Civil1z@tion
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From the paper said:In a review of every major fiscal correction in the OECD since 1975, we find
that decisive budgetary adjustments that have focused on reducing
government expenditure have (i) been successful in correcting fiscal
imbalances; (ii) typically boosted growth; and (iii) resulted in significant bond
and equity market outperformance. Tax-driven fiscal adjustments, by contrast,
typically fail to correct fiscal imbalances and are damaging for growth.
I will point to the following countries
Iceland
Ireland
Lithuania
Latvia
Estonia
All have made drastic cuts to government spending, and their economies are contracting
I'm not up to speed on Lithuania, Latvia or Estonia, but with regard to Iceland and Ireland, it is, IMO, much, much too soon to pass judgement on the success or failure of their austerity policies. It will be at least another 12 - 18 months before an informed judgement will be possible. YMMV.
I will point to the following countries
Iceland
Ireland
Lithuania
Latvia
Estonia
All have made drastic cuts to government spending, and their economies are contracting
Those where the countries which had some of the most severe contractions to begin with. The effect of cutting spending during a debt crisis is positive but not positive enough to overcome the massive GDP loss those countries face (the one with the smallest decline, Iceland, contracted by 6.6% of GDP in 2009 while the largest, Latvia, was contracting by 17.7%). Its like lighting a small fire, doing so helps keep you warm but its not going to keep away the cold at the South Pole. Countries which aren't in as harsh of contractions will probably be pushed into growth (assuming they aren't resuming growth already...though this could be the key to go from anemic growth in the face of the debt crises to solid growth).
Cutting spending during a contract reduces economic activity further. It will not promote economic activity untill the contraction is over, and the causes of the contraction have been worked through. Once that is done, the lack of extra govermment debt, will allow for stronger economic expansion, but from a lower base.
The article that you posted from Goldman was rather simplistic in its analysis. It ignored many various factors that Canada in the 90's experienced that helped it grow. First was the tech bubble in the US, which did occur in Canada as well. Second, an undervalued Can dollar compared to the US promoted Canadian trade with the US, which helped Canada have a trade surplus with the US and an overall trade surplus. During much of the 90's and early 2000's Canada's standard of living increased at a far lower rate then the US (various factors but primarily due to debt paydowns in Canada).
Overall the only time a country will experience immidiate economic gains (independant of other factors) from the government cutting spending is if government spending is spending money that the private sector would be spending. In the case of Ireland, Iceland, and the Baltics, that is not the case, the private sectors are contracting, and the governments are spending borrowed money which at the time of borrowing would not be used by the private sector for a good period of time
LordTammerlain said:Cutting spending during a contract reduces economic activity further.
It isn't quite that clear-cut. A couple of recent papers suggest that if spending as a pct of GDP is quite high, then cutting spending during a contraction may have actual beneficial effects on the level of activity. Some of this research is touted by the "austerians" as they try to make their case. The papers that I have read thus far were pretty convincing, but nonetheless, I'm withholding judgment for now. Apologies for not having links to hand just now; will look'em up and post them later in the day when time permits.
...I believe that the main issue in all was too much private debt, which when the economic crisis hit, caused strong economic contractions.
So if too much private debt was the problem, then who was it that the debt was owed to?
And why did there economy get to the point where the averge person was in so much debt?
And how did the people who lent the money get all that money to lend?
OK, makes sense to me. But dont credit card companies and banks get there money from deposits that the general public makes? Why are individuals borrowing money when they have money in the bank? I personally borrow money, but that is only because I dont have any money in the banks.Credit card companies and banks primarily.
Consumerism. People wanted more and more stuff and were willing to go into debt to get it. Easy credit lines helped enable and exacerbate this trend.
Primarily from interest from previous lending. If you want the answer where they got the money to do that you have to go back to the beginnings of the banking system whereby wealthy people who had made money primarily through merchant endeavors or pillaging foreign lands (though priests making money off tithes were also often creditors on a smaller scale) lent their money to others and started the cycle. Any questions?
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During the late 90s and 2000's banks were allowed to increase the amount of leverage they held by significant amounts. So instead of having $10 in reserves for every $100 they lent out, they were able to have $5 or less for every $100 they lent out depending on the credit rating of who they loaned to and what type of assets they held in reserves. They were able to create alot more loans then they were previously able to.
People, did not have to increase the amount of money held in bank accounts to allow for this extra lending, the banks in effect created extra money in the system (their own personal printing press in effect.
Banks in general are not much different then individuals, they act as herd animals just as much as many individuals, they saw the money being made by their compititors and wanted in on the action
Thats something that I dont totally understand. I seem to recall that recently someone on this site was indicating that the amount of money that banks could loan exceeds the amount that is deposited with them. I am not sure that is correct, it seems quite counterintuitive. They were indicating that if somone deposited an extra $100 in the bank that if the banks reserve requirment was 10% that the bank could then loan $1,000 due to having that extra $100. If so, then where did they get the $1,000 to lend out? If they only had $100 in the bank, and they wrote someone a loan check for $1,000, then that check would bounce. I don't know much about the banking system, but I would think that it would be against the law for a bank to lend more money than it has.
My issue with this is more easily understood if you assumed this to be a new bank that had no money until someone made a $100 deposit. How could a bank with no money except for one $100 deposit lend out $1,000? Their check would bounce.
What does make sense is if someone deposited $100 and if the reserve requirement was 10%, that the bank could lend $90. The check that they give the borrower would then be covered because the bank has $100.
So if reserve requirements were lowered from 10% to 5% then certainly the bank would have more loanable money. But only a marginal amount equal to the reduction in reserve requirment - not an exponitial amount.
If I am correct about my understanding of the banking system, then adjustment to reserve amounts really couldn't explain why most Americans are broke, but yet the banks have money to loan us tens of thousands of dollars to purchase cars or hundreds of thousands of dollars to purchase houses.
Seems to me that all banks must have a few fat cat depositors who have zillions of dollars deposited. So have these rich dudes somehow gotton a hold of most of our money supply - essentially forcing the rest of of to rent money from them?
There is a chart which show a 20% reserve requirement lending scenario as wellFractional-reserve banking is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.[1][2] Fractional reserve banking necessarily occurs when banks lend out any fraction of the funds received from deposit accounts, and is practiced by all modern commercial banks.
The practice of fractional reserve banking expands the money supply (cash and demand deposits) beyond what it would otherwise be. Due to the prevalence of fractional reserve banking, the broad money supply of most countries is a multiple larger than the amount of base money created by the country's central bank. That multiple (called the money multiplier) is determined by the reserve requirement or other financial ratio requirements imposed by financial regulators, and by the excess reserves kept by commercial banks.
Central banks generally mandate reserve requirements that require banks to keep a minimum fraction of their demand deposits as cash reserves. This both limits the amount of money creation that occurs in the commercial banking system, and ensures that banks have enough ready cash to meet normal demand for withdrawals. Problems can arise, however, when a large number of depositors seek withdrawal of their deposits; this can cause a bank run or, when problems are extreme and widespread, a systemic crisis. To mitigate these problems, central banks generally regulate and oversee commercial banks, act as lender of last resort to commercial banks, and also insure the deposits of the commercial banks' customers
snip
Example of deposit multiplication
The table below displays how loans are funded and how the money supply is affected. It also shows how central bank money is used to create commercial bank money from an initial deposit of $100 of central bank money. In the example, the initial deposit is lent out 10 times with a fractional-reserve rate of 20% to ultimately create $400 of commercial bank money. Each successive bank involved in this process creates new commercial bank money on a diminishing portion of the original deposit of central bank money. This is because banks only lend out a portion of the central bank money deposited, in order to fulfill reserve requirements and to ensure that they always have enough reserves on hand to meet normal transaction demands.
The process begins when an initial $100 deposit of central bank money is made into Bank A. Bank A takes 20 percent of it, or $20, and sets it aside as reserves, and then loans out the remaining 80 percent, or $80. At this point, the money supply actually totals $180, not $100, because the bank has loaned out $80 of the central bank money, kept $20 of central bank money in reserve (not part of the money supply), and substituted a newly created $100 IOU claim for the depositor that acts equivalently to and can be implicitly redeemed for central bank money (the depositor can transfer it to another account, write a check on it, demand his cash back, etc.). These claims by depositors on banks are termed demand deposits or commercial bank money and are simply recorded in a bank's accounts as a liability (specifically, an IOU to the depositor). From a depositor's perspective, commercial money is equivalent to central bank money – it is impossible to tell the two forms of money apart unless a bank run occurs (at which time everyone wants central bank money).[5]
At this point, Bank A now only has $20 of central bank money on its books. The loan recipient is holding $80 in central bank money, but he soon spends the $80. The receiver of that $80 then deposits it into Bank B. Bank B is now in the same situation as Bank A started with, except it has a deposit of $80 of central bank money instead of $100. Similar to Bank A, Bank B sets aside 20 percent of that $80, or $16, as reserves and lends out the remaining $64, increasing money supply by $64. As the process continues, more commercial bank money is created. To simplify the table, a different bank is used for each deposit. In the real world, the money a bank lends may end up in the same bank so that it then has more money to lend out.
I was going to explain it myself, but Wiki states it more clearly
Fractional-reserve banking - Wikipedia, the free encyclopedia
There is a chart which show a 20% reserve requirement lending scenario as well
Generally if a bank had say $100 in reserves but wrote a check for $1000, it would borrow money from the central bank using its loans as collateral to pay for the money it did not have, or it could borrow money from other banks (see Libor on google). The main thing to recall is that most money lent out, gets put back into a bank, which the bank can then lend out
Yes, money does multiply, but it multiplies not due to the banking system, it multiplies because it utilized for trade over and over again.
I just read in the local paper that consumerism normally accounts for 70 per cent of economic activity in the USA, but not so much now.. Also, savings rate is up. Credit use is down. Consumers are spending less, and saving more. Less money is circulating.
It may sound harsh, but maybe some of us will have to suffer a bit longer until the people who have money decide to spend it again. Maybe people, in the long run, will be better off for being forced to learn how to manage their funds better.
Certainly those who managed their funds well in past years are suffering less than those who just earn X amount and spend 1.1X, thus building a deficit of their own. IMO, easy credit is the one major contributor to the mess we are in....
I just read in the local paper that consumerism normally accounts for 70 per cent of economic activity in the USA, but not so much now.. Also, savings rate is up. Credit use is down. Consumers are spending less, and saving more. Less money is circulating.
It may sound harsh, but maybe some of us will have to suffer a bit longer until the people who have money decide to spend it again. Maybe people, in the long run, will be better off for being forced to learn how to manage their funds better.
Certainly those who managed their funds well in past years are suffering less than those who just earn X amount and spend 1.1X, thus building a deficit of their own. IMO, easy credit is the one major contributor to the mess we are in....
A higher savings rate would be good for the US, but there are signs that consumers are picking up spending again. That's good for the short term but long term perhaps problematic. We don't need a German or Japanese savings rate (those rates are ridiculous and produce their own problems), but a 5-10% savings rate should probably be a good norm for the US.
Just out of curiosity, what all is included in the "savings rate"? Does that include paying down principle in loans? Like if I made $100k/yr and I was paying down principle on my home/car and business loans at the rate of $2,500 a month, but was not actually saving any cash, would that still result in a 30% savings rate?
Just out of curiosity, what all is included in the "savings rate"? Does that include paying down principle in loans? Like if I made $100k/yr and I was paying down principle on my home/car and business loans at the rate of $2,500 a month, but was not actually saving any cash, would that still result in a 30% savings rate?
Just out of curiosity, what all is included in the "savings rate"?
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