Hunkering Down

I got an email from my fellow blogger Anson Burlingame today, and I want to thank him for inspiring this post. He drew my attention to a new development in the U.K.’s part of the global financial crisis.

The Bank of England in Threadneedle Street, Lo...

The Bank of England in Threadneedle Street, via Wikipedia

Calling this “. . . the most serious financial crisis we’ve seen, at least since the 1930s, if not ever”, Bank of England head Sir Mervyn King appears to be sounding the alarm as the Bank’s Monetary Policy Committee, in their own Quantitative Easing 2, decided to add 75 Billion pounds of new money to the British economy. Anson believes that the U.K., like the U.S., is ignoring the real problem, which he says is the debt itself. He calls it the “cliff”. His solution? He said,

It is the DEBT, stupid and we all know how to get out of debt. Work harder, live frugally and pay the damn debt down or even “off”.

While I agree that Anson’s “cliff” is a serious problem, I do not agree with his solution. I wish it were that simple, but it’s not. Economics is not simple. If the national debt were like family finances, that would be a proper approach, but again, it’s not. I don’t know how many times I can point it out without it penetrating, but a national economy is a feedback loop. If we were to take the “hunker down, work hard and pay it off” approach, we would be sure to slide into another deep recession and maybe even depression. Jobs are indeed the key, Anson’s denial not withstanding. Jobs generate more jobs, and so on.

Now why is it that nobody on either side of the pond is dealing with this by simply hunkering down to pay it off? I searched for other articles on Sir Mervyn’s comments because the link wasn’t clear to me as to what he meant. Was he complaining about the QE2 decision or saying it was the wrong approach? It turns out that it is he himself who is pushing the U.K.’s QE2, and that amounts to “priming the pump” with money. That’s what Bush II did after the housing crisis and that’s what Obama was forced to do when Bush’s efforts were seen to be failing. They were following the advice of the experts because hunkering down would just make the problem worse – that’s the Herbert Hoover approach. Been there, done that.

Should the budget be balanced and the debt paid down? Absolutely. But as Sir Mervyn said,

“We’re having to deal with very unusual circumstances, but to act calmly to this and to do the right thing.”

Hunkering down and ignoring jobs would be panic and not doing the right thing. And we should also remember that paying off a national debt of some 15 Trillion dollars is not a short-term exercise. Even with a good economy, that could take decades. So, how do we begin? We do it like Confucius said:

Whirlpool

Circling the drain, by tolomea via Flickr

“A journey of a thousand miles begins with one step.”

But in the meantime, we need to worry about jobs. Without jobs an economy is simply circling the drain into financial oblivion.

The U.K., by the way, is worse off than we are. Their inflation is running at 4.5% whereas ours is a little lower at 3.7% as of last August. (The difference is attributed to energy costs.)  Inflation is the principal concern when infusing money into the economy. For more on this and for a balanced, non-panicky review of the effects of Quantitative Easing in the U.K., please consider the purple box at the bottom of the article in this link.

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About Jim Wheeler

U. S. Naval Academy, BS, Engineering, 1959; Naval line officer and submariner, 1959 -1981, Commander, USN; The George Washington U., MSA, Management Eng.; Aerospace Engineer, 1981-1999; Resident Gadfly, 1999 - present. Political affiliation: Independent, tending progressive as the GOP recedes from its Eisenhower roots.
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5 Responses to Hunkering Down

  1. John Erickson says:

    Some of the reporting from the BBC and other British news sources have also suggested there is a great deal of concern (within British financial circles) of continuing problems with the Euro thanks to Greece, Portugal, Spain, and increasingly, Italy, and that Sir Mervyn King is attempting to jump-start growth in the UK to provide a buffer if the continent starts going “down the drain” while supporting the Euro. There’s also been a lot of talk about “ring fencing” the consumer bank portions of the large financial institutions to separate them from the intra- and inter-governmental financial portions to protect them from Greek defaults, but there’s been very little action on that so far.
    Greek and/or Portugal defaulting will be troublesome but manageable. What terrifies me is the failure of either Spain or Italy – or both, which has been batted around as a growing possibility. Angela Merkel is taking a hammering in German politics, and the French don’t seem to have the stomach for much more intervention. It’s getting rather “sporty” over in Europe!

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    • Jim Wheeler says:

      Thanks for the insight, John. I hadn’t heard the term, “ring fencing”, before, but I see it has a small Wiki page. To me, that sounds like the leak that can lead to the dam collapse. I wonder what the breakup would actually entail? (I would never have imagined that so many disparate cultures could hang together as long as they have.)

      You may be right about Greece and Portugal being manageable – they are small compared to the others. I looked up the 2010 GDP’s involved and found them interesting. These are in Trillions of U.S. dollars:

      14.82 E.U.
      0.32 Greece
      0.25 Portugal
      1.37 Spain
      1.77 Italy

      And, for comparison,

      0.17 Ireland
      2.17 U.K.
      2.94 Germany
      10.09 China
      14.66 U.S.

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  2. Pingback: ‘UK crisis to get significantly worse’ |

  3. ansonburlingame says:

    Jim and John,

    Read John’s remarks above and yoiu don’t see JOBs anywhere therein. But you do “hear” concerns about debt. To me jobs are not the end all in themselves. Our problems world wide are bigger than “just” jobs or “just” the housing market (in U.S.) or “just” health care, etc.

    But someone recently, maybe David Stockman or some other link recently read has gotten it right. Unsustainability of our collective financial obligations throughout the western world. Debt is the way we measure such unsustainability in that we must borrow money to met committments previously made under law. Stockman I am sure was the one that refered to western government issues today as the “welfare – warfare” state(s).

    As previously blogged, we USED to go into debt to fight big wars but then paid off those debts. Beginning in the 1930’s under you know who we went into debt for the first time to create social programs to mitigate the Great Depression. And we have NEVER repaid those debts since we started doing that or come even close to doing so. About 30% debt to GDP is a close as we have ever come to that debt repayment.

    And look at us today with debt to GDP at or slightly over 100% (second time since we incurred such huge debt for WWII). And we nor any other western government straddled with debt know how to fix that problem. In the U.S. we have not even been able to turn the curve of debt as Duane used to talk about all the time. I am not even sure if we have turned the curve in deficit spending over the last ten years or so. The deficits seem to just keep going up.

    Also note if interested that I have now blogged on why jobs created by government money don’t work either to fix our sustainibility problem. That only happens when we spend only that which we earn. We went through that argument in 2008 over a $900 Trillion stimulus from government and now we are going through it again over a stimulus half that size. Bottom line is when a job to fix roads and bridges costs $225,000 per job (see last stimulus) we don’t fix many roads and bridges and cannot sustain such pay scales for blue collar laborers or even bulldozer drivers.

    Anson.

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    • Jim Wheeler says:

      Germane to the discussion, I will offer this comment I made on Anson’s blog to those in my readership who might not also be following his:

      Your point about the $225K cost per job is a worthy one, Anson. I agree that on the face of it, it doesn’t seem to make sense. However, as the economists always say, there is more to the argument, and in this case it brings to mind the “multiplier effect”. I have attempted to refresh my memory about that just now and find that there is something to it. On the other hand, as the economists say, it is controversial as to how to measure it. Please consider this from Wikipedia’s page on how the Fiscal Multiplier works:

      For example: a company spends $1 million to build a factory. The money does not disappear, but rather becomes wages to builders, revenue to suppliers etc. The builders will have higher disposable income as a result, consumption rises as well, and hence aggregate demand will also rise. Suppose further that recipients of the new spending by the builder in turn spend their new income, this will raise consumption and demand further, and so on.

      The increase in the gross domestic product is the sum of the increases in net income of everyone affected. If the builder receives $1 million and pays out $800,000 to sub contractors, he has a net income of $200,000 and a corresponding increase in disposable income (the amount remaining after taxes).

      This process proceeds down the line through subcontractors and their employees, each experiencing an increase in disposable income to the degree the new work they perform does not displace other work they are already performing. Each participant who experiences an increase in disposable income then spends some portion of it on final (consumer) goods, according to his or her marginal propensity to consume, which causes the cycle to repeat an arbitrary number of times, limited only by the spare capacity available.

      Another example: when tourists visit somewhere they need to buy the plane ticket, catch a taxi from the airport to the hotel, book in at the hotel, eat at the restaurant and go to the movies or tourist destination. The taxi driver needs petrol (gasoline) for his cab, the hotel needs to hire the staff, the restaurant needs attendants and chefs, and the movies and tourist destinations need staff and cleaners.

      What I get from the above is that a $225K job would be worth the money if the multiplier is 1.0 or greater because it is stopping the slide deeper into recession. Further, if the job itself improves the infrastructure, as in roads, bridges, dams and extending broadband access to remote areas, then it also leverages future economic growth and thereby benefits both business and society. So the real question as I see it is, what is the multiplier? In any case, my points here are:

      1. Government is expected by the electorate to help.
      2. If government chooses to help by cutting revenues further, the economy is virtually certain to get worse in the near term (the Herbert Hoover method).
      3. Stimulus injection might help because of the fiscal multiplier effect.

      For more on the Fiscal Multiplier effect, please see this link:

      http://en.wikipedia.org/wiki/Fiscal_multiplier#United_States_of_America

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