A couple of economic history links

Bob Gordon on long run economic growth prospects on the technological frontier.

Alan Taylor on the ‘great leveraging’.

75 replies on “A couple of economic history links”

Thanks, Kevin

This is from 2006

It seems evident that there are both short-term and long-term limits to the rising debt/GDP ratio. Not only are periodic “credit crunches” of the kind that have shaken the financial system from time to time in recent decades inevitable, but also a major financial meltdown of a kind that the system can much less easily absorb is increasingly probable over the long run, as the financial explosion continues. As former Federal Reserve chairman Alan Greenspan told Congress in June 2005: “I think we’ve learned very early on in economic history that debt in modest quantities does enhance the rate of growth of an economy and does create higher standards of living, but in excess, creates very serious problems.” The chief economist MBG Information Services, Charles W. McMillion, was more straightforward—“The economy’s increasing reliance on unprecedented levels of debt is clearly unsustainable and extremely troubling….The only serious questions are when and how will current imbalances be addressed and what will be the consequences” (Washington Post, January 23, 2006).


Paul Gillespie had a very interesting piece in the IT on Saturday


Climate change means economic growth based on the unlimited expansion of capitalism is no longer viable. This is hard to communicate or admit during a recession, as we see in the US elections or euro zone crisis. This contradiction between the needs of ecology and capital will most likely dominate the coming century.

A pity that the full Bob Gordon article is hidden from plebeians behind a paywall. So much for free exchange of ideas…

I’m afraid I have not looked past the NBER pay barrier, but for me this issue about innovation and economic growth prospects raises an important measurement issue that I don’t believe has been tackled satisfactorily to date.

The issue is about accounting for the greater value that consumers and businesses gain from improvements in quality as opposed to quantity of goods and services consumed, particularly where improvements in quality are not reflected by increases in prices ahead of general inflation. There has been good work done on accounting for improvements in ICT quality in national accounts data (particularly in the US), but I don’t believe that standard methodologies yet properly reflect the quality benefits of innovation across the wider economy.

This matters a lot. There is probably more innovation underway now than there has ever been in the past, but there is also a relentless process of commoditisation that drives the price of existing innovations down over time. As a consequence, the quality-adjusted price of products and services (for example in areas such as pharmaceuticals, digital entertainment and even many foods) is falling fairly steadily.

My understanding is that there is a fourth industrial revolution underway, but one that is far more about improvements to the quality and functionality of goods and services than about the sort of easily-measured structural change than occured in the three earlier industrial revolutions. Whether the revolution shows up in national accounts data like the earlier revolutions depends, not on its reality, but on whether we choose to measure the value it adds through higher product and service quality.

Its extremely telling that academic economists increasingly draw on historical comparisons to try to guide policy on the financial crisis, with modern macroeconomic theory offering nothing, having entirely dismissed the impact of money growth, banking and leverage.

Can anyone deny that the practice of DSGE New Keynesian Phillips Curve analysis and the development of macroeconomic theory up to 2007 has been an extraordinarily costly, misleading and ultimately irrelevant exercise

It is very hard to see any future tech. change to match the economic effect of the spread of the petrol economy and the rundown of the planet’s natural resources. Future economists will have to learn how to account for non renewable resource use and environmental damage.

As Kurt Vonnegut used to say “we could have saved the world but we were too cheap and too lazy”.

And the oil economy is about about cheapness and laziness.


Its a good point that you raise. As I said before on another thread the most useful macroeconomics seems to be economic history. Of course, simple models like IS-LM can provide insights, but they are really just useful abstractions of past events. Whether the results of a particular model can be applied to the current situation is a tricky business and developing highly sophisticated dynamic systems (e.g. DSGE models) that are supposed to model a whole chaotic economy is really a fools errand.

I’m not an economist, but one area that I think that economists could and should focus on is to revisit the simple static models of the past and try to determine or review the set of initial conditions that apply to each model. That is, there are a variety of lessons to be learned from history and a variety of models to help us understand the past – indeed, even within a given model, a variety of conflicting policy responses could be recommended depending on where we are on the curve. But there seems to me to be little work done on which models or lessons from the past should be applied in any given economic situation.

For example, a lot of policy paralysis seems to stem from the conflict between the lessons of the 1930s and those of the 1970s. Many policymakers, citing the lessons of the Great Depression, call for monetary easing and the old fashioned route out of debt crises involving debasement and inflation. Others cite the inflation disasters of the 20s in Germany and the 70s in the West and say that monetary policy should not be used to cure financial crises and instead demand austerity, depression and, ultimately, mass bankruptcy as the solution to the current debt crisis.

I came across an example of this recently when JMcH posted a link to a paper by Buiter on the limits of central bank printing and the supposed link to CB recapitalisations. When I read the paper, it transpired that much of the model was built on empirical evidence taken from a 1950s study of hyperinflation, disregarding the fact that we are currently experiencing very low inflation and a shrinkage of the broad money supply (M4) due to the collapse of bank credit. Indeed, without using the hyperinflationary empirical evidence as a starting point, the paper made no obvious contribution IMO.

All the above leads me to believe that there is little sense of context amongst economic researchers. It seems to be assumed that the lessons of every era are fair game for informing policy in any other era. It’s almost as if economists believe that, once an empirical or theoretical relationship has been established, then it holds true for evermore, whereas we know that due to the reflexive (Soros’s term) nature of markets and economies, the “laws” of economics are not immutable, unlike Physics.

Obviously there are lessons to be learnt from all types of crises (debt, banking, fiscal, inflation etc.) and surely it is not beyond the power of economic researchers to determine which lessons should be applied at any given point in time?

There is no paywall. I just clicked on the pdf icon and the paper downloaded – – maybe the latest version of Acrobat needs to be downloaded from Adobe’s site?

This is an interesting paper and while the focus is on the US, with Europe lagging in innovation and ageing faster, the prognosis is even more grim.

The argument is that while innovation continues, the big leaps forward in productivity were made as a result of the remarkable series of inventions in the three decades after the Civil War — electricity, the internal combustion engine, telephone communication and a big improvement in public health as a result of improved sanitation and the launch of drugs such as Bayer’s Aspirin in the 1890s.

Innovation happens in every sector of economic activity and in manufacturing, robots will increasingly take over from humans.

Gordon’s point like Tyler Cowen’s ‘The Great Stagnation’ is that the low hanging fruit have been picked.

There will still be innovation. For example in pharmaceuticals but the FDA approved as many new drugs in 1950 as it does today. The iPad is an improvement on the laptop as it was on the portable PC.

The issue is that there will not be huge jumps in productivity. More people may buy a fridge with an ice dispenser but while household items such as the fridge, washing machine and other household equipment have improved but not significantly.

The US is well ahead of other regions in innovation. The OECD says 40 of the world’s top 50 research universities are in the US.

There is a venturesome market for consumer products and while the rate of creation of employer US startup firms has fallen since the 1980s, in contrast with the US, most of the big companies in Europe and Japan are old.

The main message does not depend on models. Rapid economic growth is a phenomenon of recent centuries and the continuation of the pattern is not a given.

I don’t know where you are based, but if as has been suggested here before it is Malaysia you will be getting a free pass through the paywall like other residents of developing and transition economies. It’s automated, so you just won’t see the paywall that we see from Ireland.

Every so often the FT runs an editorial about sorting out the economic mess. The answer is always increasing demand. More consumption. Get the growth machine running again. Run down resources. They are infinite of course. And anyway tech will sort everything out.

The other big question is when labour is going to supplant capital again. We are due a switch.

@ Alan Taylor

Page 28 of the PDF, 8 lines from the bottom, you’ve misspelt crisis.

Great piece of work.

I wouldn’t be too pessimistic on technology.

3D printing has a lot of potential. Think printed houses!! As does battery and renewable tech. Wireless power will change a few things. Also Moores law is still in full flow and it could have yet more dramatic game changing effects before it runs its course.

That’s ‘Optogenetics may lead to…’. Who knows advances in tech may even bring an edit button to irisheconomy.ie.

The globalisation/technology headwind argument is quite vaild for many developed countries. Germany is next after the US for income inequality. They have also helped their car manufactures and industry compete with the lower cost developing countires (for the moment) by making a two-tier system for their workers.

@ Alan Taylor: Schularick and Taylor 2012: Ref ??

In general folk DO NOT learn from mistakes. They have an ‘ideology’ (a Model-in-Use) of some kind and will follow it to the bitter end. It becomes a mythological justification.

We have a problem. So what caused it? Were warnings issued? Were these warnings valid? Use the empirical evidence and work backward. the 1970s seem to be important – why? The energy (oil) shocks??? Now what would an energy shock do to an economy which was 100% dependent (I am taking some poetic licence here) on liquid hydrocarbon fuels? Not good I fancy.

Forget all that went before. So what were the outcome of those two energy shocks? If one billion new (very cheap) new labour units became available a 20 year period, what would be the economic outcome of that? Bad? You bet! But for whom? Its a work in progress as they say.

Eventually (if you think carefully enough about it) you come around to the idea about a paradigm of political economy and how that paradigm has been continuously massaged by the different interest groups. Compare the ‘power’ of these groups pre-1970 to to-day. Similar? Different?

That paradigm is embedded within a Permagrowth model of aggregate economic activity. Permagrowth has faltered. Its a physical system using finite resources . It must falter at some point. So what do you do to replace the physical bits that are marginalized? You replace them with virtual bits. Problemo solved! Eh, no.

As the fraud (of the virtual bits) fades the force intensives (to save them) and simply makes the problem even worse. Its known as Successful Failure. Folk DO NOT learn from mistakes (apart from falling off a ladder – and surviving).

Debt (of the excessive and unpayable variety) is like Dry Rot. Unattended it will destroy your edifice. You promptly remove and burn the effective parts. Apply liberal applications of fungicide (regulation) to all the remaining exposed parts. Then pray.

@ seafóid

This is Water Week:

The water the dinosaurs drank millions of years ago is from the same finite supply that falls as rain today.

To produce roast beans for just one cup of coffee, 130 litres of water are required. That corresponds to the average daily consumption for Germans.

@ BeeCeeTee

“developing and transition economies” – surely Ireland counts under one or both of these labels???

There are lists published by international organizations that define these things. While Malaysia, for example, is on a 2012 IMF list of developing countries, Ireland is not. Objectively, I think, we are still a developed country for all our problems.

a couple of comments,
income distribution in Germany has not changed, after you account for changing household composition (see DIW SOEP data).

THe Gordon above makes a similar argument (w15351) for the US, after 1990, after Reagan reduced marginal tax rates from 70%. That this caused reported and taxed incomes at the high end to rise, is, at least for me, very understandable. At 70 % tax, it makes a lot of sense to give folks some other, non-taxable goodies, the corporate jet, country club, cheap loans and company houses.

If this “two-tier” system in Germany would have made it so easy to fire people, why did German unemployment not rise after 2008, like in the rest. Our GDP drop was (initially) stronger than in most other countries.

When you read Graeber “debt” or Reinhard / Rogoff “This time it is different”, or BM Smith”The equity culture”, this debt hangover is perfectly normal, after a long boom time you had, and the consumption binge at the end. The nordics had it in the early nineties, Japan one hell of a private debt bubble, they are still deflating, just Germany missed out, not because we are so clever people, but because of our lovely reunification we missed out on the consumption binge before


Some folks predicted “The second Great Depression 20007 – 2020” Warren Brussee in 2005, based on data up to 2003, before the US house price bubble really had developed.

Just not the Pros, with their FRB/US or ECB SDGE models. Or did they just not tell, that they are running a little experiment on their own ?

I expect, that we will have lower (close to 0) growth rate, because the working fraction of the population is shrinking, and the asians will get a bigger share of the pie.

For “water week”
The problem in Germany is, that folks do not consume enough. Especially in eastern Germany, they built a lot new water “facilities” (how do you say) and large pipes, and now it is not flowing fast enough. It does help nobody somehwere else, if this just goes to waste. Soo, if you have some ideas for (a not too dirty) industry needing lots of water, tell me !

@ MH
Those 130 litres of water for one cup of coffee stats – how much of that falls as rain ? Don’t the parts of the tropics where coffee is grown tend to get more rain than Spain ?
My understanding is that water is an issue where it is not so flúirseach and that water distribution globally is very unequal. China has one sixth of global population and something like 6% of global freshwater. India is similar. It wouldn’t make sense to grow coffee in China. It doesn’t make sense to grow cotton around lake Aral.

I found these papers quite interesting because I’ve been trying to describe how unique the current recession is in the context of how unique the ‘great leveraging’ was.

I allude to it in our paper;

It describes how little money is now created by the central banks and how an exponentially growing money supply was the only thing which brought some economic stability in the recent decades.

It concludes that such exponential grow will not happen again, primarilly because mortgages have reached their natural limit of duration, and as such more money creation by the central banks is required to resolve the debt crisis.

Paul Ferguson,

1. I looked at the Amazon of this Helleiner E., 2003, and quite frankly, it looks like a lot of hearsay. Could you here describe, what kind of data for number of unemployed over the few month, before and after this experiment they have, compared to what kind of reference?

2. Guernsey example
your reference is again hard to get, and I am not buying any obscure book.
First, the money creation is roughly in line with GDP increase over that time. Second, guernsey was some tax evasion place, as I believe to remember.
Third, please comment who loaned interest free to this island, why, if he could have a stable, (low) interest paying pound sterling as the standard.
These things do not just happen somehow. How about you cite the relevant pages somewhere?

Because, quite honestly, my experience with such vague, hard to get references have turned out near universal pretty negative.

4. M3 growth in Ireland 2003 – 2012
Looks to me like the classical example of a bubble with some 10 – 20 % more hot air to be let out.

5. long term money growth
Show me one (closed, Japan today is NOT good) example, sufficient size, sufficient length, sufficiently documented, where money growth beyond the growth of the underlying economy did not result in the equivalent inflation.

Maybe these remarks help you to make your paper more convincing. So far I am definitely NOT.

I’d be a little hesitant to suggest gloom. Although the “everything that can be invented has been” quote
May be apocrypha the sentiments above are similar. Fact is we haven’t a clue where the next breakthrough will
Come from.


it is not the 5$, it is on principle. Just as with the Greek blackmail.
The guy is paid by the public, and supported by a foundation.

We had 2 very recent “breakthroughs”, the PC and the mobile phone, and both dont need inflation to filter through over many years. If you take closer look at the steam engine, car, they didnt need it either.

Our true European community
28 August 2012 Frankfurter Allgemeine Zeitung Frankfurt

Fiscal union in order to complete the single currency is the only way out of the crisis, says German writer Martin Walser. But it is important to remember that the true Europe has always been a community of learning, which respects the various cultures that make it up.

…Only those that hope that the European Union will also be a monetary union get my vote. The euro is here. It is more than a currency. Today, for a country to return to the age of national currencies, to become, once again, the plaything of every speculator, is a nightmare scenario.

…Literature has always been European
A 1799 letter by Friedrich Hölderlin reads: “But the best of the Germans continue to think that everything would be for the best if only this world were neatly symmetrical. Oh Greece, with your geniality and your piety, where to have you come?” If I quote this passage, it is not because Greece is today manhandled within the eurozone, but because it shows how much a poet from Nürtingen [southern Germany], aged 24 at the time, felt close to other European countries, to the point that this foreign place was his homeland; to the point that it was part of his conscience; of his identity. In other words, literature has always been European. Europe is our literary homeland.

Nietzsche’s Greek soul
As for Nietzsche, he ends The Birth of Tragedy From the Spirit of Music, a wild and precocious work in which he described the never-ending struggle between followers of Apollo and those of Dionysus, – a book on Greece, no more no less – in the following way: “How much these people must have suffered in order to be able to become so beautiful!”


Interlude: Die Nederlandz

Dutch Discontent
Socialists Ride Wave of Anti-EU Sentiment
By Christoph Pauly in Rotterdam

The economy is in trouble and unemployment is rising — in the Netherlands as in much of the rest of Europe. Ahead of upcoming elections, the Socialists are riding a wave of euro-skepticism and may emerge as the strongest political force in the country.


@Dutch Socoalists

Appreciate that ‘vote’ on the odius Irish Debt pile to be fiterered intotal to bust banks while the serfs were to be screwed to make up the difference. That said, appreciate the vote which prevented a real f*ck up in Dutch/Irish relations.

Many thanks to Kevin D. for posting the link to the paper. $5 is not a barrier to accessing a paper, but the amount of faffing around (or surrender of additional privacy) that’s involved in making transactions like that is unpleasant enough so that I avoid doing it where possible.

I’m entertained by the idea that no one would choose to haul water and use hole-in-the ground latrines over losing the innovations of more recent decades. First because the biggest benefits of running water and sewerage systems are about public health and not about convenience. Second, because I have hauled water and dug trenches by hand, and if there were no accompanying public health issues I would personally go back to doing it again before giving up on the fruits of modern information and communications technologies.

Having read the paper, I am still of the view that there is a problem with accounting for improvements in the quality and performance of products and services in national accounts data, and that growth will be understated as long as these are not accounted for properly. I note that even Gordon seems to base his immediate projections of slow US growth on issues (“headwinds”) specific to the US, rather than on the grand-macro scale slowdown in innovation effects that he thinks is underway.

@ genauer

Regarding points 1. and 2. I came across some contradicting papers on the nature of how well managed the issuance of debt free money was in Worgl and Guernsey but I went with the best references I could find.

Of course, there’s no example of money being carefully issued solely by a central bank for any appreciable length of time but the above two are the closest I know of and they appear to have been successful while in operation.

On point 4. I think you’re suggesting that the growth in the M3 money supply is a classic bubble which will deflate further and then grow again?

I’m suggesting it was a very unique bubble as we’ve never seen a doubling of the money supply over 9 or 10 years before for two decades in a row.
I also point out that since the amount of cash in the economy is now negligible this growth in the digital money supply was the only thing which gave this system some functionally.

Finally I don’t think this is a classic bubble because the money supply won’t grow to such extents again because mortgages cannot increase in duration like they have before. The majority of the money supply is created through mortgages.

Point 5. is confusing for me. I can’t imagine any example exists but I don’t see where I suggest I do?

What I’m proposing is a system whereby the money supply is rarely deleted like it is through loan repayments today. As such, once we have a certain amount of money in the economy, that should almost be that.

The Central Bank would monitor inflation (and many other factors) and adjust the money supply directly accordingly. Any new money would be added to the Exchequer’s account and spent into circulation but the amounts involved would be very small since money wouldn’t be canceled out of existence as debts are repaid and we would no longer require exponential growth in the money supply for stability.

Finally, can I ask how you imagine we can resolve the debt crisis under the current system of money creation/deletion?

Bear in mind that every euro has a corresponding debt.
If we reduce our debts (to financial institutions) the money no longer exists and we’re no better off.
Equally, for the economy to have any new money someone has to organise a loan from a bank and this brings an even higher amount of debt to the economy than it does money.

The main way we’ve gotten out of recessions under this system in the past is by encouraging more people to take on more debt and dwarfing the existing money supply and ultimately that’s what all the current policies are trying to achieve. That doesn’t seem feasible from now on primarily because of mortgages ‘maxing out’.

Tull, Blackmail !

D O D, Trichet letter !

You bring up actually a pretty interesting point. Severe cultural differences in the perception of the same political events.

Most folks in Ireland were probably in the last (2011) summer / fall pretty busy with yourselves and your own country, and Italian and Spanish CDS going up a percent or two did not look particularly dramatic to you anymore.

Just as we in Germany focused on our own shit until 2008, and watching only the other 2 big players,US and China, more closely. The rest of Europe was more or less supposed to be the same as we, in some areas a little catch up to do, especially in the Balkans. Me worry about Ireland, Italy, Spain, ….., why? Having more “rust belt” industry, being “behind” on financials, we did not see as an advantage.

But even with having this in mind, I wonder a lot about the cultural differences in perception. What subsequent Greek governments and prime ministers did, was repeatedly negotiating some package deal, and as soon as this was finally agreed, immediately reneging on their side of the deal, together with endless shameless ignorance of agreements with the troika. When Venizelos in July 2011 and Papandreou in November 2011 pretty openly threatened to just walk away from deals, every time the Italian, Spanish CDS jumped, because people realized the whole setup was a lot more fragile than most believed before. From the core perspective they took both countries hostage. I believe, that Italy and Spain would have had a lot more time to sort out their respective mess, if it wouldn’t have been for the, from the core perspective, repeated blackmail behavior of Greece. And I mean the nation, because it was not just one time one lone guy, but, the way it looks now, all the time all Greek politicians.
In a business environment, the gloves would have come off the latest in Nov 2011, all deals cancelled, and the offender put to immediate, drastic court actions. With nations at stake, just the political head of Papandreou chopped off, had to make do.

A pretty similar thing is the letter, Trichet wrote to Berlusconi, which enraged David O Donnell and some others here.
From the core perspective, Berlusconi had the problem, that people were increasingly doubting the will / ability of Italy to serve its debt. It was high since long times ago, but the rest of the business data are actually not that bad. But he did nothing, apparently occupied with Bunga Bunga and fighting of corruption allegation of a left opposition, which is opposition because the Italian public perceives them as even worse (Beppe Grillo: A member of the Italian Socialist Party asked Craxi: “If the Chinese are all socialists, whom do they steal from”?, priceless)
From our perspective it was: while you are busy with your genitals and enriching your family, we wrote you up a little laundry list, so you don’t forget again what was said agreed upon on the phone, repeatedly. Something he should have been deeply ashamed of. But David has a point, that it is not the job of a central bank, especially not a supra national to tell an elected leader the fine print of what he has to do. I wouldn’t like that either.

But, tuck and DOD, you are just 2 examples, that a lot of other people, in other countries, see the same events very differently. Is this just because we might see this mainly from the other sides in the eternal creditor / debtor conflict? I don’t think so.
We are now becoming more and more aware, that the cultural differences seem to be larger than thought. The southern model of running up debt, and then neutralizing it in some jubilee, via inflation or outright default is actually more the norm than the exception. The usual way in Europe was actually that this happens somehow during a war time, when most people care more about other things, like their life. And that obviously also means, that this works, somehow, for other people. The evidence is there. The US and UK, paying down deficits of 250% GDP, repeatedly, and Germany after WWII are the exception. Even the Nordic needed a lot more “crisis”, before they changed their welfare states.
Agenda 2010, turning around the German ship long before creditors get itchy, is an exception with a significance, I only fully became aware of in the last year. And we scratched the buoy of the 3% deficit limit 4 times, some thing, a lot of people try to hold against us, even when it is now pretty clear, that at the 4th time this was actually working “too good”.
Germany now has to ramp up (a little bit) wages and the subsequent inflation, to compensate for the periphery. When the “last europhile” Schaeuble and a FDP minister of economy Bruederle publicly encourage the unions to ask for more, this is heresy for people like me, how much string do I have in my attic ?

David O D,

Hölderlin and Nietzsche were poets. Nice to read, when you sit in “der Wald”, and want to feel one with the world, your soul.

Not good advisors for the real world, interest rates, risk premiums, they ended up in the insane asylum.

As a belated, incomplete response to the Frankfurt school discusssion:

@David O D
I did ask (“Planted?”), what Irish people think of that Siemens statement, since a lot of urban legends, look, lets say, at least considerably different, if people take a closer look.


1. Frankfurt school
As a physicist I should not pick on my own profession, but this Frankfurt school reminds me of string theory. All the fashion now, will explain everything and more, just not yet, since 30 years. In fact there is still not one observable fact or idea of an observable fact in the future by which one would get a hint of whether this is all nonsense or some nugget to find there. “Not even wrong”.

The Frankfurt school is now pretty much a dead closed chapter. Soo, what did it achieve? not just “should be”, “should improve”, “must at all times”, “must”, “purpose”, “goal”, as so often in the wiki text.
It is still all promise, and no delivery, as far as I can see.
But maybe you and David O D see something, they actually “achieved”, what I don’t see. I know that I am pretty good with technical / business texts, but at a loss with most of poetry. Please tell me what value you see there.

When I read a book like David Graeber “Debt” I can usually summarize it in my own words and in a very few sentences, like “there was debt, even before there was money. You actually can try to write the whole human history as an endless fight between creditors and debtors, and this recently gotten a lot more humane.” And, ….., you shouldn’t trust David (G !, before I get an earwash from David OD) too much, because he is a great writer, but often a little short on the supporting facts : – )
How do each of you summarize the “Frankfurt School”?

A few more interesting, recent examples:
Doug Sanders “Arrival City”: “property rights”, each square meter, tree somehow accounted for, “city planning”, these are maybe more of a description of a tiny 5 – 10 % core western population, but not for the vast majority of the whole world. The US suburban sprawl, the European revival or core cities, and the rise of of the mega cities, very often about 50% of economic activity centered around one capitol, 3 very different developments of human settlements.
Jared Diamond “Collapse”: Without hostile neighbors, internal conflicts somehow settled, you can always ruin your environment
Acemoglu “Why nations fail”, because there is no “fatherland”, overriding principle to begin with? David Landes: why are some nations rich and so many others poor? Just some temporary freak accident of history and geography?

From where I’m sitting, what happened in Greece looks a bit different to what you have described. Both sides desperately needed a deal – the Greeks because they were running an enormous primary deficit that would take time to shrink, and the Germans to prevent the euro from unravelling and to give their banks time to get out without having their own bailout crisis. It was really tough to find common ground, so the Greeks fudged and the Germans allowed them loose enough supervision on conditionality so that they could fudge.

I think it has actually worked out OK for Germany. If you cut Greece loose now, it won’t directly hurt your banks much, and there’s a better prospect that the euro would survive than there was last summer.

@ genauer
Everything milton friedman saw reminded him of the money supply. I have the feeling the germans need to lose the hyperinflation phobia.. It isn’t healthy to have these 1920s fixations. Per haps you could go into national therapy with the israelis who see a second shoah in iran. We need less nihilism and more cop on.

Poll prayer: Europe must vote
23 August 2012 De Morgen Brussels

An essential corollary of monetary and fiscal union, the political union discussed by European leaders and the Constitution that goes with it, cannot be legitimate unless it can be achieved democratically. To achieve this, it must be put to pan-European consultation, according to a Flemish writer.

The German constitution, however, explicitly prohibits the transfer of such powers. Various German politicians have recently launched a call for a referendum, albeit with various degrees of enthusiasm. By doing so, they are backing the ideas expressed by the 83-year old philosopher Jürgen Habermas, whose booklet La Constitution de l’Europe (Gallimard) is now also available in French bookstores.

A constitution, in the interpretation of Habermas, stands both for construction and charter. According to Habermas, we must avoid seeing the hopeful European project being changed into its exact reverse, namely a “post-democratic bureaucracy”, which is judged oppressive and hostile by the people of Europe.


3 of 3

Manipulating Europe’s DNA
6 July 2012 Gazeta Wyborcza Warsaw

Whether it means economic solidarity or political unity, “More Europe” seems to be the way out from the current crisis, writes a Polish columnist. But how can we achieve this without widening the gap between what the EU needs and what European societies are willing to accept? Excerpts.

Conflicts between the two have usually been settled to the latter’s advantage. In the past, politicians would offer pork barrels. Today, it is the “market expectations” that have become the determinant and weaker countries such as Greece or Italy have had to accept reform packages agreed upon in Brussels as the price for financial support, while the wealthier member states, e.g. Germany, offered that support without paying heed to parliamentary procedures or public opinion. Jürgen Habermas has referred to this surrender of prerogatives by parliaments to intergovernmental arrangements as “technocratic federalism”.


Welcome to Europe. Not bad since we first educated you in the 6th, 7th & 8th centuries.

Jens again. He surely deserves that assistant professorship in Harvard! Worth a read.

Bundesbank President on ECB Bond Purchases
‘Too Close to State Financing Via the Money Press’

Jens Weidmann, the 44-year-old head of Germany’s central bank, has made a name for himself by championing price stability and opposing bond purchases by the European Central Bank. In a SPIEGEL interview, he criticizes the ECB’s latest plans and insists he only wants to secure the euro’s long-term future.

I eventually got the White paper: long and interesting. Useful up-to-date biblography.

Correction: I commented above about the absence of a reference in Taylor (2012). The reference is there, but the first author’s name (Jorda, O) was omitted in the text.

My principle critique of the White article is that it (again) fails to explicity state what the ‘growth’ paradigm is. He uses the term, “… strong, sustainable and balanced global growth”. I presume this is also the position with the English, Austrian, Freshwater and Saltwater teams. This growth paradigm is embedded in a physical system and can only operate up to fixed physical (finite) margins. Then it mandat(orily) inflects over into a decline. This trend-decline is irreversible – apart from the odd uptick.

The idea that the global economy is an adaptive system makes sense. It is a collection of different individual economies. Robert Jervis has described the ‘effects’ of systems. And unintended consequences are high on the list. The outcomes are chaotic. Frantic attempts are made to ‘solve’ the salient issue/s rather than attempting to ‘dismantle’ the system and deal with the faulty components – even if one could identify them in the midst of the complexity and the confounding variables.

The conclusion is that economics is actually a social science owned and controlled by politicians for their benefit (plus their financial backers and ideologues). They command the galley. The taxpayers do the rowing. Nice work!

The Production Consumption economy (real) reached its limits about 3 or 4 decades ago. The Finance, Insurance and Real Estate (and latterly Education) economy (virtual) was substituted. It also has also topped-out. Profit maximization was no longer possible so income-stream maximization became the objective. Physical goods (unless produced under conditions or near slavery) were unsalable (median incomes of demanders were in long-term decline) so false incomes (credit) had to be created for them. Problem is the interest on credit grows geometrically. Hence the long-term incomes of credit-based demanders must also increase geometrically.

If all your intellectual models-in-use are embedded in a failing paradigm? Then what? Do like the easter Islander’s did. Carry on regardless! You do not suffer the deep pangs of ‘loss’ and you can always blame the weather. As Cormac Ó Gráda said (when the water level is up to your nostrils) – “its the ripple that drowns you”.

Just viewed a highly entertaing and skillful ParOlympic baskeball match between Germany [77] and Great Britain [72] which went to overtime. Great European ideal – getting them to play ball with each other!

@Brian Woods Snr

Well, were it to be, or in my opinion a number of them, that complex adaptive systems are in play. It follows that attempts at centralised control or linear bureaucratic rules based thinking will fail.

HSE cuts to hit services for the elderly and disabled
PAUL CULLEN, Health Correspondent

Cuts affecting the elderly and the disabled feature strongly in a €130 million cost-reduction package announced by the HSE today.

Some 600,000 home-help hours are being cut, the second time this service has been cut this year, while €10 million will be saved through a reduction in personal assistant hours for the disabled. Another €1.7 million will be saved by reducing 200 monthly home care packages.



Blind Biddy is FURIOUS. She is polishing one of her inter-continentals, a sawn off version still in beta.

@paul ferguson
Sorry for the late reply.
My post was pretty hard to read, because the point 3 was missing.
For some reason, the blog didn’t take it (table format ?, ) And I posted only 1-5 without the 3: M3 growth in the Euro area 1980 – 2010, basically growing “as expected”
a) Growing from 1080 to 8235, or 6.7 % per year. What probably most people don’t remember, we had substantial inflation in the (early) 80ties, to the tune of 10 % in some countries, and even 6% in Germany (for a short time)
b) 2.3 % “standard” inflation afterwards (whether that is 2.1 or 2.3 I didn’t look up, but is over this variation gut feeling), “mature” old Europe growing at 2% natural and 0.5 – 1% population (mainly immigration, the “high” birth rate in Ireland is a very significant exception to continental Europe !)
c) Substantial parts of “newer” Europe, like Spain, Portugal, Greece, Ireland, doing their catchup and growing more like 4 %
d) With 10 % inflation, people do “cash management”, getting rid of depreciating cash more quickly. With inflation monster tamed to 2%, or lower, for most people “close enough to zero”, much less so, so cash and checking accounts tend to get larger.
e) There is no reason why the “money velocity” = M/P has to stay exactly constant
2.3% inflation + 2% natural growth + 0.5 * (4% – 2%) catchup + ( 0.5% + 1%) / 2 population growth + 0.7% for early 80ties inflation, and you need just something less than a noise 0.5%/year of velocity change trend to be fine with your graph one.

@paul ferguson, 3

a) I would be actually interested in whether my short explanation was understandable / acceptable enough for you, your feedback very welcome. I assume, based on your bio, that you look up numbers like inflation, GDP, growth, for yourself anyways, but I could certainly help with that.
b) Based on my point 3, and the, as crude as possible, calculations in it was based, my 10% gut feeling for point 4 (Irish “total deposits”, whatever that means exactly, in relation to more conventional M3, and a lot to be said, what that really means) does not worry me actually that much. 300 -> 550 m, over 10 years. We could now heckle through a lot more details, it seems that investors have a similar view to me, with the recent irish debt floating.
c) On your difference between “digital” money, versus “other” like cash, in former times bullion, I don’t buy it, so far, but I am still reading on with Graeber “Debt”, as hard as it it, lots of claims, with thin evidence. I also recommend Tamin ansary “destiny disrupted” (my german version: “Die unbekannte Mitte ….. “ to get an Islamic view of how things happened.
d) Further to your response to my point 4, “The majority of the money supply is created through mortgages.” Your evidence please?
e) Your, with the difficulties above, very legitimate “Point 5. is confusing for me”. Is that now more clear? Because, I don’t think we are actually much far apart. Where is your “The Central Bank would monitor inflation (and many other factors) and adjust the money supply directly accordingly” really different to my German “Ordnungspolitik”? M3 (or whatever similar measure) has to rise according to velocity = roughly constant. I am interested in your feedback!
f) Just 300 years ago, the very most of the people were convinced that democracy doesn’t work, in the long run, with many people. Well, now, most of us are.
g) I did not ask for your Wörgl and Guernsey example, because I really expected some revelation. But sometimes I discover some interesting aspects in unexpected places. I believe, I could give you some hint to somewhat better examples, Israel kibbuzim comes to my mind.
h) Your “Finally, can I ask how you imagine we can resolve the debt crisis under the current system of money creation/deletion?” there is no easy answer, and I don’t want to give a cheap bullshit answer. It is on my list to give a somewhat reasonable answer, how I see that, in the next few days.

First, this is an irish economics blog, not a (german) culture discussion, as far as I see it.

Second, I will not respond to every post, even in relation to me, it would defeat the purpose.

That was the point, I was trying to make, we see the same events with very different eyes, not only rich/poor, left/right, old/young, but actually culturally different, what is ok, to drive a hard bargain, or what is downright criminal or just “culturally” impossible.

But Papandreou and Berlusconi had to go, even by the standards of their own countries, or is that already “german cultural hegemony”? ?? I am asking for your view !

That somebody like Röttgen had to be fired in this way, was unusual for Germany too.

I have said it many times all over the world, this myth of German phobia of 1923 inflation (from my view engineered by a german government) ,is a well trotted out myth, but just that. People like me experienced the Italian and other southern inflation in the 70/80ties, with hard candy exchange, and we don’t like it.

Friedman / Chicago School, I see Argentine and Russia bankruptcies, to make it very short. And I don’t accept these permanent blackmail with stuff, even my grandfather didn’t vote for. I Do NOT accept Nazi like “Sippenhaft”.

@ David O Donnell
I think I have asked you 3 times, what you see in this Frankfurt School / Habermas. I don’t feel that I got an answer. Probably more from me in a few hours. Got meals to cook.

@ D O D,
one more time:

giving some link to a bio of Habermas does not replace an answer to my personal question to you, in person:

what means the Frankfurt school to you today?

Just a very few personal sentences.

Are you just some online ELIZA robot, who has no personality ?

This is first half:

@DO’D: “It follows that attempts at centralised control or linear bureaucratic rules based thinking will fail.”

Ah! Now! Failure is all the rage David (think Labourtaine!). And of course one gets Bonus Points for C or higher grades in Successful Failure (Higher Level Course of course) and one can even acquire bonus-Bonus Points for ás our very own furrin langage! Now where did I misplace that Joseph Heller book?

Poor sod in charge of UB (of the IT glitch) had to self-destruct his own bonus! Now there is a good idea. Teeshuck and minsters (sic) need to take a cut in their salaries – due to un-performance problems, you understand.

Third part simply refuses to upload.

1 = Coincidenc. 2 = Happenstance. 3 = Enemy Action.

Water Meters by 2016!!!!! Here, cut those government salaries even more. PH has abandonded us (temporarily I hope). He has some interesting posts on Politicalreform.ie. I think William Kingston (Interrogating Irish Policies) needs a rapid update.

Well, well, well. I used the full name of a former contributor in my original text. Just on the off-chance I subbed his initials. Lo and behold! I got lift-off. Well, well well.

WOW! I wrote ‘you know whom’s’ name in full and it refused to upload. I think an explanation is in order.

Brian, are you attempting to imply that the blog automatically rejects any post that has PH’s name spelled out in full attached to it?

@ Grumpy: Suppose. If the moderators wish to restrain a particular person from contributing that’s there privilege, but if I wish to use a specific person’s name because I am referring to something they wrote and my entire comment is ‘blocked’ unless I either delete their full name or use their initials – then that is not acceptable. Its censorship. An alert moderator could always delete an unwanted comment and if the site was unattended comments might be placed in a ‘pending’ queue. Its sorta sad.

@ DO’D: I had “Catch 22” in mind.

@paul ferguson, 4

Irish M3 growth
CIA world fact book 2009 about Ireland: GDP growth averaged 6% in 1995-2007″ with 4 % inflation (in 2003,2007 and 2008, the years I looked up, 3.7, 4.7, 4 %) you get a nominal increase of exp( ( 4% + 6%) * 9 ) = factor 2.5
M3 corresponds to that, nothing wrong with that.

Debt crisis solution

a) Private people in Ireland and elsewhere pay down their debt, if they can’t, they go bankrupt. Ireland is currently updating their bankruptcy laws to reflect the current circumstances. I did not find case numbers for recent years, understanding they are still small. In Germany it is about 100 000 personal bankruptcies per year.

b) Euro Governments have signed the ESM / stability pact. I assume the German constitutional court as the final arbiter will accept it, but making it clear, that there is no funny banking license covered by it. Giving the general aging, real (after tax and inflation) interest over 5 years will be about 0.5%, maybe 1.5% for Ireland, given its not so stellar history, If investors believe, that they get their money back. According to http://www.irisheconomy.ie/index.php/2012/03/08/the-glidepath-rule/ the required reduction of a 101 % GDP debt is (101-60) / 20 = 2% GDP, effectively some gigantic (ironic here) 3.5% GDP. If the people of Ireland would default on the generous loans the people of Europe have given them, the consequences would be at least a factor of 3, probably closer to 10, worse.

c) What has actually become painfully clear over the last few years, that a lot of people and even countries are kept honest only by the very real threat of quick painful consequences. When I look at a Paul Whelan, or Luis de Guindos, not to speak of all Greek politicians, it is pretty clear that all European regulations in word and effect have to be made safe against hardened criminals. There is nothing wrong with the ECB and its mandate. Nordics and central European countries can life by general good rules. Krugmenistans to a lesser degree. People will learn to live within their means, as the very most somewhere else, the law will be upheld, and we wait for new events coming in, to be dealt with.

@paul ferguson,
If you think, after what I have posted, I could have some relevant input on your theories (experience, numbers, models), say so, here

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