JeffDB

2 Unfortunate, Possible Consequences of Deficit Hysteria

On Nov 26 02:37 PM John Aislabie wrote:

> The present level is higher than usual but well worth it to avoid the rally nasty (and difficult to redress) consequences of depression. >

But that much higher than usual debt is what helped fuel the bubble that lead to the mess we're in in the first place. We also don't know whether or not we're even out of the woods yet with regard to "really nasty consequences of a depression". As noted earlier, a significant number of economists, including those at the Société Générale, the 3rd largest bank in the Eurozone, think there is still a significant chance of one. www.scribd.com/doc/227... We've already shot all of our bullets, so to speak, interest rates are already at zero, and we've already ratcheted our deficit far beyond any historical precedent. Many economists around the world, including but not limited to various foreign governments, are warning that we are flooding the world with liquidity feeding various new bubbles that could explode and cause new, perhaps worse crises. The dollar has already dropped some 15% against even other fiat currencies, despite the fact that many other central banks have been inflating their own money supplies via "quantitative easing", and trying to prop up the U.S. dollar as best they can. They're swimming against the tide, however, and are probably getting a little worn out. Who knows how long everyone can hold on waiting for the patient to revive. Despite all of the massive spending, however, the patient is still on life support and probably couldn't take much of any additional significant shock without serious adverse consequences. Unemployment is very high and perhaps still rising. Consumer debt is still at extreme levels. Many banks are still on the brink, often operating as "zombie banks" with little ability or inclination to extend credit. Many of their outstanding loans are to customers who are under water or delinquent or both.

In other words, I don't think avoiding a depression is a foregone conclusion.

> A gradual reduction from 100% of GNP to say 70% can be achieved without much pain if it is spread out in a growing economy. >

> Getting down from 200% of GNP to 70% is quite another ball of wax and that is what Japan faces. >

Japan followed our prescription for avoiding a recession/depression and they seem to have only been digging their hole deeper. I fear we may be doing the same.

Look at some of those ratios as per the US debt clock: www.usdebtclock.org/


$41,590 GDP per citizen:
-$12,802 Tax per citizen:
-$4,545 deficit/citizen
$24,243 / net GDP citizen


$39,089 US Debt per citizen:
$54,198 Private debt per citizen:
$345,060 US Unfunded liabilities per citizen (Social Security, Medicare + Drugs)
438,347 total liabilities / citizen
-$2,101 savings / citizen
-$241,758 assets / citizen
= $194,488 net liabilities / citizen
/ 24,243 = 802.24% liabilities as a percent of GDP

I think it is also important to note that the first baby boomers were born in 1946. They will hit age 65 in 2011 and though some are already taking early retirement, particularly given the current economic conditions, they will be retiring in much larger waves in a little over a year. They will be going from net contributors to the social security system to a large net draw on that system putting much greater stress on the deficit. The Social Security Administration estimates that we will have only two workers per retiree by 2020.

Given the demographic situation and the fact that our current deficit is more than 11% of our GDP I doubt that a balancing of the budget, much less paying down the deficit from some 800+% to 70% of GDP, "can be achieved without much pain".

2 Unfortunate, Possible Consequences of Deficit Hysteria

On Nov 26 01:54 PM bob adamson wrote:

> JeffDB –
>
>I will not prolong our discussion but thought you might be interested in reading a different take on Schumpeter's views on socialism. Arguable his prediction in 1942 that socialism would triumph was a reluctant one as the following article suggests: >

OK, maybe it wasn't a "predilection" for socialism, but all 3 of them assumed that was where we were inevitably headed.

I for one, hope not. I think that would be throwing the baby out with the bathwater.

2 Unfortunate, Possible Consequences of Deficit Hysteria

On Nov 26 02:51 AM bob adamson wrote:

> JeffDB -
>
> Whatever his failings or merits, having a "predilection for socialism" was hardly part of Schumpeter's DNA as you suggest .

Well, he apparently agreed with Marx that it would inevitably take the place of capitalism according to a Wikipedia article:

en.wikipedia.org/wiki/...
Schumpeter and capitalism's demise
Schumpeter's most popular book in English is probably Capitalism, Socialism and Democracy. This book opens with a treatment of Karl Marx. While he is sympathetic to Marx's theory that capitalism will collapse and will be replaced by socialism

> The use of mathematical models is neither inherently good nor bad. Such models, if well conceived and used in appropriate instances, are often good ways to introduce a topic but there is always a danger that we will carelessly confuse the model for the real economy and, in fact, subordinate the real economy to the model. This danger is compounded where the model to begin with is deficient as a representation of the actual economy. >

I agree wholeheartedly with that.

> It is you prerogative to assert that the economic cycle described by Minsky is not intrinsic to capitalism but only applies where a modern banking system is superimposed on capitalism. It is my prerogative to respond that capitalism without a modern banking system could not sustain an economy more sophisticated than that of the 1840s. We can probably both agree that it is highly unlikely that one of us will convince the other on these points >

Does your preferred socialistic paradigm rely upon a fractional reserve banking system and a fiat money created out of thin air by a central bank? If so, and you think that a benevolent socialist government will moderate the business cycles and eliminate that inherent instability of such a system, then I think that you are certainly correct that neither of us will convince the other to change their mind. Certainly not via posts on a message board such as this one.

We’ve Survived Worse Markets (& Economies) Before – the 1970s

Though I'm not as confident as you appear to be that this will all end well, I think it is an excellent read and deserves to be posted as an article, if not an "Editor's Pick".

Kudos.

2 Unfortunate, Possible Consequences of Deficit Hysteria

Thanks for the reply.

On Nov 25 10:13 PM Kimball Corson wrote:

> 2. Too, not all economist got it wrong. I didn't, Nouriel Roubini didn't, Bob Shiller didn't and a slew of others didn't, too. Many on Wall Street saw it coming as well. Economists with their heads stuck in models teaching students those models, missed it big time, but that is not surprising, given all that the models ignore. >

Unfortunately, the economists advising the presidents, running the Fed and the Treasury "missed it big time" as well, and in my opinion at least exacerbated the problem if not caused it outright.

Even more unfortunately, most of them are at the helm in "saving us" from the problem they are largely responsible for.

> 3. Finally, I am not anti-Austrian. They have much good and useful to say. I also like their aversion to models, for example. I just don't agree with them on the notion that markets always get it right and we should never intervene. >

From the little I've read, I don't think they contend that "markets always get it right" but rather that they get it less wrong less often than the government bureaucrats. But, I'm no expert on their theories. From my own perspective, I think the government has a necessary role in providing a stable base and a level playing field and a role in setting legitimate rules to make things fair for everyone. I also see them as having a role in providing a safety net for people and in helping to provide at least some minimal living standards consistent with the dignity of human beings.

Although I haven't seen a full treatment of the subject, the idea of a negative income tax sounds like an excellent idea and far preferable to the hodge podge of programs we now have with their myriad problems, unfair outcomes, inefficiencies and disincentives.

2 Unfortunate, Possible Consequences of Deficit Hysteria

On Nov 25 08:06 PM bob adamson wrote:

> I think of Hyman Minsky who had the audacity to adapt a common element from such disparate thinkers as Marx, Schumpeter and Keynes; >

The common element appears to be a predilection for socialism.

> the concept that periodic crises were an endemic and central feature of capitalism. From this he showed with intelligence and perception that
1. the capitalist economy was inherently unstable because markets were driven by intrinsic uncertainty about the future with consequent dramatic collective mood swings, >

You have a right to your opinion, of course, but an opinion it is. I take issue with it on a couple of points here. First, I don't think he "showed" anything, at least not in the sense of someone "showing" someone how to do a math problem. He expressed his opinion that a capitalist economy is inherently unstable, but didn't really give any proof of it that I am aware of. From what I've read, it wasn't the uncertainty of the future causing the instability, but rather the accumulation of debt during boom times when “merchants of debt” induced more and more people to take on riskier and riskier levels of debt. Indeed things moved from “hedge” debt, which could be repayed from a person or firm's normal cash flow, to “speculative” debt where only the interest could be paid and loans rolled over until things improved, and eventually to “ponzi” debt which relied on growing asset values &/or wages to even pay the interest. (1) (2)

I don't think that is an inherent flaw in “capitalism”. I think it is only possible in a system like we currently have with a fractional reserve banking system &/or with a central bank that can accommodate member banks needs for ever increasing cash flow via “creating” fiat money out of thin air when needed.

> 2. Keynes had been misapplied during the quarter century following WW II because the core of Keynes’s insight was this intrinsic instability and not a bag of monetary and fiscal tricks and tools to fine-tune the economy when recessions threatened, and >

Perhaps. But he certainly advocated using that bag of monetary and fiscal tricks and tools, particularly in advising President Roosevelt in the days of the Great Depression.

> 3. government management of economic cycles was necessity to prevent deep recessionary crises but that this management had to allow for a necessary degree of constructive destruction to prevent misallocations and inefficiencies from accumulating in the economy. >

I'm curious as to how he determined the “necessary degree of constructive destruction”. I don't remember reading of him advocating that in the handling of the Great Depression. In fact, he seemed to have a definite preference for living in the present and not worrying so much about the future consequences of making things easier in the present. He was hostile to “introducing present evils for the sake of future benefits”. “It is the paramount duty of governments and of politicians to secure the well-being of the community under the case in the present, and not to run risks overmuch for the future”. “The long run is a misleading guide to current affairs. In the long run we are all dead.” (3)(4)

1). Does the Current Financial Crisis Vindicate the Economics of Hyman Minsky?
Frank Shostak
mises.org/daily/2787#_...

2). Minsky Having a Moment?
by Robert Blumen
blog.mises.org/archive...

3). Keynes, the Man
By Murray N. Rothbard
mises.org/etexts/keyne...

4). John Maynard Keynes
Wikiquote
en.wikiquote.org/wiki/...

Douche Bag Of The Year Award

Great idea, YH, and some great comments to boot.

But it's a bit of a tragicomedy for me. I'm torn between laughing and throwing up. Probably not too good a combination heading into Thanksgiving. But I suppose that's the price I pay for following this link, wondering how Seeking Alpha came up with a title for this article (yeah, I know now they didn't). I shouldn't complain, though, as it was worth the read, and rehashing what some of these douches have done is certainly a small price to pay compared to what our founding fathers endured.

But I can't bring myself to choose the worst of the worst. There are just too many to choose from. I'll be content to settle for the majority opinion.

2 Unfortunate, Possible Consequences of Deficit Hysteria

On Nov 25 05:07 PM Kimball Corson wrote:

> To conceptwizard.

In fact, the numbers are staggering, as you suggest. But they would have been dwarfed in magnitude by our losses and the transactional costs from dislocations due to the major and fast hitting depression we just avoided. We are clearly better off now then we would have been, the Austrian School and the dooms day guys notwithstanding. It is hard to even imagine the costs of a major depression, fully considered. What we have on the books now is chump change by comparison. >

But avoiding a major depression may have only been temporary as the Société Générale, the 3rd largest Corporate and Investment bank in the Eurozone by net banking income, notes in their paper on the "Worst Case Debt Scenario" www.scribd.com/doc/227... and I'll bet at least a few of their economists have graduated from college.

I know you think that the Austrian school economists are nutjobs, but I have taken note that they correctly warned about this crisis while our mainstream economists, not to mention our Fed Chairman and his cohorts calmed the markets with soothing words that there was nothing to worry about as they had things well under control.

I think Mr. Krugman was correct in asking "How Did Economists Get It So Wrong?", though to be accurate, he should have qualified that by using the term "mainstream economists". www.nytimes.com/2009/0...

They were unequivocally wrong and caught with their pants down in the lead up to this crisis. Here's a Youtube clip of Bernanke's predictions:

www.youtube.com/watch?...

and a clip of Austrian school advocate Peter Schiff being laughed at for his warnings:

www.youtube.com/watch?...

I think it rather premature to pat Bernanke et al on the back for "saving the economy" when it may yet turn out to be the case that they just postponed the day of reckoning by kicking the can down the road and that day of reckoning will be worse the longer we put off the inevitable pain.

As Société Générale implies, this may be more akin to a heroin addict gloating over the fact he got another fix rather than going through all of the gut wrenching withdrawal symptoms he was beginning to experience, than a doctor who just removed a cancerous tumor to save a patient.

ETF Market Trends: Just Another 'Debase' Party on Wall Street

On Nov 25 05:30 PM Northern Dancer wrote:

> And while nobody was watching the buck fall 1% today, the market barely budged. Hasn't it been the norm that as the dollar tanks, the market surges? Yes it has... until now. It sure looks to me like we're now in that scenario that nobody wants to talk about. The dollar and the markets tanking at the same time. It's a horrendous situation, but if today's action is any indicator, it's upon us. >

Happy Thanksgiving?

Well no use letting it ruin our Thanksgiving, or birthday for that matter.

Happy Birthday Mr. Hill!

Thanksgiving Dinner 2009: Over the Past Year, Turkey Outperformed Gold

"They've been doing this exercise regularly since 1986 ... adjusted for inflation."

Shouldn't they also adjust for the increasing obesity of Americans? That family of 10 would now probably require at least an 18 pound turkey. ;)

The SEC Surrenders to the Oil Industry

On Nov 20 02:49 PM Tony Petroski wrote:

> From the author:

"What are the consequences of allowing multi-billion-dollar systemically important multinational corporations to report their assets using proprietary mark-to-model tools involving discredited Monte Carlo simulations?"

My answer: Huh?

His answer: "I think we all know the answer to that one."

Didn't they have any English teachers at Cambridge or Harvard? >

On Nov 20 10:06 PM berated wrote:

> So, after reading Salmon's post and von Altendorf's report, sentence construction what you choose to comment on!? Interesting.... >
------------

Perhaps he was being facetious, but I didn't quite understand why the slam against Cambridge & Harvard. Mr. Salmon never claimed an education from either that I am aware of. According to his bio:
"Salmon is a graduate of the University of Glasgow."

Though it's a fairly complex sentence, I personally didn't see anything wrong with it, but I'm certainly no English major and may only be showing my own ignorance.

But as you imply, that distracts from the main issue here, and a very important one at that, namely that the SEC is changing the rules in a way that apparently opens the door to those who might vastly overstate reserves. That would not only deceive and cheat a lot of investors, but could have massive consequences that could reverberate throughout the economy, perhaps bringing it to its knees once again.

Some others comment that P2 and some of the other reserve estimates might be better and more accurate measures than the historical methods used. Perhaps that is true, but if so, wouldn't it be less confusing to change the methodology dramatically mid-stream? Why not have them report reserves by the historical standards, but list P2 or the Monte Carlo simulations separately and let people come to their own conclusions?

Using the same terms in the reports, but changing underlying formulas makes the comparisons from year to year confusing at best, and meaningless in many cases. Why not just allow them to add footnotes for other estimates companies think might be more accurate and let them make their case there?

The Oil Casino: SEC Heading for Monte Carlo, Part III

I too thank you for the article. It's not something average folks can ferret out on their own. We need whistle blowers to keep those entrusted with the job of protecting us honest.

T-Bills Go Negative

"this will eventually rebound back to at least 0%"

What a line. ;)

Still the Worst Deflation in U.S. History

On Nov 19 06:33 AM Roger Knights wrote:

> "The crystal-meth monetary policy at the Fed"
>
> How about "Benny's bennies"?
---

Good one. Can you archive it to the hall of fame?

seekingalpha.com/insta...

Fed Sends Gold Higher, But What Is It Good For?

On Nov 19 04:56 PM odin wrote:

> JeffDB: I very much disagree that the growth in M1 has "more than filled" the gap created by credit contraction. This is not borne out by the data. (M3 measures tracked by parties outside the Fed are actually contracting. See SGS or other estimators of M3. More broader measures -- ones that include credit are even worse). >
---

Actually, it looks to me as if that SGS estimated M3 was not contracting, but rather that the year over year growth rate had slowed dramatically.

Here is a link to their charts: www.shadowstats.com/al...

Note that what is being measured in that first chart is year over year growth, NOT the actual M3 money supply. The growth rate dropped from about 17% in 2008 to about 2% by late 2009. But it was not contracting. In fact it was still growing, just at a slower rate. To me that would indicate that although a lot of “money” disappeared because of the loan defaults, the Fed still more than made up the difference through its injections of money into the system and the money supply, even that very broad M3 definition of money not only didn't collapse, but in fact expanded, albeit at a much slower rate than M1 and M2. But over time, the Fed's big expansion in M1 resulted in an expansion in M2 and M3 and over time the expansion in the monetary base will continue to work its way into and even be amplified in M2 and M3.
---

> odin wrote: “What I am trying to get at is we want to track purchasing power (which is not necessarily captured by these narrower measures) vs. goods available for sale. If the broader money in M2 isnt growing as fast as M1, it should tell us something about the growth of this buying power. If MZM is growing but M2 is not, that should also tell us something about the velocity of money. This is what answers the inflation/deflation question. It should be clear that even with Fed's money pumping, the "money supply" available to buy cars, houses etc. is lower than it was at the peak.” >
---

But there's not really that big of a difference in the growth rates between M1, M2 and MZM:

M1:
+ 7.17% year over year
+13.81% since 1-7-08

M2:
+ 5.7% year over year
+12.53% since 1-7-08

MZM:
+ 7.94% year over year
+ 17.47% from 1-7-08

I agree that lower velocity is the reason inflation hasn't really taken off yet, but disagree that the “money supply” is lower now than it was at it's peak. Actually, right now is the peak for all 3 measures of the money supply per the Fed. M1, M2 and MZM are higher than they were a year ago, and higher yet than they were at the beginning of 2008. The same is true of the estimates of M3 by the Shadow Governments Stats (SGS) site.

The issue is really the velocity of the money and that has slowed considerably as people are cautious right now. So are the banks, and to be honest with you I can't really blame them. Housing prices are likely still to high in many areas, still propped up by abnormally low interest rates, home buyer tax credits, and by the governmental “lenders of last resort” who are still lending money at low rates with little money down even to people with marginal credit. Default rates are still very high compared to historical standards. In fact some of the charts indicate the new loans are following a very similar pattern to the ones that are now considered “toxic assets”.

It's a lot safer for those banks to borrow at near zero rates, leave much of it on deposit at the Fed and collect interest on it for a guaranteed profit, even if the interest they collect is a bit lower than they might earn on mortgages if interest rates remain low and default rates improve significantly.

But there's almost always a lag between an increase in the money supply and the resultant increase in the inflation rate. That's to be expected. Once it starts to pick up, however, the velocity of the money can pick up quite rapidly. If people think the price of things are going up they will want to hurry up and spend that money in their bank accounts to buy things before they become more expensive. And that, of course, causes inflation to rise even faster, becoming a catalyst for an inflationary spiral.
---

> odin wrote: “I dont think this is where the real debate is. The debate I think is whether the Fed can withdraw liquidity fast enough ONCE the economy recovers (as in we have a contracting money supply driven by a collapsing multiplier and partially offset by the money printing....but if the banks start lending again, if risk appetites rise, will the velocity rise cause so rapid an expansion in money supply that the feds cant compensate fast enough by withdrawing their liquidity programs). I think you will find that a lot of the programs initiated in the past year have been reserve neutral (new money was not created). There is some money printing going on....but (and _this_ is a market view which you are free to disagree with) I believe the fed has the tools to take liquidity out. I'm less sure that there wont be political pressure (as in will apart from ability), but the tools are there. >
---

I don't disagree with you in the slightest. The Fed has virtually absolute power to withdraw the liquidity they injected. But as you say, the key issue here is whether or not they will have the *will* to do so. If inflation starts to kick in they could be in a real bind, especially if it is before an election. It would cause interest rates to rise, which not only would make the deficit worse as the interest on our deficit and the part of the debt that is rolling over month by month would go up significantly, but it would hammer the housing and commercial real estate industries, and the mortgage companies. It would also slow the economy, and likely at a very bad time with unemployment already very high. It would also tend to raise the number of mortgage and commercial real estate defaults and the Fed has an awful lot of those already toxic assets on their balance sheet, causing even more losses there.

In short, I think it would be nearly impossible to do what should be done and I would bet that they would just have to live with the inflation when it comes.

> odin wrote: “As to the question of looking at gold via the lens of a medium of exchange: it is no different than a fiat currency managed by a _responsible central bank_. >

---

“Aye, there's the rub” as William Shakespeare might say. A central bank that operates responsibly with the fiat currency they bring into existance at will, over a long period of time, is probably about as rare as pink unicorns.

> odin wrote: “It no more represents wealth creation than does fiat money.” >
---

But money isn't really about “wealth creation”, but rather a stable unit of exchange to eliminate the inefficiencies of barter. If the unit of exchange is unstable and cannot be relied upon as a store of value, it creates its own inefficiencies and distortions in an economy.
---

> odin wrote: “Those somehow sanctifying gold because theyve read the Fountainhead have a very superficial understanding of money. If you start pricing gold as if its a medium of exchange, what happens do you think when the world GDP grows but gold supply does not? >

Then the cost of things goes down, much as the cost of computers, TVs and digital cameras have gone down over the years or the features and quality has improved while prices remain stable. The same has been true of advancements in manufacturing or farming etc. Power tools, engines and motors made the manufacture of many goods less expensive and with competion prices tended to drop. Though inflation seems to be an inherent part of our economy, it really isn't necessary. In fact, our contry has had most of its most dramatic growth in the absence of inflation. Given that government spending is included in GDP, a gold standard might also have a tendency to rein in that spending somewhat, or at least one could hope. ;) It has in the past, which is one reason the government is so keen on having the ability to print money out of thin air.
---

> odin wrote: “(There is a popular and populist William Jennings Bryant speech about getting off the gold standard that can clue people in).” >
---

He also had popular speeches in favor of prohibition and against the demon rum. Popular speakers don't necessarily have the best policies, and the fact that someone made a popular speech isn't really a strong argument in favor of something. He was also an advocate of bimetalism with silver sharing the load along with gold as a medium of exchange. He was in favor of a statutory 16:1 exchange rate between silver and gold. His movement was also apparently instrumental in bringing in the Federal Reserve System in 1913 and I think that has been a disaster for our country.
---

> odin wrote: “What happens when world GDP contracts but new gold is discovered? Now, you can say that the central bankers are crooks (they are certainly not infallible but they do have a stake in the proper functioning of the system) but I wonder if its any better to put our faith the boom and busts of the gold supply cycle. ”>

It seems to me that there might theoretically be some monetary standard other than gold or silver etc. that could work quite well. But the fatal flaw in all of the fiat currencies that have been tried so far is that the governments, or in our case, a private banking cartel, have the ability to create money and control the money supply at their whim. Invariably, that leads to disaster. If they had some system whereby the money supply were constitutionally tied to the population, or perhaps to something like GDP, or even if it were kept perfectly constant there might be some hope for it. But if the politicians or bankers control it the system is doomed, even if they are apparently great men. It gives them too much power, and as Lord Acton so accurately noted, "Power tends to corrupt, and absolute power corrupts absolutely. Great men are almost always bad men."

By the way, the booms and busts have been more frequent and more severe since the Federal Reserve was spawned. They were at the helm after all when our country fell into both “The Great Depression” and this “Great Recession”.
---

> odin wrote: “One only needs to look at nations that have lost control of their money supply to see the consequences.” >
---

That's a rather ironic statement given that “nations that have lost control of their money supply” invariably have a fiat monetary system.
---

> odin wrote: “Furthermore, the value of a currency (gold or fiat) does not come from hoarding. It comes from its ability to buy goods. Sure, if gold is in tight supply, it may rise in price (for a while). But if it causes a widespread contraction in the economy and puts people out of a job and causes riots, what good is it? ” >
---

I don't think anyone is advocating hoarding on either side, and I don't think a gold or silver or other similar standard promotes hoarding any more than a fiat currency would. It might seem that way in comparison to a country with a fiat currency that has gotten out of control. When hyper-inflation hits people tend to run out and spend their money as fast as they get it because it will drop in value so rapidly. That really isn't to be desired, however, as it causes many distortions in an economy and results in misery for its citizens.