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Scotland will refuse to accept British Bill of Rights (The Telegraph)
Catalonia Pushes Ahead With Independence Referendum Plan (The World Post)
Protest Camps in Hong Kong Come Under Assault (The New York Times)
Ebola outbreak upsets Exxon drilling plans (USA Today)
Turkey’s ISIS Crisis (Project Syndicate)
ISIL closes in on besieged Syrian town (Al Jazeera)
The Future of Syria (Project Syndicate)
The Intellectual Battle Against ISIS (Project Syndicate)
Putin Trumpets Economic Strength, but Advisers Seem Less Certain (The New York Times)
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Now, we normally think of deficits as a bad thing - government borrowing competes with private borrowing, driving up interest rates, hurting investment, and possibly setting the stage for higher inflation. But, since 2008, we have, to use the economics jargon, been stuck in a liquidity trap, which is basically a situation in which the economy is awash in desired saving with no place to go. In this situation, government borrowing doesn't compete with private demand because the private sector doesn't want to spend. And because they aren't competing with the private sector, deficits needn't cause interest rates to rise.
Prof. K invokes a crowding out concept based on a concept known as the discredited but widely cited loanable theory of funds. In fact the amount of deposits in a banks has no relationship to the credit extended by banks. That is determined by the credit worthiness of the borrowers and credit worthy loans are made whether the banking system has deposits to lend or not. In the case that any additional reserves are needed within the banking system when additional credit is extended the central bank simply creates them.
Consider the simple process of government borrowing. Does the government borrow money to hoard it? No, every dollar borrowed is spent into the economy. So how can government borrowing crowd out private borrowing? Government borrowing does not change the amount of money in the economy available for private investment. It only increases the amount of money in private savings (Treasury securities held by the public). The money put into those private savings is spent back into the economy by the government.
So Prof. K is spouting nonsense when he says that the problem is that everyone wants to save more and invest less. The reason that there is less investment is because there are fewer applicants considered creditworthy by the banks who provide the new money for investment. (Remember that the money in the economy remains constant absent new credit or contracts if old credit is repaid without new issuance to offset.)
What is unfortunate is that Prof. K has a valid conclusion that deficit spending by the federal government and the creation of vast excess reserves at the Fed resulting from QE has no possible inflationary affect as long as the economy remains operating well below full capacity. But this is no justification for the use of theoretical concepts so thoroughly discredited.
Note: There will be a much more complete discussion of Krugman's misunderstanding of the liquidity trap by Philip Pilkington in his weekly article at GEI Analysis tomorrow (Sunday).
EU Austerity as Frat House Hazing (William K. Black, New Economic Perspectives)
Abenomics: will the sun rise on Japan again? (The Telegraph)
Handbook of Macroeconomics, vol 1 (EconPapers)
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