Cynicus Economicus's Comments

Krugman Surprises

Tue, 20 Jul 2010 20:02:21 -0400

James,

Thank you for your clarification. I have also posted a copy of your clarification on my blog here:

cynicuseconomicus.blog...

As a point of interest to other readers, I have found an interesting discussion of another debate, Krugman vs. Ferguson which can be found here:

blogs.telegraph.co.uk/.../

I rather liked the conclusion, which neatly summarises a problem with economics (I sometimes wonder whether I might be guilty of this, but hope not):

"First decide on your conclusions, and then find the supporting evidence. That’s about the sum of it."

Origins and Development of Economic Crisis, Part II

Mon, 24 May 2010 20:24:42 -0400

Some very interesting comments, and I will try to reply to a few (time allowing).

dvargasr: You are right that there is a fundamental problem in dealing with the underlying problems. The solution presented itself 2 years ago, but the politicians chose not to take it, and instead made the problems worse. I see no easy or gradual way out of this mess, but still hope that just perhaps such a way still exists.

apberusdisvet: You are assuming competence and a plan here. I doubt in both.

Chris Cook: I think you have misunderstood - this is not the theory of a savings glut, but a theory of a mis-allocation of those savings.

Phil from Edmond: An interesting comparison. I am slowly developing an idea that the causes of this crisis replicates the real causes of the Great Depression in some respects. However, I need to get into the history books, and look at the extent of globalisation post-WWI. As such, at the moment, just a slightly informed hunch (I have studied a lot of modern Chinese history, and noted there was a boom in inward investment into China before the Great Depression).

Ferdinand E. Banks: I have no particular position on Obama per se, but do have a position on his policy in relation to my understanding of the economic crisis. As my regular blog readers know, I am not partisan in terms of 'x' or 'y' political party. Also, I do not want to be right in my conclusions, and sincerely hope that I am wrong. I do not want the US, UK, China or any country to go through economic hardship for any reason. On a second point, are you serious about Bernanke et al? Or are you being sarcastic?

User 353732: I am not sure that we are that far apart, but your post appears critical nonetheless?

Leftfield: It is good to see that you have recognised the problem of GDP. With regards to your implication of a stitch up, I am certainly sympathetic about the all too close relationships between certain business interests and government, and the investment banks are the obvious example. I agree that "History has been replete with "modern" eras that had supposedly evolved beyond old limitations and then bit the dust." When will we learn?

ALue167: I do not comment on the rights and wrongs of any particular spending priority. However, as part of a mature approach to fiscal policy, it is clear that choices need to be laid before electorates on the basis of; if we use 'x' amount for 'y', we will have 'x' less for 'z'. The problems arise when the hard choices are avoided through borrowing to fill the holes.

General Comment: Thanks for the comments, and I always try to read them all, even if I do not always have time to respond, or respond in the depth that would be ideal.

Why the Risk of Sovereign Debt Crisis?

Sun, 07 Feb 2010 15:29:12 -0500

Many thanks for the comments so far.

whereisthefire:

It relies on both correlation and explanatory theory. However, with the huge number of factors that determine the economy, it is impossible to single out any single event as a cause of itself, as the response also determine th effect. Perhaps prime mover might better express it.

Chandragupta: I agree 100%. I have been banging on about the problem of GDP as a measure forever. It is a miracle that it has survived this long, but perhaps too many economists have 'invested' in the credibility of the measure, or perhaps it undermines their theoretical stance too radically.

Explorer: My first post on my blog was on the subject of debt fuelled 'growth' in 2007. I looked at the UK economy, and sought the foundations of growth in real wealth creation, and found none. From this, I concluded that *all* the growth in the UK could only be explained by debt growth. From this starting point, I predicted that the UK economy would crash. It is a very long essay, that was radical at the time, but the explanation is now accepted by pretty well everyone. What is lacking is acceptance of the consequences.

Leftfield: You are partly right. For example, there is an ever expanding trade in 'virtual' goods. However, when you switch on a light in your house, or fill your car with petrol (gas), or want to buy anything that is 'real', you are still drawing upon a diminishing pool of commodity per person, which means that you are in competition for an allocation of the share which would previously have had no competition. A simplistic answer, but hope it makes sense.

Davewmart: No argument with your point (and agreement with the follow on comments regarding this time it will be different). There were many different responses that might have been made to the change in the structure of the world economy. However, it suited everyone to congratulate themselves on how well they were 'managing' the economy.

Bigbaboon57: I agree that in broad terms there has been too much of a shift towards non-productive use of labour. I perhaps have read enough of the US situation to believe that it mirrors that of the UK, where there has been a massive expansion in non-jobs in the government sector, as well as expanding benefits for government employees. However, this is something I have not looked at closely in the US, so I will leave it to others to comment on this.

I am also in agreement over the question of Chinese mercantilism, and have posted on this subject many times. The longer the politicicans leave this problem, the greater the problem becomes as China takes on ever greater economic power. Facing down this problem is essential, though the risks and cost may be very high indeed. To allow the situation to continue however, is even worse.

General:

There are several areas I have not covered in the article, such as why, for example, the output of commodities did not meet demand. In part this is because the commodity companies had been 'bitten' before by overexpanding supply. Not realising that the change in demand had a foundation in structural change, they failed to expand to meet demand out of caution. In the case of oil, of course, there was a cartel in operation and, even if they had recognised the change, there was no necessity to respond. There were also bottlenecks. I read at one point of the inability to expand mining output due to a lack of supply of the massive earth mover tyres. Crazy, but true.

The problem was the sheer speed and the scale of the change, which is unprecedented.

I have also not discussed what I call the 'era of hyper-competition'. This is the idea that, if there is insufficient resource, the resource will flow in the direction of where the inputs are utilised most cost effectively. This has always been true to some extent, but when the supply of labour is continually expanding faster than the supply of commodities, there is no breathing space. Competitive weaknesses will be apparent very quickly. My answer to this problem is that there needs to be a radical reform of the structure of Western economies. In a brief comment, this is a simplistic description, but nevertheless I hope it makes the point.

On a different subject, I sometimes use the supply of oil as an analogy for the supply of labour in terms of consequences. Imagine, for example, that a discovery of oil was made in Central Africa, and that the size of the find was equivalent to the reserves in the Middle East. Imagine the shift in the world economy that would follow, and imagine the impact on the Middle East.....

Economists would be buzzing around the subject like bees around a honey pot. In the case of the expansion of the supply of labour in the world, aside from myself, I know of nobody who has discussed this as a fundamental cause for the current change in the world economy (i.e. as the underlying cause of the economic crisis). I find this very curious. It also worries me, as without identifying the cause of the change, the policy responses will be misguided.

Thanks for the many interesting comments.

Cash for Clunkers: A Man-Made Disaster

Sun, 15 Nov 2009 14:10:01 -0500

static.seekingalpha.co...">

Roadrunner: You say:

" A large private sector and a small public sector creates regular and large boom and bust cycles (study the economy of the 1800s through the Great Depression that was full booms and busts)"

Take a look at the UK. High government spending and boom and bust. Gordon Brown promised no more boom and bust, even as he increased the government's share of spending. The UK is now facing a fiscal crisis. I am not so sure that 'the solid economic theory' you discuss is so solid. Furthermore, the economic theory you discuss has been the determining the economic policy that led the world into this mess. Perhaps it is time to revise those text books?

As a final note, you have not mentioned whether you would accept the garbage compactor at the end of the production line.

Cash for Clunkers: A Man-Made Disaster

Sun, 15 Nov 2009 13:56:39 -0500

Road Runner: You say

"Anyone who does not understand why government needs to spend now to stimulate the economy to prevent it from spiraling down into a deflationary depression, does not understand economics."

You may wish to take a look at a previous post that details why deflation is not an evil of itself. Furthermore, the Austrian school of economics is one which deals with this issue in some considerable detail. I would suggest that, even if you do not agree with the school, it would be difficult to suggest that they 'do not understand economics'. I am not an Austrian myself, but see merit in some of their arguments.

The article I mentioned can be found here:

seekingalpha.com/artic...

More to the point, would you accept the idea of a production line with a garbage compactor at the end of the line. Imagine a product coming off the line, with a value equivalent to the cash for clunkers scheme, and with the same useful lifespan as an older car. Would you really accept the product being compacted?

Notsosmart:

All goods have a lifespan, but destruction before the end of the lifespan makes no sense. The replacement of Europe's infrastructure after the war was not a good thing, as it would have been better if it had never been destroyed. If you were to ask the people who no longer had a house, or whose factory had been destroyed, I think you will find that they would rather that this never took place.

I find it genuinely amazing to see that people believe needless destruction of assets might be a good thing.

U.S. Economic Growth Deconstructed

Sun, 01 Nov 2009 23:39:37 -0500

Dave and Trading Help: I agree that many of us have been concerned about the real wealth generated in the UK and US economies, and 'yes', the UK is truly frightening. If there is no 'growth' with this level of borrowing, what is the true state of the UK economy?

The Great Shift: China Rising, U.S. Falling

Thu, 08 Oct 2009 23:29:51 -0400

I just thought that I would comment to agree that many of the comments are very well considered and are food for thought. I would address the many points but (happily) there are rather too many. However, there is one point that is a clarification, as follows:

waitin4mypitch says the following:

"At one point in the article (paragraph 7, to be precise), it is stated that "[i]n so many cases, the price of doing business in China was risking the very thing that made the Western companies such a success; transfer of technology and process." I find the use of the word "was" here to be noteworthy. With no further discussion within the article itself that even suggests, let alone fully explains, why it is that this phenomenon is viewed by the author as a thing of the past, I am very interested to hear the thoughts of others on whether the misappropriation by Chinese companies of non-Chinese industrial technology is a problem which continues to be significant or whether, as the article suggests, this is somehow no longer a meaningful concern."

The use of the past tense was an error. I think the process is ongoing, though Chinese companies are also advancing in their own right, such as in the supply of telecoms equipment.

Overall, I would like to thank all of those who have commented. Whilst not agreeing with some of the views, it is refreshing to see so many intelligent considerations.

The Rise and Rise of China

Thu, 10 Sep 2009 17:25:39 -0400

Many thanks for the comments. I just thought I would very briefly answer James. In particular the following comment:

"My advice to people who are basing their investing decisions on the premise of China being the economic superpower/ having the world reserve currency is to come and spend some time in China. Try and buy some property in tier 2 city or below. Involve yourself in doing some business here."

I have lived and worked in China, and have done business in China. I speak and read Chinese, and am very aware of both the faults and the positives in China.

You say that the RMB as a reserve currency is nonsense. However, you ignore the many moves that China is actually making towards this end. The issuance of bonds, the bilateral deals to trade in the RMB and so forth.

As for trust in the currency, how does the RMB compare with a $US floating on a sea of debt and printed money? At present, my choice is the RMB over the $US. The RMB is supported by massive reserves and massive current account surplus.

Take a hypothetical situation. If the $US were not already the current reserve currency, would anyone suggest that it might become the reserve currency? The idea would be laughed at. On the other hand, if there were no reserve currency, how would the RMB look by comparison?

Where Exactly Is the Recovery Coming From?

Tue, 01 Sep 2009 20:09:26 -0400

Thank you for some very interesting comments. It appears that many of you share my cynicism about the underlying state of the US economy. I can also detect some underlying frustration/anger in some of the responses, which is perhaps reasonable given the circumstances.

I have received a small criticism on my blog for the use of terms like 'meltdown' and 'tickety boo' in this article. The criticism is actually fair, and I should use less emotive language. However, like some of the commentators here I am somewhat frustrated, and these little slips are a symptom of the frustration. The trouble is that, when you see a car rushing towards a cliff, it is difficult to understand why the driver will not apply the brake.

U.K. Continues to Monetize Debt: This Won't End Well

Thu, 20 Aug 2009 18:28:30 -0400

General: Many thanks for some interesting comments.

Chap 08: I agree that, in a sense I have not explained the problems with the actuality of debt servicing altering. However, I would start with the point that this only appears to be an issue when the word 'deflation' is included. As I pointed out in my article on deflation, a move from high inflation to low is the same as a move from low inflation to deflation in this respect. For those that did not read the original article, the point is as follows:

The move from inflation to deflation is identical. It is not the deflation that is the cause of the problem, but rather the alteration from once circumstance to another. For example, if there is a change in the rate of inflation from 5% to 2%, and compare this with a change from 2% inflation to deflation of 1%, we can see that there is the same process taking place. In both cases we are seeing the relative burden of debt moving in exactly the same way. In the inflation and deflation environment, interest rates will move to reflect the underlying changes in the value of money, and debt burdens on fixed interest will be locked into repayments that are based upon an out of date criterion.

For some reason, when there is a 'fight against inflation', the cost for borrowers is not considered......as it is when the word deflation appears.

However, as you correctly identify there is a reality that there are many people with overhanging debt, and facing the potential difficulties in the move from inflation to deflation. The problem is that any policy such as QE might ameliorate the problems for one section of society (e.g. net debtors) whilst punishing others (e.g. savers).

The real solution to these problems is outlined in my fixed fiat currency article, but that is a 'shutting the stable door after the horse has bolted solution' and does not address the problems now.

I am afraid that there is no easy solution. However, 'irresponsible' monetary and fiscal policy will eventually impact both savers and borrows negatively, such that both sections will be hurt. This really requires more explanation, so I apologise for simply making the assertion, but I would need to write a post on the subject to make sense of it. Perhaps a future post, if I am not distracted by other news.

Pat: Many thanks for the origins of the expression QE, which is very interesting. I had no idea where or why the expression was used, so I very much appreciate this.

U.K. Recovery Just a Mirage

Fri, 07 Aug 2009 19:48:39 -0400

Sorry, the above comment was unintentionally submitted. What I meant so say was thank you for all of the thoughtful comments. In particular, with regards to QE and Ponzi schemes, I agree that we are witnessing something similar but slightly different. Perhaps one day QE will be called a 'Bernanke' scheme?

With regards to the similarities of the US and UK mentioned by Chap08, I could not agree more. I was tempted to do a similar piece for the US economy, but chose the UK as many of my blog readers are from the UK. However, the story is very similar for both countries. The point about the reserve status is interesting, as I think that, rather than a positive, it multiplies the dangers for the US. It allows even greater problems to develop. More could be said on that subject, but needs more consideration than can be put in a single short comment.

Above all, it is encouraging to see that the informed readers of SA are cynical about QE, despite so much support for this policy in the press. It is worrying to see how it is spun, and how this has created a broad acceptance of the policy.

U.K. Recovery Just a Mirage

Fri, 07 Aug 2009 19:35:00 -0400

Thank you for the comments

Why Is Deflation Scary?

Mon, 03 Aug 2009 16:54:07 -0400

Many thanks for the interesting comments. There have been some interesting points raised. In my original article, the following was included and may address some of the concerns (I am guessing the article was too long for SA:
-------
Debt and Deflation

There is an argument that suggests that deflation causes problems with the servicing of debt, as the value of the debt sees relative increases through the deflation. This is a scenario that appears to be very plausible, and can be backed by some solid calculations and formulae. However, what is missed in such arguments is that it is not deflation that is problematic, but the move from inflation to deflation. It is not the change in the value of money that is problematic, but the change in inflation/deflation from the original inflation/deflation position from the time of the issuance of the loan.

A good example of this can be seen in private mortgages on housing. If a loan is taken out in a high inflation environment, the interest rate will be relatively high. The targeted central bank interest rate will be high, and the lenders will seek to account for the high inflation by charging a rate of interest that will overcome the devaluation of the money that they are lending, such that they can achieve a positive return. If the interest rate is fixed over a period of, for example, five years and at year four the rate of inflation has fallen by a half, the holder of the debt is effectively seeing the value of their debt inflating. The earlier rate of inflation was eroding the value of their overall debt, and this was accounted for in the interest rate. However, with inflation falling, their debt value is no longer declining at the same high rate, but they are still servicing the debt as if this were the case. Their payments in relation to the actual value of the debt have increased.

If we think of this example and think of a change in the rate of inflation from 5% to 2%, and compare this with a change from 2% inflation to deflation of 1%, we can see that there is the same process taking place. In both cases we are seeing the relative burden of debt in relation to income moving in exactly the same way. In the inflation and deflation environment, interest rates will move to reflect the underlying changes in the value of money, and debt burdens will be locked into repayments that are based upon an out of date criterion.

In other words, it is not inflation or deflation that is problematic, but rather it is the change in inflation/deflation that alters the burden of the debt. As such, any monetary system should aim to achieve either stable inflation or stable deflation.
------
I hope this helps. If I have a chance, I will try to return to address some other points.

Reforming Money: A Fixed Fiat Currency Proposal

Sun, 26 Jul 2009 20:58:09 -0400

The Recusant:

Many thanks for taking the trouble to read such a long article. With regards to the calculation of labour, this can be achieved in the market. There is no need for any 'active' calculation. I think that, in this respect, you have misunderstood me.

My currency, as proposed, will work without any authority working out the value of labour. At its most simple, the implementation in the US would just need the identification of the amount of 'traditional' money in the system today, and ensure that the quantity of currency units never changes from the day that the system is implemented (notwithstanding the point about all countries adopting the system, which would need to simply do the same thing). This would then allow the reform of the banking system that is detailed.

It has nothing to do with Leninism, communism, socialism, or any other 'ism'. The only link with Marx is his identification that economic activity commences with value of labour - the rest would have no place in any Marxist thought. The entire system could be implemented with no other change to the capitalist structure of the US, with the exception of the banking system, which in any case needs reform. The reform of banking proposed is a more 'free market' structure than today, but offers a more stable structure and enhanced competition.

I hope this clarifies the article.

Reforming Money: A Fixed Fiat Currency Proposal

Sun, 26 Jul 2009 17:24:29 -0400

A quick note: There is an error in the article in which I say that the FFC will cause steady 'inflation', which is a typo. Those that have read the article will be aware that this is the opposite effect of the system, and please accept my apologies for the error.

Dave, thanks for the comment, but in your first comment you have misunderstood the entire intent and content of the article. There is no driver of the amount of 'traditional' money in circulation. It is fixed in quantity.That is why I call it fixed fiat currency. The effect of the fixed quantity of currency is to remove the kinds of cycles that you describe. I think that you realised this by the time of your second comment.

I have described the difficulty of a transition to a deflationary environment and wage negotiations would be tough whilst inflationary **expectations** persist. However, people would adapt.

I am not sure what a 'gold bug' might be, but guess that I am not one of them. I point out the flaws in a gold or gold backed currency. How a fair form of money, and inherently more stable system might be a 'nightmare scenario' baffles me.

Reforming Money: A Fixed Fiat Currency Proposal

Sun, 26 Jul 2009 05:23:29 -0400

I just thought I would add a comment, as the original version of this article on my blog led to critiques on the issue of whether economics is rooted in the exchange of value of labour. I have addressed these concerns on the blog, and also on the Reddit comments system. As such, if you have a critique of the idea that all value commences with some form of labour, you may wish to refer to the two debates that have already taken place. They can be found here:

www.reddit.com/r/Econo.../

cynicuseconomicus.blog...

If you find these explanations problematic, then please feel free to open the debate here.

As a note, if you have managed to get through such a long article, I would like to reiterate my gratitude for your patience. I hope that the article proves to be worth the effort.

Supporting the Financial System by Bleeding the 'Real' Economy

Sun, 19 Jul 2009 17:07:07 -0400

Clive:

You are, of course, quite right. In the current circumstances anything might happen. Thank you for highlighting the uncertainty that still surrounds the financial system.

Other Comments:

Many thanks for the comments. It seems that there is considerable antagonism directed towards the way in which this economic crisis is being handled. My worry is this. Just by being readers of something like Seeking Alpha, you are all by definition 'well informed'. The real question is how to raise these concerns and engage a wider audience. I was struck by John's comment, that this is the real problem. I am not alone in holding cynical views, but am not sure that our views are reaching out of a narrow niche.

Dangerous Fallacy in GDP Measures

Mon, 13 Jul 2009 18:03:08 -0400

Ryan, I should have replied to your comment a little earlier. Thanks for your thoughts.

You are quite right that everything in the economy is a failing asset. The key question is when it will fail. As such, a bridge with a 100 year life being destroyed after a year is a terrible destruction of value. The bridge represents a store of the value of labour, for example the miners who provided materials, the steel mills, the construction workers etc. The stored value of that labour is not being utilised, but being destroyed.

My concern is the Econ 101 does not teach such a basic principle. Destroying 'stuff' early is simply throwing away stored value. A commentator on my blog put it this way.

"If you destroyed you own house and built a new one, would it help you pay off your mortgage? Going by GDP, it would have to! Destroying your house and building a new one will not make you wealthy, let alone wealthier. In fact, it will make you poorer!, because of all the time, effort, energy, material and natural resources put into it.Not to mention environment"

cynicuseconomicus.blog...

The question to ask is how any measure which allows the early destruction of an asset might result in economic growth. For example, baking a loaf of bread and eating one slice before throwing the rest away would normally be called a 'waste'. Econ 101 needs some work I think.

Kotika 98:

Think of a factory output as activity. Think of the activity necessary to build the factory. Think of the activity of supported by a bridge. Think of the activity necessary to build the bridge. I think that you will find that rebuilding both would create more activity than the activity resultant from their being in place. Whilst there is a loss of activity from the destruction of the asset, the replacement will certainly create more short run activity, then roughly the same output will be achieved when completed.

On the other hand, if the asset was still there (e.g. your bridge example), then there is the opportunity of using the money to, for example, build another bridge in another place.

General: Thanks for the many other comments, and I will try to address more if time allows.