Monday, July 13, 2015

Three Experiments in Keynesian Stimulus

The Greek adventure is the latest example of Keynesian stimulation in the news.
Unfortunately for Greece, the adventure is ending badly with stimulation replaced with at least a forced national budget that must be in balance. This will be an example of one economic balance morphing into a second economic balance. We can learn lessons from this event.

The Greek example can be contrasted with the experience of China and Japan. Both China and Japan have also had high rates of monetary stimulus. The difference is that Greece obtained stimulus by borrowing from outside the national boundaries. China and Japan borrowed from within their national boundaries.

As this post is being written, Greece has been sent home with a demand to pass legislation acceptable to the remaining euro community. This with enough money to allow Greek banks to reopen soon. The goal for a Greek budget seems to be balance -- balance expenses with income. It will take a large change in the Greek economy to accomplish this goal.

One lesson here should be that Keynesian stimulation obtained by borrowing from extra-national sources exposes the borrower to a sudden stimulation stop due to denial by lenders. Loss of control is never a good option for a national government.

On the other hand, China and Japan have both borrowed internally to obtain their Keynesian stimulus. Both have run up their internal debt to multiples of their GDP. At the same time, both have acquired ownership of large amounts of debt from other nations. Both have more than $1 trillion in value of American debt.

This acquisition of foreign debt can be traced to internal debt being used to build products intended for foreign sale. Then the foreign nation must be willing to buy the products with borrowed money. The foreign borrowing does not need to be directly linked to the products. In America, the borrowing was for houses and American national debt; subsequently the money borrowed for houses and national debt was spent on China and Japan products. The final result was large amounts of American debt held by China and Japan.

There are more differences. The difference between internal and external borrowing of stimulus seems to have led to different internal economic distribution. In Japan, the stimulus led to very low unemployment and later, persistent GDP malaise. The malaise has coincided with a population decline as the population opted to have a birthrate less than death rate (but this may not be a direct result of stimulation).

The Chinese example seems similar but the record of stimulus in China is shorter and is being carried out in a one party political environment. China uniquely enacted a one-child policy that slowed it's population growth.

The Greek experience with stimulus has been different. Some groups (such as pensioners) seem to have done very well. Others, such as young workers, have done very poorly with unemployment rates near 25 per cent. Greek productivity seems to have greatly declined and imports have increasingly exceeded exports.

One lesson from Greece seems to be that groups favored by government do very well compared to groups not favored. This effect also seems to be present in China and Japan but is less visible.

We should also notice that the Greek borrowing was mostly done from within the euro zone. We can therefore examine if the Greek borrowing can be considered as a subset of borrowing within the larger euro zone, with the larger euro zone also having Keynesian stimulation but at a different rate with different distribution effect.

These observations are all anecdotal,  offered without charts and data support. Careful examination of the data is expected to support these observations and may dig out additional correlations or contrast.

Keynesian stimulation remains in the experimental stage. Year-after-year borrowing has only been widely undertaken by governments-world-wide since about 1973 when the gold standard was abandoned by the United States. The long-long term effects are yet to be recorded.

Tuesday, July 7, 2015

Greek Loan Repayment

The following is a comment made in response to a Ralph Musgrave post. An example of a young-couple-who-liked-to-borrow is used to question whether we really want to have Greece repay the loans it has received.

"Our community could have a young couple that liked to borrow money from the community bank for the simple reason that they liked to spend more than they could earn.

If this couple was very likable, they might be able to borrow more than they earned every year for many years.

In fact, they could do this until the bank said "NO MORE LOANS!".

A "NO MORE LOANS" decision would be a paradigm change. It would be a change in the annual way of running the local economy.

How might the economy change if, after many years of lending to the (formerly) young couple, the lending stopped? Those businesses that received the annual loan proceeds (the couple always spent the loan money) would see fewer sales and need fewer workers. This because less money each year would be spent.

Now if the bank also required the (formerly) young couple to repay the loan, there would be an additional effect that we might call a second paradigm change. The couple would need to work harder to earn money. Working harder would entail producing products already made by other workers which would increase sales competition. The  economic effect of loan repayment is the opposite of initial loan creation.

I think we can consider that Greece has been this (formerly) young couple. Now the loans are being denied. Do we really want them to repay the loans?"

The story of the (formerly) young couple illustrates that TWO paradigm changes occur when a series of annual loans evolves into a series of annual loan repayments. Paradigm changes are difficult events for entire economies.