Now Here's The Really Sick Joke About The Deficit Deal

This weekend, while politicians were debating how to save us from a crisis of their own making, we were at the beach reading Richard Koo’s Holy Grail of Macroeconomics, only to get really depressed at how badly policy makers are screwing things up, and failing to learn the lessons of past crises.

The simple point in the book — when you have a balance sheet recession, brought about by bursting bubbles, and a private sector that’s focused on debt deleveraging — the only policy that works is government spending. Cutting spending just makes the problem worse, and monetary easing fails, because no matter how cheap money is, nobody wants more debt when their goal is to minimize it.

Both Japan’s experience and the Great Depression confirm this, but alas, the political desire to cut deficits (in both cases) circumvented nascent recoveries.

Anyway, there’s a lot to be depressed about, but here’s the kicker. We won’t even lower the deficit.

Since its multi-decade recession began, Japan had pronounced periods of “fiscal consolidation” and each time… deficits rose due to collapsing GDP.

This chart from a past Koo presentation makes that clear.

chart

Photo: Richard Koo

So nobody’s goals will be furthered: Not the people interested in growth, and not the people interested in deficits.

Sick.

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

Source: Presentation to the Institute for New Economic Thinking

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