Heterodox critiques of quantitative easing

Following last week’s quote from Michael Hudson on quantitative easing (QE), here are some other insightful perspectives which for me offer explanatory power, given the course of economic and financial events over the decade since the crisis began.

The aim of QE is to reduce long-term interest rates, boost private sector lending, and raise asset prices to generate a positive wealth effect on private spending. Altogether, these are meant to raise private sector consumption and investment, and thus economic growth.

Richard Koo, economist at Nomura and originator of the theory of balance sheet recessions, has outlined the potential problem of the ‘QE Trap’ (2015). While QE might have the effect of mitigating such a recession, once the recovery is underway, its withdrawal could lead to slower growth than otherwise. In other words, over the longer term, its overall effect might be negligible or even negative: Continue reading


Michael Hudson on housing, student debt and economic stagnation

An interview with Professor Michael Hudson on the Real News Network, where he focuses on US house prices, the ongoing problem of private sector debt (particularly student debt) and the lacklustre performance of the economy.

It’s the private debt, stupid

An eleven-minute interview with post-Keynesian economist Steve Keen, which begins one minute into the video. He discusses the huge accumulation of private debt in the US and how it is to blame for the Great Recession and the aftermath of sluggish growth. This story has been repeated in many countries across the world. In my view this is only part of the story, but it is an essential part. He usefully counters the hysteria over public debt and the ignorance over levels of private debt with some lessons from history.

Alternative approaches to boom and bust: Austrians, Marxists, Keynesians

Contando_Dinheiro_(8228640)What should governments do about the phenomenon of boom and bust, if anything? Different schools of thought have different explanations for what is known as the economic or business cycle. Below I shall touch upon three of them, and consider the implications for policy.

In brief: Marxists and Keynesians tend to think that the economic cycle is endemic or endogeneous to capitalism, while Austrians think it is the result of meddling governments and central banks. For Marx, the solution was ultimately to abolish and replace the system with socialism. For Keynes, intelligent government policy could mitigate the cycle, while Austrians propose that this could happen if only government and central banks would get out of the way.

Which of these three sets of ideas is the most relevant and helpful, especially given recent economic history? Continue reading

Changing balance sheets, public and private

A fall in aggregate effective demand and expenditure in an economy is the major feature of a recession. Private consumption is usually the largest component of aggregate demand, and it falls in the downturn, while consumers try to collectively increase their saving; that is, the income they do not spend.

Graphs of the saving rate in major economies over the economic cycle tend to show it falling during booms and rising in recessions. So an increase in the desired saving rate does lead to a rise in the actual rate.

In the current recession, consumers in many countries have seen a collapse in their personal wealth, due to a fall in asset prices, particularly in housing and stock markets. This is a further reason for them to cut borrowing and consumption and increase saving, as a way to rebuild their personal balance sheets.

At the same time, banks, other financial intermediaries and non-financial firms are also rebuilding their balance sheets by restructuring their financial positions ie reducing their exposure to debt.

The debt of households and firms is growing much more slowly than before the recession and household debt even recorded a recent fall in the US. As the economy returns to growth, however slow, it will be necessary for private debt to grow more slowly than income for some time, until balance sheets become more healthy. This is likely to slow  private sector investment and consumption and hence overall growth, particularly in heavily indebted countries.

The rebuilding of private sector balance sheets can be seen as a debt-deflation process, which is one way of looking at the process of such a deep recession in many countries. While private sector debt as a percentage of national income has been falling, public sector debt has been rising as governments have run increased fiscal deficits, partly as automatic stabilizers have taken effect, but also as a result of stimulus packages aimed at mitigating the fall in aggregate demand.

Public sector balance sheets have in many cases worsened, notwithstanding the funds used to bail out the banks by injecting capital, which include the purchase of assets which, one hopes, will ultimately recover in value and eventually show governments, and hence taxpayers, some profit.

Conservative opinion seems to dislike debt and especially public debt. It may seem perverse to some for the government to be increasing its own debt while the private sector becomes increasingly thrifty. But an essential insight of macroeconomics is that governments can help to stabilize an economy using fiscal policy. Especially in such a deep recession as this one, such damage limitation is necessary to prevent unemployment from rising even further, with all the social ills that go with that phenomenon.

In fact, rising government debt may allow the private sector to pay down debt more rapidly and speed recovery from recession over the medium term. The process is unlikely to be smooth or mechanical, but during the period in which the private sector is increasing its saving and paying off debt in aggregate, and certainly reducing debt relative to income, the multiplier from a rising public deficit may be somewhat reduced, but a rising deficit can still in this instance mitigate the recession and speed recovery.  For a time public debt may rise at an unsustainable rate. One hopes that the private sector can recover before public debt reaches unsustainable levels, whatever those might be.