Dave Raithel

10 Notes on the Current Markets

Silly me. I'd thought for an "economic act" to commit the "broken window fallacy", there must be no net wealth created. The parable I'd been taught has the GLAZIER breaking the windows secretly at night to generate demand for his services; hence the direct transfer of wealth. On your analysis (which is, I guess, the one you cite to in Wikipedia), replacing worn capital equipment isn't free of the fallacy: The capitalist cannot spend that money on a new additional machine, or more likely, hide the money in an off-shore account ...

Today's (Friday Aug 7) WAPO reads: "The average miles per gallon of the new vehicles is 25.3, compared with the trade-ins that averaged 15.8 miles per gallon. " (www.washingtonpost.com...) Granted, the program could have been improved had auto recyclers been allowed to cannibalize for parts - the net reduction of clunkers on the road would have been the same, though the parts would have kept similar vehicles on the road longer. So a more exact analysis is required to evaluate whether any net wealth results from this. There may not be, but you're simply begging the question.

Still, the piling on has been amusing: The same political/ideological factions that bloat about big guvmint needing to leave taxpayers more of their dollars now object that some taxpayers get a tax-credit; the same faction that cared nothing about saving The Big Three now bellyache that foreign car companies (some of which make eligible vehicles in the US) are getting the majority of sales; the same faction that waxes indignant on the importance of locally owned dealerships no longer finds them all that important ...

Some people just need to grouse...

Taxpayers' Best Interests and the Tragedy of Commons

People have so laid waste to Hardin's classic little essay, that THAT fact has become the "tragedy." A different inference to draw is that each pursuing the maximum of his interest is to the detriment of all. (The Tragedy of the Commons is really a version of the Prisoner's Dilemma on that reading.) From the above, we have to conclude that people are "essentially" irresponsible. That's not an ordinary looking glass; that's a fun house mirror ...

More on the Misalignment of the U.S. Treasury and Taxpayer Interests

I'd have thought the analysis is this: "U.S. Treasury officials' incentives are NO MORE aligned with the interests of taxpayers THAN bank managers' incentives are aligned with the interests of their shareholders." How often have we not read that much of what got us here is due to manager and executive compensation schemes that benefited them short term over long term (equity)? The implication of these disparate interests for compensation is, of course, leveling. I have no problem with that, but I doubt that is your meaning ....

Monetizing the Debt: Explanation For Non-Economists, Bankers and Other Laymen

A non-polemical account would have been much appreciated, but I usually expect too much from people. About all this "essay" does is demonstrate, once again, that "economics" is not a science. Economics is a babble of competing claims about reality reflecting the interests of the babblers...

Observations on the Total U.S. Debt

I thought Eric Zencey's piece on Frederick Soddy's work relevant and succinct (foreshadows of Minksy, Keene, and others...)

www.nytimes.com/2009/0...

"Debt ... is a claim on the economy’s ability to generate wealth in the future. 'The ruling passion of the age,' Soddy said, 'is to convert wealth into debt' — to exchange a thing with present-day real value (a thing that could be stolen, or broken, or rust or rot before you can manage to use it) for something immutable and unchanging, a claim on wealth that has yet to be made. Money facilitates the exchange; it is, he said, 'the nothing you get for something before you can get anything.'

Problems arise when wealth and debt are not kept in proper relation. The amount of wealth that an economy can create is limited by the amount of low-entropy energy that it can sustainably suck from its environment — and by the amount of high-entropy effluent from an economy that the environment can sustainably absorb. Debt, being imaginary, has no such natural limit. It can grow infinitely, compounding at any rate we decide.

Whenever an economy allows debt to grow faster than wealth can be created, that economy has a need for debt repudiation. Inflation can do the job, decreasing debt gradually by eroding the purchasing power, the claim on future wealth, that each of your saved dollars represents. But when there is no inflation, an economy with overgrown claims on future wealth will experience regular crises of debt repudiation — stock market crashes, bankruptcies and foreclosures, defaults on bonds or loans or pension promises, the disappearance of paper assets.
....
Soddy would not have been surprised at our current state of affairs. The problem isn’t simply greed, isn’t simply ignorance, isn’t a failure of regulatory diligence, but a systemic flaw in how our economy finances itself. As long as growth in claims on wealth outstrips the economy’s capacity to increase its wealth, market capitalism creates a niche for entrepreneurs who are all too willing to invent instruments of debt that will someday be repudiated. ...
...
Soddy distilled his eccentric vision into five policy prescriptions ...: The first four were to abandon the gold standard, let international exchange rates float, use federal surpluses and deficits as macroeconomic policy tools that could counter cyclical trends, and establish bureaus of economic statistics (including a consumer price index) in order to facilitate this effort. All of these are now conventional practice.

Soddy’s fifth proposal ..., was to stop banks from creating money (and debt) out of nothing. Banks do this by lending out most of their depositors’ money at interest — making loans that the borrower soon puts in a demand deposit (checking) account, where it will soon be lent out again to create more debt and demand deposits, and so on, almost ad infinitum.

One way to stop this cycle, suggests Herman Daly, an ecological economist, would be to gradually institute a 100-percent reserve requirement on demand deposits. This would begin to shrink what Professor Daly calls 'the enormous pyramid of debt that is precariously balanced atop the real economy, threatening to crash.'

Banks would support themselves by charging fees for safekeeping, check clearing and all the other legitimate financial services they provide. They would still make loans and still be able to lend at interest 'the real money of real depositors,' in Professor Daly’s phrase, people who forgo consumption today by taking money out of their checking accounts and putting it in time deposits — CDs, passbook savings, 401(k)’s. In return, these savers receive a slightly larger claim on the real wealth of the community in the future.

In such a system, every increase in spending by borrowers would have to be matched by an act of saving or abstinence on the part of a depositor. This would re-establish a one-to-one correspondence between the real wealth of the community and the claims on that real wealth. (Of course, it would not solve the problem completely, not unless financial institutions were also forbidden to create subprime mortgage derivatives and other instruments of leveraged debt.) ...."

Stewart vs. Cramer: A Cheap Shot

Conspiracy theories and rationalizations ignore the simple history: The Daily Show went after CNBC as negligent journalism - professional misfeasance, if you will. Cramer, for whatever his reasons, chose to pose counter-points. I'm with the minority above who find nothing wrong with Stewart's basic claim: That MSM business journalists were at best disengenuous and at worst criminally involved in the misrepresentation of reality. By analogy to Buiter's notion of "cognitive regulatory capture", business journalists in general drank the cool aid, and then passed it around...

As to exculpating Cramer on the grounds that he was one of the first to start yelling "run away, run away": Long before I became a regular reader of finance/econ blogs (I was initiated by Yves Smith and I am a fan of hers, and give special attention to Menzie Chinn, Jim Hamilton, Steve Waldman, Steven Keen, Buiter, Thoma) I would ocassionaly bump into Cramer on the TV yelling for the Fed to cut interest rates even more - back when Greenspan still had the Fed gig. I am not a reductionist - how we got here resulted from multiple necessary but singularly insufficient causes - but most everyone counts Fed policy in the years up to 2007 as part of the causal chain. So was Cramer just passing out the Kool Aid he enjoyed believing it was good? Or was it his job to know more about it than the people who still want to believe there's a difference between entertainment and information?

Someone elsewhere has pointed out that Stewart functions as a court jester: It's his job to speak truth to power when nobody else safely can - people lose their jobs, or access to their subjects, ya know. The (surprisingly to me) proportion of people who somehow think he just done po'Cramer wrongly is evidence that he's just making explicit what people know but don't want to admit: Something is very wrong with a profession that has failed us TWICE on the two most significant events of our recent history - WMD's in Iraq, and the instablity by design of our economy.

It makes one ask: Just what the hell have journalism students been learning the last 30 years? Is there something wrong with a culture that cannot sustain a profession whose practioners are ethically committed (and financially secure) in telling the truth? Or is the moral: Go along to get along .... unless you can do comedy....