting, and define any kinds of equality you want at the monetary side of the economy. In the end, the real side will distribute everything that is produced to people that want it, and set the real wealth of the economy. If you want to claim that monetary phenomena cause real problems, well, you must claim a link between them, because it's not automatic, and "money disappears" isn't one (although "prices are sticky" is).