occasionally indulge in the dark art of macroeconomics. I don’t try to forecast the future (that would be truly pointless), but I do think that understanding the macro backdrop can, on occasion, help inform the investment process. For instance, those who understood the impact of a bursting credit bubble stayed well clear
during 2008. Those who focused purely on the bottom-up tended to plow in and repent at leisure, as the deteriorating fundamentals generated a permanent loss of capital.
So why share this confession now? I think we are seeing a very worrying trend around the world: the rise of the Austerians. This breed is the latest incarnation of what
families the most certain method to increase an estate, so some imagine
that, whether a country be barren or fruitful, the same method if generally
pursued (which they think practicable) will have the same effect upon a
whole nation, and that, for example, the English might be much richer
than they are, if they would be as frugal as some of their neighbours. This,
I think, is an error.” Bernard Mandeville, The Fable of Bees: or, Private
on the incomes of others makes it impossible for all individuals simultaneously to save any given sums. Every such attempt to save more by reducing consumption will so affect incomes that the attempt necessarily defeats itself. It is, of course, just as impossible for the community as a whole to save less than the amount of current investment, since the attempt to do so will necessarily raise incomes to a level at which the sums which individuals choose to
In essence, the paradox of thrift is a fallacy of composition. Whilst it may be perfectly rational for one household (or section of the economy) to save more, if everyone tries to save more, total income is lowered. If you aren’t spending, then neither are the people who depend upon you for their source of income. Firms won’t invest if there is no demand for their products, and we end up in a nasty downward spiral.
An alternative presentation was provided by my good friend, Rob Parenteau, in one of John Mauldin’s “Outside the Box”2columns earlier this year. Parenteau reminds us that:
This makes it clear that it is impossible for all sectors to net save at the same time. As Parenteau notes, this isn’t a theory, it is an accounting identity. If this is wrong, then so are hundreds of years of double-entry bookkeeping.
In early 2009, Christina Romer, Chair of the Council of Economic Advisers, gave a speech laying out six lessons from the Great Depression.3
share the hallmark of being adjustments occurring in small, open economies with weak currencies at a time of generally healthy global growth. These are about as far removed as one can imagine from the circumstances that the world faces currently.
that doesn’t mean that policy makers won’t try to tighten. Indeed, one of the world’s worst economists and a paragon of orthodox belief, Alan Greenspan, opined in a recent Wall Street Journal OpEd that “an urgency to
One can understand the pressure being placed upon policy makers. They are caught between a rock and a hard place. On one side, the Austerians and the (albeit invisible) bond vigilantes argue that unless governments act, there will be sovereign debt crises left, right, and center. On the other side, the Keynesians (like me) argue that tightening will lead to a relapse into recession.
the Gold Standard seems to have produced remarkable results in terms of real growth: the U.S. economy grew by 11% in 1934, 9% in 1935, and 13% in 1936 in real terms! This lulled the authorities into thinking that all was well with the system again. Hence, in 1937, the
Japan provides us with another example of the unerring ability of policy makers to snatch recession from the jaws of recovery. Time and time again in the post bubble period, the Japanese policy makers have beaten an incipient recovery over the head with overly aggressive tightening measures. Most relevant for the Austerians was the experience in 1997, when the authorities raised the consumption tax by 2% and plunged the economy back into a recession.
ing,” 2009; forthcoming in Tax Policy and the Economy, available at:
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