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  • Concerns Related To U.S. GDP Growth [View article]
    What happened to the 'investment' component of the GDP from 2007 to 2012?

    I like to take the 'I' component out the the GDP and divide it by the GDP....becasue ultimately the ability to spend on the rest of the GDP comes from the 'I' component. Last I checked, the I/GDP of the U.S. was under 14%...while China was about 50%.

    My problem with GDP as a metric for growth is that it is not a metric for measures spending from an unsound aggregation of both private and government spending that assumes the Keynesian approach to demand management as the basis of economics. Gowth must be seen as something more than spending. Real Growth must include an increase in the value of aggregate assets relative to debt, with assets being defined as possessory rights to future income flows. The GDP does not measure does not even consider the role of debt with spending...are you really growing when you borrow and spend the debt on cheetos, beer, cigaretts and welfare subsidies?
    May 15, 2013. 12:02 PM | Likes Like |Link to Comment
  • Dr. Marc Faber's Gloomy Market Outlook [View article]
    Agree with most of your comment here and in previous articles. I think your assumption that banks behavior ('Conservative,' unwilling to lend) is misplaced as an explanation of excess liquidity on the Fed balance sheet. RR and ER on the balance sheet is independent of bank policy and instead dependent on monetary policy in purchase of assets. Bank lending policy is credit demand driven which is a function of fiscal context and not materially effected by supply of base money on the Fed balance sheet. Demand for credit must be created in a fiscal context that is positive for possession of profits, investment and cannot be created by supply of base money at the Fed.
    May 15, 2013. 11:38 AM | Likes Like |Link to Comment
  • Monetary Base, Deflation And Investment Strategy [View article]
    Credit expansion is limited by leverage ratios applied to collateral assets under current underwriting standards. The decline in the value of collateral assets since 2008 and the lower leverage ratios reduce the supply of credit whether banks are "willing to take risks" or not. Inflation itself depends on a process of increasing leverage ratios on collateral assets which in turn drives increased 'value' in those collateral assets and is characterised by an accelerating flow of capital from and out of financial assets and into tangible collateral assets. The context for this process depends on fiscal policy and cannot be driven by monetary supply or interest rate manipulation. The issue is not really about bank's willingness to lend; of course they would lend if they could underwrite the loans without compromising thier capital base.
    May 13, 2013. 11:05 AM | 1 Like Like |Link to Comment
  • When the Bond Market Breaks, Or the True Cause of Hyperinflation [View article]
    Yoleao, thanks for bringing back this old article and discussion thread that I had forgotton about. I think the reason that inflation did not take hold during the past three years even after the dramatic and unprecedented expansion of the Fed balance sheet is that there is no transmission mechanixs between the expansion of the money supply by the Fed and the translation of that money supply into private credit formation. It is the private credit formation that is the velocity necessary for inflation to take hold. The QE experiments do push money around in different asset groups so that there has been price volatility in bonds, commodities, equities and sovereign currencies, but there has been no translation of increased money supply into a broad increase in the price of goods and services in our domestic economy. Inflation is always characterised and is recognizable as a process where capital flows out of financial assets and into tangible assets. The flow of capital is facilitated by increasing leverage ratio's on collateral assets that provide the basis of private credit formation. This process of increasing leverage ratios making private debt formation expand is the basis of monetary inflation and distinct from spot price increase that is caused by other market factors. If you understand that you can see that inflation cannot take hold until collateral asset prices are stabilized and perhaps increaseing and until private credit is expanding. This context cannot be created by monetary policy. Only fiscal policy can create the future expectations to increase demand for credit and investment in assets that can serve as collateral. The Fed has tried to dominate that credit expansion process in the face of private sector deleveraging. It appears by the failure of the Fed to drive private credit expansion through increased base money supply, that private credit expansion is demand driven and nut driven by base money supply or by interest rate manipulation. This obvious becuase the base money created by the Fed never leaves the banking system. The Fed buys income producing asseets (Treasuries, RMBS, MBS) from the banks and the banks get cash deposit credit to thier accounts. The banks simply turn around and put the new money in their Fed Reserve account as excess reserves. The new money does not really leave the Fed. It cannot enter the private sector economy until it is drawn out in a demand for private credit formation.

    There is a distiinction that must be made between Hyperinflation and inflation. Inflation as a process requires a currency that is operating along with a solvent sovereign bond market. Inflation requires private credit formation so it implies a leveraging, not a deleveragin economy. On the other hand the author of the article above properly defins Hyperinflation as a broken soverieng bond market. You must see that there can by no inflation where there is a broken bond market that produces Hyperinflaiton. Hyperinflation is what happens to a currency when the soverieng sponsor of that currency is bankrupt and can no longer raise third party investment in its bonds. It is the bonds of the Sovereign that back up the currency (non interest bearing demand credit). If the bonds are no good then the currency is no good. This outcome is profoundly deflationary in that all financial assets and fixed tangible assets that cannot be taken out of the juristiction become almost worthless. Sure gold and foreign currencies go up but your house, hour car, your silver tea set, all lose value relative to the cost of necessities....that is not infation...that is deflation.
    Sep 24, 2012. 03:02 PM | Likes Like |Link to Comment
  • The Unavoidable U.S. Reality: The Upcoming Economic Collapse [View article]
    James, your whole discussion hangs on the legitimacy of GDP as a proper measure of Growth. I suggest that it is terribly flawed, was at its creation, and does not measure real growth. The metric was developed by Simon Kuznets, a Russian born economis working for the National Bureal of Economic Research. He sought to create a metric to measure both private and public economic output in one metric. This was done in 1934 and Kuzets accepted and assumed the legitimacy of the social and Keynesain economic theory of the time. As a consequence he created an aggregate consumption metric that merged private consumption and government consumption by assuming that they were exogenous.

    The problem with the metric is that consumption is not the proper measure of growth and increase of real wealth and beyond that, the relationship between government spending and private spending is endogenous and not exogenous.

    There is a feed back mechanism between government spending and private investment which is waved aside in Kuznet's Keynesain construction and in your analysis. By the way your analysis is solidly neo-Keynesian and is not at all a classical economic construct as you label it.

    From a production point of view increased government spending funded by debt and maintained by deficit spending reduces private investment because it implies higher future taxes on profits. In addition it matters very much how moeny is spent in both the private and public sectors. You cycle theory is too general to be useful or accurate. The idea that government spend on investment and make malinvestment is utopian and history shows it is not what happens.

    A proper metric to measure the real 'growth' of an nation would not include government spending at all. Such spending is of course ultimately dependent on the expansion of private production which in turn is dependent on private investment. If you look at the GDP over time you will see that the part of the GDP that is government spending has grown and the part that is private investment has declined. The decline in the percent of GDP attributable to private investment corresponds with the decline in real income in the U.S. Dramatically, real personal income fell between 2002 and 2006, even before the curren crises...even though the GDP rose. If you look back to the 1950's you will see that private investment made up 50% of the it around 12%....and alarmingly is the part that is declining the most right now. China's investment part of its GDP is 55% today. I suggest that economic well being and real growth that implies higher personal income and a higher standard of living is better measured by GDP/I (private Investment).

    It is a fraud to sugges that you can simply increase government spending on anything, which of course would raise the GDP and then claim on spacious historical anaylsis that the rise in the GDP itself defines and creates growth. It is that kind of thinking that has created the befuddlement of the government and economic policy leaders today. You feed right into it.
    Jun 13, 2012. 10:17 AM | 6 Likes Like |Link to Comment
  • Correcting Robert Samuelson On Japan And Deflation [View article]
    Your statement, "The problem with deflation is simply that the inflation rate is too low" is a tautology; not an explanation. Of course the two process descriptions are different ways of saying the same thing. If this is your inflation explanation that differentiates you from Samulson then you merely demonstrate that neigher of you have a clue about how the process of deflation or inflation actually works and how the process is transmitted to the real economy in ways that can be measured. Why do you think interest rates are low? What is the relationship between money supply and interest rates and inflation or deflation that can be measured. Is there a transmission mechanism between expansion of base money or interest rate manipulation and general price change in the real economy? What is that transmission mechanism and how does it work? What is the role of credit in the process of deflation or inflation? Is there a difference between formation or reduction of private credit and government credit with regard to the processess of deflation or inflation? What is meant by the velocity of money and how does this concept interact with inflation or deflation? these are the questions that must be answered if you would explain how monetary policy effects these processess. Do you really think that suggesting inflation expectations will rise if the fed sets an inflation target for its base money supply open market operations, and that this will magically become self-fullfilling (how?), or that if you say low inflation causes deflation, that have explained anything, really? These statements are as useful as a 'cargo cult' belief that passing airplanes will bring rain.
    Mar 13, 2012. 10:27 AM | Likes Like |Link to Comment
  • The 'High Oil Prices = Recession' Fallacy [View article]
    On the issue of inflation and its relationship to money supply you wrote, "What causes price inflation is an expansion of money supply (and a desire of people to spend it, often quickly). " Your parenthetical qualifier is interesting and marks a clear departure from the orthodoxy of the Quantity Theory of Money. Certainly this was not Freidman's formulation as his full quote had a different qualifier. Freidman actually wrote, "Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than output."

    I think that Freidman allowed for some sense that the effect of the supply of money was related somehow to the rate of production. I wonder what you mean by adding your paraenthetical qualifier.

    I would suggest that inflation is the effect of an acceleration of private credit formation. The effect of money supply in that case depends on how money supply in turn effects private credit formation. I don't think an increase in money supply by itself has any transmission mechanism to create inflation if private credit is contracting. Stated differently, the supply of money does not create the demand for credit, and without the demand for underwritable private credit there can be no general price inflation. The only way you can salvage the usefulness of the Quantity Theory of Money then is if you in turn defined money as credit.
    Mar 2, 2012. 04:38 PM | Likes Like |Link to Comment
  • Is This Recovery? Part II [View article]
    Great Article Jeff, both I & II. You have your mind around this better than anyone I know or read...except me of course. I won't comment now because all I would add is nuance, nits and mechanics and that can wait...I think you have it exactly right in your conclusions. Thanks for putting it together so well.
    Feb 16, 2012. 12:05 PM | Likes Like |Link to Comment
  • A Brief Guide To The Euro Crisis: It's A Mess And It's Not Over [View article]
    Complete, throrough and accurate analysis of the situation as usual Jeff. I agree with your analysis.

    I think the near term trigger point is the ability to attract new private money to the scheme. The analogy is the China Buffet (Buffett?) coming in to show confidence as happened repeatedly on Wall the first crow comes down to the dump to see if its all clear and the flock follows long as the first crow does not get shot.
    Oct 28, 2011. 11:59 AM | 1 Like Like |Link to Comment
  • Is The Real Estate Market Turning Around? [View article]
    Purhaps I should have read newhomesnha more carfully. Now I understand your comment! Its a brokerage commission come on. Sorry, I thought you were dissing appology for misunderstanding...not that you can't diss me if you have a good reason!

    I thought your original article was great back in 2010...I just read it again...its still valid and it now shows that you were right. That's why I follow your thoughts.
    Jun 20, 2011. 04:52 PM | Likes Like |Link to Comment
  • Is The Real Estate Market Turning Around? [View article]
    Why, you don't think a rebate on a new house allows a purchaser to use more leverage? You don't think that the cost of the rebate could not be used to discount the sale price instead?. I can understand that you might disagree, but if you bother to respond, I would expect something more constructive. 'Spam,'...really?

    I know you teach real estate as an adjunct in a city college, and I respect that, but I know something about real estate too. I am qualified as an appraiser, a had a brokers license, and I have experience developing land into residential lots, financial builders and I consulting on RTC portfolio bids. I don't think I deserve the tenor of your comment and I must say I am surprised by it...especially in this thread has been dormant for so long.
    Jun 20, 2011. 04:29 PM | Likes Like |Link to Comment
  • Is The Real Estate Market Turning Around? [View article]
    I was raised to believe that you don't get something for nothing. If the seller can offer a rebate; then he can offer a discount. The rebate come-on just allows you to increase the leverage on an inflated purchase price basis that is likely to drop in the future...sort of like paying the rebate back after you over pay for the house.
    Jun 20, 2011. 12:30 PM | Likes Like |Link to Comment
  • The Economy Is Sliding Into a Stagflationary Spiral [View article]
    T. Boone, what notion of inflation do you use to suggest that inflation and asset deflation can take place at the same time? I understand slow growth and high unemployment...really different sides of the same coin. If you define inflation as entirely monetary, a la Freidman, then you cannot have the effect of asset deflation. If you simply mean that some prices go up while asset prices decline, then you must mean that inflation is not a pervasive monetary process that increases all prices generally.

    The way I look at the mechanics of the process is that 'monetary inflation,' casued by supplying increased base money such that money velocity in the real economy accelerates, can only manifest where private demand for credit is expanding. Without the private demand for credit expansion the increased money supply is just pushing on a string, and so the base money simply pools in the banking structure and never produces the real economic velocity that is manifest as general price change... that can be measured in price change indexes. Shure it creates economic distortions, and opposing tensioins in a complex global economy, but the energy that manifests as inflation is not focused...I suppose such energy builds in the system and makes dangerous distortions in different ways, especially when you consider that the increase in sovereign debt being incurred as part of the base money expansion, but the distortion does not manifest as inflation in those economies where credit is not expanding.

    If you look at what really happens with capital in an infationary cycle, as occurred famously in the 1970's, you can see that capital flowed from financial assets into tangible assets. Demand for private credit expanded through that whole inflationary period, and leverage ratios increased on collateral assets. The value of collateral assets inflated, facilitating the general inflation by providing the underwriting basis for the expanding credit...which is really what 'money velocity' is.

    So, if presently collateral assets are deflating, and there is no private demand for credit that can be supported by underwriting devalued assets, then how can their be general inflation? How can their be any 'velocity'?
    May 20, 2011. 10:19 AM | 3 Likes Like |Link to Comment
  • The Economy Is Sliding Into a Stagflationary Spiral [View article]
    Jeff, you and I agree on a lot, but there is enough in your post here that we disagree on to say that we disagree here. I think your post was ambitious and the disperate data charts you cobbled together all had different issues that need adjusting and explaining...coming from so many different sources. I will not parse that out however, too tedious. I do respect the scope of your article and your grasp of all the issues.

    Nonetheless, my opinion remains that you conflate too many issues and cite so many 'facts' that do not hold together to tell one story only.

    I get that you describe a condition of stagflation..inflation with slow or no growth. I get that you think the cause is expansion of money supply by the Fed as manifest in QEII. I think the stagflation is short respite in a continuing decline and will ultimately be seen as deflationary. Asset deflation.

    I suggest that interest rates began to rise on the announcement of QEII last August when equities were sliding, and interest rates have been higher this whole period becuase of it. The money supply increase of QEII did not cause inflation because the money never left the aggregate banking system. As QEII ends, I expect interest rates to they have been doing since the Barnanke made it clear there would be no QEIII. The main effect of QEII has been to prop up equities and emerging market growth along with driving inflation in emerging markets through carry trade on our reserve currency. As QEII ends, equities will decline and money will flow into treasuries, even as the Fed withdraws its volume of purchases. Assets will not inflate in the U.S., but will continue to decline and deleverage. Emerging market growth will slow. Sovereign credit markets will deteriorate, including emerging market debt. PIGG insolvency in the EU will get worse slowing EU growth. The Mid East will continue in chaos. Energy and commodity prices will generally decline eratically with volatility thrown by geopolitical events. Inflation will not be the problem.
    May 18, 2011. 03:55 PM | Likes Like |Link to Comment
  • The Economy Is Sliding Into a Stagflationary Spiral [View article]
    Oh Jeff, I have been away from your comments...for many weeks now, tending to business and stuff...increased metal prices eroding gross margin and gobbling free cash flow like the mummy of ancient pac man wakened by the curse of the ppi...makes work for poor blokes who seek profits...must re-engineer pricing and seek gold in neglected scrap. But there have been some pleasures...another chance to view the beatnick of Neil Young, so loud for one man, shaking the screws from the railings and the custom buttons on the blue blazers and blue jeans so insecure in the aisles of Avery Fisher Hall...and fried chicken at the Loveless Cafe, tacos and margaritas in Laguna and Chapulines at Pujol Enrique Olvera in Mexico City. Reading your latest tome Jeff, I think you need a vacation.

    Its good based upon the crap that is usually available, but it is not your best. You know, like the rappers say, I have 'mad love' for your opinion, but you could don't really have it all togehter here.

    You should not conflate supply demand price increase with the effect of monetary inflation in your understanding of 'inflation.' Inflation by money is systemic ...and the mechanism of such monetary inflation requires a expanding private credit to manifest in measurable price change. Price change volatility is also, sperately and indirectly, caused by temporal imbalance in supply and demand which, if properly and dynamically understood, is exascerbated by prior inconsistent monetary policy discouraging capital from long cycle investment that otherwise would have created capacity in supply that could have adjusted quicker to reduce and react to demand volatility. So, we are victimized both by our past and the mistakes of our present....and of course, most importantly, by our estimations of our mistakes in the futue.

    Your assessment of the horrorible distortion of the establishment understanding of the GDP metric is confused. You are right and special to notice the problem but you do not offer a resolution or even a work around. The problem with that uniquely and subliminaly seductive keynesian metric is that it is understood by those who have been over educated by the stupid into a state of tranqualized obviousness such that they accept the conflation, with comfortable idiocy, of the ideas of consumption, investment and government spending... as if they were all the same!....and could be thought of as growth itself!...really? Common Jeff, which one of those variable has anything to do with real growth...and what is the realtionship betwee growth and wealth? I get monetary illusion and how it can be confused with growth...but the distinction between what passes for growth and real wealth demands a focus on assets.

    I applaud your emphasis on production..but I have to ask...procuction of what...if we make a lot of cheetos, is it the same as making a lot of software? The way I look at it is that wealth itself is measured and defined as the present value of the prossessory right to a future income stream. Properly understood a future income stream is an asset if you can establish a possessory right to it. Weath is assets. So, if yoy are going to procduce, it would be best that you producte assets. Wealth is product of the focus of production on the maintenance and creation of assets. Only through the creation and maintenance of assets can debts be repaid. Everything else, all other spending, is the dissapation of surplus that does not of itself produce wealth or provide the means to sevrice or retire debt...this is true of enterprise just as it is of sovereigns.

    So, looking at the wealth problem through such a prisme leads to the conclusion that, 'the ony increase in inflation that matters is asset price inflation.' I would suggest that if assets don't increase in value, even if illusory, there can be no real 'inflation'...of the sort that will allow you to retire debt.

    Your digression that the devaluation of the dollar supports exporters and harms consumers betrays a keynesian bias in that you accept the keynesian theory in asserting that the icreased cost of imported goods, gasoline, will hurt consumers, so dampen aggregate demand and so precipitate some sort of macro economic contraction. The keynesian theory is so prevasive that even Austrians get it on thier shoes as they traverse the economic yard. Get a pooper scooper.

    Exporters have capital becuase capital is created by future prospects...its the future that makes the savings valuable and the savings will always flow to the best future...regardless of the jurisdiction...its not about some reservoir of savings that was not otherwise wasted yet. The right idea of the future will create all the capital it needs.

    Finally, with regard to Rhinehart and Rogoff...the flaw of thier book was that they conflated public and private debt...and there is a difference...but their title, and your play on it, reminds me that I used to be different but now I am the same.
    May 17, 2011. 10:14 PM | 2 Likes Like |Link to Comment