Is the Paradox of Thrift Actually a Paradox?

By contrast, here is Marriner Eccles, to the Utah Bankers’ Association in 1932:

“The theory of hard work and thrift as a means of pulling us out of the depression is unsound economically. True hard work means more production but thrift and economy mean less consumption Now reconcile those two forces, will you?”

( http://delong.typepad.com/sdj/2013/10/david-warsh-marriner-eccles-noted.html )

It is well known among historians of economics that John Maynard Keynes didn’t invent the paradox of thrift – he merely popularised it. Bernard Mandeville was an earlier figure who wrote passages which describe it. The paradox of thrift actually belongs to a broader category of logical fallacy called the “fallacy of distribution”, which also has two types: the fallacy of composition, and the fallacy of division. The paradox of thrift belongs to the former, and not the latter.

That stated, I thought these book reviews of The General Theory on Amazon were quite interesting and useful. They certainly try to deal with the technicalities of the book, which was really written to address his fellow professional economists in academic circles – hence why the message of the text might have come off as “uncommonly difficult” to some. (There’s a reason J.M. Keynes picks The Theory of Unemployment by Arthur Cecil Pigou as a big target in the book.)

http://www.amazon.com/review/R2ZM7IH1ON8VVR/

http://www.amazon.com/review/R3MIH7H023E7U1/

It’s not a moral issue, but as Eric Titus notes, the fondness of economists for being “counter-intuitive” and “finding paradoxes” and “debunking common sense” certainly biases the profession towards certain kinds of results.

Slightly OT and a dumb question because IANAE, but I was trying to translate the linked Krugman post on Germany into concrete, layperson’s language and figure out exactly what it is Krugman (and the U.S. Treas. report he cites) wants German policymakers to do.

Most of this Krugman post seems to focus on current account balances, Germany’s in particular. In order for Germany to reduce its current acct surplus, German companies and/or consumers would have to import more goods and/or services from other countries (and/or export fewer goods and/or services). [A glance at the very old basic econ text on my shelf indicates there are other things that go into the current acct, but I’ll put those aside.] In the pre-euro days when Germany had its own currency, the German govt could have tried to encourage such behavior (more importing, less exporting) by revaluing the d-mark upward. Obvs. it can’t do that now b.c it doesn’t have its own currency. I suppose the German govt cd spend more domestically and thus try to increase the growth rate, in the hope that faster ec growth might translate into more importing (relative to exporting) by Ger. firms and/or consumers. But to the extent (and I don’t know what extent that in fact is) that the Ger. current acct surplus is caused/determined by consumers’ private saving and spending patterns and behavior, I’m not sure exactly what the Ger. govt can do to change that. I suppose it could launch an ad campaign urging Germans to buy more, e.g., Spanish wine. I’m not trying to be flip but rather trying to figure out what are the (implicit) concrete policy prescriptions of the Krugman post as it specifically relates to the current acct/trade balance issue.

Krugman wants Germany to allow higher inflation in the euro and quit demanding counterproductive austerity measures.

LFC,

Krugman basically wants Germany to adopt the same stimulus policies he advocates for the US. More public spending, temporary tax cuts. This will push up consumption by government and by Germans, and some of that will be met by imports. The savings rate is not fixed in stone and total savings even less so. Give people money and they’ll spend at least some of it, and obviously direct public spending is consumption. Ideally (both to accomplish Krugman’s goals and to minimize German inflation, which is very important to them, although sorta anti-Krugman’s goals in a second order way) they would target their increased spending toward imports, but that’s pretty hard and not really necessary. Higher inflation in Germany will also act similarly to a currency appreciation and can be induced by heavy stimulus.

Also I’ve read there are some anti-protectionist measures the European Commission has been bugging Germany about, such as restrictions keeping foreigners out of the construction industry. They should do that stuff but it’s of small importance compared to a big stimulus.

If I read more economist’s notes would I come across more fairly lengthy interpretations of contested rhymes? If so this would conspire to make economic readings more interesting.

(Please delete mods if this is considered too lengthy a quote – it does happen to be on topic though)

Keynes “Short [?] Notes Suggested by the General Theory”
On Mercantilism

“Though complaints of under-consumption were a very subsidiary aspect of mercantilist thought, Professor Heckscher quotes a number of examples of what he calls “the deep-rooted belief in the utility of luxury and the evil of thrift. Thrift, in fact, was regarded as the cause of unemployment, and for two reasons: in the first place, because real income was believed to diminish by the amount of money which did not enter into exchange, and secondly, because saving was believed to withdraw money from circulation.”[29] In 1598 Laffemas (Les Trésors et richesses pour mettre l’Estat en Splendeur) denounced the objectors to the use of French silks on the ground that all purchasers of French luxury goods created a livelihood for the poor, whereas the miser caused them to die in distress.[30] In 1662 Petty justified “entertainments, magnificent shews, triumphal arches, etc.”, on the ground that their costs flowed back into the pockets of brewers, bakers, tailors, shoemakers and so forth. Fortrey justified “excess of apparel”. Von Schrötter (1686) deprecated sumptuary regulations and declared that he would wish that display in clothing and the like were even greater. Barbon (1690) wrote that “Prodigality is a vice that is prejudicial to the Man, but not to trade. … Covetousness is a Vice, prejudicial both to Man and Trade.” [31] In 1695 Cary argued that if everybody spent more, all would obtain larger incomes “and might then live more plentifully”.[32]

But it was by Bernard Mandeville’s Fable of the Bees that Barbon’s opinion was mainly popularised, a book convicted as a nuisance by the grand jury of Middlesex in 1723, which stands out in the history of the moral sciences for its scandalous reputation. Only one man is recorded as having spoken a good word for it, namely Dr. Johnson, who declared that it did not puzzle him, but “opened his eyes into real life very much”. The nature of the book’s wickedness can be best conveyed by Leslie Stephen’s summary in the Dictionary of National Biography:

Mandeville gave great offence by this book, in which a cynical system of morality was made attractive by ingenious paradoxes. … His doctrine that prosperity was increased by expenditure rather than by saving fell in with many current economic fallacies not yet extinct.[33] Assuming with the ascetics that human desires were essentially evil and therefore produced “private vices” and assuming with the common view that wealth was a “public benefit”, he easily showed that all civilisation implied the development of vicious propensities….

The text of the Fable of the Bees is an allegorical poem — “The Grumbling Hive, or Knaves turned honest”, in which is set forth the appalling plight of a prosperous community in which all the citizens suddenly take it into their heads to abandon luxurious living, and the State to cut down armaments, in the interests of Saving:

No Honour now could be content,
To live and owe for what was spent,
Liv’ries in Broker’s shops are hung;
They part with Coaches for a song;
Sell stately Horses by whole sets;
And Country-Houses to pay debts.
Vain cost is shunn’d as moral Fraud;
They have no Forces kept Abroad;
Laugh at th’ Esteem of Foreigners,
And empty Glory got by Wars;
They fight, but for their Country’s sake,
When Right or Liberty’s at Stake.

The haughty Chloe

Contracts th’ expensive Bill of Fare,
And wears her strong Suit a whole Year.

And what is the result? —

Now mind the glorious Hive, and see
How Honesty and Trade agree:
The Shew is gone, it thins apace;
And looks with quite another Face,
For ’twas not only they that went,
By whom vast sums were yearly spent;
But Multitudes that lived on them,
Were daily forc’d to do the same.
In vain to other Trades they’d fly;
All were o’er-stocked accordingly.
The price of Land and Houses falls;
Mirac’lous Palaces whose Walls,
Like those of Thebes, were rais’d by Play,
Are to be let …
The Building Trade is quite destroy’d,
Artificers are not employ’d;
No limner for his Art is fam’d,
Stone-cutters, Carvers are not nam’d.

So “The Moral” is:

are Virtue can’t make Nations live
In Splendour. They that would revive
A Golden Age, must be as free,
For Acorns as for Honesty.

Two extracts from the commentary which follows the allegory will show that the above was not without a theoretical basis:

As this prudent economy, which some people call Saving, is in private families the most certain method to increase an estate, so some imagine that, whether a country be barren or fruitful, the same method if generally pursued (which they think practicable) will have the same effect upon a whole nation, and that, for example, the English might be much richer than they are, if they would be as frugal as some of their neighbours. This, I think, is an error.[34]

On the contrary, Mandeville concludes:

The great art to make a nation happy, and what we call flourishing, consists in giving everybody an opportunity of being employed; which to compass, let a Government’s first care be to promote as great a variety of Manufactures, Arts and Handicrafts as human wit can invent; and the second to encourage Agriculture and Fishery in all their branches, that the whole Earth may be forced to exert itself as well as Man. It is from this Policy and not from the trifling regulations of Lavishness and Frugality that the greatness and felicity of Nations must be expected; for let the value of Gold and Silver rise or fall, the enjoyment of all Societies will ever depend upon the Fruits of the Earth and the Labour of the People; both which joined together are a more certain, a more inexhaustible and a more real Treasure than the Gold of Brazil or the Silver of Potosi.”

Is the paradox of thrift actually a paradox?

It seems that way to me. But what is a paradox, anyway? A 3-dimensional thing (so to speak) that looks very different from different angles? Someday it may be conventional wisdom to say that, long term, spending money is actually good for one’s bank account.

But speaking of favorites, here is one of mine. I noticed over the years that one thing William F. Buckley had in common with Noam Chomsky was a particular affection for the law of identity: If A then not not-A. Which seems to me doesn’t hold at all.

“What is obvious is not obvious.”

The question of whether this is a paradox ties in nicely to Ingrid’s thread. It’s a paradox not in terms of the economics (where Hirschman is right that this is perfectly plausible) but in the moral sense. Mandeville makes that even clearer than Keynes: Individually morally good actions (frugality) lead to an overall negative outcome (crisis).

adam.smith@17
Crisis or Utopia? I am not sure that Mandeville makes it clearer – the rhyme’s point seems to have been quite contested and he got into trouble for writing it. He wrote a preface amidst the trouble.

“’Twas said of Montagne, that he was pretty well vers’d in the Defects of Man-kind, but unacquainted with the Excellencies of human Nature: If I fare no worse, I shall think my self well used.”

“But if, without any regard to the Interest or Happiness of the City [of London], the Question was put, What Place I thought most pleasant to walk in? No body can doubt but, before the stinking Streets of London, I would esteem a fragrant Garden, or a shady Grove in the Country. In the same manner, if laying aside all worldly Greatness and Vain-Glory, I should be ask’d where I thought it was most probable that Men might enjoy true Happiness, I would prefer a small peaceable Society, in which Men, neither envy’d nor esteem’d by Neighbours, should be contented to live upon the Natural Product of the Spot they inhabit, to a vast Multitude abounding in Wealth and Power, that should always be conquering others by their Arms Abroad, and debauching themselves by Foreign Luxury at Home.”

A bit absurd racism targeted at Germany is quite convenient at those times when you got caught taping the chancelors phone, isnt it.

hix, here’s Krugman:

“Oh, and yes, the US inexcusably spied on Angela Merkel — but that has nothing to do with this, and anyone bringing it into this conversation thereby demonstrates his or her intellectual bankruptcy”

And he’s right, as he is most of the time.

notsneaky, don’t forget,

“Also, frank talk about German economic policies doesn’t make you anti-German or anti-European; again, anyone trying to evade the substance by bringing that kind of accusation in has in effect conceded the argument.”

Agreed!

Chaz, you type some super-charged rhetoric as if it was a statement of fact. That is not a good conversation. It doesn’t mean anything, or at least I can’t make any sense of it.

How do inadequate demand and excessive consumption interrelate?

Krugman 2013
” We are still in a world ruled by inadequate demand, and very much subject to the paradox of thrift.”
“The Scientific Revolution that accompanied the revolution in industry has also given us far more knowledge about the world, including an understanding of what we ourselves are doing to the environment.”

Schor 2005
“One aspect of recent consumer history that has not been sufficiently addressed is the growth of what I term excess consumption. This refers to addi- tional consumption that is triggered by declines in the prices of goods and commodities caused by the particular organization of the global political econ- omy. Broadly, I intend the term excess consumption to refer to the fact that the structure of global power, and in particular the dominant role of the United States, has artificially reduced prices for consumers in the industrialized countries, and this in turn increases consumption demand both through substi- tution effects and because real purchasing power is greater.”

Layman, I didn’t perceive an attack. I was just saying that they pursue their interest, as they see it, and it would be odd to expect anything else. Like I said, no one has dropped out of the Eurozone yet; if/once it starts happening, and if they don’t like it to happen, then they’ll have to adjust their behavior, of course. But for now everything seems to be working well for them: 7.7% unemployment, the lowest in the EU. Very successful governing there, I’d say.

Prices and quantities: Unsustainable consumption and the
global economy – Juliet B. Schor

Why funny – is it incorrect is a definitive sort of way? I know it’s a little old.

Well, I think you are choosing to pay attention to the less significant things in the article (of course with the GDP figures if there is something wrong or inconsistent there it’s a shame it wasn’t corrected).

In terms of saving representing future consumption – isn’t that what the paradox of thrift thing is supposed to be about? Or perhaps I have misunderstood.

What I think is important, on the other hand, is that if you have economists like Krugman arguing that our demand is not high enough, at the same time as you also have numerous scientists arguing that we are consuming materials at an unsustainable rate – then one or the other position must be wrong – unless you would argue that Krugman implicitly only wants to increase the demand for human services that are decoupled from or have nothing at all to do with increasing the use of materials?

“For Krugman today demand is not high enough and should be increased but perhaps at some future point it might be too high and should be decreased.”

Are you sure Krugman is explicit somewhere that at some future point (when?) demand would be too high and should be decreased (ie. thrift should be increased) ? What is his method for determining this future point (and why not now?), and what transformations does he propose for the economy then – because going in one way and then the other way would be and about face for the economy and the people to make.

Note: I’ve been a proud member of the “max’d out” 401k group for most of my life.

But this very interesting discussion is on pretty swampy ground – what is “saving”, anyhow? How do you truly “save” for the future? Financial assets are obviously ephermal. A solid roof over your head one minute could be a drone-produced crater the next. And etc.

The only kind of “saving” that makes sense is, per above, as “investment” but that isn’t savings at all just (gasp!) redistribution – it isn’t investment if the money doesn’t get spent immediately. And that, I think puts paid (sorry, couldn’t help myself) to the “investment is future consumption” story, at least at the group level.

So my money proudly goes into my 401k hoping that somebody makes something useful that will benefit me* down the road, probably pretty indirectly if truth be told. But if everybody just sits on it (and that EXACTLY what our “low taxes on the rich” encourages, heck, demands) we are all screwed.

*Google yes, Facebook, not seeing it…. best would be if gov’t just skims some off the top and fixes my road.

mattski
“No, ZM. Krugman is talking about the health of the economy which is more or less a question of are people able to find work and have a decent standard of living. Scientists in your example are talking about planetary resources. That is a different question. And I believe Krugman would point out that humans are constantly improving the efficiency of production and consumption so that it would be difficult indeed to say with certainty what the “carrying capacity” of the planet is.”

well, if by work you mean actions, then you could argue that work could have not so much to do with planetary resources (obviously, people engaged in acting would still want a ground to stand on, air to breathe, perhaps a little light and even a breeze) – for instance, they might dance, or play hopscotch, or bow, or speak as their work, in which case it would be materially negligible.

By decent living standards I’m guessing that you are not meaning the individuals moral standards, but are speaking of the material conditions which in part constitute a persons life. Now, provisionally supposing this is so, “decent” (what is decent? Who decides? How?) living “standards” ( if these are standards that sould apply to everyone globally does the categorical imperative apply? Something else?) are completely bound up with planetary resources, and if Krugman doesn’t acknowledge this he cannot see the forest for the trees.

So, the are related questions – and I was asking about the relationship, in the context of the idea of thrift (which I am unsure of bring a paradox or not – it must be related to parable in someway).

I am not sure Krugman is so optimistic as to the infinite extension of the earth’s carrying capacity, and he does acknowledge that us acting so is a gamble in the context of climate change at least –
“But it seems that we have, without knowing it, made an immensely dangerous bet: namely, that we’ll be able to use the power and knowledge we’ve gained in the past couple of centuries to cope with the climate risks we’ve unleashed over the same period. Will we win that bet? Time will tell. Unfortunately, if the bet goes bad, we won’t get another chance to play.”

It is uterly inapropiate to make up some push efffect of any random country you dont like (yesterday China, today Germany, why those 2, the data sure does not back up targeting those, never did*) . The cause of excesive current account deficits in a few countries is massive societal failure there, mainly in the US. It is pathetic. First, the decade long denial, all those claims about how the current account deficits are a sign of strenghts, as opposed to structural problems as they always were in reality. Then to turn arround and claim one was forced to overconsume by other countries policy.

*Maybe those 2 are the major targets because the basis of US foreign policy is still based on realpolitik kindergarten?

Henry, can you put me out of my misery from reading that cited favourite Hirschmann essay and tell us what he does think about the truth claims of his four simple and beautifully arranged ideas – telling the reader they could only know by reading chapters in Hirschmann 1981 made me be all – argh no fair Hirschmann!

“The cause of excesive current account deficits in a few countries is massive societal failure there, mainly in the US.”

Can you explain the specific societal failures that have caused what you consider to be an excessively large US current account balance or is this just empty rhetoric? Is the reverse true as well–if the USA pursued mercantilist practices to eliminate the current account balance (immediately sending China, Japan, South Korea, and Taiwan into recession) would that repair our moral fabric?

Would you not call it a massive societal failure that Germany is chronically unable to maintain full employment in absence of a large trade surplus?

The taste for difficulty and paradox is selective. For example, intellectuals did not receive as favorably Marx’s paradox of the fallacy of composition that a spurt of individual decisions to raise profitability will tend to reduce the average profit rate. Yet another aspect of the paradox is that a likely rational response to the fall in the average rate of profit would be investment decisions that in the aggregate would likely reduce the average rate of profit further. John Cassidy rightfully talks about irrational rationality; and so did Marx.

ZM @ 43, 44

By decent living standards I’m guessing that you are not meaning the individuals moral standards, but are speaking of the material conditions which in part constitute a persons life…

Yes, indeed, that is what I’m talking about. Material conditions of life. Who decides what decent is? Who do you think decides what decent is? Shouldn’t everyone have the right to decide what they consider to be a comfortable and dignified life? And isn’t that more or less what democracy aspires to?

ZM, taking your comments as a whole, it seems to me that you are placing your hopes on the arrival of some sort of “benevolent dictator” who is going to save the day by telling people how they have to behave. Well, I don’t think that is ever going to happen. Humanity might survive, or maybe not. It’s a close call and we just don’t know.

mattski @53
“Who decides what decent is? Who do you think decides what decent is? Shouldn’t everyone have the right to decide what they consider to be a comfortable and dignified life? And isn’t that more or less what democracy aspires to?”

1. a) first things first – what is decent:

1530s, “proper to one’s station or rank,” also “tasteful,” from Middle French décent, or directly from Latin decentem (nominative decens) “becoming, seemly, fitting, proper,” present participle of decere “to be fitting or suitable,” from PIE *deke-, from root *dek- “to take, accept, to receive, greet, be suitable” (cf. Greek dokein “to appear, seem, think,” dekhesthai “to accept;” Sanskrit daÅ›asyati “shows honor, is gracious,” dacati “makes offerings, bestows;” Latin docere “to teach,” decus “grace, ornament”). Meaning “kind, pleasant” is from 1902. Are you decent? (1949) was originally backstage theater jargon for “are you dressed.”

So – what is honourably and graciously fitting and suitable is my reading of that. Yours?

1. b) who decides – well, as everyone who reads Alice in Wonderland knows (sorry, I know, we’ve been here before) decisions about the meanings of words/symbols are funny sort of things – what do we do if a fellow decides to say they see neither a rabbit or a duck but are all –

“indubitably, my good fellow, I see linguists at ten paces. And ten hundred thousand ponies to boot”.

I know you guys up there to the right or extreme left, however you spin in, are gonna be –

“hey, we have this clause that’s about freedom of speech – and another one that’s about freedom of association – and if we wanna associate one meaning to another word, well hey you apron-string-tugging-colonials, it’s our constitutional right literally in the sense of the OED of which you must approve, referring to dictionaries and all”

So, where was I, oh yes, – I think one must try to discern what is decent.

One? you say – which one? Oh yes, who, that was the key. Who? As the television show has it.

Well, in a sense we all do discern this for ourselves – but in another sense I happen to live neither in an anarchy, or Athenian democracy (yeah I know this is a touchy subject up there, with one party alway telling another – hey we’re a republic – the other shooting back that all men are equal (except except the founding fathers stuttering splutter is still heard) stuff, plus our name’s the right name and we are super indubitably a democracy wherein everyone has an equal chance of becoming president at the next election [you political science folks should run this as an experiment – object: to observe what happen when everyone stands]) – but, back to me – I live in this place where, funnily enough, the whole population aren’t involved in law making constantly, but, at the Commonwealth level, bills are debated in a bi-cameral parliament (wherein are MPs who are elected by local electorates, and senators who are elected proportionally for each state. and, oh yes, we have compulsory voting at elections. if people want to cast a donkey vote they may) and if they are passed in both houses and get Royal assent they become acts of parliament – and thus laws are built.

So – as to who – some discernments as to decency are determined by myself, others by that new fangled method described above.

2. Shouldn’t everyone have the right to decide what they consider to be a comfortable and dignified life?

Aargh. We started with decent and now we have gone to comfortable AND dignified. Eeeek these are not the same at all. Plus I’m not sure if you’re talking “disciplined by political realities on the ground” right to decide (bye bye Pakistani rights to decide in that case I guess, and bye bye German rights to decide too, to a lesser extent, going by that most disciplined of men.) or Castles in the Air right to decide (if so, without question with my non existent magic wand i would grant every shanty town dweller the right to decide to live like kings if they so desire it, and glass slippers all around).

So, I guess with that, we’re back to the whole no-one has the right to unilaterally decide how they live when they live in communities – a hair shirt wearing hermit OTOH. Then, on top of this (hey, what is this, some sort of tiered cake argument, I hear you grumble disgruntled) we happen to have established that we’re talking about the material conditions of life – and – Boo! Hiss! Look Below You! Something’s Creeping Under You! – we live on a little round earthy planet, that is bounteous to a degree but not necessarily to the degree of satisfying all of those When Our Ship Comes In kind of demands.

In short, the Promethean should is something I have no power over, all I can see is that we don’t. The should you’re suggesting is simply not there.

3. So we’re back to democracy again. Tell you what, when you’ve got all those folks nominated for President next time around, I’ll think this claim over more seriously. But because some carpetbaggers have happened to have sold people on the idea they live in democracies when they don’t, I really can’t argue about this one. It’s not there either. But sadly all those aspirations you mention seem to be there regardless.

4. “Humanity might survive, or maybe not”
Humanity is an idea, a fellowship of folks you might say, but it is made up of individual humans, who say and do different things. “You might survive, or maybe not” – said the soldier to the communist or the West Papuan (apologies to Indonesia, it’s an example not a singling out). I couldn’t bring myself to watch The Act of Killing, but I read some interesting articles about it – and how the killers were influenced by genre movies, and wanted to reenact the killings as genre pieces too. Sans responsibility.

Also, if you take the US’s large trade deficit as a given (I would only take part of it as a given), then the US’s very low savings rate (private and government combined) is actually a very healthy adaptation. Without all that “excessive” domestic consumption we would have a structural shortage of demand and thus high structural unemployment. Basically we’d be like Spain post-crash. We’re currently like Spain pre-crash, but since we have our own currency (which foreigners greatly desire) it’s more sustainable. Unfortunately, though the US government has infinite dollars, US consumers do not. Thus within the domestic sector it would be best for us to move to higher government deficits and less consumer borrowing.

Chaz – one answer is Monica Prasad’s book: http://www.hup.harvard.edu/catalog.php?isbn=9780674066526 which describes how the US developed its economy based on consumption and easy credit. I’m not necessarily agreeing with all of what she says, but especially when you read this together with the Varieties of Capitalism literature http://en.wikipedia.org/wiki/Varieties_of_Capitalism that highlights the importance of welfare state institutions for high-skill industrial production you get a sense of where the larger societal failure is. It doesn’t lend itself to policy advice for quick&easy course correction, of course.

My point isn’t simply to be polemical, it’s a call to realism. This shouldn’t be a game of creative writing, in which a narrative is bolted onto a string of statistical artifacts, and various, emotionally evocative terms are attached, like charms on a bracelet.

I haven’t read the entire book, I’ve just read parts of it and heard her talk about it (and mostly about the later part), but the globalization–> change narrative I’d say is very typical for economic sociology/political economy:
globalization –> changing domestic political realignment depending on economic structure –> divergent policy outcomes.

That’s very similar to the general causal chain in her neoliberalism book, where you also have a common shock (she starts with the Oil crisis IIRC) that gets translated differently by different domestic political and economic structures.

Isn’t it typically “shock” plus some (possibly implicit) form of aging or anacyclosis? The “shock” serves in part as a way to get the narrative analysis off the ground of a vaguely drawn, historical prologue.

Chaz @56 57

I’m not sure you can in good faith argue that countries prefer or desire building up US currency reserves:

WSJ March 2008: “- China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the U.S. role in the world economy.”

Zero Hedge Oct 2013: “We assume it is a coincidence that on the day in which we demonstrate China’s relentless appetite for gold, driven by what we and many others believe is the country’s desire to have a call option on a gold-backed reserve currency when the time comes, just posted in China’s official press agency, Xinhua, is an op-ed by writer Liu Chang in which he decries the “US fiscal failure which warrants a de-Americanized world” and flatly states that the world should consider a new reserve currency “that is to be created to replace the dominant U.S. dollar, so that the international community could permanently stay away from the spillover of the intensifying domestic political turmoil in the United States.””

And when you say they’ll stop when they feel they have enough, isn’t all that – gosh, darn, I’ve forgotten the euphemism – oh yes, quantitative easing, kind of deflating the value of the reserves they have already accumulated?

Chaz:

A lot of countries are trying to build up large currency reserves to ensure their central bank can keep their currency stable in a financial crisis, especially since the Asian financial crisis of the ’90s. The preferred form of reserve is US Treasury bonds, and in order for countries to increase their horde of dollar assets the US has to run a current account deficit.

US Treasury bonds as a “form of reserve” is a bit puzzling. When, say, China’s central bank buys a $10,000 US Treasury bond, it is of course loaning $10,000 to the US govt, which proceeds to pay the Chinese central bank interest on the loan. Holding US T-bonds is holding dollar-denominated ‘paper’, but if doing so is increasing the Chinese central bank’s stock of dollars (dollar reserves) it’s certainly not doing so all at once, since the interest is paid over time. In the short run buying lots of T-bonds would decrease a foreign central bank’s stock of dollars, not increase it, ISTM. So, (again) ISTM, holding T-bonds is not the same as holding dollars, though people may treat them as equivalent.

I’m unclear on the connection if any to the US current account balance (US borrowing abroad shows up on the US capital account balance, but that’s different). The US govt is selling T-bonds mainly to finance/cover its budget deficit.* The Chinese central bank is loaning dollars to the US govt; I suppose some of that might find its way into consumption, but still, China is not loaning dollars to US consumers to help them buy Chinese-made products in US stores. Hence if there’s a connection between US govt borrowing abroad and the US trade balance, it would seem to be indirect at best. (And my impression is that economists don’t entirely agree about the relation between budget deficits and trade deficits, suggesting at least that it’s not obvious.)

*I put aside for purposes of this comment the Fed’s buying billions of dollars of T-bonds, since that just confuses things further.

The Chinese buy loads of U.S. sovereign and near-sovereign (Fannie Mae securitized mortgages, etc) debt as part of a scheme for maintaining a currency exchange rate peg, which makes investing in manufacturing capacity for export a low-risk proposition. U.S. and multinational corporations with claims on distributional rents have encouraged to take advantage of this distortion; the flood of branded goods through big U.S. retailers is the result.

The exchange-rate peg is low enough that this is, in the long-run, a highly destabilizing policy, but it has enabled China to maintain a very high rate of investment. This is not, it may be noted, a matter of inflows of foreign direct investment to China to buy Chinese assets — very little of that is permitted, and domestic consumption has been severely repressed to maintain the rate of investment necessary for a rapid growth rate. Both the domestic Chinese banking system, not institutionally strong to begin with, and the U.S. financial sector, have been corrupted by this practice.

This is not familiar territory for most people, but it is far from rocket science. The key insight is that money is how we keep score, not an hydraulic flow.

Precisly because im very aware about how the current account surpluses/deficits are distributed over industries and countries and how that has changed during the crisis rebalancing or not changed much in the US case, where they were not adressed, im so shocked about those braindead attacks.

Now we could go trough all that data, and even debate structural problems in Germany, or debate how interaction between different economic cultures amplified both the Eurozone and the US crisis in neutral non blame asigning terms, but that would lead nowhere in this context. It would be like telling someone who thinks Obama is a secret Muslim born in Ghana that no, Obama is not a secret Muslim born in Ghana. That just reinforces the lie.

So lets make i it simple, the US fucked up at home, that explains 90% of the story and getse 0% of the debate time with regards to current accounts.

LFC @69:

Reserves are held in T-bonds because T-bond markets are highly liquid and one might as well earn some interest on one’s holdings, (which compensates for inflation risk, if not interest rate risk). That has nothing to do with lending the U.S. government money. Also the current account and the capital account are mirror image negatives of each other; a positive one is a negative other in the exact same amount. This is an N.I.P.A. accounting identity, which always obtains, regardless of what happens causally or structurally or behaviorally to bring the result about. If a country is running a current account deficit, by definition, it is consuming more than it produces and it is importing capital in the same degree. It doesn’t really matter exactly how the flows are arranged or which particular agents take on the borrowing or consumption. Nor does it necessarily say who or what is responsible for the situation and whether it is a good or bad thing for any or all involved.

“Doesn’t a buyer of a T-bond pay dollars to buy it? Of course this is done in this context electronically, a matter of keystrokes and blips on a screen, but isn’t that what’s actually happening? (Btw you don’t address the question about the relation between budget deficits and trade deficits.)”

I’m not sure if you’re trying o get at this, but is the problem to do with the borrowing of money to finance a trade deficit (yes I’m aware at the individual level this doesn’t hold – I mean at the national aggregate level) and now there’s not ony QE but now some people internally are arguing for a specially minted coin to pay off the debt?

Putting Chaz’s and Halasz’s comments together, I draw the inference that “the markets” and banks etc treat T-bonds just as if they were dollars. I was trying to suggest @69 that they are different, but as a practical matter that’s apparently wrong. I think we are fairly far, in any case, from the OP’s subject of the paradox of thrift, (another thing I didn’t bother to dig into).

p.p.s.
A key pt on which Chaz and Halasz seem to agree is that (quoting Chaz) “in order for countries to increase their horde [sic; s/b “hoard”] of dollar assets the US has to run a current account deficit.” And according to Halasz this is so b/c of accounting identities, “regardless of what happens causally or structurally or behaviorally to bring the result about.” (This last phrase is in one way comforting, I suppose, since it means “what happens” doesn’t, for these purposes, matter.)

@halasz
Thanks, I follow at least some of this. I understand that it is not necessarily bad to run a moderate CA deficit. I never suggested it was bad. I’m mainly asking questions here, not making judgments about what’s good or bad.

When I said it doesn’t much matter who buys the bonds that ultimately would finance the CA deficit, I meant, aside from the possibility that a government could simply print currency rather than issue debt, … the government can always pay any public debt issued in its own currency, including interest. (Countries can run into trouble when they issue debt in foreign currencies.)

My puzzlement (well, one of them) is that I don’t know what actually happens when the US govt sells a bond to, e.g., a foreign bank. Presumably some blips cross some computer screens, but what do those blips represent? If, for ex., a Chinese central bank officer were to write a check to the US govt to buy a T-bond — and I understand it happens by computer keystrokes not by check, but let’s pretend it happened by check — would the check be written in dollars or RMB? Or doesn’t it matter? And when the US govt pays interest to the Chinese bank, presumably it’s paying in dollars, right?

You use the phrases “importing capital” and “issuing debt,” but “to issue debt” is “to borrow,” isn’t it? Why not use the phrase “to borrow”? If this were a tea party site where all deficits and hence all borrowing were viewed as evil, I could see avoiding the word. But those circumstances don’t obtain, obviously.

mattski @80

“When I say decent you know what I mean.”

No, I don’t really. I know in terms of my own material standard of living, it’s lower than the Australian average, but it is still in, say, the top 20 per cent of the world based on income (I can’t remember the exact percentage off the top of my head). If you accept current overall human consumption of material natural resources is creating a likely ecological catastrophe (climate change, mass extinctions etc), which I do, and would be interested to know if people have authoritative research by environmental scientists that state otherwise (and no, geologists do not count) – then my standard of living is unsustainable and needs to be lower, and most other people’s in developed countries and some developing countries as well.

I have read a back of the envelope calcuation suggesting that, for Australia, our material consumption would have to drop to 6 per cent of what it currently is to come near to being sustainable (and this includes other poorer countries consuming less than that 6 per cent):

“Multiply these factors together and we end up with a reduction to about 6% of what we currently consume in energy and materials in Australia. That is 16 times less than we now use.

This is the goal we need to set, without which we have little chance of hitting the target – survival. I hope that survival is what most people want.”

http://theconversation.com/our-sustainability-crisis-didnt-start-and-doesnt-stop-at-climate-change-17471

Our current standard of living is largely indecent I surmise.

Our current standard of living is largely indecent I surmise.

I don’t dispute that we are on an environmentally disastrous trajectory. The problem is what to do about it. A lot of people in rich nations are poorly informed about these matters and don’t think we need to change much. That’s one problem. Many more people in poorer nations wish for a higher standard of living. Can you blame them? That’s another problem.

Then there are questions about how politics works, how things get done. There are also questions about the promise of technology to keep our standard of living high while impacting the environment less and less. This makes it very difficult to make judgements about what levels of material comfort we can “afford.”

Sorry, “come to a conclusion” (they probably proofread too these people)

ZM @88

[Rawls] suggests a society be formed by people who think and come to a conclusion about the best way a society should run/their own interest or something – and then all the people come together to form a society.

No. The original position, as R. calls it, is a hypothetical situation. It’s not that people actually get into the orig. position (OP), decide on principles for the basic structure of a society, and then proceed to form that society. Rather, the point of imagining the OP is to provide a theoretical justification for principles that R believes either already accord with (or roughly match) the considered judgments of most people in existing societies or would accord w those judgments on further reflection. Armed w this theoretical justification and with their considered judgments confirmed and/or clarified in the light of it, people in actually existing societies can, perhaps, act in ways that make it more likely that their actual societies will be brought closer to one based on the aforementioned principles. The orig. pos. is not like a conference or mtg where actual people get together and decide things, nor is it a place where people “form a society.” It’s a hypothetical situation, as (in a somewhat diff. way) the state of nature is usu. a hypothetical situation in one well-known tradition of Western pol. thought. The OP is something that people in already existing and running societies are asked to imagine in order to help them reach and/or clarify their own judgments about what a just society is. (Having imagined it, some may end up finding R’s arguments persuasive and others may not.)

Worth reading at least the opening sentences of Freeman’s Stanford Enc. article:
http://plato.stanford.edu/entries/original-position/

(Sorry if above sounds didactic and I don’t mean to import the R. thread over here. I’m sure everyone has had enough of it by now.)

Eeek, thank you LFC and bianca steele, – sorry, i knew it was just Rawls making a story up, not that there would be a way for the OP ever to happen. I just wrote my comment quicky so i guess the clarity was a bit muddled. i don’t think mattski would have thought it was a genuine direction by Rawls to future pioneers either, but I guess someone reading not used to my dashed off writing (usually i am just happy to have got to the end of my train of thought, and if i read it over i think of new things to add, like this bracket) could have gotten misled, so thank you.

I thought the imagined people, once they had come to their conclusions, would have to come together b/c as far as I could tell Rawls didn’t suggest all the people thought exactly the same way (doesn’t the difference position mean he understood people were different, and at least to an extent, recognised and/or valued that difference – or are the OP and the DP completely separate and confined?) – they wouldn’t need to think up how to be in a society in the first place I guess, it would be easy for them???

He writes

“Or are they [conditions for a fair system of cooperation] conditions settled by an agreement [arising from coming together?] reached by free and equal citizens engaged in cooperation, and made in regard of what they consider their reciprocal advantage, or good….nor can they agree abouna moral order of values….so what better alternative is there than an agreement…”

“ZM at 67: Thank you for accusing me of arguing in bad faith.”

Sorry, my apologies. I genuinely assumed you weren’t arguing in good faith, because your conclusion is foreign to me and also made me cross in its assumptions.

If you tell me you’re stating things plainly as you see them, how did you arrive at the conclusion that weak countries would act to accumulate reserves of the most powerful country’s bonds/dollars (sorry I’m a bit confused with the intricacies, which you seem to know a lot better than I do) out of preference or desire?

It would truly seem to me that the pressures of the global economic system, which the US seems to me to actively seek to construct to ends suiting what certain sorts of people would say its interest were, would mean less powerful countries would accumulate these reserves to try to protect themselves, and as a type of insurance? I myself don’t see why any country would simply prefer or desire to stockpile foreign currency that can be deflated easily – what would their reasons behind this preference or desire be?

It seems to me that weaker countries often provide stronger countries with excess consumer goods (embedding labour and materials, although these may be imported from “middle power” (ugh) countries like Australia) and buy US cultural products and some other things (medical products etc), and then the US and its allies don’t intervene in “uppity” weaker countries by bombing and disposing of presidents and so forth. Australia i think developed a military alluance with the US because we are not string enough to protect ourselves, and most people don’t want weapons if mass destruction here, but then we are often pressed into going to wars and our governments usually agree to most of the clauses in trade agreements that the US presses upon us too. And then various politicians also try to curry favour with the US by, I can’t think of the correct word, but similar to informing on what is happening in the Party rooms and so forth.

So my conclusion would be that those countries were pressed into accumulating US reserves, not that they would necessarily prefer or desire it if they were left to act of their own volition.

So my conclusion would be that those countries were pressed into accumulating US reserves, not that they would necessarily prefer or desire it if they were left to act of their own volition.

ZM,

Yikes. This is not an opinion based on careful consideration of available facts.

Okay, I’m not an expert on this. Again I’m pulling it from Warren Mosler, so you may want to read him or a relevant economics textbook. But here goes:

For countries that have their own currency, their central bank has to administer it one of two ways. Way one is a floating currency, which is what the US, Britain, Canada, Australia, Sweden, Japan, and many others have. This means that the central bank does not fix the value of the currency relative to any other currency and does not allow you to “convert” (see below) one currency to another. All the world’s floating currencies float on a market and their exchange rates relative to each other are determined by supply and demand. This used to be unusual. Before the Great Depression almost every country pegged to gold and afterward most pegged to the dollar. The problem with floating currencies is that supply and demand for the currency can change quickly. For big economies it tends to be adequately stable, but more small countries the currency value can shift around wildly, which disrupts trade and makes foreigners nervous about investing in your country.

Way two is a currency peg. Currency pegs used to be the dominant method and are still common for developing countries. The central bank “pegs” the value of their currency to another currency (from a larger or richer country) or to gold. The most popular currency to peg to is the dollar; the deutschmark used to be popular to peg to in Europe, and now some countries peg to the euro, such as Denmark and Kosovo. When Denmark uses a peg that means the kroner has a fixed exchange rate and the Danish central bank has a standing offer to “convert” kroner to euros or euros to kroner at that exchange rate for anyone who asks. They don’t convert it by magic or chemistry, they really just trade one for the other. In order for them to give you kroner for your euros they have to have kroner; that’s easy enough because they create kroner themselves. But in order to give you euros for your kroner they have to take them out of their reserves. That means they have to keep enough euros in reserve at all times to meet the public’s exchange desires. In Denmark’s case I think the European Central Bank may help them with that in some way, but ignore that; the normal situation, such as for an Asian country pegging to the dollar, is that they have to accumulate the reserves totally on their own. The public’s (this is the world public) exchange desires can be very unstable and fickle; they’re determined by world trade and the world financial market. If there is a run on kroner (everyone wants to get rid of their kroner by exchanging them for euros) then Denmark needs to have very big reserves of euros or they’ll run out. If they run out of euros then they effectively switch to being a floating currency: they can no longer keep the kroner at their desired exchange rate and the value of the kroner will start to drop. They don’t want that.

Even for countries that maintain a floating currency, the central bank may worry about the exchange rate floating too far from their desired level. If they feel their currency is too low (undervalued) then the central bank can buy up their own currency on the market (giving foreign currency in exchange) to drive up the price (another option is for the government to tighten its fiscal policy). If they feel their currency is too high then they can print their own money and exchange it for foreign currency to drive their currency’s value a lot. China and Japan do this a lot (drive their currency down below the market’s natural level), which is why we call them currency manipulators. China and Japan are focused on keeping their currencies down all the time, so they buy up dollars, which is why now have so many.

So China and Japan have massive dollar reserves because they’re manipulating the market. Other Asian (and other) countries have large reserves because they need them to maintain their currency pegs without risk of running out of dollars. Now why is all this action in dollars instead of other currencies? It’s not. The Chinese and Japanese do occasionally buy up euros and pounds for to keep the yen and renminbi exchange rates down. However, the dollar has the biggest, stablest, most liquid market, so it’s the most convenient for foreigners to deal with (unless they have a lot of trade with Germany/the eurozone, then they focus on deutschmarks/euros). Thus other countries use the dollar as the “reserve currency”, meaning that they prefer to hold their reserves in dollars and do international business in dollars, and just exchange dollars for other foreign currencies when necessary. And naturally countries pegging to the dollar need to keep large reserves in the dollar specifically, just like Denmark needs large euro reserves.

This is all voluntary. Countries choose to peg because they fear a floating currency would be unstable. They can choose to peg to whichever currency they want, but after World War 2 the dollar was the natural choice, and it still is for most. But some peg to the euro and China pegs to a mix of currencies (I won’t get into that). America used to do a lot to help other countries maintain their dollar pegs through the IMF, which meant they didn’t need such big reserves. But the IMF is a dogmatic institution and their assistance comes with strings attached. A lot of countries now feel the medicine is worse than the disease, so they actually prefer to tell the IMF to fuck off and fend for themselves using humongous currency reserves. See Argentina. The US could be more helpful by getting the IMF to chillax or just going around them, and sometimes we have. We gave cash support to end the peso crisis and the Asian crisis. But generally foreign currency ordeals get filed under Not Our Problem. And while it’s true that the US has power to help, it’s also true that the US is not the source of foreign currency problems and hasn’t made any commitment to deal with them outside the IMF.

As to the reason Australia goes along with right wing American policies, the main reason is that there is a strong right wing in Australia which shares its ideology with the American right wing, and they communicate with each other extensively. Same goes for Canada and the UK. Australia invaded Iraq and rejected Kyoto because that’s what Howard wanted to do. Then you adopted a carbon trading program because that’s what Labor wanted, not Bush or Obama, and now unfortunately Abbot does not want it. The USA does push for biased trade treaties which favor US corporations and entrench corporate power generally, but in Australia’s case your problem is ~90% corrupt Australian politicians and business interests, and only ~10% overbearing American imperialism (driven by corrupt American politicians and business interests). The Transpacific Partnership is as much about screwing over common Americans as it is about screwing over foreigners.

And yeah, the US has a nasty imperialist history along with the UK and France, but now, with the cold war over, countries are mostly running their own affairs. There are still some Latin American countries following the Washington Consensus mostly because their local elites benefit from it and have adopted right wing American dogma in their own hearts.

China and Japan do this a lot (drive their currency down below the market’s natural level), which is why we call them currency manipulators

This is widely believed but it is not true, at least with respect to China. Yes, China pegs it’s exchange rate, and yes, China’s central bank has accumulated large holdings of dollars. But China also has strict capital controls, especially on financial flows out of the country. One recent estimate suggests that if China were to liberalize its financial account, it would result in net outflows on the order of 20% of GDP. If the renminbi were floating, financial outflows on that scale would certainly result in a large depreciation. So the net effect of China’s interventions is to keep their currency stronger than it would otherwise be. Not weaker.

The rest of your comment seems reasonable.

Thank you for taking the time to write that reply Chaz, I understand you know a lot more of the practicalities of how these things work in terms of economic laws and practices.

Re: “This is all voluntary. Countries choose to peg because they fear a floating currency would be unstable. They can choose to peg to whichever currency they want, but after World War 2 the dollar was the natural choice, and it still is for most”

I would just like to say however that i don’t really agree that it is voluntary (at least on the parts of large numbers of those involved, as you mentioned there are numbers of corrupt elites and so forth everywhere).

After World War 2 (which didn’t just happen without long lines of causes) the dollar was not a natural choice but a hot and bloodily contested choice – there was the whole first world, second world, third world situation. the US had the reds under the beds scare etc internally. There was the Korean War, Vietnam, sanctions, interventions, encouragements etc etc Puting the global trade laws in place was a conscious activity, constructed by and imposed by human actors (yes, not exclusively US actors, and not only to the benefit of US people and not to all of their benefits at all) – i don’t agree that it can be claimed to have naturally occurred (and this gets to the bottom of why economics is not a science like the natural sciences) – it was pursued with some vigour, and much blood was spilt in the process.

Re the OT, the paradox of thrift is indeed a paradox

Depends what you mean by paradox.