Interesting (to me) lecture by economist on debt levels

[Ross Scott]

I saw this lecture on Youtube a little while ago that I thought was pretty interesting. It's by an economist about the current state of our economy, where's it headed, and what our possible options are. It focuses on our current debt levels and ramifications of that especially. Some of this was over my head, but a lot of his logic on different economic issues I was able to follow and found it quite interesting. If anyone has more of an economic background, I wouldn't mind hearing some more opinions on this. It's about an hour long however plus 30 minutes of questions. I watched it in chunks spread out over a few days.

 

 

*Warning* some people may find this EXTREMELY dry, if you bore easily, don't watch this.

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I'm so glad that I found this dinosaur buried here. It's funny while how some economists are constantly throwing warning signs at everyone, but the guy on the steering wheel is still crashing the bus into something. It's also ironic that we have the other economists running the very banks and government agencies that everyone's dependent on, but likes to treat everything as a giant laboratory with little or no negative consequences.

 

So to the lecture...

What a refresher.

The following severely lacks vocabulary, so please take your time. That's how dry Economics is, and I'm going to regurgitate some stuff.

 

1) I was taught that Aggregate Demand (AD) = C + I + G + Net Exports... not GDP = those. (Notice 'taught', so whoever had a different education may argue otherwise.)

GDP, Gross Domestic Product, is the nominal value of total market value of goods and services produced within the geographical boundaries of a country within a period of time (usually a year), regardless if it's produced by nationals or foreigners. There's also the real GDP, which is when you take inflation into account.

Before we look at how we get GDP, let's look at some of the definitions.

AD = Total desired spending on domestically produced goods and services by all sectors (hence C, I, G and exports) in a given time period at different price levels. Then we have Aggregate Supply (AS, I mean where else do you get stuff even if you demand?) = Total output that firms in an economy (that is, the country) are willing and able to supply at different price levels in a given period of time.

Let's ignore time and assume we have a price equilibrium. At that point, where we have reasonable output (AS) to meet some of the AD (since wants are unlimited, you can only do so much), we have the economy's real national output, which translates to GDP.

So, I found Mauldin's first definition of GDP is flawed. The second one is fine.

 

2) Over-expenditure (aka "dis-save") of government is applicable in practice. But Mauldin skipped how the debt/deficit came about. But I think we all know.

 

3a) Multiplier is a very important savior to the economy when you inject government expenditure in the perfect situation. So at the 12th minute mark where he explains that the velocity of money is not fast enough, it's because of leakages of income. Leakage as in savings. Savings do not contribute to the circular flow of income, to get firms to produce, to pass corporate profits to workers' salaries, to pass salaries/income to spend on stuff, and to pass household and corporate income to government revenue. Since the multiplier is falling, means an increasing amount money that the government tried to inject (not supply, I will explain that later) from its own pocket went missing! Not literally missing, but missing from the circular flow.

Is it under some pillow? Household safe? Or maybe in an ordinary savings bank account? We don't know. But what we do know is that the money is not helping the economy at all because it isn't being spent on the right things. We can't say for sure if some rich bastard is hoarding an unnecessarily big savings, but that's another story.

 

 

3b) How the multiplier works:

It's an effect of the government's expansionary fiscal policy.

 

In theory, when the government spends more (on anything), it activates the multiplier process. The rise in injection into the circular income flow will initially lead to an equal rise in national income as the government makes payment for its purchases. This leads to a rise in induced consumption by households as the firms pass on their profits from the government to their employees (households). (The greater the proportion of additional income spent on consumption, the larger the rise in induced consumption and the subsequent increase in national income.)

 

The multiplier process continues until the economy reaches a new equilibrium national income at a higher level (which is good!), which is nearer to the full-employment level of national income (not good). (About the full-employment level, this is where inflation comes in, as with assuming an unmoving AS, you're going to have to spend proportionately more to produce more stuff.)

 

Reducing taxes on households and firms would yield the same effect, since less tax = more income.

 

A discretionary fiscal policy is when G falls and taxes rise. Effect is reverse.

 

Is it effective? I haven't fully studied USA's messy situation, but the lecture pretty much says it all.

Consumers (and many small and medium firms) don't want to borrow, they don't really want to spend on more stuff... so the household money is going nowhere. That's no good.

High marginal propensity to save = smaller multiplier.

 

 

4) Growth of Federal Assets... huh. From a foreign observer's perspective, what the hell? It sounds to me like the banks are leaching off the Feds... hey wait, where did the interests come from? Oh yeah, bonds and other countries.

 

5) About delta-GDP. Population = workforce, productivity = efficiency of resources (incl. labor).

But for some reason he ran into the crowding out effect of an expansionary fiscal policy. "Each $1 rise in G reduces $1 private spending." Private spending can mean both consumption and investment. What I'd studied is when the rise in G is financed by borrowing from private capital markets, the increase in demand for funds by the government will drive interest rates up, discouraging private investment (and consumption) because of higher costs of borrowing. That's what's happening in USA now.

 

6) "When government debt rises to 90% of GDP, it seems to reduce potential GDP (growth) by about 1% annually." Damn.

I think there are a few factors in play here. Speculation (trust and confidence in the government and the market), and politics could be the big ones.

Starting off with speculation, it's like playing with stocks. Anyone who invests in stocks know very well that speculation, though indirect, can produce drastic consequences.

 

So what's up with the government? Debt. Debt from the Feds and other countries is simply bad. Greenspan claimed that the US can repay any debt. That's an outright lie from an intelligent economist. While debt from other countries is real, internal debt is artificial. It is in a way supplying more money, increasing its liquidity, in the economy. There is no way to pay back something that is created out of thin air, might as well write it off like how banks do it with a bankrupt. But no, the system is made in such a way it has to continue because it is the money system. Write that off and chaos ensues.

So the people thinks that the country is in debt, and higher than before, that must mean they got to tighten their purses, right? That's the speculation, almost like a reflex.

With less consumption (and private investment), less money is spent by the consumers and firms themselves on improving their productivity (like private education, automation etc.). Therefore, ceteris paribus, lower potential economic growth. This links to point 5 above.

I talked about Greenspan, so I don't wanna divulge about my opinion of American politics.

 

Side-note: Discretionary fiscal policy is politically unpopular with the people.

 

...kind of losing focus... it's midnight here. I don't feel like continuing the next day.

 

7) Right, government is not the engine of growth. The government does not produce any "worthwhile" goods and services because the goods and services it produces are public goods, stuff that no one is willing to pay for, That includes public services, law enforcement, military etc. Private (and small) firms are needed to employ people to produce stuff for consumption and development.

 

8) Inflation is said by academics to be necessary evil. Mauldin is right about how bad deflation is, since deflation = general price level falls = lower production = shrinkage = unemployment... ...you get the idea.

 

9) As a case study: Japanese Disease... uh... that's what happens when you try to advance too fast. Crowding out effect, inefficiency in resource allocation... Nationalism and sexism (preference for male employees over female) is not helping. And so is not foreseeing a greying population. What?

 

10) Emerging markets adds on to the global competition. Spotlight's on China. If USA were to continue to carry out protectionist measures, there's little room for improvements for American steel, chemical products etc. that is in competition with China. The Comparative Advantage theory may seem a bit farfetched, but if USA were to only produce what it's good at to sell to China, and vice versa, (kind of like exchanging), it'd be cool.

 

 

Explanation of Comparative Advantage:

 

The theory is, even if one country has absolute advantage over others in the production of all goods, there is still a basis for mutually beneficial trade as long as there is comparative advantage (CA) in the production of these goods. A country is said to have CA in the production of a good if it can produce that commodity at a lower opportunity cost (OC) than another country. The OC of producing good X is the amount of the other good which has to be sacrificed in order to produce an additional unit of X.

 

In layman's term: Assume a world with only USA & China and the only goods are wheat & steel, if USA can produce cheaper wheat than steel compared to China can produce cheaper steel than wheat, then both countries benefit by USA dedicating all resources to produce wheat, and China to produce steel (specialization), and both countries gain from it by trading.

 

 

11) EU debt crisis (Greece, Spain, Italy...) could very likely be due to deregulation... like USA. Let lose the leash, and banks are allowed to do whatever they like... Here comes the moral hazard!

 

12) Biotech! Nanotech! Space industries! Very cool stuff that people will be all over these like they were hyped about smartphones. Silicon Valley may have to make way for these sunrise industries. I just hope things don't start to look like Deus Ex. Dystopian... ugh.

 

Side-note: We can no longer rely on silicon and semiconductors for higher work-intensive computers in the near future, thanks to the heating effect. I think Ross understands this. But I think q-computers still have a long way to go. We are also still stuck in the 20th Century when it comes to portable batteries.

 

14) FOREX has a direct impact on an economy. For USA: Appreciate the dollar and import prices fall, but exports become more expensive in foreign currency. Depreciate and you get the reverse. Multiple assumptions included, Marshall-Lerner conditions and whatnot. Now that the dollar appreciates, people will tend to import stuff, and by importing stuff domestic producers are endangered as they are losing the competition. Other countries are also less likely to buy the now-relatively expensive US exports. This implies possible retrenchment, unemployment of resources... and so on. That's no good. USA then suffers from a bigger deficit, BIGGER current account deficit, coupled with slow or even negative growth.

Edited April 3, 2014 by Guest (see edit history)

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Assuming anyone ever reads this boring crap...

I got too engrossed writing the above, I forgot to conclude it.

 

We all have to agree that the debt is too much and there must be an alternative way to save the uneconomical economy. Consumerism is no longer the key driver of the economy, so the country must find another way to circulate the money, export more and clear its foreign debt. If anyone thinks that arms and defense manufacturing can do it, that is so wrong on multiple levels. Neither is recruiting more young adults to join the army. "Making F35s creates jobs!" "Open Walmart and Target near a military base creates jobs!" Those are fair arguments... but... "The Army creates jobs!" Sure, but how are you gonna get the money to pay them? More debt?

 

Any economist will wholeheartedly agree that to reduce unemployment, pave way for sustainable economic growth, foster a better society, and raise the standard of living and quality of life, the country needs to invest in education (the right one, that is), innovation, and technology. These create a lot more jobs than anything that has to do with the military or supermarkets, which besides the armed forces, the limit to the number of employees is very low. How many workmen can you fit in a highly secure factory, or logistics support staff in Walmart? Unless you strip them of technology, there is no way you can employ more people. Neither can you develop the country. NASA may be somewhat related to the military, but at least they employ Americans to develop fantastic technology that was once thought to be completely sci-fi, and apply them to enhance our lives.

 

If the government keeps spending but most of the money never makes it back, the plan's screwed. There's negative returns because the multiplier effect barely took place. Net export still sucks, because the country is still importing more bulks of stuff (even with tariffs) than what could have been made domestically (and more efficiently). The power has shifted to emerging economies that hold most of the manufacturing industries of the world, but USA is still clinging onto Wall Street and government spending. That's not going to work. Wall St does not even produce anything, and therefore unproductive. No actual value is made out of it.

 

So, to sum it up: USA must spend its dollars somewhere truly productive.