Tag: economics

A tale by Desert Cat

“Sir, according to our calculations, we should have just entered orbit around the moon.”

“You’re sitting in the parking lot.”

“No, sir, we should be in orbit now.”

“I’m looking out my window right now. I see you in your pod talking to me.”

“Sir, that cannot be. We have carefully checked our calculations. We are in orbit. Shall we initiate the landing sequence?”

“Look, you’re not in orbit around the moon. You did not get off the ground on earth. You’re sitting in your pod in a parking lot behind the building, talking to me on your cell phone. Look out the window of your pod. What do you see?”

“I can’t, sir.”

“What?”

“I can’t look out the window.”

“Why not?”

“It doesn’t fit with our calculations.”

“Oh FFS! I am ordering you to look out your pod window! Now, I am waving at you from my office window. What do you see?”

“…”

“Hello?”

“…”

“What do you see?”

“Sir?”

“Yes?”

“Sir, you may not believe this, but I think we’ve come face to face with an alien life form.”

“Huh?!”

“It is a large, cube-shaped craft, hovering next to our pod. The aliens appear to be trying to hail us…”

Truly excellent work. It is becoming evermore apparent to those who are cognizant of a reasonable range of economic theories that the more stubbornly the Neo-Keynesians cling to their econometric models, the further from reality they will find themselves.

Calculated Risk considers his indicators:

Historically the best leading indicator for the economy (and employment) has been housing. I’ve been writing about this for years. For a great summary paper, see Professor Leamer’s presentation from the 2007 Jackson Hole Symposium: Housing and the Business Cycle

For housing as a leading indicator, I use Residential Investment (quarterly from the BEA’s GDP report), and monthly data on Housing Starts and New Home sales from the Census Bureau, and builder confidence from the NAHB.

1. “Total starts had rebounded to 590 thousand in June, and have moved mostly sideways for eight months.”

2. “The record low was 8 set in January 2009. This is still very low – and this is what I’ve expected – a long period of builder depression. The HMI has been in the 15 to 19 range since May 2009.”

3. “New Home Sales in January were at a seasonally adjusted annual rate (SAAR) of 309 thousand. This is a record low and a sharp decrease from the 348 thousand rate in December.”

I don’t think the correct conclusion is to say that “any growth will be sluggish and choppy”, but rather “this supports the debt-deflation data showing economic contraction and very clearly shows that there is no recovery no matter what the GDP numbers say”.

Lest you think I exaggerated how little the mainstream economists are aware of the increasingly tenuous link between their Neo-Keynesian economic model and the way the economy actually operates in RGD:

The Congressional Budget Office (CBO) has produced a new report estimating that the $862 billion stimulus has thus far saved or created 1.5 million jobs. Yet the CBO’s calculations are not based on actually observing the economy’s recent performance. Rather, they used an economic model that was programmed to assume that stimulus spending automatically creates jobs — thus guaranteeing their result.

Logicians call this the begging-the-question fallacy. Mathematicians call it assuming what you are trying to prove. The CBO model started by automatically assuming that government spending increases GDP by pre-set multipliers, such as:

* Every $1 of government spending that directly purchases goods and services ultimately raises the GDP by $1.75;

* Every $1 of government spending sent to state and local governments for infrastructure ultimately raises GDP by $1.75;

* Every $1 of government spending sent to state and local governments for non-infrastructure spending ultimately raises GDP by $1.25; and

* Every $1 of government spending sent to an individual as a transfer payment ultimately raises GDP by $1.45.

Then CBO plugged the stimulus provisions into the multipliers above, came up with a total increase in gross domestic product (GDP) of 2.6 percent, and then converted that added GDP into 1.5 million jobs.

The problem here is obvious. Once CBO decided to assume that every dollar of government spending increased GDP by the multipliers above, its conclusion that the stimulus saved jobs was pre-ordained. The economy could have lost 10 million jobs and the model still would have said that without the stimulus it would have lost 11.5 million jobs.

The present state of economics is very, very bad. The fact that mainstream economists not only can’t recognize that the economy is in a depression, probably a Great Depression, but think it’s in the midst of a genuine recovery is powerful evidence that their theories and models need to be completely junked.

The UK is doing its best to do so through its Keynesian response to the Great Depression 2.0:

The U.K. has produced notable economists over the years, but John Maynard Keynes, the guru of government intervention, was one of truly global significance.

So it may be fitting that the U.K. will also become the deathbed of Keynesian economics.

Britain has been following the mainstream prescriptions of his followers more than any developed nation. It has cut interest rates, pumped up government spending, printed money like crazy, and nationalized almost half the banking industry.

Short of digging Karl Marx out of his London grave, and putting him in charge, it is hard to see how the state could get more involved in the economy.

The results will be dire. The economy is flat on its back, unemployment is rising, the pound is sinking, and the bond markets are bracketing the country with Greece and Portugal in the category marked “bankruptcy imminent.” At some point soon, even the most loyal disciples of Keynes will have to admit defeat, and accept that a radical change of direction is needed.

The usual Keynesian defense of “well, it just wasn’t enough stimulus isn’t going to wash this time, no matter how often that Paul Krugman complains that a bigger stimulus plan than the one he prescribed himself was too small. Their myopic cluelessness simply knows no bounds; reading Brad DeLong’s attempt to school Brian Riedl is like watching two little girls in a slapfight where neither of them knows how to fight.

“When–in conditions in which there are masses of unemployed–the government spends money to hire people who were previously among the involuntarily unemployed, their productivity increases. It goes from zero to whatever the value of what the government hires them to do is. This increases income and demand, all in tandem.”

No, you blithering idiot with a PhD, it doesn’t necessarily do anything of the sort. The number of incorrect assumptions contained in those three paragraphs are remarkable. These cretins babble on and on about irrelevant factors while constantly ignoring the elephant in the room, namely, the debt-imposed limits of demand. Aside from the obvious fact that there is a high probability that there will be no productivity gain whatsoever from the nonexistent demand being “met” by the government employment and the fact that unemployed people do not immediately go into a frozen stasis where they do absolutely nothing economically productive, the mere fact of providing employment and income to a worker does not create demand.

Keynesians simply don’t understand debt or demand, at either the micro or macro levels. They’re not equipped to do so because of the structural flaws of their conceptual models. And that is one of the primary reasons why the various economies around the world are not only in terrible shape, but are going to get worse.

After bestowing a well-deserved Dynamite Prize to Alan Greenspan for being the economist “most responsible for blowing up the global economy”, the Real-World Economics Blog is now accepting nominations for the Revere Award:

The Revere Award in Economics

The economics establishment has attempted to evade responsibility for the Global Financial Collapse by calling it an unpredictable, “Black Swan” event. But in fact some non-neoclassical economists foresaw the crisis and warned the public of its approach. The Revere Award aims to give these economists the professional and public recognition that they deserve, to encourage others to utilize their methods, and to increase the likelihood that, for the benefit of humankind, empirically responsible economists will be listened to in the future

You may nominate up to three candidates by leaving a comment below. They must be economists, and we are looking for the three who first and most cogently warned of the coming calamity.

Nominations are to be made in the comments. While I seem to recall that I may have made a few predictions related to the matter, here are the three candidates I believe to best merit the award:

Ludwig von Mises. He long preceded Hyman Minsky in describing the nature of the boom-bust cycle and assigning responsibility for it to the expansion of bank credit. He provided the best conceptual model for anticipating and recognizing both the housing bubble and its consequences for the financial system. Granted, he didn’t predict this specific boom-and-bust due to the obvious disadvantage of his having been long deceased, so he may not be eligible.

Edward Gramlich. RGD readers will recall him as the Federal Reserve governor who told Alan Greenspan that making home mortgages available to low-income borrowers would lead to widespread loan defaults having extremely negative effects on the national economy. And he did this in 2000! Greenspan blew him off because – seriously – he was afraid of undermining the availability of subprime credit.

Robert Prechter. He forecast both the housing bubble and the threat to the global financial system very early on. Some will complain that he did so too early, but Prechter, by his own admission, usually gets it too early. The much more important point is that he usually also gets it right.

It has become entirely apparent that I simply can’t manage two blogs. So, rather than simply shut down the RGD economics blog or quit blogging here and focus on all economics all the time, I’m interested in finding out if there are one or two economically aware bloggers who might be interested in becoming co-bloggers there. I’d like to see it become a statistical and analytical resource, like Calculated Risk, only more focused on the factors I consider to be more relevant. My thought is that I would direct the content, including the schedule of economic data releases, produce the graphs for the data I track on a regular basis, and generally serve as the editor, but the brunt of the daily blogging would be done by the co-bloggers. There should probably be three or four posts per day, including the statistical releases with historical charts incorporated.

While there are a lot of decent econoblogs on the Internet, only CR comes close to what I think of as a one-stop statistical shop. What I’d like to see is something that is a mix of CR, Mish, and the Market Ticker, albeit with a more international flavor. Ideally, there would be one European, one American, and one Asian blogger to cover all the bases.

Anyhow, if this may happen to be of interest to you, you possess a basic knowledge of economics, and more importantly, the time to post a few times per day, let me know in the comments here. Or shoot me an email. If no one is interested, that’s fine, it’s certainly not a problem. But I thought the idea was worth throwing out there in case there is a stat geek or two with an Austrian inclination.

Karl Denninger calls shenanigans on the Bureau of Labor Statistics:

Remember the market’s “cheering” of the “-0.1%” CPI-U reading (core) yesterday?

There’s a problem – it was wrong.

Look at the highlighted numbers. Let’s multiply them up.

(5.966 x 0) + (.769 x -2.1) + (25.206 x -0.1) + (.347 x 0.4) / 32.288 = -0.12%, or -0.1%.

But it was reported as -0.5% in the line directly above (inverted tone.)

Oops.

I didn’t re-run the weightings for the entire series but a quick “eyeball” of the table shows that this should result in a CORE reading of 0.1% (positive), not the negative number reported.

Will the BLS admit to this error? Who the hell knows, but if you have a calculator, you can verify that yet another game to “boost” the market was run, with desire effect – a roughly 1/2% spike in the S&P 500 futures right on the BOGUS data release…. We now officially live in a world where intentionally-incorrect data is published by our government for the specific intention of misleading the markets.

It’s entirely possible. I certainly wouldn’t put it past them. On the other hand, given the BLS’s autopodiatrical assault chronicled in RGD, when they proved their own CPI-U numbers to be less reliable than the Shadowstats statistics they were incompetently attacking, it doesn’t stagger the imagination to think they just got the number wrong because they’re stupid government bureaucrats.

Of course, either way, you have to be an idiot yourself to put any credence in their reports. It simply doesn’t matter what the official paper count happens to be, because debt-deflation is well on its way.

The Market Ticker does the math:

Mortgage Bankers Association: 15% of US mortgages were in foreclosure or delinquency (remains a record); with loans 90 days past due also a record

Oh that’s nice.

70% of homes have a mortgage on them (the other 30% are “paid off.”) This implies that approximately 10.5% of all all homes are delinquent or in foreclosure.

One in ten. No, the housing mess is not over.

Don’t forget that all that is keeping many banks technically solvent is the fact that they are still keeping these delinquent and defaulting loans on their books as performing. It’s not over. It’s not even CLOSE to over.