bob adamson

2 Unfortunate, Possible Consequences of Deficit Hysteria

JeffDB -

Whatever his failings or merits, having a "predilection for socialism"
was hardly part of Schumpeter's DNA as you suggest .

You point out that Minsky does not show “anything, at least not in the sense of someone "showing" someone how to do a math problem”. The Austrian School of economic analysis is, admittedly, quite elegant as presented by its better practitioners but their illustration of problems and solutions also generally avoids attempts to reduce the complexity of the economy to mathematical models. The use of mathematical models is neither inherently good nor bad. Such models, if well conceived and used in appropriate instances, are often good ways to introduce a topic but there is always a danger that we will carelessly confuse the model for the real economy and, in fact, subordinate the real economy to the model. This danger is compounded where the model to begin with is deficient as a representation of the actual economy.

In short, Minsky, like Keynes and the better Austrian School proponents, generally avoided use of mathematical models where to do so would be inadequate or misleading. Happily, the logic of his analysis did not depend on the existence of such models.

It is you prerogative to assert that the economic cycle described by Minsky is not intrinsic to capitalism but only applies where a modern banking system is superimposed on capitalism. It is my prerogative to respond that capitalism without a modern banking system could not sustain an economy more sophisticated than that of the 1840s. We can probably both agree that it is highly unlikely that one of us will convince the other on these points

bob adamson


On Nov 26 01:01 AM JeffDB wrote:

> On Nov 25 08:06 PM bob adamson wrote:

How Much Would You Spend to Buy a Recession?

I’m having quite a bit of difficulty following your logic Mr. Mulligan. You seem to be saying that if there was no safety net whatsoever for employees that lose their jobs (or, presumably, for persons seeking employment) then there would be no unemployment. Presumably this is some version of the position of Hubert Hoover’s Treasury Secretary, Andrew Mellon, that the answer to a recession was to liquidate all costs, including labour costs, as soon as possible. Costs being thereby driven to rock bottom, entrepreneurs will magically appear without further delay and push the reset button for the economy.

Whatever the merits of this analysis might have had in the 1880s when large sections of the population on being denied employment could retreat outside the money economy and subsist by subsistence farming or fishing and labourers had little option other than accept wage cuts demanded by their employers because if they were fired they had nothing to fall back on except minuscule savings and whatever meager help other family members or church congregations could provide, these purported merits are a bizarre illusion in 2009. To set out the purported 1880 merits is to make plain that even then the notion that that this analysis offered a legitimate answer to a recession was a cruel illusion that disregarded the suffering of whole families in large sectors of society when recession struck.

Today (or even in 1930 when Mellon was making his assertions) when much of the wage and salary earning middle and working classes have mortgages and consumer debt and there is no significant subsistence economy outside the money economy to fall back on other than the already large criminal black and gray markets, this ‘liquidate labour’ formula of Mellon is a recipe for social collapse. Even if one accepted the dislocation and extreme suffering in the middle and working classes, it is plain that the financial system and tax base for local, state and national governments would simply evaporate as would the markets for commerce and industry.

One feels foolish having to set out in detail why your analysis, unless I truly misunderstood its thrust, is ridiculous but apparently this is necessary in light of your article, Mr. Mulligan, and the comments of some responding to it.

2 Unfortunate, Possible Consequences of Deficit Hysteria

Kimball -

Thanks for the confirming in your own words what I, with some difficulty, was trying to say. If you can square the circle you describe this will be a great thing. In any case, it’s a worthy effort.

Very productive, if stranger, syntheses have been achieved by others in the past so it is not a fool’s errand that you are on (quite the contrary). I think of Hyman Minsky who had the audacity to adapt a common element from such disparate thinkers as Marx, Schumpeter and Keynes; the concept that periodic crises were an endemic and central feature of capitalism. From this he showed with intelligence and perception that
1. the capitalist economy was inherently unstable because markets were driven by intrinsic uncertainty about the future with consequent dramatic collective mood swings,
2. Keynes had been misapplied during the quarter century following WW II because the core of Keynes’s insight was this intrinsic instability and not a bag of monetary and fiscal tricks and tools to fine-tune the economy when recessions threatened, and
3. government management of economic cycles was necessity to prevent deep recessionary crises but that this management had to allow for a necessary degree of constructive destruction to prevent misallocations and inefficiencies from accumulating in the economy.

Good luck,

bob adamson


On Nov 25 05:07 PM Kimball Corson wrote:

> Tuckfinitee raises a real tough question I am not sure I can answer
> well, but I'll have a go at it. Here's the question:
>
> "My question is there any point Mr Corson at which the forced money
> flows become harmful to people who don't directly benefit? Should
> ever greater resources be diverted to the government, financial institutions,
> assets, and overseas? The only proof that is ever offered that gov
> spending sprees and loose monetary policy is effective has been "it
> would have been worse". That's no proof at all. However the superior
> record of non-interventionists could be used to draw inferences."
>
>
> Second thought. I am going to turn this into what I hope will be
> a published article here, although I may have to reframe and condense
> the question a bit. At a minimum it will be a blog post.I take this
> as an opportunity to think about the question.
>
> To conceptwizard.
>
> In fact, the numbers are staggering, as you suggest. But they would
> have been dwarfed in magnitude by our losses and the tranactional
> costs from dislocations due to the major and fast hitting depression
> we just avoided. We are clearly better off now then we would have
> been, the Austrian School and the dooms day guys nowithstanding.
> It is hard to even imagine the costs of a major depression, fully
> considered. What we have on the books now is chump change by comparison.
>
>
> To bob adamson:
>
> My apparent schizophrenia is easily rationalized.
>
> I am one of those who believe our target equilibrium is a new "lower
> normal," largely because we are not addressing our huge trade deficit,
> which Keynes correctly said will leave us in a relatively depressed
> state, nor the maldistribution of income which permanently reduces
> aggregate demand. These are structural problems that push us down
> to a new lower level normal. The engineered housing bubble was an
> effort to push for the old higher equilibrium level and it failed
> conspicuously.
>
> At the same time, I do not want to jeopardize the gains we have and
> are getting that are taking us up to the new lower level equilibrium
> that I think is our natural state, with the attending structural
> problems.
>
> Depending on which issues I am addressing at the time, I do indeed
> appear to be talking out of both sides of my mouth. I admit that.

Economic Reports Show Mixed Results

Thanks for the article Andrew Horowitz. It confirms for the time being the mixed economic picture (from which, arguably, mixed stock and commodity markets expectations currently flow) that causes me currently to see thing in the following way.

Both the economy and the stock and commodity markets are at interesting points marked by uncertainty about future direction in the near to middle term. The economy has stabilized after narrow avoidance of a deep deflationary collapse during the October 2008 to March 2009 period but the quality of the underpinnings of both that stability and the future potential for further improvement is questioned, with cause, in many quarters, while others, with justification, can point to improving trends, particularly outside North America. Many of the economic problems that set the stage for the meltdown crisis of October of 2008 remain to be identified and addressed let alone resolved but the governments and central banks give every indication (rhetorically at least) of their determination to maintain vigorous fiscal and monetary stimulus measures for as long as needed to give time for reform (which they imply will be proposed in detail soon) and recovery. Some welcome this determination while others question whether that determination is anything more that rhetorical or fear the potential consequences, as they discern them, of the measures that might flow from such determination (or, alternatively, from a drift into inaction on the reform front). In short, a precarious stability and even some indications of improvement may be appearing but what will happen next on the economic front is an open question for which there isn’t even a rough agenda to begin the answering process.

Turning to the stock market, the back-story for most investors is as much about their losses since 2007 (and their experience of deep unease and loss of control in 2008) as about their gains since March of 2009. After a spectacular nine month surge in the stock market, the usual euphoria of investors and consequent overbought market conditions following such a surge are decidedly absent now. In sum, we each get a very different message about the near future depending on whether we focus on how far the market fell from its October 2007 high or focus on the spectacular rise since February of 2009.

Paradoxically, it is this very deep ambivalence that, for me at least, suggests that the upward trend may continue yet for a short while (say into February?).

Examining the Debt Data

Leaving modeling and one’s preference for one school of economic thought over others to one side, could most of us agree that:
1. The danger of increased inflation at some point in the future is significant if current interest rates and deficit levels continue for a protracted period.
2. While many have been surprised that more manifestations of an increasing tendency for inflation to increase have not appeared, they and others are equally surprised that manifestations of deflationary tendencies have not disappeared.
3. It follows that a significant cut to stimulus (fine-tuning how stimulus is structured and administered being a different matter) now would be premature.
4. A close eye for changes in the underlying state of the economy is needed as the need to address inflationary or deflationary issues promptly may arise on relatively short notice?

In short, echoing Dorothy in the Wizard of Oz , we’re not in Kansas any more (metaphorically speaking) and it is misleading for us to assume that the play-book used to resolve earlier post WW II recessions (or a play-book devised by scholars in light of such earlier experiences) can simply be followed. We must not let this lack of a clear path (I’m resisting the temptation to call it a Yellow Brick Road) immobilize us but, equally, we can’t wish one into existence by dogmatic belief alone. We’re just going to have to move forward cautiously and be prepared to alter course (but not be skitterish in that regard).

On Debt Monetization

MacroStrategy Edge –

I think you and I are interpreting “monetize” differently. Correct me if I’m wrong but you appear to be saying that whenever the Federal government runs a deficit by not meeting all its annual expenditures out of annual revenues the amount of that deficit has been monetized. I would say that in that situation any amount of that deficit that is covered by a US government bond promising future payment of the principle covered by the bond is not monetized; this is so because no increase in legal tender has been created to cover that principle (only a promise to make future payments as specified in the bond. In short, if you want to say that amounts covered by US Treasuries and other US bonds represent ‘latent monetization’ because, if not paid down, defaulted on or borrowed afresh when the principle comes due, it must at this later date be monetized, I’ll agree with you. It just isn’t monetization now.

You might respond that the distinction I draw between 'latent monetization' and monetization is a distinction without a difference that matters. If so, I would respond that while domestic and foreign markets may not welcome increasing US government borrowing beyond certain levels, they would be much more worried if the US government, instead of such borrowing simply increased the supply of US legal tender.

2 Unfortunate, Possible Consequences of Deficit Hysteria

Thank you, Kimball, for another timely article reminding us of the need to avoid overly doctrinaire solutions to complex and rapidly evolving problem situations. Arguably some read your earlier article “Why Opposition to Deficit Spending Is Growing Rapidly” and some points in other recent articles criticizing some purportedly Keynesian proposals as endorsing a strict monetarist or even an Austrian School approach. They expressed their displeasure at your apparent apostasy from such as endorsement in their comments in response to “25 Reasons We Will Not Have a Depression”.

The current article continues the search for a viable new middle ground which I, for one, welcome.

Another Crisis Looms Right Around the Corner

Maxe Paul -

It's all the recent reruns on late night US TV of the Mad Max movies you Aussies made that has tipped some folk over the edge. It’s your fault!

Regards from Canada.

Bob

On Nov 25 08:43 AM Maxe Paul wrote:

> LOL Yes it is rather Funny i think, from the perspective of an outsider
> like myself.

Give Thanks to the Market

Thanks for the article Bespoke Investment Group.

Both the economy and the stock market are at interesting points marked by uncertainty about future direction in the near to middle term. The economy has stabilized after the narrow avoidance of a deep deflationary collapse during the October 2008 to March 2009 period but the quality of the underpinnings of both that stability and the future near term potential for further improvement is questioned, with cause, in many quarters, while others, with justification, can point to improving trends, particularly outside North America. Many of the economic problems that set the stage for the meltdown crisis of October of 2008 remain to be addressed let alone resolved but the governments and central banks give every indication of their determination to maintain vigorous fiscal and monetary stimulus measures for as long as needed to give time for reform and recovery. Some welcome this determination while others question whether that determination is anything more that rhetorical or fear the potential consequences, as they discern them, in the long run of the measures that might flow from such determination.

Turning to the stock market, the back-story for most investors is as much about their losses since 2007 and their experience of deep unease and loss of control of 2008 as about their gains since March of 2009. After a spectacular eight month surge in the stock market, the usual euphoria of investors and consequent overbought market conditions following such a surge are decidedly absent now. In sum, we all get very different messages about the near future depending on whether we focus on how far the market fell from its October 2007 high or focus on the spectacular rise since February of 2009.

Paradoxically, it is this very deep ambivalence that, for me at least, suggests that the upward trend may continue yet for a short while (say into February?).

Are Markets on the Verge of a Breakout or Meltdown?

Thank you, Macro Man, for this article.

Both the economy and the stock market are at interesting points marked by uncertainty about future direction in the near to middle term. The economy has stabilized after the narrow avoidance of a deep deflationary collapse during the October 2008 to March 2009 period but the quality of the underpinnings of both that stability and the future near term potential for further improvement is questioned, with cause, in many quarters, while others, with justification, can point to improving trends, particularly outside North America. Many of the economic problems that set the stage for the meltdown crisis of October of 2008 remain to be addressed let alone resolved but the governments and central banks give every indication of their determination to maintain vigorous fiscal and monetary stimulus measures for as long as needed to give time for reform and recovery. Some welcome this determination while others question whether that determination is anything more that rhetorical or fear the potential consequences, as they discern them, in the long run of the measures that might flow from such determination.

Turning to the stock market, the back-story for most investors is as much about their losses since 2007 and their experience of deep unease and loss of control of 2008 as about their gains since March of 2009. After a spectacular eight month surge in the stock market, the usual euphoria of investors and consequent overbought market conditions following such a surge are decidedly absent now. In sum, we all get very different messages about the near future depending on whether we focus on how far the market fell from its October 2007 high or focus on the spectacular rise since February of 2009.

Paradoxically, it is this very deep ambivalence that, for me at least, suggests that the upward trend may continue yet for a short while (say into February?).

Are Markets on the Verge of a Breakout or Meltdown?

conceptwizard

Yes there are some good buys in Canadian bonds but don't count on the Canadian dollar moving above par with the US dollar for more than a few weeks if at all. The Canadian economy, tied as it is to the US economy in so many ways, can not afford further CAN$ appreciation after a rise of over 30% from its low earlier this year.

On Nov 25 01:20 PM conceptwizard wrote:

> Buy Canadian bonds. Good solid low "stanadard deviation" solid returns
> and exchange rate bet on the US dollar devaluation.

On Paul Krugman's Deficit Rationalization

We armchair quarterbacks tend to have perfect 22/22 hindsight vision. We tend to discount the hard truths that by the fall of 2008 the threat of economic chaos reigned in a way that never before had been envisaged and that the agencies of the various governments globally were at sixes and sevens on what, in detail, was to be done, who should do various things and what authority each had to act. We are fortunate that stability was achieved and deflation forestalled to the extent achieved in the circumstances. The proper measure is what was possible and not what is perfect in determining should have been done in the past and what now should be done.

All available options at present entail significant present or future potential problems; it’s essentially a matter of trying to choose from amongst them the one that can reasonably be expected to
1. require the least suffering now,
2. provide the best promise of maintaining reasonable stability to continue and recovery to begin and
3. limit major future problems that can’t be dodged by some intervening future actions.
That has been the box policy makers have been in at several points in time since the middle of 2008; at each stage there haven’t been cheap and easy choices available and they just had to try to do the best with what was available. So it is now.

Therefore, appreciating that deficit spending is simply a tool to be applied as appropriate and not a solution to the current economic malaise, what should now be done?

China's Massive Stimulus Isn't Saving Its Banks

Another indication of the current state of the Chinese economy is the extent of China's willingness to allow the value of its currency to appreciate.

Reading two articles posted concurrently in the English language version of China’s ‘People’s Daily Online’ at present, one gets the strong impression that any loosening of the narrow band the yuan peg will be modest indeed. The articles are at the link below.


english.people.com.cn/...

english.people.com.cn/...

Asian Currencies: Expect More of the Same

Reading two articles posted concurrently in the English language version of China’s ‘People’s Daily Online’ at present, one gets the strong impression that any loosening of the narrow band the yuan peg will be modest indeed. The articles are at the link below.


english.people.com.cn/...

english.people.com.cn/...

Gold Is Rallying: Now Where Do We Keep It?

Thanks, Mr. Iacono, for an interesting vignette on changing New York folk ways. To complement that slice of life is an article from The Australian about changing Middle Class Indian practices respecting gold.

www.theaustralian.com....