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To the extent the increasing intertemporal ratio results in increased GDP, I think it's good. But, seeing what just happened in the last crisis, we should be mindful that a fall in the borrowing or lending ratio is accompanied by deflation, whereas a fall in international trade normally isn't.

Value of all financial assets as a ratio to GDP looks like a good measure of a country's openness to intertemporal trade.

This is actually very related to something that puzzled me for quite a while.

There is a big difference between "intertemporal trade" and international trade. There can be no actual movement of goods intertemporally. We can borrow money from our children, but we can't actually reach into the future and take their cars, houses, or latest gadgets. Interesting if we could.

People often talk about the national debt in moral terms, saying that we are laying a burden on our children or stealing from them. Actually, all we are doing is creating an obligation for some of our children (those who pay taxes) to pay others of our children (those who hold government bonds directly or through retirement plans or other savings). Often those will be the same people.

Rogue: I think that both drops in international trade and intertemporal trade are *correlated* with recessions. Doesn't imply causation of course.

Drops in intertemporal trade (e.g. financial crises) can cause recessions. Maybe drops in international trade can do so too (like tariffs worsening the Great depression?). Or maybe something else causes a recession, and both international and intertemporal trade drop as a result.

Paul:

1. Yes, only real investment (building factories etc.) including storage of goods can shift consumption of goods across time.

2. But borrowing and lending can affect real investment.

3. It is possible to shift consumption of goods (and income) across *generations* even if real investment doesn't change. Consider these two examples:
A. The government taxes the young and gives the proceeds to the old immediately. (The govt takes a young person's car and gives it to an old person.)
B. The government borrows from the young, and gives the proceeds to the old. 25 years later, the government increases taxes on the young (who are now old), to 'repay' the debt it owes them. (The government borrows a car from each young person, gives it to an old person, then 25 years later it taxes one car, plus interest, from each person who used to be young 25 years ago).

A and B are sort of equivalent, in their effects.

"Borrowing money from our children" seems like an incoherent idea to me. If we can "borrow money from our children" then our children must be able to "borrow money from their children" and so where's the problem? Each generation passes their debt to the next generation so it never has to be paid off!

But what legal mechanism allows us to pass debt to future generations? Debt is a contract and how can someone not alive when the contract was made be party to that contract? Obviously they can't.

The whole idea of "passing debt to future generations" seems meaningless to me. Economists should be especially careful about using emotionally loaded language like this, especially when, when examined clearly, the language is meaningless.

Ed: "But what legal mechanism allows us to pass debt to future generations? Debt is a contract and how can someone not alive when the contract was made be party to that contract? Obviously they can't."

But future governments can tax future generations to pay for the debt the current government incurs to pay for goodies for the current generation, even if those future generations are not yet born. Whether we should call this a "contract" is indeed debatable. But governments can do this. And do do this.

Nick said: "But future governments can tax future generations to pay for the debt the current government incurs to pay for goodies for the current generation, even if those future generations are not yet born."

If these future governments choose to do so, that is their decision. We'll be dead so how do we get any say in that? It is by no means "borrowing from our children" so far as I can see. In any event, if we use the taxes to create valuable assets, such as such as an educated population, then they will also receive a balancing asset. Where's the problem?

Now my generation was handed a country with all it's lands, wealth, and people, and a costly infrastructure. If we then take that wealth that was given to us and lay waste to it and pass on ruins to our children, then I think we night well be said to have stolen that wealth from them.

I realize I am not responding to your blog entry, but to another commentator, so I hope you don't mind that too much. Phrases such as "borrowing from our children" do not, to my mind, contribute to a productive discussion since they are, on inspection, basically meaningless and self contradictory.


" tax future generations to pay for the debt the current government incurs to pay for goodies for the current generation "

Debt repayment starts immediately, so the current generation is always going to pay back at least some of the debt.

Too much debt? Just sell off parts of the country - say Nova Scotia - home of the Blue-nosed people.

"tax future generations to pay for the debt the current government incurs to pay for goodies for the current generation"

We cannot tax future generations, they can only tax themselves, if that is what they wish to do. If they decide not to pay the debt we supposedly incurred for them shall we rise from the grave and smite them?

The very idea that a generation can owe something to a future generation seems incoherent to me. It looks like it means something but when examined it actually doesn't.

I cannot see how generations can either owe or be owed. Individuals can owe individuals or defined collections of individuals (collectives for short). Collectives can owe either individuals or other collectives. But for each borrower there must, ipso facto, be a loaner.

Only individuals or collectives can either loan or borrow. But overall, the human race as a whole does not owe anything to anybody, at least in terms of money. For each individual or collective that owes money there is some other that is owed the money. The total monetary debt of humankind at any one time, on the other hand, must, by definition, be zero so far as I can see.

Ed: "The total monetary debt of humankind at any one time, on the other hand, must, by definition, be zero so far as I can see."

Agreed, of course, (though it might be clearer if you said "total *net* debt must be zero"). Just as total *net* exports must be zero, aggregating over the whole world.

But some times there is more borrowing and lending between individuals than at others. Just as at some times there is more exporting and importing between nations than at others.

Zero sum game. Just another way of stating the unheralded Gaia Economic Pie Slice Traders Hypothesis (GEPSTH)

http://tinyurl.com/yzdvpm3

I was not trying to form any "hypothesis", merely attempting point out that "borrowing from our descendants" appears to me to be an incoherent phrase that would best be left out of what I imagine we all hope, is some kind of rational discussion.

"just as total *net* exports must be zero, aggregating over the whole world."

I'm not sure I see that, at least not as phrased. I would say that, at least until we have colonies off planet that engage in significant economic activity, the world as a whole can't "export" or "import". A few thousand satellites excepted, perhaps.

However, fairly obviously you can't export anything without someone else importing that thing, and I suppose that's what you were saying.

No, I was the one with the "hypothesis". I just use every opportunity to reference it :) I agree with your points - they fit into my orb.

Debt service may be a better measure than debt unless you assume some more or less constant reversion to the mean discount/interest rate. It is at least useful to consider the two, debt service and discount rates, separately. There are, of course, good debts and bad debts though the portion is adjustable through discount rates. Higher debt service could mean higher expectations, or more speculation or desperation and the means to turn debt into equity. Lower rates may mean increased wealth or reduced investment opportunities or increased risk aversion. In general I would say it is a case of dismal expectations or people would be investing in equity rather than debt, but perhaps not as dismal as feared, leading to better equity returns in the future.

I understand the textbook benefits of intertemporal trade, but the increase in non-productive borrowing is why increasing ratios of debt to income are not positive or equivalent to other types of trade.

First the positive, countries in which present consumption is relatively cheap (low real interest rates) will “export” or lend present consumption to countries in which present consumption is relatively expensive (high real interest rates). The equilibrium real interest rate after borrowing/lending lies between the previous ones and gains are like gains from trade as there is greater efficiency in the production of goods intertemporally.

But in Canada and the U.S, consumer and mortgage debt is what has been dramatically growing for 10 years (more than doubled in Canada) and credit card balances emerge as the fastest growing aspect after quadrupling. This non-productive borrowing with 20% and up charged on outstanding balances is what people view negatively and hope to discourage. These borrowers are taking on debt to their detriment, and it cascades in societies like ours with social programs like income guarantees for seniors.

"(A couple of weeks ago I saw a graph showing the ratio of personal debt to income in the US over the last century. It showed a very strong upward trend, with a several-fold increase. Seeing recent changes in the context of a much longer term trend gave a very different perspective. Now of course I can't remember the blog where I saw it.)"

Try Steve Keen's debt deflation blog.

Here is another with about 10 graphs:

http://www.nakedcapitalism.com/2010/04/the-origins-of-the-next-crisis.html

Here is the beginning:

"William White, the former chief economist at the Bank of International Settlements (BIS) gave an important speech at George Soros’ Inaugural Institute of New Economic Thinking (INET) conference in Cambridge. While everyone is casting about for the one magic bullet solution which would have prevented this and future crises, he placed the blame for the credit crisis on short-termism, pointing the finger most notably at economists and their models. White said that the models almost all economists use are ‘flow’ models which leave no room for ’stocks’ and thus completely miss unsustainable secular trends.

In essence, White was saying: "IT'S THE DEBT, STUPID. (my emphasis)" When aggregate debt levels build up across business cycles, economists focused on managing within business cycles miss the key ingredient that leads to systemic crisis. It should be expected that politicians or private sector participants worried about the day-to-day exhibit short-termism. But White says it is particularly troubling that economists and their models exhibit the same tendency because it means there is no long-term oriented systemic counterweight guiding the economy.

This short-termism that White refers to is what I call the asset-based economic model. And, quite frankly, it works – especially when interest rates are declining as they have over the past quarter century. The problem, however, is that you reach a critical state when the accumulation of debt and the misallocation of resources is so large that the same old policies just don’t work anymore. And that’s when the next crisis occurs.

Let me take you through my thinking on this step by step. This is a pretty long post because I want to cover a lot of topics. But they should fit together from the economic models to the likely outcome.

The topics are:

The concentration of economic models on flow and the failure to model debt stocks

The empirical evidence that debt stocks have been increasing across a broad swathe of private sector dimensions

The doom loop of ever lower interest rates that allows debt stocks to increase

The effect that a secular decrease in interest rates has on an economy’s ability to increase debt loads

The evidence that monetary stimulus is no longer effective in allowing debt levels to increase

The likely outcome of a balance sheet recession and a secular decrease in debt

I believe you need to incorporate "intertemporal trade" to PRESENT GDP to the "fungible" money supply with savings being past demand brought to the present, currency being present demand in the present, and currency denominated debt being future demand brought to the present.

Throw in which groups have positive real earnings growth vs. negative real earnings growth along with changes in retirement dates and see what kind of conclusions a model like that leads you to.

Ben said: "First the positive, countries in which present consumption is relatively cheap (low real interest rates) will “export” or lend present consumption to countries in which present consumption is relatively expensive (high real interest rates)."

What happens when all countries try to become "exporters"?

Ben said: "But in Canada and the U.S, consumer and mortgage debt is what has been dramatically growing for 10 years (more than doubled in Canada) and credit card balances emerge as the fastest growing aspect after quadrupling. This non-productive borrowing with 20% and up charged on outstanding balances is what people view negatively and hope to discourage."

Mock greenspan, bernanke, and the rest of the fed response:

This is borrowing to prevent price deflation and to "trick" people into working longer or even not retiring at all.

This is "productive" borrowing that we at the fed and the rest of the spoiled and rich encourage.

"To put the last point more provocatively: should we view increasing ratios of debt to income in the same way that we view increasing ratios of other types of trade to income? As prime facie a good thing?"

There is no reason to view either as a good thing, especially if more trade is because of cheap labor and/or lax regulation like environmental.

Increasing currency denominated debt levels without price inflation usually mean some "entity" is suffering negative real earnings growth. This could show up eventually as debt defaults.

Nick,

I actually think the analogy works. In recessions the supply of goods (both capital and consumption) exceeds the demand, thus trade (international and otherwise) partially breaks down.

You can equivalently say that in a recession savings exceed investment or, equivalently the supply of savings exceeds the demand for saving. Thus intertemporal trade (across states and otherwise) partially breaks down.

Two sides to the same coin.

Adam: that's roughly my intuition as well. But it's still a bit of a surprise, because almost all of GDP is measuring some sort of "trade" (most home production is excluded). So it's a bit of a surprise that international and intertemporal trade should be more volatile than the other trades that comprise GDP, if you see what I mean.

Lord: I see your point. Not sure which of the two would be best. Or should it be the *flow* of *new* borrowing/lending instead?

Don, or Ben? (Either my eyesight or computer screen is bad!). Yes, but not all trade is "productive" in the sense of increasing total output. I produce 2 apples, you produce 2 bananas, and each of us prefers to eat 1 apple and 1 banana. No change in production, but trade is still mutually advantageous. By the same reasoning, pure consumption loans can be a good thing too. OK, with hyperbolic discounting, and asymmetric information on the likelihood of repayment, there's more scope for problems with intertemporal trade. But then people sometimes make bad trades in all markets, not just intertemporal ones.

Too much Fed: Thought you would be commenting on this post ;-)

But I'm not sure if you understand that intertemporal trade can be mutually beneficial!


Off-topic but since I can't find the corporate tax rate post fast ...

opticsguy says: (comment I found in a blog)

“There was a great article in the Atlantic about Germany. There is an employee representative (elected) on the BOD. This could be even the janitor. This give employees a say in how the company is run.

The GmBh private corporation usually puts most profits back into the company. The German corporation is more about providing jobs and exports for the German economy than raping shareholders and employees.

The director of the German company I work for said this about high tax rates: We will put our profit back into the company as plant and equipment rather than pay the government a third of it.

If our corporations thought the same way, that taxes are an incentive to invest in your business rather than an incentive to cheat or avoid paying them by moving, perhaps we wouldn't be in this situation."

A borrower will look at it in terms of debt service. If it isn't rising neither they or their lender will be too concerned about repayment. If it is rising, they are either optimistic, speculative, or desperate, and the lender better know which, whether reasonable, and what the collateral is valued at.

A lender will look at it in terms of interest rate. If it is falling, borrowers are not borrowing enough and it is contractionary for the economy, but will lower debt service and allow the pursuit of lower return or riskier activities.

Since no one is forced to borrow or lend, borrowing, in terms of debt service, must be seen as, a possibly unwarranted, but fundamentally optimistic act, and retreat from it as either the payback of a successful result or a failed one, but one must be wary of exuberance and despair, conscious of the investment being undertaken, and aware it can't grow without limit. A falling rate should be seen as concurrently negative but hopefully prospectively positive event.

Overall, the change is more significant, but the rate can change faster than the debt. Demographics, fiscal and monetary policy, risk aversion, or available investment opportunities may all alter preferred levels so the result can be difficult to interpret.

"it's a bit of a surprise that international and intertemporal trade should be more volatile than the other trades that comprise GDP"

I'd say it's because these are the types of trade most in need of credit intermediation. Virtually all modern trade is intermediated (retailers intermediate the basic consumer goods trade) but a large amount of domestic retail trade is not credit financed (or at least doesn't have to be).

Adam P said: "I'd say it's because these are the types of trade most in need of credit intermediation."

Funny how a lot of this comes back to currency denominated debt.

By the way, did something similar happen around the time of the Great Depression (instead of blaming Smoot-Hawley)?

Nick's post said: "But I'm not sure if you understand that intertemporal trade can be mutually beneficial!"

The key word is can. I don't believe that is what is going on.

It seems to be more about changes ("wealth/income inequality") in retirement dates, as in the few who could retire but won't forcing the many to postpone if not completely eliminate retirement while using price inflation targeting as an excuse.

Did you ever wonder why 'short-sighted' is a synonym for foolish, while 'far-sighted' is a synonym for wise?

Decaln: Yes, I did wonder about that. Because one of the things that bubbles and financial crises teach us is that people can be foolishly *too* far-sighted, as well as too near-sigted. "Discounting the hereafter" is one expression used to describe this foolishness. In fact, I remember reading one empirical study of hi-tech stock prices that showed exactly that. Forgetting about the risk of short-term liquidity problems is another.

So your contention is that people are equally likely to go wrong putting too much weight on the short term as they are to go wrong putting too much weight on the long term?

I think that's the right question to ask. I don't know the answer. Of course, with hindsight, it will usually look like people didn't put enough weight on what would happen in the distant future, if only because the distant future is usually more uncertain.

I expect you might argue, from an evolutionary biology perspective, that people are hard-wired to put too much weight on the near future, because the risk of death was so much higher in the past, when we were evolving.

@Paul

'There is a big difference between "intertemporal trade" and international trade. There can be no actual movement of goods intertemporally. We can borrow money from our children, but we can't actually reach into the future and take their cars, houses, or latest gadgets. Interesting if we could.'

We can take them away from the future, but we can't actually have them ourselves.

"We can borrow money from our children, but we can't actually reach into the future and take their cars, houses, or latest gadgets. Interesting if we could."

That's what we are doing by eventually copying a few elements of USA'a slow corporatist (Presidential system is inferior to Westminster government) enviro-policy. The debate should be about an efficient (no cap-n-trade beauracracy or lobby fat) carbon tax vs buying out and decommissioning the most carbon intensive sources in a way that doesn't encourage developing tar to qualify for the buyout.

There is a neocon moral hazard. Hate picking on them but it is a USD world and they choose an economy almost as inefficient in the long-term as Soviets had, swapping rich idiots for polit tyrants.
In Winnipeg, there is a family who was contemptuous of public spending before the recession and who did lobby for public funding for an expensive blueprint for a museum and tried to get an expensive 10 anchor tenant days a year stadium built paid for by a subsidized "high-end" clothing mall. The city is already highest poverty rate, highest pre-teen hooker rate, highest murder rate...
Neocons have this thing about going into public debt to kill programmes that help people who aren't born into middle class. We have a $60B/yr deficit because the Neocon dream here leads to a 2050s dominated by finance and oil sands. I'm not sure for every economic sector, but for banking the public becomes on the hook progressively more as banks use their Flaherty tax rates to take more and more risk. For oil sands it is exporting future AGW anarchy to almost everyone but us initially, but still no good for a trading nation.

I see existing 40% and 35% of all Canadian profits in 2007, finance and oil, using their Flaherty rates to bring about a 2050 dystopia of instrusive holographic banking ads and AGW. Anyway, Flaherty, Harper et al don't mind borrowing from the future in many ways, to promote finance and oil sands. Without debt, it would be harder to rip off taxpayers and social programmes. If USA deprogrammed the Cold War in 1980s, economic theory and practise could positive sum grow. But CPC voters want poor people to die or go bale some hay (GMO drought flood hail and insect resistant I assume?).

Not quite the same, because the future gets any assets you don't get rid of. This is a very big difference.

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