This was a fascinating read. Is there any sort of explanation or analysis out there on why so many political leaders as of late believe they can alter the deal and then keep the same level of trust immediately afterwards?
I know this happens occasionally and I may just be seeing a pattern that’s not there, but it seems like a noticeable uptick in leaders who don’t understand why people they just fucked over won’t trust their IOUs anymore
This is my personal theory: modern technology and media has made it more possible to surround yourself with only like-minded views that share your "fairy tale thinking", even if the eventual outcomes are obvious from the outset.
Was really glad that this article mentioned Liz Truss at the end, because I think the dynamics are absolutely the same. It was painfully obvious (indeed, the current PM made it clear in the summer) that cutting taxes, and having no way to pay for them, in the midst of rampant inflation is an idiotic idea. I read elsewhere that it's almost as if Truss and Kwarteng formed a pact in college saying, "if we ever make it to the top of government, we'll prove that supply side ideology works!", and then completely disregarded the current economic climate.
I just see it more and more over the past decade or so that things that you know are not going to end well (see also crypto deposits paying 10% interest) somehow snowball because it's easier to surround yourself with "ideological cultism".
The irony is that the damage is almost exclusively done by Conservative governments who are traditionally view as more fiscally responsible and more competent at economics, while the left side of politics are often viewed as more ideologically driven.
A similar reversal of roles can be seen in Germany, where the greens economics minister surprised the business community with effective solution oriented "realpolitik" and the free Liberal (a pro business/free market party) finance minister is blocking decisions for purely ideological reasons often against the recommendations of large portions of the business community.
Rick Perlstein goes into some depth on this in direct response to Liz Truss. And yet, after her brief reign, I wonder if he misunderstands why he's her favorite author. Perhaps she didn't misunderstand any of it, she merely said the quiet part loud.
More likely that 'modern tech' is just exposing corruption that has always been there.
This is just statist feudalism exposed.
Modern technology is also amplifying populism, which is who the word 'Truss' ends up in all of this, because however much one may agree or disagree with the contents or orientation of the mini-budget, it was woefully misrepresented in the press (almost universally) in an excessively populist manner.
This is an example of fairy tail thinking though because so many people say this. Government spending money that didn’t directly come from taxes during inflation is just going to pour fuel on the inflation fire, regardless of how useful the investment.
Money needs to be taken out of circulation, not added.
The most recent US federal legislation (the Inflation Reduction Act) actually raises government revenue significantly. While the Inflation Reduction Act probably won't do much short term with respect to inflation, it should reduce the deficit over the long term.
I can definitely understand arguments and debates around the proper level of taxation. But while it may be acceptable and even a good idea to substantially lower taxes and raise the deficit during periods of low inflation, it is the height of idiocy to do that during a period of high inflation.
Debt reduction of ~$6B/year is rather minimal given trillion dollar annual deficits.
“CBO estimates that Public Law 117-169 will result in a net decrease in the unified deficit totaling $58.1 billion over the 2022-2031 period. That decrease in the deficit is estimated to result from an increase in direct spending of $50.6 billion and an increase in revenues of $108.7 billion.”
Anyone confident in any answer here is too confident to listen to. But I generally think of it as a natural result of big change.
Big economic/political/tech shifts leave people mistrusting old institutions that naturally aren’t well equipped to handle the new situation. The institutions screw up, electors lose trust, and new folks take over. The new folks (being new, and sometimes being the less-competent rejects) tend to misunderstand the institution, and change things that aren’t necessary; they overreact.
What you’re seeing is just the overreactions: they’re knocking out walls, and sometimes they hit the wrong wall.
But you also don’t see the benefits because effective bureaucratic adaptation is boring.
The thing I wonder about is if the seeming endless screw ups are because we have more change today, more morons, or we just see it all more.
I agree mostly but would amend one thing: I think there is a mix of well-meaning overreaction and often substantial hubris. Politicians tend to have big egos, and many, especially of the upstart class, seem to mistake popular appeal for efficacy ("people seem to really like this platform--I must be on to something here"). So in these cases they'll ignore their lack of understanding of finance and do random or inadvisable things in the hope that the outcome will be good--and if so they'll be heroes. I don't think they realize that awful outcomes are actually quite possible when pulling big levers in complex systems you don't understand, and that awful outcomes had previously been avoided because, in recent memory, policy decisions tended to be made with a measure of respect, at least, for the things that might absolutely, causally wreck the economy.
At the opposite end of the global scale, I've often seen new (young) employees, arrive and immediately start suggesting sweeping changes.
We're using the wrong language, the wrong source control, the wrong methodologies, the wrong libraries, and so on.
If the flavor of the month is say BoringSSL we should be working to switch all our code from OpenSSL and so on.
Usualy it takes a bit of effort to bring them up to speed. There are positives and negatives to all choices. Usually I assign them the task of coming up with 5 downsides to their suggestions.
Articulating the downsides helps to show you understand the whole impact of an idea, and thus aren't making a "buying the koolaid" decision simply based on popular opinion.
Not new. Lot of examples from history under the Theory of Bounded Rationality. Theory says there is an upper limit to the complexity any group of chimps can handle.
I think the key is that most politicians (and honestly, just about everyone still of working age) haven't been in an economic environment like this one- not since the early 1980's four decades ago. Everyone today grew up in a low-to-zero interest rate environment with low inflation. Argentina- the international borrower most famous for defaulting- has, over the past 21 years alone, defaulted 4 times (2020, 2014, 2005, and 2001)- a total of 9 times since they got independence in 1816. And yet, after the 2014 and 2020 defaults they were issuing debt on the global market at reasonable, normal, non-penalty rates within a short period of time. That was because the overall bond market was so low that investors were desperate for yield, hence Argentina's bond issuance got over-subscribed and so they didn't have to pay much of a penalty.
If the current high-inflation, high interest rate environment sticks around, a whole lot of things are going to end up very different, because the bond investors won't be so desperate for yield and so there will be a penalty for disrespecting the bond market. If it doesn't stick around (which seems to be the current aggregated guess of the bond market) then this will be a brief blip. Trillions of dollars rest on the answer to that question.
Everything you are saying here is orthogonal to the developments described in the story. A provincial government refused to honour bonds in a tiny development in their region and it caused a contagion across the country.. none of this has anything to do with the current rate of interest or the orderly federal default of Argentina and its re-issuance of bonds at generous rates.
For two decades defaulting on your bonds was not be a big deal- witness Argentina. So a rando local politician thought it wouldn't be a big deal, because that's been most of his political career. And the way the bond market is now, it is not nearly as forgiving, so it became an enormous deal.
It is not a big deal if Argentina defaults on its bonds because they were already paying a huge premium because everyone expects them to default on their bonds, South Korean governments municipal to federal do not pay that premium because they are considered reliable - if there are doubts no one knows how to price their bonds - so they don't get bought. It has nothing to do with now vs then!
If you want an example of now vs then go try to buy some cybersecurity insurance for data breaches or flood insurance.. in those circumstances things have legitimately changed!
There is a "populist renegade leader" persona, that violates rules, social customs, and even laws, to signal their independence. The populist appeal is that the rules are seen as being meaningful only to the elite, or too technical to be believable.
It's a common flaw of democracies I find. I come from France and live in a soft dictatorship now, Hong Kong (soft because they dont beat us regularly, yet).
In France, you cannot escape expensive white elephants: the population might even vote for one, like that Airport in the middle of nowhere they wanted to revitalize the dead region. These issues become political eventually with both sides veering to the irrational to defend, or attack, the expensive project. Since we can all vote, we end up balancing left and right, project and no project, cancelling stuff half built, starting others.
In dictatorship, the absurdity is different: sometimes, no matter how silly the white elephant (the HK Macau Zuhai bridge is a good exemple: no car can ever get 3 license plates, three driving permits and three driving insurance, so no car can ever drive on it), the politicians will stubbornely see it to completion, gloat in intense glory whatever the cost overrun when it's done, and move on with the project standing there unused.
I dont know what the best model is, I only know there cannot be perfection: we cannot always take good public decisions, always stick to them, always be right about the future. We can only fail in absurd waste sometimes.
I think, some countries are broken by design, others, because of technical progress, have to change their borders and/or internal structure, but not many lucky enough to do this in time.
Investors actually seem to have short memories. They are more interested in whether they can make a quick profit. An example is Argentina, which was issuing 100 year bonds in 2017 at an interest rate of 8%, despite a long history of defaults and inflation.
After 9 years, you'll get your money back, but without any return. If they last 11 or 12 years, and since it's paid in US dollars, you'd get a little return on the investment. The question is whether they'll continue paying out for 12 years.
But my point is more that investors haven't blacklisted them forever, just because of prior defaults.
I don't know whether the interest on this particular bond is still being paid at the quoted rate, or if it was "restructured", since they did default again in 2020:
Countries are polarizing both on the world stage and on the domestic one. And in polarized societies (of any level) it's not uncommon to see people do things that are self defeating, so long as it's perceived as negatively affecting "the other side" even more.
The current clear demonstrations in the world, on both the global and domestic stage, are endless.
Some experts think, direct democracy will be more reliable, but it is not implemented.
Direct, mean, ALL decisions will be made by referendum, using latest technologies - blockchain, crypto, distributed document editing, govt in smartphone, etc, so everybody will have opportunity to affect decisions.
This is issue of representative democracy, by design. Representatives, sometimes have too wide rights and have not strong enough constraints, hoping, elections will choose very good guy, who will use his opportunities wisely.
But unfortunately, in real world, exists deficit of good leaders, and it is much worse on local govt level, because this is like second league (supreme league are govt of country, country parliament, top scientific organizations, military tops, and tops of top corporations).
I think the issue here isn't that the people winning elections have changed their views, it is that the people with bad opinions are winning elections. (In this instance the politician in question believes that the protest movement that helped bring democracy to South Korea was a North Korean operation.)
Institutionalist right wing politicians understood the value of trust, the new right all over the world is generally not institutionalist anymore, so they break things and then wonder why everyone is freaking out. When the useful idiots start to actually win elections we learn what idiots they are.
Many people vote for parties, not individual politicians.
Unless a politician fucks up so badly that they completely ruin their party's reputation, people will keep voting for whichever candidate their favorite party endorses.
Parties have gotten clever, too. They'll quickly throw a troublemaker overboard than risk ruining the whole party's reputation. The conservatives in UK quickly got rid of Liz Truss. Few members of the People Power Party in South Korea are even trying to defend Kim Jin-tae now. Likewise, the party has more or less abandoned the head of Yongsan-gu district who is currently taking a lot of heat for October's Itaewon disaster. The party leaders are probably too busy arguing who to endorse in the readily foreseeable by-election.
> This was a fascinating read. Is there any sort of explanation or analysis out there on why so many political leaders as of late believe they can alter the deal and then keep the same level of trust immediately afterwards?
Ignoring norms and escalating worked for Johnson, it worked for Trump, it worked for Putin, and the wealthy individuals and orgs who back them love them for it.
Johnson resigned in, somewhat, disgrace, brought about Brexit and ruined the British Economy. Trump was voted out, cost the GOP the Senate twice, mighy be indicted and risks loosing his privtae wealth. Putin started a pointless war, which he is loosing, and ruined Russia global standing, military and economy. Not sure if any of that is actual success.
Huh? Colonial looting is often disguised as the natives voluntarily overpaying for a frivolous luxury, so this doesn't seem like a great counterargument.
Our politicians are bribed, bullied and intimated to enrich a few at the expensive of us all.
Every single election is completely corrupt, do you really think all those billions that they pay to ALL parties are for nothing in return.
And if you don't toe the line you will be punished.
When you realise that this is the case all the insanity makes sense. Where BLM supporters will gladly provide awards for individuals with actual swastikas on their skin. Where states will move to completely deindustrialisation without consultation of the citizens. Where countries won't grow their own food. Where they buy the debt of the those that are oppressing them.
It's all madness until you realise we are all without sovereignty.
Doesn't MMT actually prescribe the exact opposite? One central "layman's" understanding I have about MMT (and honestly happy to be corrected if I'm wrong) is that, for countries that control their own currency, you don't really have to care much about deficits and debt in low inflation environments. You only have to worry about them in as much as they relate to inflation.
Well, inflation is currently sky-fucking high, so right now is when MMT would say you do have to worry about deficits and debt.
Yeah, having a quick read of the article, nothing in this has anything to do with MMT, apart from the fact that MMT is a theoretical framework of how economies work (including in the models both a banking system, and the interactions between Government, domestic and international sectors, that all actually follows accounting rules) that can help understand why what happened was bad...
Inflation wasn’t terrible in Korea and has likely already passed its peak. The decision to default on the bonds was clearly about servicing the debt and the impact of debt payments on the government’s ability to create a budget.
It's unlikely that this politician explicitly believes in MMT, but the belief that you can somehow wish debt away in in-line with MMT. And of course, any philosophy exists within the zeitgeist of the times. After the GFC, a lot of people in the world started to believe that money is somehow imaginary.
> the belief that you can somehow wish debt away in in-line with MMT
The belief that you can wish debt away is rooted in the Keynesianism/Reaganomics of the past five decades. MMT basically just accepts the realpolitik that the enormous handouts to the financial industry will never be stopped, and says that we might as well use some of the new money deliberately. From my economically conservative Austrian perspective, at least MMT appears intellectually honest. MMT also corrects/shortens the feedback path from monetary creation to price inflation, rather than relying on the roundabout feedback path that has created this ever-growing asset bubble.
It would be more appropriate to say that Keynesians understand the system well enough to say that it is impossible to get rid of debt without negative interest rates so the only way out is to have slow burning inflation and the most effective way to generate inflation is not via the central bank but by government spending.
I advocate replacing slow burning inflation with negative interest on cash. When that is done, debts can be repaid.
I think you'd be surprised the degree to which many far right politicians would be supportive of some versions of MMT.
MMT is attractive to essentially all politicians. It says you can spend without consequences. You don't have to spend that on a welfare state although many MMT advocates take this line. You could just as easy spend it on the military or surveillance.
Really? I thought it said that money exists because a government prints it, so a government cannot default on a debt denominated in its currency unless it chooses to, and that inflation is a second order effect resulting from the money supply increasing faster than the pool of goods and services it's chasing.
What you tend to see is some MMT proponents use this argument to state that government deficits aren't a problem, since they can't default on their debt. But the debt can still be a problem, not because a government indebted in its own currency can't default, but because it still has second order effects...
But we have seen that countries who did more QE had even less inflation like Japan. The reason for that is that interest rates hit zero and therefore debt does not grow from interest which means less inflation is needed to erode debts.
The second order effects that limit money creation are highly fluid but the fact that governments with their own currency cannot default is set in stone.
I think that was always the main argument against MMT prescription "spend like there is no tomorrow if the inflation is low". Politicians and population love only this part and will ignore/fight the other one.
Far right doesn't mean reagan ist anymore. MMT is quite popular among populists, probably because they hate the elite and MMT is pretty explicitly about elite economists being wrong.
I know this happens occasionally and I may just be seeing a pattern that’s not there, but it seems like a noticeable uptick in leaders who don’t understand why people they just fucked over won’t trust their IOUs anymore