derryl's Comments RSS Syndication from SeekingAlpha.com http://seekingalpha.comuser/276073/comments http://seekingalpha.com/article/175494-how-to-live-with-a-financially-illiterate-population?source=feed#comment-779575 779575
In the revised introduction to "The Ascent of Money", Niall Ferguson lists as one of the 3 major insights he gained while writing the book, "equality and its absence".

A few people are financially literate. Everybody else is less so. Ferguson writes, "But finance also exaggerates the differences between us, enriching the lucky and smart, impoverishing the unlucky and not-so-smart. ...The rewards for 'getting it' have never been so immense. And the penalties for financial ignorance have never been so stiff."

If we can agree that what distinguishes developed countries from less developed is the presence of a flourishing middle class, then the widening income gap between the financially savvy and the rest of the population can be seen as a devolutionary force. The middle class is becoming poorer because the benefits of the economy flow disproportionately to the financially savvy and lucky at the top of the food chain.

People who know how to make things and build things are getting poorer. People who know how to finance things are getting richer. This trend leads to a rich financial aristocracy ruling a population of impoverished peasants. I am not speaking for Ferguson when I say that this state of affairs is the ultimate outcome of 'the ascent of money'.

I don't think this is a desirable outcome. It is economic prowess and innovation that creates wealth. Financial prowess and innovation merely redistributes ownership of that wealth. Conservatives and libertarians who bemoan government welfare state redistributionism are beguiled into celebrating financial welfare state redistributionism as "market outcomes". They are deceived. These are not "market" outcomes.

Since the 1982 Latin debt default big finance has been a client of the corporate welfare state. A recently publicized Fed missive from that era shows that 7 of the 8 largest US banks were rendered insolvent by their exposure to that bad bet. In Canada 4 of the big 5 banks were similarly affected by their exposure to the Latin default.

Western banks malinvested Arab petrobillions into Latin American resource plays, creating overcapacity. When all that new production came onstream commoditiy prices collapsed and the Latin governments had insufficient revenues to service their development loans, so they defaulted. Latin American resource development was the first of our recent debt bubbles to burst. The bust rendered insolvent all the overexposed banks. And each time since 1982 we have bailed them out.

So big finance is not big and profitable due to "markets". It only still exists due to "bailouts". Capitalism would have meant the bankruptcy and dissolution of those banks. Smaller players would have picked up their assets at bankruptcy sale prices. Smaller players would have become bigger, and probably lent into the next bubble, and they in turn would be bankrupted and their assets picked off by a new set of players.

Each cycle of malinvestment and bankruptcy redistributes wealth from the formerly wealthy to the newly wealthy. Everybody makes mistakes, and fails. As the Chinese say, "From shirtsleeves to shirtsleeves in 3 generations."

Nobody can become "too big to fail" if they are made to pay for their malinvestments in the normal capitalist way. But since 1982 big finance has been in the process of capturing its regulators. Laws are made to protect them from their mistakes. Laws are modified to let them 'earn' their way out of insolvency, like borrowing at 0% from the Fed and 'investing' in Treasuries paying 3.5%. This is a pure transfer of money from the taxpayers who ultimately fund Treasury interest to the failed banks who collect the interest payments.

Finance has become way too important a component of modern developed world economies. Insofar as it funds productive investment by intermediating between passive savers and active innovators, finance is the engine that drives wealth creation. But when finance ceases funding economic activity and only finances wealth redistributions by betting on various financial instruments, the business cycle has reached the "speculative" stage that is supposed to end in collapse of the malinvestments and a redistribution of financial and economic power to solvent players from insolvent. We have not let that happen. ]]> Fri, 27 Nov 2009 10:32:02 -0500
In the revised introduction to "The Ascent of Money", Niall Ferguson lists as one of the 3 major insights he gained while writing the book, "equality and its absence".

A few people are financially literate. Everybody else is less so. Ferguson writes, "But finance also exaggerates the differences between us, enriching the lucky and smart, impoverishing the unlucky and not-so-smart. ...The rewards for 'getting it' have never been so immense. And the penalties for financial ignorance have never been so stiff."

If we can agree that what distinguishes developed countries from less developed is the presence of a flourishing middle class, then the widening income gap between the financially savvy and the rest of the population can be seen as a devolutionary force. The middle class is becoming poorer because the benefits of the economy flow disproportionately to the financially savvy and lucky at the top of the food chain.

People who know how to make things and build things are getting poorer. People who know how to finance things are getting richer. This trend leads to a rich financial aristocracy ruling a population of impoverished peasants. I am not speaking for Ferguson when I say that this state of affairs is the ultimate outcome of 'the ascent of money'.

I don't think this is a desirable outcome. It is economic prowess and innovation that creates wealth. Financial prowess and innovation merely redistributes ownership of that wealth. Conservatives and libertarians who bemoan government welfare state redistributionism are beguiled into celebrating financial welfare state redistributionism as "market outcomes". They are deceived. These are not "market" outcomes.

Since the 1982 Latin debt default big finance has been a client of the corporate welfare state. A recently publicized Fed missive from that era shows that 7 of the 8 largest US banks were rendered insolvent by their exposure to that bad bet. In Canada 4 of the big 5 banks were similarly affected by their exposure to the Latin default.

Western banks malinvested Arab petrobillions into Latin American resource plays, creating overcapacity. When all that new production came onstream commoditiy prices collapsed and the Latin governments had insufficient revenues to service their development loans, so they defaulted. Latin American resource development was the first of our recent debt bubbles to burst. The bust rendered insolvent all the overexposed banks. And each time since 1982 we have bailed them out.

So big finance is not big and profitable due to "markets". It only still exists due to "bailouts". Capitalism would have meant the bankruptcy and dissolution of those banks. Smaller players would have picked up their assets at bankruptcy sale prices. Smaller players would have become bigger, and probably lent into the next bubble, and they in turn would be bankrupted and their assets picked off by a new set of players.

Each cycle of malinvestment and bankruptcy redistributes wealth from the formerly wealthy to the newly wealthy. Everybody makes mistakes, and fails. As the Chinese say, "From shirtsleeves to shirtsleeves in 3 generations."

Nobody can become "too big to fail" if they are made to pay for their malinvestments in the normal capitalist way. But since 1982 big finance has been in the process of capturing its regulators. Laws are made to protect them from their mistakes. Laws are modified to let them 'earn' their way out of insolvency, like borrowing at 0% from the Fed and 'investing' in Treasuries paying 3.5%. This is a pure transfer of money from the taxpayers who ultimately fund Treasury interest to the failed banks who collect the interest payments.

Finance has become way too important a component of modern developed world economies. Insofar as it funds productive investment by intermediating between passive savers and active innovators, finance is the engine that drives wealth creation. But when finance ceases funding economic activity and only finances wealth redistributions by betting on various financial instruments, the business cycle has reached the "speculative" stage that is supposed to end in collapse of the malinvestments and a redistribution of financial and economic power to solvent players from insolvent. We have not let that happen. ]]> http://seekingalpha.com/article/175487-will-dubai-s-standstill-spark-a-reversal-in-the-dollar?source=feed#comment-779488 779488 Fri, 27 Nov 2009 09:47:06 -0500 http://seekingalpha.com/instablog/98115-john-lounsbury/37396-leverage-to-move-the-world?source=feed#comment-778947 778947 "The above argument overstates the loss of value because many things of utility have been created during this century that did not exist at the beginning. But it is certainly true that a significant part of the inflation of the past hundred years represents no value. "

I think what happens in our fiat money system is that the quantity of money and monetary debt in the system becomes increasingly disconnected from the quantity of real productive capital. In a rising economy debt can be repaid by investing in new equipment that increases production of goods. After the debt is repaid the fixed capital remains even though the debt-money has been extinguished.

The credit-money began its existence as a loan and it ends its existence when the loan is repaid, so over the total life cycle of this credit creation no new permanent money has been created. But fixed capital and productive capacity HAS been added.

So now we have the situation where fixed capital is capable of producing abundant goods. But where will the new money come from to buy those goods? During a building phase like the US and world enjoyed after WWII there are always new profitable productive ventures to be financed with new loans and these add money into the economy. But as those loans are paid down money is removed from the economy and extinguished, so we have the situation where a whole bunch of fixed capital is capable of producing abundant goods, but where will the money come from to buy them?

Natural growth periods like population expansions, building up newly opened frontiers, and integrating new technological innovations, all offer opportunities to borrow and invest money and earn it back to repay your loans. But in a more "stationary state" economic environment where there are not many new growth opportunities, where will the money come from to buy all the output and keep the economy going?

The only source of new credit creation in such a state is "consumer" loans. Banks create new credit-money and people spend it into the economy, adding the needed fuel to keep the economic machine running. But every consumer loan is ultimately borrowing from your own future consumption. I can buy and enjoy the goods today, but for years into the future I must consume LESS than I earn in order to devote some of my income to repaying my loan.

This is not like a business loan invested in increasing production, where the loan can be repaid by increasing sales. Consumer deficit spending is a straightforward borrowing from your own future spending. When that future arrives and you have already committed all your income to previous spending, the consumer loans source for new money is exhausted and your fiat debt-money/credit-money monetary system arrives at its inevitable end state.

Fiat credit money is a true Ponzi scheme, where early borrowers can only repay their loans and make ongoing profits if later borrowers keep injecting new money into the system. When this ongoing money creation metric stalls we get a debt crisis and an economic recession. All of the fixed capital and labor is still there ready to go to work producing goods, but the system has run out of spending money.

Money is the fuel that drives the whole economic machine. Our system of creating money as bank loans runs into the problems I just laid out. It runs out of gas. It requires constant and accelerating "economic" growth, not just monetary growth, to keep new credit-money coming into the system. If the economy is not growing then productive enterprises will not be able to maintain production and sell it all at a profit in order to first repay the loans they used to build up their fixed capital and then to sell goods for ongoing profits. They will not be able to employ labor and pay incomes.

In a stagnant or declining economy nobody is a good credit risk. Banks who lend into such an environment risk their own solvency so they try to contract, recover monies they have already advanced rather than trying to grow their balance sheets. But in our system where all money is issued as debt, if there is no debt there is no money.

So we have an economic infrastructure of fixed capital and trained labor capable of producing abundance, but the monetary fuel production mechanism of repayable bank loans has reached its limits of exhaustion. Once you reach this point, in the absence of new frontiers to productively and profitably invest new money in, you either let your economy drop down into permanent Depression or you introduce a new source of money.

The new money cannot be issued as debt. You have reached your system's limit of debt so more new debt cannot fix it. You have already reached the state where the old debtors cannot repay their loans. The new debt will not be repayable even if you try to collect on it because the conditions for rapid economic growth (new frontiers, rising population, etc.) and profitable investment of borrowed money no longer exist. From here you need a flow of non-debt money into the system to keep the economy fueled, to maintain a steady state of production and consumption that doesn't depend on ongoing growth.

Towns and communities (and California) are experimenting with creating their own local money. Comox, British Columbia in Canada has created "Community Way Dollars", for e.g. Such measures work fine for a limited local economy. But for a national economy you need real dollars. So the government must create and distribute the non-debt money into the economy to keep it fueled when the bank-loan money fuel supply reaches peak debt.

'Fiscal conservatives' and others are aghast at this idea of the government creating and giving away free money. They say there are always new innovative growth opportunities to keep the credit cycle pumping new money into the economy. Okay guys, it's up to you. Show me these profitable opportunities that lead to jobs and incomes and buying power to keep the economy running and I will believe monetary innovation is not necessary.]]> Thu, 26 Nov 2009 21:26:03 -0500 "The above argument overstates the loss of value because many things of utility have been created during this century that did not exist at the beginning. But it is certainly true that a significant part of the inflation of the past hundred years represents no value. "

I think what happens in our fiat money system is that the quantity of money and monetary debt in the system becomes increasingly disconnected from the quantity of real productive capital. In a rising economy debt can be repaid by investing in new equipment that increases production of goods. After the debt is repaid the fixed capital remains even though the debt-money has been extinguished.

The credit-money began its existence as a loan and it ends its existence when the loan is repaid, so over the total life cycle of this credit creation no new permanent money has been created. But fixed capital and productive capacity HAS been added.

So now we have the situation where fixed capital is capable of producing abundant goods. But where will the new money come from to buy those goods? During a building phase like the US and world enjoyed after WWII there are always new profitable productive ventures to be financed with new loans and these add money into the economy. But as those loans are paid down money is removed from the economy and extinguished, so we have the situation where a whole bunch of fixed capital is capable of producing abundant goods, but where will the money come from to buy them?

Natural growth periods like population expansions, building up newly opened frontiers, and integrating new technological innovations, all offer opportunities to borrow and invest money and earn it back to repay your loans. But in a more "stationary state" economic environment where there are not many new growth opportunities, where will the money come from to buy all the output and keep the economy going?

The only source of new credit creation in such a state is "consumer" loans. Banks create new credit-money and people spend it into the economy, adding the needed fuel to keep the economic machine running. But every consumer loan is ultimately borrowing from your own future consumption. I can buy and enjoy the goods today, but for years into the future I must consume LESS than I earn in order to devote some of my income to repaying my loan.

This is not like a business loan invested in increasing production, where the loan can be repaid by increasing sales. Consumer deficit spending is a straightforward borrowing from your own future spending. When that future arrives and you have already committed all your income to previous spending, the consumer loans source for new money is exhausted and your fiat debt-money/credit-money monetary system arrives at its inevitable end state.

Fiat credit money is a true Ponzi scheme, where early borrowers can only repay their loans and make ongoing profits if later borrowers keep injecting new money into the system. When this ongoing money creation metric stalls we get a debt crisis and an economic recession. All of the fixed capital and labor is still there ready to go to work producing goods, but the system has run out of spending money.

Money is the fuel that drives the whole economic machine. Our system of creating money as bank loans runs into the problems I just laid out. It runs out of gas. It requires constant and accelerating "economic" growth, not just monetary growth, to keep new credit-money coming into the system. If the economy is not growing then productive enterprises will not be able to maintain production and sell it all at a profit in order to first repay the loans they used to build up their fixed capital and then to sell goods for ongoing profits. They will not be able to employ labor and pay incomes.

In a stagnant or declining economy nobody is a good credit risk. Banks who lend into such an environment risk their own solvency so they try to contract, recover monies they have already advanced rather than trying to grow their balance sheets. But in our system where all money is issued as debt, if there is no debt there is no money.

So we have an economic infrastructure of fixed capital and trained labor capable of producing abundance, but the monetary fuel production mechanism of repayable bank loans has reached its limits of exhaustion. Once you reach this point, in the absence of new frontiers to productively and profitably invest new money in, you either let your economy drop down into permanent Depression or you introduce a new source of money.

The new money cannot be issued as debt. You have reached your system's limit of debt so more new debt cannot fix it. You have already reached the state where the old debtors cannot repay their loans. The new debt will not be repayable even if you try to collect on it because the conditions for rapid economic growth (new frontiers, rising population, etc.) and profitable investment of borrowed money no longer exist. From here you need a flow of non-debt money into the system to keep the economy fueled, to maintain a steady state of production and consumption that doesn't depend on ongoing growth.

Towns and communities (and California) are experimenting with creating their own local money. Comox, British Columbia in Canada has created "Community Way Dollars", for e.g. Such measures work fine for a limited local economy. But for a national economy you need real dollars. So the government must create and distribute the non-debt money into the economy to keep it fueled when the bank-loan money fuel supply reaches peak debt.

'Fiscal conservatives' and others are aghast at this idea of the government creating and giving away free money. They say there are always new innovative growth opportunities to keep the credit cycle pumping new money into the economy. Okay guys, it's up to you. Show me these profitable opportunities that lead to jobs and incomes and buying power to keep the economy running and I will believe monetary innovation is not necessary.]]> http://seekingalpha.com/article/175050-capital-requirements-are-a-bad-thing-says-morgan-stanley?source=feed#comment-777897 777897
Deposit creating institutions like banks should function like monetary utilities, regulated to provide a stable supply of money to the economy at an affordable price with very low risk of blowouts. This utility function is the reason we guarantee bank deposits with taxpayers' money and it's why we bail out commercial banks during systemic insolvency events. The economy depends on commercial banks so we try to keep them safe and help them up when they need it. Taxpayers have no interest in guaranteeing casino bets where players get all the upside and taxpayers pay all the losses.

If Morgan Stanley doesn't like safe capital levels then it should voluntarily split its operations into commercial banking and investment banking. There are thousands of small and medium banks in the US who would like to pick up a larger share of the commercial banking market. Small banks are more nimble and efficient and can operate profitably even with higher capital requirements. The US doesn't need tottering multitasking monoliths that repeatedly fall over and require trillions of dollars of taxpayer support. ]]> Wed, 25 Nov 2009 19:07:48 -0500
Deposit creating institutions like banks should function like monetary utilities, regulated to provide a stable supply of money to the economy at an affordable price with very low risk of blowouts. This utility function is the reason we guarantee bank deposits with taxpayers' money and it's why we bail out commercial banks during systemic insolvency events. The economy depends on commercial banks so we try to keep them safe and help them up when they need it. Taxpayers have no interest in guaranteeing casino bets where players get all the upside and taxpayers pay all the losses.

If Morgan Stanley doesn't like safe capital levels then it should voluntarily split its operations into commercial banking and investment banking. There are thousands of small and medium banks in the US who would like to pick up a larger share of the commercial banking market. Small banks are more nimble and efficient and can operate profitably even with higher capital requirements. The US doesn't need tottering multitasking monoliths that repeatedly fall over and require trillions of dollars of taxpayer support. ]]> http://seekingalpha.com/article/175293-why-the-dollar-is-continuing-lower?source=feed#comment-777136 777136
Monetary easing in the form of low interest rates is the standard policy to increase credit and spending and stabilize prices in a deflationary environment. Increased spending also increases employment. So both aspects of the Fed's mandate suggest continuation of the monetary easing policies.

China's yuan is tied to the dollar so inasmuch as consumer goods are imported from China, a lower dollar will not affect CPI prices. America's other major import, oil, would trend higher with a falling dollar. As oil is an input into virtually all prices, mainly due to the need to transport goods, higher oil will put inflationary pressure on CPI prices. Higher input costs and tight domestic spending will squeeze profit margins for US producers and retailers. But squeezed profits absorb some of the oil price inflation so CPI prices will not necessarily follow oil up point for point.

On balance I don't think the Fed has much choice but to continue its monetary easing policies, and quite possibly expand them, in the face of the secular deflationary trend. Interest rates are going nowhere "for an extended time".]]> Wed, 25 Nov 2009 10:52:23 -0500
Monetary easing in the form of low interest rates is the standard policy to increase credit and spending and stabilize prices in a deflationary environment. Increased spending also increases employment. So both aspects of the Fed's mandate suggest continuation of the monetary easing policies.

China's yuan is tied to the dollar so inasmuch as consumer goods are imported from China, a lower dollar will not affect CPI prices. America's other major import, oil, would trend higher with a falling dollar. As oil is an input into virtually all prices, mainly due to the need to transport goods, higher oil will put inflationary pressure on CPI prices. Higher input costs and tight domestic spending will squeeze profit margins for US producers and retailers. But squeezed profits absorb some of the oil price inflation so CPI prices will not necessarily follow oil up point for point.

On balance I don't think the Fed has much choice but to continue its monetary easing policies, and quite possibly expand them, in the face of the secular deflationary trend. Interest rates are going nowhere "for an extended time".]]> http://seekingalpha.com/article/175295-bank-of-montreal-putting-shareholders-ahead-of-bonuses?source=feed#comment-777096 777096 Wed, 25 Nov 2009 10:33:40 -0500 http://seekingalpha.com/article/175190-how-much-would-you-spend-to-buy-a-recession?source=feed#comment-777077 777077 I have been a small business employer since 1978. I'm not rich. I can't afford to keep people employed unless they are making money for the business. It is never pleasant to let people go. It would be even worse to keep everyone on payroll until my money and credit is exhausted then lay everyone off, including myself, during my bankruptcy.]]> Wed, 25 Nov 2009 10:21:36 -0500 I have been a small business employer since 1978. I'm not rich. I can't afford to keep people employed unless they are making money for the business. It is never pleasant to let people go. It would be even worse to keep everyone on payroll until my money and credit is exhausted then lay everyone off, including myself, during my bankruptcy.]]> http://seekingalpha.com/article/175095-how-important-is-central-bank-independence?source=feed#comment-775437 775437 Tue, 24 Nov 2009 12:57:32 -0500 http://seekingalpha.com/article/175088-more-losses-on-the-way-don-t-drink-the-kool-aid?source=feed#comment-775414 775414
The real estate losses, realized and unrealized, have created a deflationary secular trend. All of the inflation generating money creation has already been exhausted buying those properties and creating the bubble. The bubble profits are now sloshing around the world as an ocean of liquidity inflating investable asset classes. The bubble debts are now becoming defaults which threaten banking solvency, and constraining consumer spending and shrinking the real economy.

A program of QE targeted at households would put spending money in people's hands to support GDP. It would put debt paydown money in people's hands to bail out household balance sheets and restore bank mortgages and other loans to performing status.

This would not be inflationary. It would be anti-deflationary. It would target the source of the deflation pressures, which is the household balance sheet whose ills are infecting bank balance sheets. QE money that is not spent on consumption or used to pay down debt would contribute to the savings glut and asset inflation, which keeps interest rates and returns on investments low--a fairly benign side effect of the monetary injection.

Everybody was supposed to get their swine flu shot to prevent a nonexistent flu pandemic. The real pandemic is household debt. The cure is grape flavored QE Koolaid injected into households.]]> Tue, 24 Nov 2009 12:37:02 -0500
The real estate losses, realized and unrealized, have created a deflationary secular trend. All of the inflation generating money creation has already been exhausted buying those properties and creating the bubble. The bubble profits are now sloshing around the world as an ocean of liquidity inflating investable asset classes. The bubble debts are now becoming defaults which threaten banking solvency, and constraining consumer spending and shrinking the real economy.

A program of QE targeted at households would put spending money in people's hands to support GDP. It would put debt paydown money in people's hands to bail out household balance sheets and restore bank mortgages and other loans to performing status.

This would not be inflationary. It would be anti-deflationary. It would target the source of the deflation pressures, which is the household balance sheet whose ills are infecting bank balance sheets. QE money that is not spent on consumption or used to pay down debt would contribute to the savings glut and asset inflation, which keeps interest rates and returns on investments low--a fairly benign side effect of the monetary injection.

Everybody was supposed to get their swine flu shot to prevent a nonexistent flu pandemic. The real pandemic is household debt. The cure is grape flavored QE Koolaid injected into households.]]> http://seekingalpha.com/news/market_currents/post/37104?source=feed#comment-775365 775365 Tue, 24 Nov 2009 12:12:55 -0500 http://seekingalpha.com/article/174885-when-free-markets-fail?source=feed#comment-774164 774164
If a self-serving monopoly or oligopoly controls essential factors of the economy there can be no liberty for anyone else, so in the US it should be an essential function of government to restrain overconcentration of wealth and power. By the same token government itself must be limited in its wealth and power, and many would argue that government today has indeed become a fascist collusion of big business and big government preying on the citizenry and destroying the prospects for liberty.

I tend towards the libertarian view but I recognize that capitalism generates an extreme concentration of wealth in the hands of the skillful and ambitious, a reality that Ayn Rand celebrated in "Atlas Shrugged". Even I must admit that Ayn made no allowance for capitalist losers, and that economic Darwinism and its social destruction is more uneconomic than a limited welfare state that keeps the losers in the game, if only at the margins. I share Hobbes' view that in a truly free market state of nature life would be a "war of all against all". So there is a place for government and even for the welfare state.

This is why economics has historically been studied as political economy rather than as pure market economics. Adam Smith saw himself as a political economist studying the moral issue of how to get the most benefit for an economy's participants and concluded that economic specialization and trade, though driven by the pursuit of self interest, is both morally and economically superior to alternate economic systems. The fate of losers, and their response to losing, is a political problem that cannot simply be factored out of economic equations. To get a realistic understanding of how economies work they must be seen within this wider context of political economy.

Smith's market maximizes liberty. Everyone is free to prosper to the best of their ability. But concentrated power, whether in the private or public sector, subverts this virtuous outcome. In order to be free markets must be competitive, or else they should be regulated like utilities so they serve the cause of liberty rather than the narrow interests of their owners.

There will always be losers who cannot really contribute much to an economy. But it remains true that it is the competition of individual vs individual in the pursuit of money and glory that drives innovation and wealth creation. As far as possible I think it is the function of the state to maintain an environment in which this healthy competition and individual reward can be maximized.]]> Mon, 23 Nov 2009 19:01:53 -0500
If a self-serving monopoly or oligopoly controls essential factors of the economy there can be no liberty for anyone else, so in the US it should be an essential function of government to restrain overconcentration of wealth and power. By the same token government itself must be limited in its wealth and power, and many would argue that government today has indeed become a fascist collusion of big business and big government preying on the citizenry and destroying the prospects for liberty.

I tend towards the libertarian view but I recognize that capitalism generates an extreme concentration of wealth in the hands of the skillful and ambitious, a reality that Ayn Rand celebrated in "Atlas Shrugged". Even I must admit that Ayn made no allowance for capitalist losers, and that economic Darwinism and its social destruction is more uneconomic than a limited welfare state that keeps the losers in the game, if only at the margins. I share Hobbes' view that in a truly free market state of nature life would be a "war of all against all". So there is a place for government and even for the welfare state.

This is why economics has historically been studied as political economy rather than as pure market economics. Adam Smith saw himself as a political economist studying the moral issue of how to get the most benefit for an economy's participants and concluded that economic specialization and trade, though driven by the pursuit of self interest, is both morally and economically superior to alternate economic systems. The fate of losers, and their response to losing, is a political problem that cannot simply be factored out of economic equations. To get a realistic understanding of how economies work they must be seen within this wider context of political economy.

Smith's market maximizes liberty. Everyone is free to prosper to the best of their ability. But concentrated power, whether in the private or public sector, subverts this virtuous outcome. In order to be free markets must be competitive, or else they should be regulated like utilities so they serve the cause of liberty rather than the narrow interests of their owners.

There will always be losers who cannot really contribute much to an economy. But it remains true that it is the competition of individual vs individual in the pursuit of money and glory that drives innovation and wealth creation. As far as possible I think it is the function of the state to maintain an environment in which this healthy competition and individual reward can be maximized.]]> http://seekingalpha.com/article/174931-eastern-alliance-energy-investment-in-the-u-s-and-china?source=feed#comment-774093 774093 Mon, 23 Nov 2009 18:16:44 -0500 http://seekingalpha.com/article/174934-ford-gaining-on-honda-toyota-in-perceived-quality?source=feed#comment-774079 774079 Mon, 23 Nov 2009 18:04:27 -0500 http://seekingalpha.com/article/174890-on-the-limitations-of-government?source=feed#comment-774057 774057
seekingalpha.com/artic...

Like Edward I consider myself a fiscal conservative with libertarian leanings and I also accept the necessity of current and ongoing fiscal stimulus to maintain aggregate demand to prevent the economy and employment from falling totally through the floor.

That said, Martenson describes his woes with local real estate regulations that are clearly bureaucratic overkill. As the public sector grows it becomes the vampire squid on any individual and small business who tries to do anything. The vampire squid has grown so large and pervasive that it is strangling the real economy.

Certain basic restraints on individual liberty are obviously justified. I would say that if your behavior motivates your neighbors to want to shoot you to get rid of the danger or nuisance you are causing them, then you've probably crossed a line and there may be good reason to regulate against what you are doing. But lawyerism has created an environment where the slightest inconvenience to anyone is used to prevent everybody from doing a thing. Caveat emptor, let the buyer beware, has been replaced by government efforts to eliminate ALL personal responsibility.

Don't like the color of the paint in your new house? Sue the previous owner and lobby the government to ban that color of paint. This is absurd but unfortunately it is the kind of complaint that local bureaucrats hear all the time. A few squeaky wheels destroy our freedom by complaining about everything to governments. Complainers truly feel hard done by so they persist, and bureaucrats and local politicians cave in to their ridiculous demands.

We didn't use to have this kind of victim culture. People were expected to suck it up and suffer through. Complainers were humored by government officials but their pipsqueak issues were otherwise ignored. Now we have empowered the pipsqueaks and they are tyrannizing us with millions of stupid and expensive little regulations.

If government stimulus is necessary now to stabilize the economy, then another measure to improve the economy would be to remove about 90% of the pipsqueak rules and regulations that currently saddle businesses and individuals with unnecessary costs for trying to do anything. These costs prevent a lot of economic activity from happening that would otherwise have been done. They are a drag on the economy.

Almost none of these regulations improves safety or otherwise benefits the economy. They are a pure wasteful cost with zero benefit. The only people benefiting from this are the millions of bureaucrats who have jobs thinking up and enforcing regulations. We would be far better off paying them their present salary and benefits and telling them to stay home and leave us alone.]]> Mon, 23 Nov 2009 17:37:57 -0500
seekingalpha.com/artic...

Like Edward I consider myself a fiscal conservative with libertarian leanings and I also accept the necessity of current and ongoing fiscal stimulus to maintain aggregate demand to prevent the economy and employment from falling totally through the floor.

That said, Martenson describes his woes with local real estate regulations that are clearly bureaucratic overkill. As the public sector grows it becomes the vampire squid on any individual and small business who tries to do anything. The vampire squid has grown so large and pervasive that it is strangling the real economy.

Certain basic restraints on individual liberty are obviously justified. I would say that if your behavior motivates your neighbors to want to shoot you to get rid of the danger or nuisance you are causing them, then you've probably crossed a line and there may be good reason to regulate against what you are doing. But lawyerism has created an environment where the slightest inconvenience to anyone is used to prevent everybody from doing a thing. Caveat emptor, let the buyer beware, has been replaced by government efforts to eliminate ALL personal responsibility.

Don't like the color of the paint in your new house? Sue the previous owner and lobby the government to ban that color of paint. This is absurd but unfortunately it is the kind of complaint that local bureaucrats hear all the time. A few squeaky wheels destroy our freedom by complaining about everything to governments. Complainers truly feel hard done by so they persist, and bureaucrats and local politicians cave in to their ridiculous demands.

We didn't use to have this kind of victim culture. People were expected to suck it up and suffer through. Complainers were humored by government officials but their pipsqueak issues were otherwise ignored. Now we have empowered the pipsqueaks and they are tyrannizing us with millions of stupid and expensive little regulations.

If government stimulus is necessary now to stabilize the economy, then another measure to improve the economy would be to remove about 90% of the pipsqueak rules and regulations that currently saddle businesses and individuals with unnecessary costs for trying to do anything. These costs prevent a lot of economic activity from happening that would otherwise have been done. They are a drag on the economy.

Almost none of these regulations improves safety or otherwise benefits the economy. They are a pure wasteful cost with zero benefit. The only people benefiting from this are the millions of bureaucrats who have jobs thinking up and enforcing regulations. We would be far better off paying them their present salary and benefits and telling them to stay home and leave us alone.]]> http://seekingalpha.com/article/174921-the-fiscal-prudence-debate?source=feed#comment-773996 773996
There was a lot of criticism last year of anyone daring to tell the awful truth, that we do indeed have a global savings glut. There are trillions of dollars of investable money flowing around the world seeking a rate of return, and there simply are not enough profitable investments on this planet to absorb that much money. So we get rotating asset bubbles as the money swooshes into and out of whatever seems like a likely source of profit.

The historical capitalist remedy to this situation is speculative excesses followed by a recession where the speculators are wiped out and banks write down money supply by committing their capital to extinguishing loan losses. Money supply and asset prices are deflated and the economy starts up again from a lower price level that has been greatly deleveraged.

But nobody wants to have the recession/depression so central banks and governments are doing what they can to support current money supply and asset price levels. This means the ocean of liquidity is stuck with low returns as money competes for whatever scarce real investments exist right now.

We have an excess of investment money, a global savings glut. This money will continue to compete for the right to purchase anybody's debt that offers even a scant rate of return. Ask the banks whose excess reserves are stashed at the Fed. A quarter of a percent is better than nothing.

Unless and until we have the deflationary depression that wipes out all this liquidity interest rates will stay low.]]> Mon, 23 Nov 2009 16:56:21 -0500
There was a lot of criticism last year of anyone daring to tell the awful truth, that we do indeed have a global savings glut. There are trillions of dollars of investable money flowing around the world seeking a rate of return, and there simply are not enough profitable investments on this planet to absorb that much money. So we get rotating asset bubbles as the money swooshes into and out of whatever seems like a likely source of profit.

The historical capitalist remedy to this situation is speculative excesses followed by a recession where the speculators are wiped out and banks write down money supply by committing their capital to extinguishing loan losses. Money supply and asset prices are deflated and the economy starts up again from a lower price level that has been greatly deleveraged.

But nobody wants to have the recession/depression so central banks and governments are doing what they can to support current money supply and asset price levels. This means the ocean of liquidity is stuck with low returns as money competes for whatever scarce real investments exist right now.

We have an excess of investment money, a global savings glut. This money will continue to compete for the right to purchase anybody's debt that offers even a scant rate of return. Ask the banks whose excess reserves are stashed at the Fed. A quarter of a percent is better than nothing.

Unless and until we have the deflationary depression that wipes out all this liquidity interest rates will stay low.]]> http://seekingalpha.com/article/174798-pay-extra-close-attention-to-the-dollar?source=feed#comment-773961 773961 What would it do to the budget deficit, to oil prices and producers like Russia, to food prices, US employment and the banks?"

I'm not claiming to be "more knowledgable" but I'll tell you what I know about import/export and fx rates.

If the US$ is worth $1.06 Cdn, then when a Cdn oil producer exports US $1000 worth of oil he can convert his export earnings into $1060 Cdn. If the US$ is worth $1.40 Cdn as it was just a few years ago, then that same exporter converts his US $1000 earnings into $1400 Cdn. The exporter's labor and many of his other costs are denominated in Cdn$ so it's clear that a cheap loonie is a boon to exporters. Alberta is a major energy exporter to the US. For every 1 cent rise in the value of the Cdn$ to the US$ it costs the Alberta Treasury $100 million in lost fx on the royalties. So fx movements have a major effect on exporters.

As an energy importer the US should enjoy lower dollar prices for oil with a stronger dollar. Not all of the profit of a high dollar can be retained by exporters enjoying the fx profits. Some of the profit will flow to the demand side by way of lower prices.

On the downside, a high dollar will hurt US exporters who are competing with foreign competitors on a price basis, but it is a boon to companies like Apple who produce iPods and iPhones in foreign countries and repatriate their profits in higher value US$. US exporters who sell unique or "hot" products that don't so much compete on price benefit from a higher dollar.

US food imports would be cheaper. The US exports a lot of food and food producers would benefit until lower price suppliers could be found. But markets are not perfectly elastic, and elasticity takes some time to function, so in the short term a high dollar is a boon to all US exporters as they can buy foreign inputs like oil cheaper and enjoy a stable price on their exports that will only slowly erode their market share.

The sectors that would suffer major shocks from a rapid dollar appreciation are dollar shorters and other currency speculators who bet against the greenback. These are zero sum markets, though, where one person's loss is another person's gain, so I'm not sure what systemic impact it would produce. Some guys would lose a bundle and some guys would gain that bundle.

The dollar carry trade is based on interest rate arbitrage, borrowing dollars at a fraction of a percent interest and investing them in foreign markets that pay higher interest. The fx appreciation of these foreign currencies has merely been a bonus to carry traders, and that bonus would be lost if the dollar rose. If the dollar rose high enough it could even absorb the interest rate differential that they are profiting from. If they're gaining 4% on the interest spread and the dollar gains 5% and stays there for a long time, then the net result of the investment will be negative when the trader converts his foreign currency denominated investment back into US$. It is a US$ interest rate spike that would really hurt carry traders, but that is not on anyone's horizon.

Financial assets like emerging market stocks have been pumped up somewhat by the hot money dollar carry trade, but I'm not sure how much of an influence this has had on these markets. China's markets are enjoying the domestic fiscal stimulus and increase in bank lending and I think that accounts for most of the gains in China's markets, though the carry trade may be adding a percent or two to the gains. Chinese money is likely contributing to gains in other emerging markets as well, and I don't think the carry trade is anywhere near the scale of China's recent monetary increases.]]> Mon, 23 Nov 2009 16:30:47 -0500 What would it do to the budget deficit, to oil prices and producers like Russia, to food prices, US employment and the banks?"

I'm not claiming to be "more knowledgable" but I'll tell you what I know about import/export and fx rates.

If the US$ is worth $1.06 Cdn, then when a Cdn oil producer exports US $1000 worth of oil he can convert his export earnings into $1060 Cdn. If the US$ is worth $1.40 Cdn as it was just a few years ago, then that same exporter converts his US $1000 earnings into $1400 Cdn. The exporter's labor and many of his other costs are denominated in Cdn$ so it's clear that a cheap loonie is a boon to exporters. Alberta is a major energy exporter to the US. For every 1 cent rise in the value of the Cdn$ to the US$ it costs the Alberta Treasury $100 million in lost fx on the royalties. So fx movements have a major effect on exporters.

As an energy importer the US should enjoy lower dollar prices for oil with a stronger dollar. Not all of the profit of a high dollar can be retained by exporters enjoying the fx profits. Some of the profit will flow to the demand side by way of lower prices.

On the downside, a high dollar will hurt US exporters who are competing with foreign competitors on a price basis, but it is a boon to companies like Apple who produce iPods and iPhones in foreign countries and repatriate their profits in higher value US$. US exporters who sell unique or "hot" products that don't so much compete on price benefit from a higher dollar.

US food imports would be cheaper. The US exports a lot of food and food producers would benefit until lower price suppliers could be found. But markets are not perfectly elastic, and elasticity takes some time to function, so in the short term a high dollar is a boon to all US exporters as they can buy foreign inputs like oil cheaper and enjoy a stable price on their exports that will only slowly erode their market share.

The sectors that would suffer major shocks from a rapid dollar appreciation are dollar shorters and other currency speculators who bet against the greenback. These are zero sum markets, though, where one person's loss is another person's gain, so I'm not sure what systemic impact it would produce. Some guys would lose a bundle and some guys would gain that bundle.

The dollar carry trade is based on interest rate arbitrage, borrowing dollars at a fraction of a percent interest and investing them in foreign markets that pay higher interest. The fx appreciation of these foreign currencies has merely been a bonus to carry traders, and that bonus would be lost if the dollar rose. If the dollar rose high enough it could even absorb the interest rate differential that they are profiting from. If they're gaining 4% on the interest spread and the dollar gains 5% and stays there for a long time, then the net result of the investment will be negative when the trader converts his foreign currency denominated investment back into US$. It is a US$ interest rate spike that would really hurt carry traders, but that is not on anyone's horizon.

Financial assets like emerging market stocks have been pumped up somewhat by the hot money dollar carry trade, but I'm not sure how much of an influence this has had on these markets. China's markets are enjoying the domestic fiscal stimulus and increase in bank lending and I think that accounts for most of the gains in China's markets, though the carry trade may be adding a percent or two to the gains. Chinese money is likely contributing to gains in other emerging markets as well, and I don't think the carry trade is anywhere near the scale of China's recent monetary increases.]]> http://seekingalpha.com/article/174771-congress-and-the-fed-the-addict-and-the-enabler?source=feed#comment-773532 773532
We don't want that kind of Depression. But we will get one unless we undertake an orderly unwinding of the too big to fail failures who still own all the capital they should have lost.

In his paper, "Too Big Has Failed", Kansas City Fed President Thomas Hoenig explains how such an orderly unwinding can be accomplished.

www.kc.frb.org/speechb...

Paul Volcker has been advocating similar measures. It's not too late to undertake an orderly process of creative destruction so we can start anew with new innovative players at the top and old failed players removed from the scene.]]> Mon, 23 Nov 2009 12:09:55 -0500
We don't want that kind of Depression. But we will get one unless we undertake an orderly unwinding of the too big to fail failures who still own all the capital they should have lost.

In his paper, "Too Big Has Failed", Kansas City Fed President Thomas Hoenig explains how such an orderly unwinding can be accomplished.

www.kc.frb.org/speechb...

Paul Volcker has been advocating similar measures. It's not too late to undertake an orderly process of creative destruction so we can start anew with new innovative players at the top and old failed players removed from the scene.]]> http://seekingalpha.com/article/174771-congress-and-the-fed-the-addict-and-the-enabler?source=feed#comment-773473 773473
As the economy churns along businesses amass and retain profits and individuals amass and retain savings. Retained earnings and savings are "investment money", money that is not needed for consumption, money that is seeking a rate of return. As the cycle progresses there will be more and more of this investment money in the economy chasing a static or only slowly growing quantity of profitable investment opportunities (new technologies periodically increase the availability of profitable investments so over the long term the quantity of productive fixed capital and GDP increases).

When too much investment money is chasing too few truly profitable investments (truly profitable investments are those that increase the quantity of productive fixed capital and final goods), investors are increasingly open to speculative Hail Mary's that promise returns. As Mill puts it,

"By the time a few years have passed over without a crisis, so much additional capital (*what I call "investment money") has been accumulated, that it is no longer possible to invest it at the accustomed profit; all public securities rise to a high price, the rate of interest on the best mercantile security falls very low, and the complaint is general among persons in business that no money is to be made.

...But the diminished scale of all safe gains, inclines persons to give a ready ear to projects which hold out, though at the risk of loss, the hope of a higher rate of profit; and speculations ensue, which, with the subsequent revulsions (*we call them recessions), destroy, or transfer to foreigners, a considerable amount of capital, produce a temporary rise of interest and profit, make room for fresh accumulations, and the same round is recommenced."

Since our "revulsion" of 1982 the Fed and government fiscal policy have taken measures to prevent the loss of capital which Mill says is the factor that "makes room for fresh accumulations". There has been no "creative destruction" (as Schumpeter coined it in 1942) of speculative malinvestment.

There has been no capitalist redistribution of wealth from losers to winners. Speculative losers have not been allowed to lose their money. Economic winners have not been allowed the opportunity to gain from the losses of the losers. The capitalist cycle has not been allowed to play out. Now, after nearly 30 years of interventionist monetary and fiscal policy, pretty much the entire US economy is a "malinvestment", with the losers propped up by taxpayer trillions and the winners closing shop or moving offshore. Rather than creative destruction and losses of losers, we have preservation of losers and destruction of winners.

This is what US monetary and fiscal policy have been doing since 1982, subverting the functioning of the business cycle. The business cycle is "natural", a straightforward outcome of human economic behavior.

Over the course of a cycle some players lose and other players win. There is a constant refreshing of talent and ideas. Newly emergent players bring new approaches to the task of earning profits; emphasis on "earning" profits by creating economic value, not merely "making" profits by manipulating legislation and financial instruments that add no economic value. Our economy evolves via the process of creative destruction and renewal. Insofar as the Fed and government fiscal policy prevent this from happening, we stagnate.

So I agree with Harry. The Fed does not "cause" business cycles. But it certainly exacerbates them, causing ever higher booms and ever lower busts, by allowing misallocated capital to accumulate without end.]]> Mon, 23 Nov 2009 11:43:04 -0500
As the economy churns along businesses amass and retain profits and individuals amass and retain savings. Retained earnings and savings are "investment money", money that is not needed for consumption, money that is seeking a rate of return. As the cycle progresses there will be more and more of this investment money in the economy chasing a static or only slowly growing quantity of profitable investment opportunities (new technologies periodically increase the availability of profitable investments so over the long term the quantity of productive fixed capital and GDP increases).

When too much investment money is chasing too few truly profitable investments (truly profitable investments are those that increase the quantity of productive fixed capital and final goods), investors are increasingly open to speculative Hail Mary's that promise returns. As Mill puts it,

"By the time a few years have passed over without a crisis, so much additional capital (*what I call "investment money") has been accumulated, that it is no longer possible to invest it at the accustomed profit; all public securities rise to a high price, the rate of interest on the best mercantile security falls very low, and the complaint is general among persons in business that no money is to be made.

...But the diminished scale of all safe gains, inclines persons to give a ready ear to projects which hold out, though at the risk of loss, the hope of a higher rate of profit; and speculations ensue, which, with the subsequent revulsions (*we call them recessions), destroy, or transfer to foreigners, a considerable amount of capital, produce a temporary rise of interest and profit, make room for fresh accumulations, and the same round is recommenced."

Since our "revulsion" of 1982 the Fed and government fiscal policy have taken measures to prevent the loss of capital which Mill says is the factor that "makes room for fresh accumulations". There has been no "creative destruction" (as Schumpeter coined it in 1942) of speculative malinvestment.

There has been no capitalist redistribution of wealth from losers to winners. Speculative losers have not been allowed to lose their money. Economic winners have not been allowed the opportunity to gain from the losses of the losers. The capitalist cycle has not been allowed to play out. Now, after nearly 30 years of interventionist monetary and fiscal policy, pretty much the entire US economy is a "malinvestment", with the losers propped up by taxpayer trillions and the winners closing shop or moving offshore. Rather than creative destruction and losses of losers, we have preservation of losers and destruction of winners.

This is what US monetary and fiscal policy have been doing since 1982, subverting the functioning of the business cycle. The business cycle is "natural", a straightforward outcome of human economic behavior.

Over the course of a cycle some players lose and other players win. There is a constant refreshing of talent and ideas. Newly emergent players bring new approaches to the task of earning profits; emphasis on "earning" profits by creating economic value, not merely "making" profits by manipulating legislation and financial instruments that add no economic value. Our economy evolves via the process of creative destruction and renewal. Insofar as the Fed and government fiscal policy prevent this from happening, we stagnate.

So I agree with Harry. The Fed does not "cause" business cycles. But it certainly exacerbates them, causing ever higher booms and ever lower busts, by allowing misallocated capital to accumulate without end.]]> http://seekingalpha.com/article/174728-is-the-fed-getting-real-about-valuation-and-bubbles?source=feed#comment-772334 772334
Davewmart is right about what would happen, "The argument goes that the bail-out has just transferred funds to the wealthy, who would have been bankrupt if they had had to stand the losses incurred by their over-leveraging into worthless assets such as Commercial real estate, and that poorer people such as those who do not own property would finally be able to afford somewhere to live if the prices had not been pumped in this way."

Everybody who owns assets would lose big time as the financing that supports asset prices collapsed. Money would be extinguished by voluntary and involuntary debt paydowns. Prices would be cheap but nobody would have any money to pay even cheap prices because without finance the economy collapses too. People with savings, unmortgaged houses and no debts might be alright for awhile, but with severely reduced opportunity for earning incomes, and at much lower than pre-collapse rates, these people could only hold on by consuming their savings. And state and municipal governments would be looking for anyone still standing as a source of taxes to keep themselves alive, so the savings wouldn't last long.

So I agree with Buiter that it's better that Bernanke & Co took measures to prevent the kind of financial and economic collapse that an un-bailed out free market would have produced. Our only previous experience with a fiat money credit collapse is the 1930s, and it took the colossal government borrowing and spending for WWII to get the world out of that one. The free market was incapable of getting to its feet unaided. When the authorities tried to withdraw New Deal support in 1937 the economy immediately fell back into Depression. There is no evidence, none at all, that the economy could have renewed itself unaided. We all have theories, but until they are put into practice and tested in the real world they are just opinions, not facts or evidence.

Applying IVS during a normal or stable economic time would go a long way toward preventing credit runups and the bubbles and collapses they precipitate. But when will we see "normal" again? Arguably, the US and the West have run up against our debt ceiling. What worked before--easy credit--doesn't work anymore. We are in catastrophe prevention mode, not normal times. John Mauldin calls our policies the "glide path option", an attempt to bring the engineless craft down gently rather than with one great crash. Japan is riding down a glide path, as they have been doing for nearly 2 decades.

It doesn't really matter how you value assets in such an environment, because the only politically possible option is the glide path. Everybody knows the banks are insolvent and borrowers are insolvent and the country is insolvent. There will be forebearance, because a hardass approach yields a depression that I think would be much worse than the 1930s, and there is no free market way out of such a state that does not include a mass die off and starting from a much reduced or "rationalized" base.

If you let the chips fall where they may in a free market outcome you get economic Darwinism, and which class of well armed Americans is going to meekly accept its "natural demise"? Even Keynes recognized the shortfall of overly long term thinking, "In the long run, we're all dead." People will not wait around for a free market economic recovery and behave "rationally" when they're destitute and starving.

This is why we live in a "political" economy, not a free market economy. People do not accept that they are economically obsolete and should die off. They will fight and steal and burn and loot and perform all kinds of "uneconomic" acts rather than accept their inevitable Darwinian death.

There are alternatives to the glide path/Japanese option that involve monetary innovations like a massive expansion of QE to include Main St. I have written about this in previous comments so I won't repeat it here. It may require international cooperation, a Basel III, but in a fiat money system where money is created as numbers in accounts there is no reason to let a monetary problem cause a permanent economic crisis.]]> Sun, 22 Nov 2009 18:39:43 -0500
Davewmart is right about what would happen, "The argument goes that the bail-out has just transferred funds to the wealthy, who would have been bankrupt if they had had to stand the losses incurred by their over-leveraging into worthless assets such as Commercial real estate, and that poorer people such as those who do not own property would finally be able to afford somewhere to live if the prices had not been pumped in this way."

Everybody who owns assets would lose big time as the financing that supports asset prices collapsed. Money would be extinguished by voluntary and involuntary debt paydowns. Prices would be cheap but nobody would have any money to pay even cheap prices because without finance the economy collapses too. People with savings, unmortgaged houses and no debts might be alright for awhile, but with severely reduced opportunity for earning incomes, and at much lower than pre-collapse rates, these people could only hold on by consuming their savings. And state and municipal governments would be looking for anyone still standing as a source of taxes to keep themselves alive, so the savings wouldn't last long.

So I agree with Buiter that it's better that Bernanke & Co took measures to prevent the kind of financial and economic collapse that an un-bailed out free market would have produced. Our only previous experience with a fiat money credit collapse is the 1930s, and it took the colossal government borrowing and spending for WWII to get the world out of that one. The free market was incapable of getting to its feet unaided. When the authorities tried to withdraw New Deal support in 1937 the economy immediately fell back into Depression. There is no evidence, none at all, that the economy could have renewed itself unaided. We all have theories, but until they are put into practice and tested in the real world they are just opinions, not facts or evidence.

Applying IVS during a normal or stable economic time would go a long way toward preventing credit runups and the bubbles and collapses they precipitate. But when will we see "normal" again? Arguably, the US and the West have run up against our debt ceiling. What worked before--easy credit--doesn't work anymore. We are in catastrophe prevention mode, not normal times. John Mauldin calls our policies the "glide path option", an attempt to bring the engineless craft down gently rather than with one great crash. Japan is riding down a glide path, as they have been doing for nearly 2 decades.

It doesn't really matter how you value assets in such an environment, because the only politically possible option is the glide path. Everybody knows the banks are insolvent and borrowers are insolvent and the country is insolvent. There will be forebearance, because a hardass approach yields a depression that I think would be much worse than the 1930s, and there is no free market way out of such a state that does not include a mass die off and starting from a much reduced or "rationalized" base.

If you let the chips fall where they may in a free market outcome you get economic Darwinism, and which class of well armed Americans is going to meekly accept its "natural demise"? Even Keynes recognized the shortfall of overly long term thinking, "In the long run, we're all dead." People will not wait around for a free market economic recovery and behave "rationally" when they're destitute and starving.

This is why we live in a "political" economy, not a free market economy. People do not accept that they are economically obsolete and should die off. They will fight and steal and burn and loot and perform all kinds of "uneconomic" acts rather than accept their inevitable Darwinian death.

There are alternatives to the glide path/Japanese option that involve monetary innovations like a massive expansion of QE to include Main St. I have written about this in previous comments so I won't repeat it here. It may require international cooperation, a Basel III, but in a fiat money system where money is created as numbers in accounts there is no reason to let a monetary problem cause a permanent economic crisis.]]> http://seekingalpha.com/instablog/98115-john-lounsbury/36809-ny-times-goldman-should-be-paying-the-national-debt?source=feed#comment-772005 772005 Sun, 22 Nov 2009 12:58:49 -0500 http://seekingalpha.com/article/174653-the-fed-backed-itself-into-a-corner?source=feed#comment-771942 771942
and Chris Cook is looking in the right direction for the solution,

""The problem is that the Fed can't help the Main Street directly."
Correct. But the Treasury can. It seems to me that one possible approach -very much in line with the dis-intermediating effects of the Internet - is for the Treasury to issue credit interest-free as necessary (it costs nothing to create) and for Service-Providers (formerly known as banks) to manage creation and allocation of Treasury credit."

The simplest, quickest, least disruptive way for Treasury to issue free credit-money to Main St would be a version of QE that could be administered through mechanisms that are already in place. With current QE Treasury 'sells' a bond to the Fed and the Fed 'pays' by writing a credit in Treasury's account. Presto! Money creation. Treasury can then spend that money into the economy. As part of its monetary policy the Fed manipulates the interest rate Treasury must pay on its bond-debt.

To issue this kind of QE credit-money interest free, The Fed and Treasury simply cooperate. Treasury sells the Fed zero interest bonds of very long maturity, say 100 years, with an automatic rollover clause. That is, Treasury never has to pay the money back, though Treasury would retain that option with no prepayment penalty of any kind. This is a coordination of fiscal and monetary policy to address a monetary and economic problem.

The Fed credits Treasury's account and now Treasury has "free" money to distribute to Main St. It could be distributed by using it to pay for SS and Medicare for e.g. Or for a broader effect Treasury could send out 'stimulus checks' to every American. I have advocated monthly stimulus checks of $1000 to every American with a SS number, with the program to run initially for 1 year and be renewable thereafter if it's producing good effects.

Tim asks why a 4% inflation target is not credible, and he may be right. Treasury's "free money" program could be tuned to generate any % inflation that is deemed desirable. You're not going to like this next measure, which is the design of a "braking mechanism" to control inflation. This would be a national value added tax. If inflation gets too hot, then raise the VAT rate to suck money out of the economy. Treasury could use the VAT revenue to redeem its free money bonds from the Fed, or to redeem its interest bearing bonds from the Fed.

This program should probably be firewalled off the normal Treasuries market so as not to disrupt the capital markets. So Treasury could not QE itself trillions of new free dollars to payout existing Treasury debt, as that would simply devalue all the Treasuries that people used their hard earned money to buy. But this program could be used to freeze open market Treasury debt a current levels. If Treasury can now create free money to fund its fiscal policy and operations, why borrow more of people's savings and pay them interest at the taxpayer's expense?

There are two kinds of things money buys, and 2 kinds of inflation (there are 3 things if bank capital is considered as a separate class of savings). Asset inflation happens when some people have too much savings, which also means other people have too much debt because our money originates as bank loans. When a lot of people have too much debt their ability to consume is reduced, which reduces the quantity of profitable productive investments available in the economy, so 'excess' savings is competing for too few investments, and this excess demand inflates the price of investment assets.

CPI inflation happens when consumers have too much spending money and there are not enough consumable goods for sale to absorb all the money, so the price of consumables rises to capture the available money. Normally this state of affairs would result in producers investing in expansion of their ability to produce goods, and once the new production comes online the amount of available goods would equal the amount of spending money and prices would come back down. But GDP would have increased to the higher level of producing and consuming. You get "economic growth".

The US is in an environment of asset inflation and CPI deflation. Consumers have less money to spend so producers' top line is falling: they are selling less so they are downsizing and producing less. But almost all the bank-credit money that was created as mortgages and car and other loans is still in the system. Some money is being removed slowly as borrowers pay down their bank loans, and as bank capital is being extinguished to cover loan losses. But much of that money is held by people as savings where it is contributing to very low interest rates and excessive demand for all kinds of investable assets.

To the extent that emerging markets have decoupled from the US there are profitable places to invest money in Asia and elsewhere, but with a diminished US consumer there are not a lot of profitable investments in the US outside of sectors paid for by government like pharmaceuticals and health related industries. So we see asset inflation, as too much savings chases too few profitable investments.

A program of free Treasury money would have 3 effects, distinguished by whose hands the money came into. When it comes into the hands of stressed borrowers the money would be used to pay down mortgages and other bank loans, and that money would be extinguished along with the bank debt so it would deflate debt levels and not contribute to any kind of inflation. Stimulus money that flows to savers would contribute to an increase in excess savings and asset inflation and low interest rates. Stimulus money that flows to spenders would contribute to CPI inflation where it would stimulate business profits and production and employment in the real economy.

A 4th effect could be achieved by giving money to States, who could use it to buy back their outstanding debt and at least remove the annual interest expense from their budgets. States with no debt could use the money to fund budgetary expenditures and reduce taxes. Free money should be given to States on a per capita basis. Winners would be rewarded by this measure and losers would be bailed out, which is the same thing that happens when you give stimulus checks to everyone. That's the idea. It's a "fair" method of bailing out the USA.

These effects are permanent, unlike normal Treasury borrowing and spending where stimulus today is countered by higher taxes tomorrow. If the government wants to deflate overinflated asset prices it could do so via a targeted asset tax to suck investment money out of the system. And as mentioned, CPI inflation can be readily controlled via an adjustable rate VAT. Eventually, once American private sector and State debt is down to safe levels and the economy is functioning at a stable level, the free money program could be ended. This is all simple arithmetic. It really is this simple to generate these effects.

Besides the money that flows to savers and exacerbates the excess savings problem that is keeping returns on investment so low, the free money stimulus check program would reduce total debt and contribute to the real economy. You have to give the money to everybody or else it becomes just another pork scheme where most of the benefit is absorbed by bureaucrats and politically favored interest groups. To get a truly economy wide benefit you have to give the checks to everyone.]]> Sun, 22 Nov 2009 12:47:22 -0500
and Chris Cook is looking in the right direction for the solution,

""The problem is that the Fed can't help the Main Street directly."
Correct. But the Treasury can. It seems to me that one possible approach -very much in line with the dis-intermediating effects of the Internet - is for the Treasury to issue credit interest-free as necessary (it costs nothing to create) and for Service-Providers (formerly known as banks) to manage creation and allocation of Treasury credit."

The simplest, quickest, least disruptive way for Treasury to issue free credit-money to Main St would be a version of QE that could be administered through mechanisms that are already in place. With current QE Treasury 'sells' a bond to the Fed and the Fed 'pays' by writing a credit in Treasury's account. Presto! Money creation. Treasury can then spend that money into the economy. As part of its monetary policy the Fed manipulates the interest rate Treasury must pay on its bond-debt.

To issue this kind of QE credit-money interest free, The Fed and Treasury simply cooperate. Treasury sells the Fed zero interest bonds of very long maturity, say 100 years, with an automatic rollover clause. That is, Treasury never has to pay the money back, though Treasury would retain that option with no prepayment penalty of any kind. This is a coordination of fiscal and monetary policy to address a monetary and economic problem.

The Fed credits Treasury's account and now Treasury has "free" money to distribute to Main St. It could be distributed by using it to pay for SS and Medicare for e.g. Or for a broader effect Treasury could send out 'stimulus checks' to every American. I have advocated monthly stimulus checks of $1000 to every American with a SS number, with the program to run initially for 1 year and be renewable thereafter if it's producing good effects.

Tim asks why a 4% inflation target is not credible, and he may be right. Treasury's "free money" program could be tuned to generate any % inflation that is deemed desirable. You're not going to like this next measure, which is the design of a "braking mechanism" to control inflation. This would be a national value added tax. If inflation gets too hot, then raise the VAT rate to suck money out of the economy. Treasury could use the VAT revenue to redeem its free money bonds from the Fed, or to redeem its interest bearing bonds from the Fed.

This program should probably be firewalled off the normal Treasuries market so as not to disrupt the capital markets. So Treasury could not QE itself trillions of new free dollars to payout existing Treasury debt, as that would simply devalue all the Treasuries that people used their hard earned money to buy. But this program could be used to freeze open market Treasury debt a current levels. If Treasury can now create free money to fund its fiscal policy and operations, why borrow more of people's savings and pay them interest at the taxpayer's expense?

There are two kinds of things money buys, and 2 kinds of inflation (there are 3 things if bank capital is considered as a separate class of savings). Asset inflation happens when some people have too much savings, which also means other people have too much debt because our money originates as bank loans. When a lot of people have too much debt their ability to consume is reduced, which reduces the quantity of profitable productive investments available in the economy, so 'excess' savings is competing for too few investments, and this excess demand inflates the price of investment assets.

CPI inflation happens when consumers have too much spending money and there are not enough consumable goods for sale to absorb all the money, so the price of consumables rises to capture the available money. Normally this state of affairs would result in producers investing in expansion of their ability to produce goods, and once the new production comes online the amount of available goods would equal the amount of spending money and prices would come back down. But GDP would have increased to the higher level of producing and consuming. You get "economic growth".

The US is in an environment of asset inflation and CPI deflation. Consumers have less money to spend so producers' top line is falling: they are selling less so they are downsizing and producing less. But almost all the bank-credit money that was created as mortgages and car and other loans is still in the system. Some money is being removed slowly as borrowers pay down their bank loans, and as bank capital is being extinguished to cover loan losses. But much of that money is held by people as savings where it is contributing to very low interest rates and excessive demand for all kinds of investable assets.

To the extent that emerging markets have decoupled from the US there are profitable places to invest money in Asia and elsewhere, but with a diminished US consumer there are not a lot of profitable investments in the US outside of sectors paid for by government like pharmaceuticals and health related industries. So we see asset inflation, as too much savings chases too few profitable investments.

A program of free Treasury money would have 3 effects, distinguished by whose hands the money came into. When it comes into the hands of stressed borrowers the money would be used to pay down mortgages and other bank loans, and that money would be extinguished along with the bank debt so it would deflate debt levels and not contribute to any kind of inflation. Stimulus money that flows to savers would contribute to an increase in excess savings and asset inflation and low interest rates. Stimulus money that flows to spenders would contribute to CPI inflation where it would stimulate business profits and production and employment in the real economy.

A 4th effect could be achieved by giving money to States, who could use it to buy back their outstanding debt and at least remove the annual interest expense from their budgets. States with no debt could use the money to fund budgetary expenditures and reduce taxes. Free money should be given to States on a per capita basis. Winners would be rewarded by this measure and losers would be bailed out, which is the same thing that happens when you give stimulus checks to everyone. That's the idea. It's a "fair" method of bailing out the USA.

These effects are permanent, unlike normal Treasury borrowing and spending where stimulus today is countered by higher taxes tomorrow. If the government wants to deflate overinflated asset prices it could do so via a targeted asset tax to suck investment money out of the system. And as mentioned, CPI inflation can be readily controlled via an adjustable rate VAT. Eventually, once American private sector and State debt is down to safe levels and the economy is functioning at a stable level, the free money program could be ended. This is all simple arithmetic. It really is this simple to generate these effects.

Besides the money that flows to savers and exacerbates the excess savings problem that is keeping returns on investment so low, the free money stimulus check program would reduce total debt and contribute to the real economy. You have to give the money to everybody or else it becomes just another pork scheme where most of the benefit is absorbed by bureaucrats and politically favored interest groups. To get a truly economy wide benefit you have to give the checks to everyone.]]> http://seekingalpha.com/article/174640-the-king-canute-economy-governments-futile-attempt-to-stem-the-tide?source=feed#comment-771842 771842
In addition to the SUVs, millions of Americans bought houses that were way bigger and more luxurious than they could afford. Housing wealth was overconcentrated in these too-big-to-afford houses. Now the buyers are defaulting and the houses are empty. If instead of building 2400 square foot luxury houses America had built 1200 square foot affordable housing, there wouldn't have been such a catastrophic wave of defaults as we are seeing now. America built SUV houses. Americans, really, can only afford Nano houses.

When you buy something you are "commanding the resources of the economy". If some banker gives you a $600k mortgage then you can command the economy to build you a 2400 square foot luxury house. But most people lack the means to command that much of the economy. They cannot personally generate $600k of surplus value (i.e. income beyond what it costs them to eat and live) in order to repay the economy for that house. By making those unpayable mortgages available to too many people who lack the personal resources to repay, the US financial system allowed the gross overconcentration of housing wealth to be built and purchased.

This is a very serious misallocation of economic resources. There are now millions of big expensive houses in the US that nobody can afford to own. After the 1930s Depression many mansions were converted to apartments and other multifamily uses because there weren't enough rich people left who could afford that much house. If 2 families shared a 2400 square foot house they could probably afford to own it. If the problem is overconcentration of house, the obvious solution is dilution of house ownership by making duplexes or apartments out of houses that are too big for one family to afford.

I think cynicus economicus is right that world wealth is in a process of levelling. Asians can now afford a Nano house where previously they could only afford a shack. Americans can now afford a Nano house where previously they thought they could afford a McMansion. There are millions of US McMansions just waiting to be converted to affordable Nanos. King Canute should not expect to stand in the way of this evolution by maintaining the illusion that these are viable "single family" homes.]]> Sun, 22 Nov 2009 11:22:26 -0500
In addition to the SUVs, millions of Americans bought houses that were way bigger and more luxurious than they could afford. Housing wealth was overconcentrated in these too-big-to-afford houses. Now the buyers are defaulting and the houses are empty. If instead of building 2400 square foot luxury houses America had built 1200 square foot affordable housing, there wouldn't have been such a catastrophic wave of defaults as we are seeing now. America built SUV houses. Americans, really, can only afford Nano houses.

When you buy something you are "commanding the resources of the economy". If some banker gives you a $600k mortgage then you can command the economy to build you a 2400 square foot luxury house. But most people lack the means to command that much of the economy. They cannot personally generate $600k of surplus value (i.e. income beyond what it costs them to eat and live) in order to repay the economy for that house. By making those unpayable mortgages available to too many people who lack the personal resources to repay, the US financial system allowed the gross overconcentration of housing wealth to be built and purchased.

This is a very serious misallocation of economic resources. There are now millions of big expensive houses in the US that nobody can afford to own. After the 1930s Depression many mansions were converted to apartments and other multifamily uses because there weren't enough rich people left who could afford that much house. If 2 families shared a 2400 square foot house they could probably afford to own it. If the problem is overconcentration of house, the obvious solution is dilution of house ownership by making duplexes or apartments out of houses that are too big for one family to afford.

I think cynicus economicus is right that world wealth is in a process of levelling. Asians can now afford a Nano house where previously they could only afford a shack. Americans can now afford a Nano house where previously they thought they could afford a McMansion. There are millions of US McMansions just waiting to be converted to affordable Nanos. King Canute should not expect to stand in the way of this evolution by maintaining the illusion that these are viable "single family" homes.]]> http://seekingalpha.com/article/174461-if-u-s-stopped-issuing-treasuries-would-it-go-broke?source=feed#comment-769948 769948 You are not missing anything. When the government sells
Treasuries it is taking money out of the economy that was entirely put into the economy by way of bank loans or the purchase of bonds by banks. Treasuries are the government's way of borrowing savings from dollar holders. Treasury spends those savings back into the economy which keeps them circulating and contributing to people spending and producing.

A bank "loan" is actually a "deposit creation". A "deposit" is just a credit added to your account balance. So let's call this kind of money "bank credit money". People usually think "money" is Federal Reserve Notes, or the bank notes from other countries' central banks. This kind of money is called the "monetary base". We can just call it "cash".

Before QE all money originated as bank loans or as purchases of bonds by banks. Banks get cash by selling bonds to the bank note issuer (Federal Reserve, Bank of Canada, etc.). A bond is just an IOU, a formal promise to pay back whatever was lent. So a bank writes an IOU to the Fed and the Fed prints up cash to lend to the bank. With QE the Fed can create deposits in commercial bank accounts at the Fed by buying assets from them, like mortgages. So with QE the Fed is creating money just like regular commercial banks do. The banks are the Fed's "customers", and the Fed is lending them money against collateral assets just like regular banking. But the Fed has only created under $2 trillion which is a small fraction of bank credit money. So even if the QE money was being spent or lent into the economy, which it is not, it would not be very inflationary because there's just not enough of it.

So except for QE and bank purchases of government bonds, all money begins its life when somebody gets a bank loan. The borrowers of that money need to be able to earn the money back out of the economy to repay their loans. But if too much of the money ends up locked in financial markets like stocks, or held as reserves by foreign central banks, there is not enough left circulating for everybody to earn back to pay their bank loans.

I think that's where the US is at right now. New bank lending is not keeping pace with bank loan repayments so money supply is shrinking. Not enough people are willing and able to borrow and spend new money into the system. The problem is that there is not enough money in circulation to support the level of debt that must be repaid. The government can sell Treasuries to recirculate savings but that does not address all the US$ that is locked in financial and other markets where it does not circulate in the spend and produce economy.

So if the government simply creates deposits in its accounts to fund its spending, it will simply be adding dollars to replace the dollars that have been borrowed from banks and spent but were then removed from circulation by the people who received the spending. In the current environment the government could create and spend a lot of dollars before inflation started rising, as many recipients of these new dollars would use them to pay down their bank loans which would eliminate that money. ]]> Fri, 20 Nov 2009 20:55:44 -0500 You are not missing anything. When the government sells
Treasuries it is taking money out of the economy that was entirely put into the economy by way of bank loans or the purchase of bonds by banks. Treasuries are the government's way of borrowing savings from dollar holders. Treasury spends those savings back into the economy which keeps them circulating and contributing to people spending and producing.

A bank "loan" is actually a "deposit creation". A "deposit" is just a credit added to your account balance. So let's call this kind of money "bank credit money". People usually think "money" is Federal Reserve Notes, or the bank notes from other countries' central banks. This kind of money is called the "monetary base". We can just call it "cash".

Before QE all money originated as bank loans or as purchases of bonds by banks. Banks get cash by selling bonds to the bank note issuer (Federal Reserve, Bank of Canada, etc.). A bond is just an IOU, a formal promise to pay back whatever was lent. So a bank writes an IOU to the Fed and the Fed prints up cash to lend to the bank. With QE the Fed can create deposits in commercial bank accounts at the Fed by buying assets from them, like mortgages. So with QE the Fed is creating money just like regular commercial banks do. The banks are the Fed's "customers", and the Fed is lending them money against collateral assets just like regular banking. But the Fed has only created under $2 trillion which is a small fraction of bank credit money. So even if the QE money was being spent or lent into the economy, which it is not, it would not be very inflationary because there's just not enough of it.

So except for QE and bank purchases of government bonds, all money begins its life when somebody gets a bank loan. The borrowers of that money need to be able to earn the money back out of the economy to repay their loans. But if too much of the money ends up locked in financial markets like stocks, or held as reserves by foreign central banks, there is not enough left circulating for everybody to earn back to pay their bank loans.

I think that's where the US is at right now. New bank lending is not keeping pace with bank loan repayments so money supply is shrinking. Not enough people are willing and able to borrow and spend new money into the system. The problem is that there is not enough money in circulation to support the level of debt that must be repaid. The government can sell Treasuries to recirculate savings but that does not address all the US$ that is locked in financial and other markets where it does not circulate in the spend and produce economy.

So if the government simply creates deposits in its accounts to fund its spending, it will simply be adding dollars to replace the dollars that have been borrowed from banks and spent but were then removed from circulation by the people who received the spending. In the current environment the government could create and spend a lot of dollars before inflation started rising, as many recipients of these new dollars would use them to pay down their bank loans which would eliminate that money. ]]> http://seekingalpha.com/instablog/369683-kimball-corson/36010-why-the-economy-is-not-improving-much?source=feed#comment-764771 764771
But there is a limit to how far "more" can go. When everyone lives in a McMansion with 3 cars in the driveway, how much "more" consumption can we achieve? In a world of peak resources and increasing competition from emerging economies there are hard limits on "more" material goods.

So what happens to our income model when everything that everybody needs or wants to consume can be produced by robots working for OmniCorp? There are plenty of goods but NOBODY has any income to buy those goods. We are "infinitely" productive because no human labor is used to produce goods, but the only way we have for distributing incomes is by working and earning.

The goal of productivity gains is to either reduce employment or to produce "more" goods with stable employment. If having more becomes undesirable then productivity gains will cause decreasing employment. Decreasing employment causes decreasing incomes so you can very efficiently produce goods that nobody has any incomes to buy.

Marx already foresaw this effect of industrial productivity by the mid 1800s and advocated communism as an alternative to our work-for-money income model. Communism doesn't work because it removes all incentive to be productive so we can safely rule that out as a solution to the income distribution problem.

In the 1920s C.H. Douglas saw the same problem and developed the "social credit" system as a supplement to our capitalist income distribution system. Under Douglas' system the government would create (not borrow) and distribute money, to everyone, as their "social dividend" (Douglas also had a mechanism for removing that money from circulation once it had been spent on consumption). The idea was to put spending money into people's hands equal to the amount of goods their economy produced. I don't remember Douglas discussing anything like the US case where the people have been spending much more than their economy produces, subsidized by trade deficits, so that large wrinkle would need to be addressed.

Douglas saw that the extreme productivity of any worker in his era was not so much a result of that individual's own effort but was rather due to the worker's "cultural inheritance" of the productive infrastructure and accumulated technology of his culture. The worker on his own did not "earn" all of the output of his work, so the "surplus" would be distributed via the social dividend checks.

This is just a somewhat more formalized version of what a modern economy already does. People who have never produced a bushel of grain or a barrel of oil or a piece of lumber or any other physical thing, nevertheless somehow get money to buy all those things from the people who do produce them. The non-producers are paid money to purchase the "surplus" output of the producers. But in our system non-producers either get money as earned income for working in the public sector or service industries, or they get it from redistributionist government welfare programs.

Kimball suggests a negative income tax as one way of addressing the income distribution problem. That would be similar to Douglas' social dividend checks. A renewed estate tax is one way to fund the negative income tax, but if people refuse to accept taxation as a way to get those vaults of savings back into circulation then I would go with Douglas and say the government should simply create the money then tax it back out of the system once it has been spent.]]> Tue, 17 Nov 2009 23:37:54 -0500
But there is a limit to how far "more" can go. When everyone lives in a McMansion with 3 cars in the driveway, how much "more" consumption can we achieve? In a world of peak resources and increasing competition from emerging economies there are hard limits on "more" material goods.

So what happens to our income model when everything that everybody needs or wants to consume can be produced by robots working for OmniCorp? There are plenty of goods but NOBODY has any income to buy those goods. We are "infinitely" productive because no human labor is used to produce goods, but the only way we have for distributing incomes is by working and earning.

The goal of productivity gains is to either reduce employment or to produce "more" goods with stable employment. If having more becomes undesirable then productivity gains will cause decreasing employment. Decreasing employment causes decreasing incomes so you can very efficiently produce goods that nobody has any incomes to buy.

Marx already foresaw this effect of industrial productivity by the mid 1800s and advocated communism as an alternative to our work-for-money income model. Communism doesn't work because it removes all incentive to be productive so we can safely rule that out as a solution to the income distribution problem.

In the 1920s C.H. Douglas saw the same problem and developed the "social credit" system as a supplement to our capitalist income distribution system. Under Douglas' system the government would create (not borrow) and distribute money, to everyone, as their "social dividend" (Douglas also had a mechanism for removing that money from circulation once it had been spent on consumption). The idea was to put spending money into people's hands equal to the amount of goods their economy produced. I don't remember Douglas discussing anything like the US case where the people have been spending much more than their economy produces, subsidized by trade deficits, so that large wrinkle would need to be addressed.

Douglas saw that the extreme productivity of any worker in his era was not so much a result of that individual's own effort but was rather due to the worker's "cultural inheritance" of the productive infrastructure and accumulated technology of his culture. The worker on his own did not "earn" all of the output of his work, so the "surplus" would be distributed via the social dividend checks.

This is just a somewhat more formalized version of what a modern economy already does. People who have never produced a bushel of grain or a barrel of oil or a piece of lumber or any other physical thing, nevertheless somehow get money to buy all those things from the people who do produce them. The non-producers are paid money to purchase the "surplus" output of the producers. But in our system non-producers either get money as earned income for working in the public sector or service industries, or they get it from redistributionist government welfare programs.

Kimball suggests a negative income tax as one way of addressing the income distribution problem. That would be similar to Douglas' social dividend checks. A renewed estate tax is one way to fund the negative income tax, but if people refuse to accept taxation as a way to get those vaults of savings back into circulation then I would go with Douglas and say the government should simply create the money then tax it back out of the system once it has been spent.]]> http://seekingalpha.com/article/173826-the-state-of-banking-banking-on-the-state?source=feed#comment-764739 764739
The too big to fail banks are pleading that their size (and dominance) is necessary for conducting global business and realizing economies of scale. While it may be true that this strategy increases the scale of profits for these banks in rising economies, the strategy conversely increases the scale of losses during downturns. And because all these banks have 'diversified' into all asset classes it cannot be the case that some of them specialized into lucky assets while others specialized into losers. The whole megabanking system rises and falls in synch, with the profits privatized on the way up and the losses socialized on the way down. There are no big "lucky banks" to pick up the assets of failed big 'loser banks' in a receivership sale, which makes an orderly dissolution of big banks difficult to do, so all the big banks are propped up at taxpayer expense.

The US has over 8000 banks. If the too big that failed had been dissolved, or if they are going to be dissolved as the mortgage crisis and their insolvency worsens, then America's 8000 smaller banks can pick up the pieces and the US banking system will be structured more like the decentralized and truly diverse hedge fund industry. This looks to me like a good way to start the needed reform of this dangerously out of control megabanking system.]]> Tue, 17 Nov 2009 22:12:28 -0500
The too big to fail banks are pleading that their size (and dominance) is necessary for conducting global business and realizing economies of scale. While it may be true that this strategy increases the scale of profits for these banks in rising economies, the strategy conversely increases the scale of losses during downturns. And because all these banks have 'diversified' into all asset classes it cannot be the case that some of them specialized into lucky assets while others specialized into losers. The whole megabanking system rises and falls in synch, with the profits privatized on the way up and the losses socialized on the way down. There are no big "lucky banks" to pick up the assets of failed big 'loser banks' in a receivership sale, which makes an orderly dissolution of big banks difficult to do, so all the big banks are propped up at taxpayer expense.

The US has over 8000 banks. If the too big that failed had been dissolved, or if they are going to be dissolved as the mortgage crisis and their insolvency worsens, then America's 8000 smaller banks can pick up the pieces and the US banking system will be structured more like the decentralized and truly diverse hedge fund industry. This looks to me like a good way to start the needed reform of this dangerously out of control megabanking system.]]> http://seekingalpha.com/article/173855-gordon-nixon-reform-finance-but-don-t-pile-on?source=feed#comment-764582 764582
Gordon Nixon understands the benefits of appropriate financial regulation whereas his US counterparts, even though they are still on life support, want us to believe they can look after themselves. So outraged Americans and reenergized regulators are in overkill mode. If failed bankers would at least admit they are partly at fault, if they were even a little bit repentant instead of back to bonus filled happy days, maybe the regulatory sledgehammer that some are threatening would seem excessive.

But arrogance that is maintained in the face of failure brings its woes upon itself. You can't teach caution and prudence. These are the fruits of experience, lessons taken, remembered and lived by. Regulation is no replacement for human beings intelligently pursuing a profitability that is enduring rather than moonshot and catastrophe. Banking is supposed to be boring. Canada seems to 'get' that.]]> Tue, 17 Nov 2009 20:46:10 -0500
Gordon Nixon understands the benefits of appropriate financial regulation whereas his US counterparts, even though they are still on life support, want us to believe they can look after themselves. So outraged Americans and reenergized regulators are in overkill mode. If failed bankers would at least admit they are partly at fault, if they were even a little bit repentant instead of back to bonus filled happy days, maybe the regulatory sledgehammer that some are threatening would seem excessive.

But arrogance that is maintained in the face of failure brings its woes upon itself. You can't teach caution and prudence. These are the fruits of experience, lessons taken, remembered and lived by. Regulation is no replacement for human beings intelligently pursuing a profitability that is enduring rather than moonshot and catastrophe. Banking is supposed to be boring. Canada seems to 'get' that.]]> http://seekingalpha.com/article/173572-how-can-the-government-reduce-unemployment?source=feed#comment-762992 762992
The government could pay for or subsidize the conversion of vehicles to natural gas. This provides a new market for the new supplies of US shale gas while eliminating some of the demand for imported oil. It also provides labor intensive work manufacturing and installing the vehicle conversion kits and the at home refueling kits. Pickens would approve.

Why will the Chevy Volt cost $40k? Is it all the R&D recovery? Does it really cost that much to put an electric motor and a battery on a car chassis? GM already had a popular electric car in the 1990s so they didn't have to reinvent the wheel. Government Motors could put some money into making a domestic electric car affordable, another way of reducing oil imports. Of course Ford will probably come out with a superior and affordable electric car while GM diddles with the overpriced Volt so this may be a nonstarter.

There are lots of useful places the government could spend money to put people back to work. The best way to find those places is to ask people. Governments seem to believe that if politicians or bureaucrats didn't think of an idea then there must be something wrong with it. The opposite is true. Ask people. Ask them what improvements could be made if there was money to spend where they live and work. People know stuff. Ask them.]]> Mon, 16 Nov 2009 21:46:49 -0500
The government could pay for or subsidize the conversion of vehicles to natural gas. This provides a new market for the new supplies of US shale gas while eliminating some of the demand for imported oil. It also provides labor intensive work manufacturing and installing the vehicle conversion kits and the at home refueling kits. Pickens would approve.

Why will the Chevy Volt cost $40k? Is it all the R&D recovery? Does it really cost that much to put an electric motor and a battery on a car chassis? GM already had a popular electric car in the 1990s so they didn't have to reinvent the wheel. Government Motors could put some money into making a domestic electric car affordable, another way of reducing oil imports. Of course Ford will probably come out with a superior and affordable electric car while GM diddles with the overpriced Volt so this may be a nonstarter.

There are lots of useful places the government could spend money to put people back to work. The best way to find those places is to ask people. Governments seem to believe that if politicians or bureaucrats didn't think of an idea then there must be something wrong with it. The opposite is true. Ask people. Ask them what improvements could be made if there was money to spend where they live and work. People know stuff. Ask them.]]> http://seekingalpha.com/article/173618-quantitative-easing-a-critique?source=feed#comment-762954 762954
What banks are NOT doing with the money is leveraging it up by lending to overindebted American businesses and households. So the "money multiplier" impact of adding these excess reserves is zero.

I think the Fed knows the US private sector is incapable of taking on and servicing more debt, or profitably investing new loans, even if the semi-solvent banking system is willing to risk further balance sheet damage by making new loans. So the Fed provision of this money is just a straightforward measure to help the banks earn profits to repair their balance sheets.

Insofar as banks use this money to earn trading profits, the American citizen on the losing end of the trade is paying "taxes" to rebuild the banks' balance sheets. Insofar as banks use this money to 'invest' in Treasuries, it is taxpayers who will be paying the interest that becomes the banks' 'profits'. So this is just another way for the Fed to transfer money from American taxpayers to insolvent banks.

I think it would have been better to let some or all of them fail in an orderly resolution. Wealth would be redistributed in the capitalist way, from losers to winners. Maybe at the beginning of the panic it was necessary to prop up the insolvent banks while the resolution mechanisms were being put in place. Now that the panic is over it is a good time to revisit the orderly unwinding of the too big that have failed.]]> Mon, 16 Nov 2009 21:01:13 -0500
What banks are NOT doing with the money is leveraging it up by lending to overindebted American businesses and households. So the "money multiplier" impact of adding these excess reserves is zero.

I think the Fed knows the US private sector is incapable of taking on and servicing more debt, or profitably investing new loans, even if the semi-solvent banking system is willing to risk further balance sheet damage by making new loans. So the Fed provision of this money is just a straightforward measure to help the banks earn profits to repair their balance sheets.

Insofar as banks use this money to earn trading profits, the American citizen on the losing end of the trade is paying "taxes" to rebuild the banks' balance sheets. Insofar as banks use this money to 'invest' in Treasuries, it is taxpayers who will be paying the interest that becomes the banks' 'profits'. So this is just another way for the Fed to transfer money from American taxpayers to insolvent banks.

I think it would have been better to let some or all of them fail in an orderly resolution. Wealth would be redistributed in the capitalist way, from losers to winners. Maybe at the beginning of the panic it was necessary to prop up the insolvent banks while the resolution mechanisms were being put in place. Now that the panic is over it is a good time to revisit the orderly unwinding of the too big that have failed.]]> http://seekingalpha.com/article/173479-should-the-federal-reserve-be-doing-more?source=feed#comment-762892 762892 "There is simply nothing to suggest the Fed is waiting for anything other than the first chance to "normalize" policy in the traditional sense. That may still be a long time from now, but is nonetheless the shore the Fed seeks as they attempt to navigate out of unconventional policy, not deeper in."

I get the distinct sense that all the Fed's talk of exit strategies is targeted at a Chinese audience who is worried about the value of their $ holdings. The Fed is assuring America's debt holders that they will not devalue the dollar with excessive QE or other expansive policies.

However, fulfillment of the "full employment" aspect of the Fed's mandate clearly requires measures beyond lowering interest rates to zero in an environment where the private sector is in the process of reducing debt. Even at this lowest possible interest rate it still takes the additional fiscal impetus of $4000 cash for clunkers and $8000 housing gifts to get people to take on more debt and spend new money into the economy. The private sector has pretty much reached its debt ceiling so credit easing can have little if any effect on stimulating renewed borrowing and spending by the private sector.

In a balance sheet recession like we are in the private sector is reducing spending which shrinks GDP and employment and incomes, and reducing debt which shrinks household and bank balance sheets. It is financially necessary and good that the private sector is repairing its balance sheets, but it is economically devastating.

The process of balance sheet repair will take 7 to 15 years if Japan's example is applicable. During this time the only way to prevent GDP, and the economy, and employment, from collapsing in a downward spiral is for government to become borrower and spender of last resort.

Every dollar that is owed as bank "debt" by some person is held as "savings" by some other person. But the savers are not spending. They are hoarding and/or investing. This is prudent of them on the micro level, but devastating for the economy at the macro level.

The savings are not making their way back into the economy where they can be earned as incomes by businesses and employees. If those businesses and workers have debts then they need to be able to earn back the money they borrowed and spent in order to repay their debts. If they can't earn and repay they will default and even more firms and households will go bankrupt. The economy declines further with even less employment and incomes and you wind down to an economic stalemate where savers have all the money and spenders have all the debt and money does not flow between them to activate the economy.

It would be wrong to try to compel savers to spend so there has to be some alternate way to get money into the producing and consuming, selling and buying economy. During periods of credit expansion new money is constantly injected into the economy by private sector borrowing and spending/investing.

But the private sector is tapped out and repaying debt so we are in a period of credit contraction that reduces M rather than increases it. And V has collapsed because anyone who sells something does not immediately use the money to restock inventory or otherwise spend it on economic goods. They hoard it or use it to pay down their own debt.

So the options are:

1. Do nothing. Let the downward spiral of credit contraction, economic contraction and increasing household and business bankruptcy continue until the economy reaches a static condition at a much reduced level of GDP and employment. Of course this decimates the tax base so either taxes on wealth and incomes has to skyrocket or SS, Medicare, unemployment benefits and all other public sector welfare schemes, and public sector employment and pensions, have to be drastically cut or eliminated.

2. The government can take over the role of borrower and spender for the duration of the balance sheet repair period to prevent GDP from collapsing. If there are not enough private savings made available for the government to borrow then Treasury and the Fed cooperate to QE as much new money as is necessary to stabilize GDP. Government debt would rise to Japanese levels because we are in the same predicament Japan was in when its massive credit bubble burst.

Richard Koo provides a thorough explanation of this kind of balance sheet repair process after a burst bubble.

seekingalpha.com/artic...

As John Mauldin has been explaining, there are no good choices, just less worse ones. I think option #2 above is better than the Greater Depression you get from option #1. Both options have unappealing consequences, but we are way past the point where it is possible to escape bad consequences.]]> Mon, 16 Nov 2009 19:52:07 -0500 "There is simply nothing to suggest the Fed is waiting for anything other than the first chance to "normalize" policy in the traditional sense. That may still be a long time from now, but is nonetheless the shore the Fed seeks as they attempt to navigate out of unconventional policy, not deeper in."

I get the distinct sense that all the Fed's talk of exit strategies is targeted at a Chinese audience who is worried about the value of their $ holdings. The Fed is assuring America's debt holders that they will not devalue the dollar with excessive QE or other expansive policies.

However, fulfillment of the "full employment" aspect of the Fed's mandate clearly requires measures beyond lowering interest rates to zero in an environment where the private sector is in the process of reducing debt. Even at this lowest possible interest rate it still takes the additional fiscal impetus of $4000 cash for clunkers and $8000 housing gifts to get people to take on more debt and spend new money into the economy. The private sector has pretty much reached its debt ceiling so credit easing can have little if any effect on stimulating renewed borrowing and spending by the private sector.

In a balance sheet recession like we are in the private sector is reducing spending which shrinks GDP and employment and incomes, and reducing debt which shrinks household and bank balance sheets. It is financially necessary and good that the private sector is repairing its balance sheets, but it is economically devastating.

The process of balance sheet repair will take 7 to 15 years if Japan's example is applicable. During this time the only way to prevent GDP, and the economy, and employment, from collapsing in a downward spiral is for government to become borrower and spender of last resort.

Every dollar that is owed as bank "debt" by some person is held as "savings" by some other person. But the savers are not spending. They are hoarding and/or investing. This is prudent of them on the micro level, but devastating for the economy at the macro level.

The savings are not making their way back into the economy where they can be earned as incomes by businesses and employees. If those businesses and workers have debts then they need to be able to earn back the money they borrowed and spent in order to repay their debts. If they can't earn and repay they will default and even more firms and households will go bankrupt. The economy declines further with even less employment and incomes and you wind down to an economic stalemate where savers have all the money and spenders have all the debt and money does not flow between them to activate the economy.

It would be wrong to try to compel savers to spend so there has to be some alternate way to get money into the producing and consuming, selling and buying economy. During periods of credit expansion new money is constantly injected into the economy by private sector borrowing and spending/investing.

But the private sector is tapped out and repaying debt so we are in a period of credit contraction that reduces M rather than increases it. And V has collapsed because anyone who sells something does not immediately use the money to restock inventory or otherwise spend it on economic goods. They hoard it or use it to pay down their own debt.

So the options are:

1. Do nothing. Let the downward spiral of credit contraction, economic contraction and increasing household and business bankruptcy continue until the economy reaches a static condition at a much reduced level of GDP and employment. Of course this decimates the tax base so either taxes on wealth and incomes has to skyrocket or SS, Medicare, unemployment benefits and all other public sector welfare schemes, and public sector employment and pensions, have to be drastically cut or eliminated.

2. The government can take over the role of borrower and spender for the duration of the balance sheet repair period to prevent GDP from collapsing. If there are not enough private savings made available for the government to borrow then Treasury and the Fed cooperate to QE as much new money as is necessary to stabilize GDP. Government debt would rise to Japanese levels because we are in the same predicament Japan was in when its massive credit bubble burst.

Richard Koo provides a thorough explanation of this kind of balance sheet repair process after a burst bubble.

seekingalpha.com/artic...

As John Mauldin has been explaining, there are no good choices, just less worse ones. I think option #2 above is better than the Greater Depression you get from option #1. Both options have unappealing consequences, but we are way past the point where it is possible to escape bad consequences.]]> http://seekingalpha.com/instablog/98115-john-lounsbury/35667-the-lloyd-s-prayer-version-2-from-mish?source=feed#comment-760454 760454 Sat, 14 Nov 2009 17:18:53 -0500