The best part of Sumner's arguments are found in the comments of his readers, like the below. The essence of Sumners and others arguments are that you can influence the long term by the short term. This is false. Why? Simple analogy: almost every modern perpetual motion machine works as follows: switch a dead battery on and off rapidly, and you get transient, short term energy spikes due to the fact electrons accumulate at the contact points in a battery. This gives the illusion that average power is the same as peak power, and essentially that you are getting more energy out than in (i.e., gives the illusion of perpetual motion). But it's false. A careful analysis shows that the short term is not the long term, and, likewise, while with Sumner's NGDP (see below for a synopsis) or Keynes equally fallacious "money illusion" solution, you can influence the economy in the short term, in the long term, fundamentals take over and you cannot get the economy to produce more using printing money solutions anymore than a dead battery can give you more average power. It's dead Jim, and switching it on and off with artificial stimulus only gives the illusion it is still alive. Not unlike Zombie Companies in Japan, which has been unsuccessfully trying Keynesianism for over 20 years.
Ray Lopez
A reader to Sumner's blog: Prof. Sumner,
When you describe “musical chairs” why don’t you tell a simple story like this:
“Wages are sticky. Specifically, employers are extremely reluctant to cut nominal wages.
Imagine that your economy suffers a large demand shock or supply shock. If that happens, then the average real wage has to go down.
In an environment of decelerating spending growth, employers reduce the average real wage by firing lots of people. We get mass unemployment. The productive potential of the economy is reduced.
But in an environment of consistent nominal spending growth, employers don’t fire lots of people. Instead, they raise the wages of most workers while keeping the wages of some workers flat. This way, the average real wage goes down but mass unemployment is avoided.”
As Home Building Heats Up, Trex Is Picking Up Momentum [View article]
This is a high-value added (for building materials) product that makes an attractive rot-free material to build with. But it's expensive and unless the company somehow lowers the price, I doubt it will make it outside the USA, especially in developing countries where they simply use traditional materials that are often virgin wood that's cut from public lands illegally or otherwise.
I can see a future investor banging his head, Homer Simpson style, and saying "Dang, Dang, why did I buy this stock?". The Chinese MySpace? No IP, and Chinese consumers are finicky. I'll pass.
Bill Gross's Misguided Diagnosis Of America's Economic Problems [View article]
The author's underlying thesis is that Keynesian "shock absorber" economics works and is good. But econ historian Angus Maddison showed that during the pre-1913 Fed Reserve and central banks worldwide, late 19th C economic growth rates were the same as the late 20th C. Boom and bust--the kind of ups and downs that Keynesianism is designed to guard against--works. Austrian economics works. Creative destruction works. Dare I say it? Greed is good, greed works. What we have now is Japan "Zombie" Keynesian economics that lead to (IMO) the Great Stagnation (Google this term of art). Prior to managed economies we had massive innovation. Now? Not so much. Blame governments worldwide with their 'cradle-to-grave' managed Keynesian economics. You mark my words: US style Keynesianism will work no better than it has not worked in Japan over the last 20 years, demographics be damned. Call it QE, or whatever you want, but in the end printing money for quick feel good fixes and can-kicking down the road will not jump start the economy anymore than giving a drunk a shot of booze.
Do Not Read This If You Thought The Economy Was Improving [View article]
Right you are EK1949. The WSJ Real Time Economics blog (http://on.wsj.com/11AYwh7) has a graphic for June 7 that shows Baby Boomers since 2000 have been exiting the workplace--well before the Great Recession of 2008--and this is one reason there are so few employed workers. The rest have "Gone Fishin'" (retired).
Re high inflation and low equity premium--not enough data. Take away the 1970s and the USA data, and what do you have left? Not much. So this time could indeed be different. An academic paper, http://bit.ly/15Nbngv seems to support the thesis there is no correlation between equity premiums and inflation, only between the former and uncertainty about the latter: Authors: "A related strand of research examines the relationship between equity risk premium and inflation, with mixed results. Studies that look at the relationship between the level of inflation and equity risk premiums find little or no correlation. In contrast, Brandt and Wang (2003) argue that news about inflation dominates news about real economic growth and consumption in determining risk aversion and risk premiums.5 They present evidence that equity risk premiums tend to increase if inflation is higher than anticipated and decrease when it is lower than expected. Reconciling the findings, it seems reasonable to conclude that it is not so much the level of inflation that determines equity risk premiums but uncertainty about that level."
Dr. Doom Has Gold Going Below $1,000: Why His Thesis Is Spot On [View article]
"More than 8 million people lost money on their accounts." (during the Great Depression). But only 1%, and most of them in the Deep South, lost everything. Most, including those in the Deep South, became lien creditors. They were asked to take possession of distressed properties held by the banks, and from what I've heard some of them actually made a profit above what they had deposited in the failed bank.
Dr. Doom Has Gold Going Below $1,000: Why His Thesis Is Spot On [View article]
"So you know exactly where they should be?" - no, do you? But I know they are lower than they should be. Econ 101.
"As for moral hazard, the very possibility of bank runs is a huge moral hazard. " - no, that's not moral hazard. You are describing why a bank run is rational, but that's a different topic.
Get some skoolin' and git back to we, it's gonna make you money like me, who owns their own business, made his first million before age 40, and is now semi-retired.
Micron: If You Can Buy Only 1 Stock, Make It Micron [View article]
Oh c'mon. If the computer memory business was so great, and if there were only two companies (Elpida and Micron), do you think one of them would have gone bankrupt? In fact, there are dozens of such companies and memory is a bad margin business. Go here for a list (some of them don't do DRAM but some do): http://bit.ly/10UJGCo
A Kansas farmer files suit against Monsanto (MON) over the recent discovery of genetically modified wheat in Oregon, claiming MON's gross negligence hurt U.S. growers by driving down wheat prices and causing some international markets to suspend certain imports. The lawsuit is believed to be the first stemming from the discovery, but more surely are in the works. [View news story]
Governments against GMO foods and Frankenfoods are foolish. Let the consumer decide, not governments. A while ago an African nation that was starving refused GMO wheat sent as food aid. Ridiculous, as stupid as those who refuse to microwave food since they think the microwave rays cause the food to turn cancerous. There's no scientific basis for that. GMO has been going on for millennia-- it's why there's so many dog breeds for example.
Dr. Doom Has Gold Going Below $1,000: Why His Thesis Is Spot On [View article]
Author on End the Fed: "They would say "with nothing," and I would then ask, "then how will we stop bank runs?""
You mean like the UK Fed ended a bank run at Northern Rock? NOT. What the author is trying to say is the likelihood of bank runs is diminished with Fed insurance, but this same insurance causes 'moral hazard' and makes the existing system inefficient. That's why interest rates for savers are lower than they should be, and why banks lend money to foolish projects. Great for people who invest with OPM (Other People's Money), not so great for savers.
"Based on recent evidence [since the author's previous bullish stance, five weeks ago], I believe market conditions have shifted and a change in strategy is appropriate. "
My, what a difference five weeks makes. So in another five weeks you might reverse your call?
See ya, would not want to be ya's long-term investing client....
A False Dawn In The Land Of The Rising Sun [View article]
One of the best JP summary articles, yet, with excellent graphics. It should be pointed out that JP has a greater current account surplus (at the moment) than the UK does, so perhaps the UK is, like Iceland and Ireland, the next domino to fall? Still, long term JP is desperate and while I hope indeed the Burmese mathematician discovers 2 + 2 = 5, I'm not banking on it.
Big U.S. Banks: I Say, Let 'Em Crash [View article]
Another idea, I'm surprised nobody mentions it: abolish FDIC insurance except at the very smallest level (say $25000 per account). This would force depositors to do 'due diligence' instead of throwing money at the most shaky banks offering the highest yields (as is the present practice). But the Bank Lobby will fight that.
Aggregate Wages Are Sticky, Individual Wages Don't (Much) Matter [View article]
Ray Lopez
A reader to Sumner's blog:
Prof. Sumner,
When you describe “musical chairs” why don’t you tell a simple story like this:
“Wages are sticky. Specifically, employers are extremely reluctant to cut nominal wages.
Imagine that your economy suffers a large demand shock or supply shock. If that happens, then the average real wage has to go down.
In an environment of decelerating spending growth, employers reduce the average real wage by firing lots of people. We get mass unemployment. The productive potential of the economy is reduced.
But in an environment of consistent nominal spending growth, employers don’t fire lots of people. Instead, they raise the wages of most workers while keeping the wages of some workers flat. This way, the average real wage goes down but mass unemployment is avoided.”
David Glasner seems to believe something like this story: http://bit.ly/126VA7I
As Home Building Heats Up, Trex Is Picking Up Momentum [View article]
Dangdang: 4 Reasons To Be Long [View article]
Bill Gross's Misguided Diagnosis Of America's Economic Problems [View article]
Do Not Read This If You Thought The Economy Was Improving [View article]
Equity Returns And Inflation [View article]
Dr. Doom Has Gold Going Below $1,000: Why His Thesis Is Spot On [View article]
Dr. Doom Has Gold Going Below $1,000: Why His Thesis Is Spot On [View article]
"As for moral hazard, the very possibility of bank runs is a huge moral hazard. " - no, that's not moral hazard. You are describing why a bank run is rational, but that's a different topic.
Get some skoolin' and git back to we, it's gonna make you money like me, who owns their own business, made his first million before age 40, and is now semi-retired.
Micron: If You Can Buy Only 1 Stock, Make It Micron [View article]
A Kansas farmer files suit against Monsanto (MON) over the recent discovery of genetically modified wheat in Oregon, claiming MON's gross negligence hurt U.S. growers by driving down wheat prices and causing some international markets to suspend certain imports. The lawsuit is believed to be the first stemming from the discovery, but more surely are in the works. [View news story]
Dr. Doom Has Gold Going Below $1,000: Why His Thesis Is Spot On [View article]
You mean like the UK Fed ended a bank run at Northern Rock? NOT. What the author is trying to say is the likelihood of bank runs is diminished with Fed insurance, but this same insurance causes 'moral hazard' and makes the existing system inefficient. That's why interest rates for savers are lower than they should be, and why banks lend money to foolish projects. Great for people who invest with OPM (Other People's Money), not so great for savers.
S&P 500: Do Not Buy This Dip [View article]
My, what a difference five weeks makes. So in another five weeks you might reverse your call?
See ya, would not want to be ya's long-term investing client....
A False Dawn In The Land Of The Rising Sun [View article]
Big U.S. Banks: I Say, Let 'Em Crash [View article]
That Was The Crash, Dummy [View article]
Staying out of this market. Crash coming, starting in Japan, and it will be ugly.