Tag: economics

Killing the corpse of Keynes

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.

For excellence in paying attention

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.

WND column

Deflation vs Inflation

After last week’s report on CPI-U core inflation from the Bureau of Labor Statistics, which was either -0.1 percent or 0.1 percent depending upon whose mathematics inspires you with more confidence, and the Federal Reserve’s decision to raise the discount rate to 0.75 percent from 0.50 percent, the attention of the markets is more closely focused on the question of inflation versus deflation than ever before.

Because the mainstream economic models, both Neo-Keynesian and Monetarist, are constructed around tax rates and government spending on the fiscal policy side and interest rates and money supplies on the monetary policy side, the inflation-deflation debate is almost invariably limited to contemplating interest rates and money supply. However, these analytical approaches also happen to leave out what is easily the most sizable and important factor, which is the amount of debt in the economy and the ability of the various economic actors to service their debts.

Econoblogger query

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.

Inflation manipulation

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.

Not over

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.

The social cost of maleconomy

Don Peck writes an ominous article about the transformation of America in the Atlantic:

By the time the average out-of-wedlock child has reached the age of 5, his or her mother will have had two or three significant relationships with men other than the father, and the child will typically have at least one half sibling. This kind of churning is terrible for children—heightening the risks of mental-health problems, troubles at school, teenage delinquency, and so on—and we’re likely to see more and more of it, the longer this malaise stretches on.

“We could be headed in a direction where, among elites, marriage and family are conventional, but for substantial portions of society, life is more matriarchal,” says Wilcox. The marginalization of working-class men in family life has far-reaching consequences. “Marriage plays an important role in civilizing men. They work harder, longer, more strategically. They spend less time in bars and more time in church, less with friends and more with kin. And they’re happier and healthier.”

Communities with large numbers of unmarried, jobless men take on an unsavory character over time. Edin’s research team spent part of last summer in Northeast and South Philadelphia, conducting in-depth interviews with residents. She says she was struck by what she saw: “These white working-class communities—once strong, vibrant, proud communities, often organized around big industries—they’re just in terrible straits. The social fabric of these places is just shredding. There’s little engagement in religious life, and the old civic organizations that people used to belong to are fading. Drugs have ravaged these communities, along with divorce, alcoholism, violence. I hang around these neighborhoods in South Philadelphia, and I think, ‘This is beginning to look like the black inner-city neighborhoods we’ve been studying for the past 20 years.’

Fortunately, all those millions of relatively impoverished immigrants from third-world cultures are likely to provide a wonderful antidote to this decline into matriarchal barbarism. Since immigration is good for the economy, imagine how bad unemployment might be if it weren’t for 12 million illegal immigrants doing the jobs that unemployed Americans can’t do.

Why mainstream economics is not science

A concise summary:

The entire point of the scientific method is to rule out premises that are contradicted by observations. It has never meant beginning with premises you know to be false and absurd, tracing out whatever implications you can draw from there, and, when circumstantially finding congruence with your “predictions” and observed data, asserting the result of your machinations as “scientific knowledge.”

The reader should now be able to note just how shaky and peculiar the methodological stance of positivist, or rather “positive,” economics actually is. In Friedman’s essay, “The Methodology of Positive Economics,” he defends deriving consequences from clearly false premises with regard to the study of human action. He aptly states that hypotheses are not required to be “realistic” in their assumptions.

Unfortunately for him, a “hypothesis” that incorporates notions and assertions that are demonstrably false is not a hypothesis but a falsehood. Many of the falsehoods that are defended by him, like homo economicus, perfect competition, and perfect knowledge, are still applied in neoclassical economics today.

One can identify from Friedman’s essay a confusion about the way in which assumptions are utilized in the natural sciences. Systems are never modeled according to assumptions that are fantastically flawed in describing them. If physics is truly the science that modern neoclassical economists seek to emulate, it is unfortunate for them that they have utterly misunderstood its methodology. Much of what is labeled “economics” today therefore cannot correctly be described as a science.

The intrinsic non-science is a very important point that I implied, but never quite managed to state so succinctly in RGD. But in significantly fewer words, this is what I was working towards getting across to the reader in the chapter “N-body economics”.

Debt-deflation continues apace

Although it has been drowned out by all the excited reports of massive GDP growth in the fourth quarter of 2009, the economic situation continues to worsen in the eyes of those who are focused on much more important variables, such as the amount of credit in the system. The most recent Fed report, for the week of January 20th, shows that commercial bank loans and leases have reached a new low since 2008, $37.6 billion less than the revised October 21, 2009 low. Bank loans have contracted nearly 9% from the October 2008 peak and are already down 0.42% in the first three weeks of 2010. At the present rate, bank loans will contract another 7.67% in 2010, exceeding last year’s record credit contraction of 7.05%.

To put this in perspective, the only reason the chart goes back to 1973 rather than 1947 is that the lowest rate of credit growth from 1947 through 1972 was 2.65% in 1949.  It’s not just that two straight years of credit contraction has only happened once before in the post-war era, it’s that the magnitude of it is completely without precedent.  And this is all without the banks being forced to take write-downs for the bad loans that they made and securitized off their books.   As the Market Ticker has been pointing out since April 2007, selling on bad loans to investors does not take a bank off the hook when, as was very often the case with subprime and Alt-A loans, there is a fraudulent element in the mortgage such as overstated income.

S&P put out a report the other day in which it essentially said “if the banks have to eat the reduced value now they’re all insolvent.” We in fact have fixed none of the underlying issues that brought down Fannie, Freddie, AIG, Bear and Lehman. The only reason we have seen supposed “improvement” in the markets is that the government has given permission to lie to financial institutions in the exact same form and fashion (that is, hiding actual liabilities and probable losses) that brought down ENRON. But the underlying loss is still real, still present, and still out there. Refusing to recognize it doesn’t make it go away. It just sweeps it under the carpet with the hope (wish really) that the institution will be able to screw you, the consumer, out of enough money to cover the shortfalls before they’re forced to recognize the already-occurred losses and thus declare bankruptcy.

If the mortgage security put-back issue comes to the fore, my linear projection of 7.67% bank loan contraction almost surely be overly optimistic, just as my forecast for 2009 deposit failures in RGD was. If we are still in the early stages of debt-deflation, then we must still be in the early stages of economic contraction. Paul Krugman likes to write about demand gaps, but even his most negative calculations are dwarfed by the size of the credit gap between the pre-2009 8.37% average annual credit growth and the 2009-2010 -7.5% annual contraction.

Debt is always the core of the problem. Witness how the imminent debt implosion in Greece makes the previously unthinkable prospect of sovereign defaults and the eventual disintegration of the Euro and the European Union look increasingly more likely:

The EC has no data on public debt beyond 2008, when the figure was €237bn, or 99.2pc of GDP. A surging budget deficit of 13pc of GDP has pushed the figure much higher since then. Brussels expects the debt to reach 125pc this year, and 135pc in 2011 unless spending is slashed. If auditors discover a fresh chunk of hidden debts, this would test Greek financial credibility to the limits. “If there is anything too this, it is the final straw,” said one banker.

GDP grows 5.7 percent!

The BEA’s Q4-2009 Advance report:

Real gross domestic product — the output of goods and services produced by labor and property located in the United States — increased at an annual rate of 5.7 percent in the fourth quarter of 2009, (that is, from the third quarter to the fourth quarter), according to the “advance” estimate released by the Bureau of Economic Analysis. In the third quarter, real GDP increased 2.2 percent.

Given that the last report went from 3.5 percent down to 2.2 percent, what are the chances that this impressive number – more than double the average rate of economic growth over the last 50 years – will hold up? Even Wall Street isn’t pretending to take the GDP reports seriously any longer. Note that at $14,463.4, US GDP is now reported to be larger than it ever has been before.

Apparently the 89.7 percent of workers who still have jobs are exceedingly productive. As far as I’m concerned, this claim of economic growth at a 5.7% annual rate does nothing but demonstrate the increasing disconnect between the macroeconomic statistics and the actual economy.