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  • ZeroHedge Throws Austrian Economics Under The Bus  [View article]
    The argument against Austrian economics is one of a false strawman and false precision.

    Like the Austrian economics argument of what caused the Great Depression, we are in exactly the same place today. Cheap, excess money by central authorities has distorted all money pricing mechanisms for decades (an even longer time frame than preceded 1929 bubble burst)--hence, distorting markets and the economy.

    The money has flowed predictably into vast amounts of economic "investment" projects over decades (this is the over investment the author denies occurred; his timeframe is too short). The over investment in non economic fracking is just one example of that (not all fracking is probably non economic, But how can we know with government driven ZIRP and QE and centrally pegged interest rates?). The greatest malinvestment can be seen in China ghost cities (yes, over investment outside of US counts too; the capital flows enabled by Fed and PRC policies). The over capacity in non economic uses of easy money is all around us.

    And, like previous other bubble periods (like the 20's), beyond over investment in non economic projects, a ton of money was sent to financial engineering and financial market casinos. The bubble in virtually all assets is merely the symptom of the vast expansion of debt and the funneling of that money into assets. I find it comical that there was a mention of money on the side lines denying the over investment argument. That money was leant out (fiat money created from nothing) and businesses are using that cheap money to buy back their own stocks at crazy PE ratios and gambling in the markets. This is worse than over investment (malinvestment); it is down right pissing away money via gambling for short term enrichment and strip mining value.

    Of course, all of the above denigrates the productive forces in the economy. This isn't some mysterious secular stagnation that has appeared by magic. The economy stinks because we did this too ourselves, via government enabled free money.

    All of the above is perfectly consistent with Austrian school explanation. We are stuck with massive debt, distortions, and bubbles enabled by cheap expanding fiat currencies, and the dam is all about to break . . .
    Oct 11, 2015. 10:47 AM | 5 Likes Like |Link to Comment
  • Financial Times: Markets Prophesy Secular Stagnation  [View article]
    Thx Westcoaster. Appreciate note.

    My point is that 2004-2008 was a government induced debt bubble that ultimately reduced GDP growth in the long term and destroyed a lot of wealth.

    Doing the same again now, in our current bubble . . .

    The article you cite, in my view, is classic macro economists trying to prove their ideology. Of course, government spending raises GDP in short term; that is merely an accounting identity. Can't believe economists don't crucify Krugman on this point.
    Ghost cities induced by central government induced policies in China is a perfect case where GDP now is grown by government induced spending now (note that I'm not differentiating between public and private spending here; what matters is it is governemt induced). That bubble too will burst, at the expense of long term growth.

    What matters is growth in the long term. And, that is a much harder proposition to prove in a simple two dimension regression. But, put simply, my thesis is that the enormous mal investments by government induced policies leads to long term waste, wealth destruction, lack of productivity improvements and sustainable, good jobs, and lower growth rates. Hard to prove, but the serial bubbles and wealth and GDP destruction of the last 15 years seems like a pretty good start.

    But, if you take Krugman's ridiculous argument to its extreme, then why don't we raise government spending growth by 10% or 70% annually? That will really get GDP up right?

    I understand there is a lot of pain to get out of the hole we are in, but digging the hole deeper (and blowing the current bubble to greater extremes) is a path to disaster . . .

    Again, secular stagnation is caused by these government induced debt policies . . .
    Jan 13, 2015. 09:06 AM | Likes Like |Link to Comment
  • Financial Times: Markets Prophesy Secular Stagnation  [View article]
    To answer your question, the current decade (plus) of secular stagnation is a result of years of government manipulated interest rates and cheap, continually expanding money and debt. More of the same simply ensures a bigger devastating bubble and greater wealth loss and damage to society.

    Those who want to find government generated solutions for so-called secular stagnation, should look within. What is cause of the stagnation in the first place? Debt and market distortions incentivized by government. So, why should moar and moar of the same be the solution?

    Maybe governments continuing to try to push on a string while distorting markets should be the focus of your question . . . . Empirically it hasn't worked to date . . .
    Jan 11, 2015. 09:28 AM | Likes Like |Link to Comment
  • Is Post-Keynesian Economics Catching On?  [View article]
    Thx Cullen. I always find your analyses thoughtful . . .

    Can't agree with your main points here. Many lay persons saw the 2008 crash and many from various economic schools saw crash coming. Frankly, was plain as day, in retrospect . . . .

    I agree with your point about the other schools of thought. They are all variants of the same aggregate demand bathtub model. But, I would argue that PKE is too. Yes, PKE doesn't accept that systems naturally go to optimal AD (which IS/LM models ultimately lead u too--albeit slowly for New Keynesians), but PKE still sees that such an "optimal AD" can be achieved with the right set of policy tools. Not clear what those tools are . . .

    But, none of the above schools have any inkling about how these disequilibrium of effective demand from AD emerge in the first place. True, PKE talks about various spillover effects, but why do they emerge sometimes and not other times? What are the common causes?

    The article from Godley you cite is a perfect example. It basically said that the economy was in a bad situation because the current account deficit situation and the negative savings rate situation of 2006 had to lead to negative GDP growth to unwind that situation. His argument is simply stating a fact from basic GDP accounting identities. There was no causal analysis, but rather the leveraging of an accounting identity to show why a crisis was coming, something that was clear to many lay people.

    The school of thought u are not including (it's always excluded) is the Austrian school of thought. That school has a clear reason for the current and past credit bubbles. Government induced credit expansion, usually thru monetary policy looseness. All of the bubbles of the past decades can be traced to this root cause.

    Now that we are globally at peak debt, that has been incentivized by global governments for decades, it should be no surprise why AD is down now. Frankly, it should never have been up where it was in the previous and current distorted version. And no amount of pushing on the string will fix that. But, governments globally will try with the only tools they care to use . . . Expansion of cheap money and debt and fiscal kicking of can. And, the expanding distortions will continue apace while all the time economists will wonder why we can't seem to reach optimal AD. The whole premise is wrong. No amount of turning of the government dials by the central planners will get us to the "correct" or "optimal" AD. How the heck do the central planners even know what the right mix of demand and supply should be?

    So, sorry, long winded answer, but that is why I do not concur with the view that PKE is a basis for sound, consistent prediction or an answer to our current or looming troubles . . .
    Dec 30, 2014. 10:34 AM | 1 Like Like |Link to Comment
  • Is Post-Keynesian Economics Catching On?  [View article]
    Cullen, a couple of follow ups:

    1. Can u provide a couple of prominent names of so-called Post K economists who predicted 2008 collapse, and provide the supporting articles.

    2. If the current mainstream economists are not post K, then what are they? How would you characterize them? What title? What key precepts?

    Reason I'm asking is I don't see the clear divides between schools of thought that you are inferring. I think post K assumptions permeate almost all mainstream macro. They are all just variants of each other.

    You correctly differentiate by inserting endogenous money impacts (that traditional K economists ignore) but then go right back to the view (like all mainstream economists) that we can still meaningfully impact aggregate demand without having much deleterious effects (like bubbles). Hence my questions . . . .

    Reference the post-crash "predictions", just don't think you have enough data points nor enough time to assess. We still don't know how this whole thing will play out yet. From my perspective, we are heading for a major asset deflationary crisis event (inflation to date has been concentrated in assets)--bursting of yet another bubble, followed by further money printing that eventually leads to substantially higher goods prices compared to wage prices. So, the relative tameness of goods inflation (still understated according to officiaial stats) is perfectly explainable in our distorted markets to date. This multi year saga has a long way to go . . .
    Dec 29, 2014. 10:12 AM | 3 Likes Like |Link to Comment
  • Things I Should Have Written About When They Were Published: Lawrence Summers On 'House Of Debt'  [View article]
    As usual, you miss the real root cause that some sane economists, in the less than conventional set, have been arguing for years: loose cheap and ever expanding money that fueled the credit bubble in the first place, enabling institutions (of all stripes) and households, to mal-invest, eventually leading to a crash that none of the above suggested root causes (if addressed), could have prevented. I suppose your #3 above is related, but (a) wealth was destroyed because of the popping of avoidable, government-induced bubble, and (b) even if achievable, could only delay or exacerbate the popping--as much of that false wealth was created in the illusion of market prices, not true, market-based, economically efficient or sustainable prices (goods, services, assets). The root cause was baked in the cake years ago. Look to government induced macro fiscal and particularly monetary policies . . . . As the true root cause . . .
    Dec 1, 2014. 12:44 PM | 1 Like Like |Link to Comment
  • Rebecca Strauss On The Debt  [View article]
    Incredible how some people think they can micro manage the dials of our economy--like knobs on the bathtub . . . Pure hubris . . .

    Brilliant argument. Just follow the recipe book, and no negative spillover effects . . . No issues of badly spent money. No issues of distortionary uses of money and bubbles.

    Follow the logic, we should just spend a LOT more on debt, print a LOT more money to cover the debt, and raise taxes a LOT more to counter inflation.

    Brilliant. No side effects . . . And we can grow our economy with the increased, debt-fueled government spending and simply cover it all with readily debased money and raise taxes to dial back the inflation.

    Or, maybe, just maybe, the above formula is why we are in the vicious downward spiral we have been in for decades . . . .
    Oct 5, 2014. 10:00 AM | 1 Like Like |Link to Comment
  • Joe Stiglitz Vs. The Austerity Zombies  [View article]
    I love how the macro economists all talk past each other. And the Stiglitz Keynesian framework simply sets up false straw dogs to knock down (as the people he list would never agree to the structure of the arguments he frames).

    Here is how I would counter on his 3 points.

    1. Inflation is currently rampant-- in financial assets. And, it is too early to proclaim that consumer prices will not rise as dollar continues to be devalued. Certainly, in real terms, people are already poorer due to stagnant wages combined with moderate inflation.

    2. Debt overhang is slowing growth. And more debt (yes, debt is still growing radically, globally) is not having the stimulus impacts Stiglitz proclaims should be happening. It is merely adding to the overhang that is slowing growth.

    3. Asset bubbles emerging across multiple asset classes, due to the very policies Stiglitz is proposing, is diverting scarce capital from growth pursuits to a destabilizing global, financial casino. And, when this bubble pops, distorted economies across the world will be all the more poorer for it . . .

    Fundamentally, the premise of the argument is factually wrong. What austerity is Europe undergoing? No real structural reforms are being undertaken. Debt continues to skyrocket. Government spending is out of control.

    True, the EU has not done full bore QE, so, in the short term, Europe looks relatively stingy, but that is a relative comparison.

    When the fruit of US QE ripens in the form of another asset bust, we will then have a comparison of two different failed Keynesian approaches. One (the US) that went full money printing and the other, (the EU) that expanded its sovereign debt with somewhat less support by the central bank. But, these will be differences without meaning. Both approaches will be bust . . .
    Sep 30, 2014. 09:55 AM | 1 Like Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles  [View article]
    Can't agree with the notion that it is impossible to tamp down wild speculation. Taking that argument to its logical conclusion, it is irrelevant whether we try and leverage market-based incentives or top-down government laws and regulations to address speculative risks resulting in damaging bubbles and distortions that must be worked out.

    My thesis is that government intervention, particularly thru money printing and artificially (not market determined) interest rates, is the key enabler for the most wild swings in damaging market and economy bubbles and mal investments. Not that bubbles and distortions won't happen otherwise; but, that those swings are vastly amplified by government (both in its genesis and then thru the interventions in response).

    Combine a sound money, gold based money system--as the foundation, with some smart government regulations that keep incentives of the market to work -- such as causing actors to actually eat losses, hence reducing gross speculation, and we would have a sounder system, with more robust growth.
    May 26, 2014. 02:40 PM | Likes Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles  [View article]
    Secular stagnation theory, to me, is yet another set of proposed band aids, wrapped in a new (or remade) theory, to address the myriad, unrecognized market distortions that we have been enabling, via the government, thru continuous money and credit expansion from an unpegged fiat currency. Traditional borrow and spend and money printing is not working, so rationalizing theorists (Krugman, Summers, et al) have come up with "secular stagnation" to justify even more money printing, borrowing and spending.

    It is not a coincidence that serial financial crises and bubbles and explosion of complex financial products really took off after the dollar was fully unpegged from gold in 1971.

    If we are in secular stagnation, what is its cause and why is it lingering? Why do we "need" bubbles to overcome secular stagnation.

    What if our growth stagnation is actually the resultant impacts of untethered money printing and an economy increasingly addicted to ever expansion of credit. What if that economy is reaching diminishing returns due to that root cause?
    May 26, 2014. 02:18 PM | Likes Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles  [View article]
    Shareholder: Nice bit of debate. I've conceded right upfront that there is a legitimate role for government (albeit limited), and that market failures can be both governemt and market generated. You have conceded that the effectiveness of governemt is an empirical, case by case question.

    It is hard to determine causal variables by trying to pinpoint one or two variables without viewing the problem from a supply chain perspective. There are many daisy chain enablers in the value chain that ended in the 2008 market failure. Like the original Ford cars, you have to view the problem of making, selling, marketing and distributing the products end to end and holistically.

    This is why I start with government. Governemt tinkering with interest rates--usually keeping them artificially low, and printing lots of fiat money, provides both the gas and the oxygen for enabling the firestorm . .

    Provide that as context, then allow the evolution of ever more complex financial supply chains to emerge, where actors of all stripes (Wall Street, Main street, and government actors) all find a way to profit from the milieu.

    I agree with your point about derivatives. That is an area of unimaginable damage we will face in the future. 2008 was merely the beta test.

    But, the opaque derivatives TNT is just a symptom of the convoluted, crony law making, enabled by government, over many decades.

    That is why I use the metaphor of Frankenstein's monster. To talk about adding this law or that rule on top of the monster is sort of like missing the point. How does one even fathom the impact of so called deregulation on parts of the law structure, when no one really comprehends how the monster was built or how it works. Sure, actors will shape the laws to achieve undesirable rent capture. But, it is up to our government to simplify and stop those crony carve outs.

    We need to simplify complexity and get the convoluted tapestry of law swept away. Go back to a sound money system where money is backed by something that cannot be manipulated (at least not as much as fiat money).

    I don't think we will ever go back to a time of true free markets in money. For example, FDIC is here to stay. That insurance, designed to prevent bank runs, has worked fairly well, while creating the moral hazard of banks speculating with our deposits. So, assuming banks are incentivized to gamble, go back to a much simpler Glass-Steigal, to prevent that gambling by those defined as protected banks. Then, for all the rest,require all to register as LLP's so that any losses by the company the partners eat. No longer socializing losses.

    This is what I mean when I say, it is government's fault. Dodd-frank is emblematic of what is wrong with the system. A convoluted set of laws layered on a foundation of already convoluted and incomprehensible laws. We don't even agree on the full set of causes of the latest crisis, yet we layer on more mess that just ensures that private actors will find a way to game the system--legally.

    I always find it interesting to hear people claim it is Wall Street at fault for the crisis due to things like uncontrolled derivatives manufacturing or low down payment loans. But, it is government that has enabled that convoluted system and, in most cases, it is public and private actors, working within the system for their own benefit, that are creating the market failures.

    We forget that the best way to incentivize good behaviors and outcomes is thru the fierce resultants of the market--where it is impossible to socialize losses.

    If we can get back to a simpler system, where some protections exist to prevent runs on banks, but where public and private actors then have to eat the consequences of their actions, we would be in a much better place.

    The starting point of that simpler system is one where easy money printing and artificial and grossly distortionary interest rates do not incentivize gross mal-investments and wild speculation--the likes of which we are seeing now yet again.

    And a simpler and comprehensible set of laws, where government isn't captured by special, narrow interests, that prevents (or reduces likelihood) of the evolution of Frankenstein like financial engineering and complex supply chains where actors get what they want while legitimately being able to claim no responsibility . .
    May 26, 2014. 11:25 AM | 1 Like Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles  [View article]
    Sorry shareholders unite. You have created another straw man that I never implied, but you are making up for me.

    I do not disagree that there is a role of government in ensuring an optimal economy. Government is critical in establishing the rules of the game, via law, private property rights, security, etc.

    But, the agents of government are not incentivized to optimize efficiency or effectiveness, so we try to keep government limited to the minimum in which it can and should do things that free markets cannot do as well. One example is providing for a military.

    Not sure I would frame as "complementary." Government is an enabler of effective markets. It can also be a killer of free markets. Many of the items you list I would argue, are not done well by government and are actually hurting the very people the regulators were designed to assist. The volumes of data showing how governments help create and sustain monopolies is extensive. The amount of research to show how regulators end up helping a small set of protected at the expense of the many is legion.

    One thing that free markets can do well is sort out the prices of goods and services and productive efforts. Free markets are amazing at doing that. That is the essence of the argument above. When you get government agents in charge of shaping prices, the value of money included, you usually get catastrophe . . .
    May 25, 2014. 09:26 AM | 2 Likes Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles  [View article]
    Not sure last point. My observation is that current government intervention is making most people poorer, blowing even bigger bubbles that will pop and make most of us even poorer, while a very small subset may win amongst the ruins. That is not theory. That is the reality we are living now . . .
    May 24, 2014. 11:44 AM | 1 Like Like |Link to Comment
  • Hard Money, Soft Money And Asset Bubbles  [View article]
    Not a fan of the creation of false staw men arguments that are easily knocked down.

    The essence of a good Austrian, or more free markets- based, argument, is not that markets are perfectly efficient or perfect. The essence is that it is better than the alternative. The alternative is that government guided markets inevitably always make the results of Frankenstein markets far, far worse for everyone.

    Put simply, it is not that free markets prevent market failures or that market failures cannot emerge in the private sector. It is simply that irrespective of where the market failure emerges, government intervention exacerbates the failure and then government intervention to mitigate the damage from bubbles and other market failures only exacerbates the failures further . . . And, I many cases, government intervention enables the failure at the start . . .

    The Sweden versus Norway argument is not persuasive. Leveraging the Mao argument, we don't have enough data points to make a conclusion. Particularly, we don't have enough time to assess. And it is simply hard to compare one Frankenstein monster performance with another Frankenstein monster performance -- at one Polaroid snapshot in time. Who knows how the Sweden and Norway experiments will turn out in long run. How do we even account for all the variables, in any case . . .

    Additionally, ironically, the argument that Norway went the better path by restricting loan to value, is very inline with the premise of avoiding government intervention in the first place. Monetary policy gone wild really kicked in, in 1971, when we went fully off the gold standard. That really enabled lots of cheap and free money for decades--across currencies. So, in a way, Norway's constraint on credit growth is a 2d best solution to a broader, government induced credit expansion occurring for decades across all fiat currencies.

    Again, a Frankenstein monster fix of an already adulterated economic structure. Hard to separate cause and effect in the current distorted world.
    In many ways, there is an implicit arrogance on the view that governments can effectively isolate the causal variables to manage economies in the first place. This is implicit the Norway versus Sweden "controlled experiment" . . .

    Bottom line, irrespective of the source of the emergence of bubbles and other market failures, government induced interest rate and price controls, abundant and ever growing fiat money, and other interventions, are wildly exacerbating and enabling bubbles far in excess of what a constrained monetary system would do--where value and prices are tied down to something that cannot be manipulated by governments (e.g., intrinsic value currency versus fiat currencies).
    May 24, 2014. 10:18 AM | 4 Likes Like |Link to Comment
  • 'Keynesian' Myths And Misunderstandings  [View article]
    I think if u follow Cullen's excellent work on endogenous money, even in a fractional loan system, there are really very few practical limits on money creation. When people and institutions need loans, the bank issues the loans and then gets the needed reserves to make sure reserve ratios are met. The reserve ratio is not a practical constraint.

    I agree with you that banks don't want to do bad or unprofitable loans, but in crazy markets and crazy career incentives structures, banks can expand money a lot more than is warranted by basic economics . . .
    Mar 11, 2014. 11:04 AM | Likes Like |Link to Comment