Fed releases Q3 financial accounts

Today the Fed posted the third quarter Financial Accounts, which includes flow of funds, balance sheet, & integrated macroeconomic account data.

They highlight the following developments in the third quarter:

• Household net worth increased by $3.8 trillion due to increasing stock & home prices and a high saving rate.
• Household debt grew at a 5.6% annualized rate, driven by mortgage debt increases and more subdued growth in nonmortgage consumer credit.
• Nonfinancial business debt contracted at a 0.9% annualized rate after two quarters of rapid growth, reflecting a decline in outstanding nonmortgage depository loans (loans from banks, credit unions, and S&Ls).

Furman & Summers reconsider fiscal policy; Galbraith responds

Jason Furman and Larry Summers recently wrote a paper noting the downward trend in interest rates and arguing for expanded fiscal policy.

"This paper argues that while the future is unknowable and the precise reasons for the decline in real interest rates are not entirely clear, declining real rates reflect structural changes in the economy that require changes in thinking about fiscal policy and macroeconomic policy more generally that are as profound as those that occurred in the wake of the inflation of the 1970s."

They identify three implications for fiscal policy that follow from low interest rates

1. Fiscal policy must play a crucial role in stabilization policy in  a world where monetary policy can counteract financial instability but otherwise is largely "pushing on a string" when it comes to accelerating economic growth.
2. In a world of unused capacity and very low interest rates and costs of capital, concerns about crowding out of desirable private investment have less force. Debt-to-GDP ratios are a misleading metric of fiscal sustainability that don't reflect how the present value of GDP has risen and debt service costs have fallen as interest rates have fallen.
3. Borrowing to finance appropriate categories of expenditure pays for itself.

Jamie Galbraith agrees with the conclusion but calls the underlying economics a mess.

"Their effect, and one may reasonably surmise their purpose, is to make the argument without appearing to question the longstanding "mainstream" theory of interest rates. That [loanable funds] theory, which has been the source of deficit- and debt-hysteria for several centuries, in turn underpins the newly-proposed FS debt-service-to-GDP ratio criterion for fiscal policy. It will be nothing but a source of trouble, unless disposed of...

"[To explain the decrease in rates] Their theory therefore requires one of two things, perhaps in combination: a vast offsetting, autonomous increase in the supply of savings (global or national), and/or a reduction in the private demand for savings, in the form of privately-issued debt ... There are two problems with the argument. The first is that there is no long-term trend in US private savings, nor in the import of savings from overseas - which would show up as an increasing US current account deficit relative to GDP - nor in the ratio of private debt to GDP... 

"The second problem is more theoretical. One way to put it, is to say that "loanable funds" is a theory of the sport market ... the question of maturities is secondary ... so the loanable funds theory has no explanation for the difference between short and long-term interest rates - for the yield curve. But this is precisely what FS are trying to explain...

"FS therefore arrive at a correct conclusion - interest rates will remain low indefinitely - by a route that requires them to argue that the world has changed in some fundamental, relevant ("structural") way, for which no evidence exists."

Rajan and Romanchuk

In How Much Debt is Too Much, Raghuram Rajan writes that

"The new conventional wisdom in these unconventional times is that advanced-economy governments can take advantage of today's ultra-low interest rates to borrow and spend without limit in order to support the economy. But the fact is that there is always a limit, and it may come into view sooner than many realize."

Brian Romanchuk responds, pointing out that Rajan Accuses MMT of Making Errors Made By Mainstream.

"As quite often happens when mainstream commentators critique MMT, no attempt was made to cite or quote MMT sources. In this case, that would have been useful -- since he accuses MMTers of making basic analytical errors. Unfortunately for his case, those errors are actually made by mainstream economists, and MMTers take the other side of debates."

That's debatable: Stop worrying about national deficits

Bloomberg hosted a debate on the national debt asking whether we should stop worrying about national deficits. Stephanie Kelton and Jamie Galbraith argued for the motion, facing off against Otmar Issing and Todd Buchholz arguing against.

Learn to stop worrying and love debt

Paul Krugman explains why "to act responsibly, we must stop worrying and learn to love debt."

"it’s a completely safe prediction that once Joe Biden is sworn in, we will once again hear lots of righteous Republican ranting about the evils of borrowing. What’s less clear is whether we’ll see a repeat of what happened during the Obama years, when many centrists — and much of the news media — both took obvious fiscal phonies seriously and joined in the chorus of fearmongering. 

"Let’s hope not. For the fact is that we’ve learned a lot about the economics of government debt over the past few years — enough so that Olivier Blanchard, the eminent former chief economist of the International Monetary Fund, is talking about a “shift in fiscal paradigm.” And the new paradigm suggests both that public debt isn’t a major problem and that government borrowing for the right purposes is actually the responsible thing to do.

"Why are economists thinking differently about debt? Part of the answer is that we’ve discovered some things about how the world works; the rest of the answer is that the world has changed."

Creditors owed $200 trillion

S&P expects global debt to hit $200 trillion, or 265% of global output, by the end of 2020. They don't see too much cause for concern since interest rates remain low and there is optimism about vaccine distribution.

The report is a reminder of the question: who do we owe?