Tag: economics

It’s illuminating to see what small readerships are possessed by the most popular economics blogs. Because I read Mike Shedlock and Calculated Risk, I always assumed that a number of the long list of blogs on their blogrolls were similarly well patronized. But apparently that’s not so much the case, although the omission of sites like Karl Denninger’s Market Ticker indicates that around half of the bigger fish are missing from this survey. But if EconDirectory’s list of top economics blogs is to be trusted, then this would appear to be the 11th most trafficked economics-related blog, in between #10 VoxEU’s 12,405 daily pageviews and #11 TaxProfs 8,041. It’s the same when it comes to visits, although if one adds the 1,400 feed readers – this is one of the few blogs to provide full-text feeds that negate the need to come here to read the posts – that would bump VP up to #9.

This is both scary and heartening. It’s scary, because if even the most popular econ blog only attracts 56k daily readers, it’s not hard to understand the level of economic ignorance on the part of the elite and the electorate alike. And it’s heartening, because this indicates it is feasible to reach a substantial percentage of the people who are sufficiently interested in the subject to follow it.

While we’re on the subject, it’s interesting to note that the Wall Street Journal has finally begun to wake up to the intellectual bankruptcy of the Neo-Keynesian response to the initial stages of the Great Depression 2.0:

Today’s G-20 meeting has been advertised as a showdown between the U.S. and Europe over more spending “stimulus,” and so it is. But the larger story is the end of the neo-Keynesian economic moment, and perhaps the start of a healthier policy turn. For going on three years, the developed world’s economic policy has been dominated by the revival of the old idea that vast amounts of public spending could prevent deflation, cure a recession, and ignite a new era of government-led prosperity. It hasn’t turned out that way….

Like many bad ideas, the current Keynesian revival began under George W. Bush. Larry Summers, then a private economist, told Congress that a “timely, targeted and temporary” spending program of $150 billion was urgently needed to boost consumer “demand.” Democrats who had retaken Congress adopted the idea—they love an excuse to spend—and the politically tapped-out Mr. Bush went along with $168 billion in spending and one-time tax rebates.

The cash did produce a statistical blip in GDP growth in mid-2008, but it didn’t stop the financial panic and second phase of recession. So enter Stimulus II, with Mr. Summers again leading the intellectual charge, this time as President Obama’s adviser and this time suggesting upwards of $500 billion. When Congress was done two months later, in February 2009, the amount was $862 billion. A pair of White House economists famously promised that this spending would keep the unemployment rate below 8%. Seventeen months later, and despite historically easy monetary policy for that entire period, the jobless rate is still 9.7%….

The response at the White House and among Congressional leaders has been . . . Stimulus III. While talking about the need for “fiscal discipline” some time in the future, President Obama wants more spending today to again boost “demand.” Thirty months after Mr. Summers won his first victory, we are back at the same policy stand.

RGD readers may recall that I predicted not only the failure of Stimulus II, but the failures of Stimuli III and IV as well. I expect they’ll finally give up on the fruitless endeavor sometime between V and VII. The problem, which even the new-found Neo-Keynesian skeptics don’t understand, is that these failed stimulus packages not only haven’t worked, but they are going to exacerbate the next phase of the contraction that is even now gathering steam. Although they appear to have a glimmer of concern in that regard; consider how the WSJ is ineptly attempting to construct an ex post facto cover for its backside.

“With the economy in recession in 2008 and 2009, we argued that some stimulus was justified and an increase in the deficit was understandable and inevitable. However, we also argued that permanent tax cuts aimed at marginal individual and corporate tax rates would have done far more to revive animal spirits, and in our view would have led to a far more robust recovery.”

In other words, the WSJ still subscribes to the very economic idiocy they are describing as a dead end. It’s not that the magical incantation doesn’t work, it merely wasn’t chanted in precisely the correct manner prescribed in the Keynesian grimoire. This means that we can confidently expect the decision-making elite to continue digging and making the hole deeper as the situation worsens. Note that the average weekly leading indicators are now at -6.9, a decline last seen in July 2008.

This is neither the first nor fourth time that Greece has faced a serious default situation. But, as Michael Pettis of China Financial Markets explains, because so many different things have happened before, the question is less whether history will prove a guide to the future, but rather which historical example will prove to be the relevant one:

The economic recovery in the countries hit by crisis will not begin until they are recognized as insolvent and receive debt forgiveness from their creditors. Preceding every sovereign default is the fiction that the creditor country is simply facing a short-term financing problem, and that with a lot of discipline and a little bit of good will it will be able to work its way out of the crisis. During this period a number of restructuring “solutions” are proposed – all of which involve increasing debt, and often in the most financially destabilising way – which inevitably make the final resolution of the crisis much more difficult and which sharply raise financial distress costs. The most notorious recent example of these terrible “solutions” was Argentina’s disastrous debt swap in 2001, in which it dramatically increased the country’s total obligations while it desperately tried to maintain the fiction that it could somehow grow its way out of its impossible debt burden.

Greece, and probably two or three other countries, simply cannot repay their outstanding debt amounts. Ultimately they are going to default, and then in the restructuring process they will receive enough debt forgiveness that allows them to return to a sound footing and with a reasonable repayment prospect. But as long as they maintain the pretence that they can and will repay the full outstanding amount, and struggle with the burden, the resulting distortions in the economy will mean that businesses will disinvest and the country will not grow.

Historical precedence makes it clear that as long as the sovereign borrower is forced to struggle with an unrepayable debt burden, it will not grow. Eventually, as has happened in nearly every previous case, creditors and borrowers will acknowledge reality and will work out a debt forgiveness plan that will allow the economy to return to growth. Until then, expect weak growth, high unemployment, and constant battles over debt.

Although most US-based economists are convinced that the special status of the dollar somehow renders the USA impervious to economic laws, the danger of US debt default is nearly as great as it is in Europe. The fact that the defaults are likely to begin in the next two years with the state and local governments does not mean that they are going to end there. However, a partial default would be much more likely than a general one, with the USA defaulting on the third of its debt that is presently held by China coming as a prelude to war between the waning superpower and its self-appointed would-be successor.

Major economic and historical transition points are almost always accompanied by large-scale war. I see no reason to believe that this will not be the case again in this repetition of the cycle.

In which I wholeheartedly support Simon Johnson’s call for Obama to nominate Nobel-winning economist Paul Krugman to the Office of Management and Budget:

The president should nominate Paul Krugman to replace Peter Orszag as director of the Office of Management and Budget. We have previously reviewed Krugman’s outstanding qualifications for this (or any other top level) job (link to details). The main reason Krugman himself has been reluctant in the past relates to a potentially difficult Senate confirmation hearing – for example, if Krugman had been put forward to replace Ben Bernanke.

But for the OMB position, the dynamic of a hearing would be terrific for the president’s specific agenda and broader messages. Krugman, of course, is the leading advocate for continued (or increased) fiscal stimulus. This is exactly President Obama’s message to the G20 this weekend.

Plus, when Republicans push back against Krugman on this issue, he will let them have it full blast on fiscal policy during the Bush administration. Krugman has, again and again, been an outspoken critic of the Bush era fiscal policy. He has precise chapter and verse on where the Bush team went off the deep fiscal edge.

I think this is a fantastic proposal for three reasons. Consider the benefits: 1) Krugman gets the chance to prove once and for all that Neo-Keynesian economics does not work even when its foremost champion is in a position of power. 2) He will no longer be writing ridiculous opinion columns. 3) Within 18 months, the rest of the world will be forced to acknowledge that Krugman is a maleducated ignoramus who knows virtually nothing about relevant economic theory. 4) Mainstream economics can finally move on from an outdated and destructive economic theory.

And there’s no downside. It’s not as if Obama is going to appoint anyone who understands the first thing about the present contractionary crisis, after all. Krugman can’t possibly make things any worse than whatever clueless hack ends up getting appointed; for all Krugman’s willful theoretical incompetence, he’s actually less cretinous than the average mainstream economist.

In which I am not exactly surprised to be proven correct again:

Originally, I intended to just clip out the statement from Keynesian economist Jeffrey Sachs that “the stimulus failed,” which Joe Scarborough had to dig to get, but the entire segment is worth viewing. First, Sachs confirms — on MS-NBC, no less — that the Obama administration and Democrats in Congress had no strategy for long-term growth. The stimulus was a collection of short-term minor stimuli, combined with liberal hobby horses that Democrats had ridden for twenty years. Scarborough tries to defend Keynesianism from the Keynesians, but the failure can’t be separated from the philosophy.

The amusing thing about the failure of the stimulus isn’t that its failure was predictable, but rather that the shameless excuse-making of the Neo-Keynesians regarding its failure was also not only predictable, but predicted too.

And note all the talk about double-dip recessions, coming right on schedule in Q2 2010. Remember, as per RGD, the Great Depression 2.0 talk isn’t supposed to kick off in earnest for another two quarters.

Housing Double Dip a Done Deal

Everybody take a nice long look at today’s Pending Home Sales Index from the National Association of Realtors, because it’s just about the last positive picture we’re going to see for a while. Yes, the index rose even more than expected, as buyers rushed in to take advantage of the home buyer tax credit. And yes, those numbers will show up in Existing Home Sales in May and June, but then look out.

This index is based on contracts signed in August, and that’s how the credit was set up; you had to sign your contract by April 30th and close by June 30th in order to get your $8000 if you’re a first time buyer and $6500 if you’re a move up buyer.

And then came May, traditionally the height of the spring housing season. Mortgage applications to purchase a home began to sink. Now, four weeks later, mortgage purchase applications are down nearly 40 percent from a month ago to their lowest level since April of 1997. Yes, you can argue that a larger-than normal share of buyers today are all cash, but those are largely investors.

That means real organic buyers are exiting in droves.

This is precisely why I haven’t conceded anything about my home price predictions for 2010 even though prices have been rising instead of falling this year.* Notice how the language is beginning to sour, as “V-shaped recovery” has been gradually supplanted by “double-dip” and worse terminology. The so-called recovery has been nothing but a statistical illusion caused by carefully targeted Federal intervention designed to make things look better in an attempt to fool the economy into stabilizing itself. While this may sounds incredibly stupid, it’s actually the correct action if you happen to subscribe to Keynesian economic theory, based as it is on “animal spirits”.

The problem is that animal spirits are a symptom, not the disease. It is the amount of debt that is the issue, the economic cancer that has metastasized throughout the entire global economy. Getting the patient pepped up on financial coke and methamphetamine might make him feel invincible for a while – see the equity markets – but it’s not going to forestall his demise. It should be interesting to see what the estimated 40-percent drop in housing demand will have on the markets this fall.

*It seems I was correct not to concede anything, because in looking up the current NAR data to see how far prices had to fall this year in order to salvage my prediction, I discovered that my prediction of national median existing home prices falling below $165k before the end of 2010 had already been proven correct! NAR reports US prices as having fallen to $164,600 in February; they have since risen back up to 173,100. We’ll have to wait until December 31st to see who is more correct at the end of the year, Lawrence Yun at $179,500 or me at $165,000. However, at this point, I wouldn’t count out the possibility of a collapse below $140,000.

Marc Faber pronounces his verdict:

Central banks will never tighten monetary policy again, merely print, print, print.

Bubbles used to be concentrated in one sector or region in the 19th century, but off of the gold standard this concentration has ended.

“The lifetime achievement of Greenspan and Bernanke is really that they created a bubble in everything…everywhere.”

“Central banks love to see asset prices go up,” and their policy reflects their desperation to perpetuate this.

US housing bubble that Greenspan could not spot (even though he has recently spotted bubbles in Asia) stands in stark contrast to that of Hong Kong in 1997, where prices fell by 70%, yet none of the major developers went bankrupt; this was a result of a system not built on excessive debt like that of the US.

“You have to ask what they were smoking at the Federal Reserve,” during the housing bubble, as prices were increasing by 18% annually when interest rates started to steadily rise in 2004.

Over the last couple of years, when the gross increase in public debt has exceeded the gross decrease in private debt, markets have risen, whereas when private debt growth has outpaced public debt growth, markets have tanked.

However, last year Economist Gregory Mankiw articulated the position which according to Faber essentially echoes that of Fed #2 Janet Yellen and pervades much of the Fed generally, that “The problem is that people are saving money instead of spending, and we have to get the bastards spending to keep the economy going,” so the key is to inflate the money supply at something like 6% per annum. Thus, Faber says “As far as I’m concerned, the Federal Reserve will keep interest rates at 0, precisely 0…in real terms”.

I understand and respect his case, but for reasons I have delineated in RGD, I do not think the hyperinflation scenario will proceed as Faber assumes. That being said, I agree that the central banks will leave their interest rates at zero; the more important question is if that will ultimately have any relevance to anything during an ongoing debt-deflation process. Notice that contra both Keynes and Friedman, very liberal monetary policies are not instigating growth of the money supply.

The M3 money supply in the United States is contracting at an accelerating rate that now matches the average decline seen from 1929 to 1933, despite near zero interest rates and the biggest fiscal blitz in history.