Tag: economics

Did Ron Paul read RGD or something?

It does sound rather like it:

Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.

A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954…. Can anyone realistically argue that a few small upticks in a handful of economic indicators are a sign that the recession is over?

What is more likely happening is a repeat of the Great Depression. We might have up to a year or so of an economy growing just slightly above stagnation, followed by a drop in growth worse than anything we have seen in the past two years.

Or perhaps it was a book entitled The Repeat of the Great Depression. Although it really is remarkable how in sync his comments are with my conclusions in the book.

Banking Oct 2009 update

Bank failures: 115
Total Deposits: $7,566 billion
Failed Deposits: $107.2 billion
Failed Assets: $129.5 billion
Estimated Losses: $29.4 billion
Actual Losses est: $52.4 billion

Failed Deposits/Total Deposits: 1.42 percent
Estimated Losses/Failed Deposits: 27.4 percent
Actual Losses/Failed Deposits: 48.8 percent
Total loans & leases: -6.8 percent (6720.3, 10/14/09)

DIF balance Q3 reported: negative
DIF balance FDIC est: -7.7 billion
DIF balance actual est: -20.3 billion
FD/TD 1929: 0.47 percent
FD/TD 1930: 1.65 percent
FD/TD 1931: 3.60 percent
FD/TD 1932: 1.99 percent
FD/TD 1933: 8.55 percent
AL/FD 1929-1933: 25.66 percent

FD/TD 2008: 3.21 percent
AL/FD 2008: 14.99 percent

September’s figures

Falsifying RGD

I’ve been asked to consider the possibility that the thesis of my latest book, The Return of the Great Depression is incorrect. If I were the Mogambo Guru, this would of course be the correct occasion to respond with nothing more than the Mighty Mogambo Snort of Derision (MMSoD) followed by a verbose and entertaining rant involving pitchforks, firearms, indignities performed upon the corpses of deceased central bankers, and gold, but as I am merely an Internet Superintelligence with a tendency to take things literally even when they are clearly intended as metaphor, sarcasm, or irony, sometimes for the purposes of illustration but more often for my own amusement, I shall consider the question of what would indicate that I am incorrect and we are not in the early stages of a massive worldwide economic contraction.

As it happens, I have gone into some detail in examining the possibility that I am wrong in the book itself by cataloging the six plausible scenarios, five of which are presently part of the present economic discourse. While the five scenarios that range from Saint Bernanke and the Green Shoots to Great Depression 2.0 each have their public advocates who are listed by the scenario they are forecasting, I have yet to discover any economist who is genuinely convinced that we are headed for the sixth scenario: Fallout 4 Live.

Since a significant part of my conclusions are based on Austrian theory with a much-lesser nod to Minsky’s financial instability hypothesis, the first indication that I could be wrong is related to bank credit. Austrian theory teaches that either the money supply and/or bank credit has to contract; as Mises puts it: “[T]he moment must eventually come when no further extension of the circulation of fiduciary media is possible.” So, an sustained increase in either TOTLL or total credit market debt would be the first and strongest sign that either a) the depression is coming to an end or b) Whiskey Zulu India, the hyperinflation scenario, is coming to pass. TOTLL is presently down 8.2% from its peak one year ago, while TCMD was very slightly down in the second quarter; we are still waiting for the third quarter results.

The second sign will be rising property tax revenues, particularly at the state and local level. While it is easy for governments to play games with statistics, it is much more difficult for them to falsify their tax revenues. The document “State Finance in the Great Depression” is useful on this score. “After the Depression began, local government property tax collections did not again reach the 1927 level until 1944. For states, it took until 1952 to reach the 1927 level, although in the interval, states had reduced their reliance upon the tax.” Since state and local governments now already derive their revenue from a much broader range of taxes, it is unclear if one can use aggregate tax revenues as a similar indicator, but the collapse in cumulative tax revenues from declines in sales and income taxes suggests that this may be the case.

“Among the worst cases is Indiana where revenue collections were 8 percent below forecast, or $254 million lower than expected, leading state budget officials to speculate revenue could fall $1 billion by the end of the fiscal year.”

Most economists will be looking primarily at the GDP figures, and indeed, a positive report above three percent will probably be widely cited as evidence that the recovery has arrived, although anything south of the 3.3% growth expected by the mainstream consensus will likely sink the markets. But the current numbers are considerably juiced by the summer housing and automotive subsidies and the “positive” aspects of the improvement from the second quarter were entirely the result of a) government spending, and b) Americans buying fewer imports, neither of which is a legitimate sign of economic growth. But, I would regard two quarters of economic growth of four percent growth without any substantial government programs propping up consumer spending to be a legitimate sign of recovery. The fact that it is looking increasingly likely that the home buyer’s credit act will now be extended to April 2010 does not inspire great confidence in the legitimacy of the GDP numbers for the third and fourth quarters. I will be analyzing the Q3 Advance report on the RGD blog later for those who happen to be interested. (UPDATE: the BEA is reporting 3.5% growth for Q3, of which almost half, 1.7%, is from “motor vehicle output”. In other words, from additional government-subsidized debt.)

Finally, it is important to remember that GDP is an artificial construct intended to provide a means of modelling Keynes’s general theory which is predicated first and foremost on employment. The very concept of a “jobless recovery” is a contradiction in economic terms. As with GDP, U3 and U6 are subject to government statistical shenanigans, but unemployment is a little harder to disguise, so regardless of how the BLS plays around with the consistency of the “labor force” in order to make the rate look lower, seeing the Employment/Population ratio move back above the 60% would also be a strong sign of genuine economic recovery. Note that we are presently at 1984 rates of employment-to-population.

A fifth indicator that I am incorrect and the hyperinflationary scenario is unfolding instead of the debt-deflationary one is a rapid increase in the price of gold. Please note that this is not an economic recovery scenario, it is only a different form of the massively contractionary one. I believe that gold, being a form of money, can benefit from deflation. So, $1,075 gold is not conclusive, especially since it’s still lower than the $1,425 inflation-corrected 1981 peak. But only inflation could possibly account for the sort of rapid rise in price that would be projected to take it above, say, $5,000 per ounce, and if there is hyperinflation, the gold price can safely be expected to exceed that by a considerable margin.

Finally, physical shipments of goods are a necessary and relatively objective measure of economic activity. The Baltic Dry Index is a daily average of international shipping prices and it was at 11,771 at its peak in 2008. It is presently below 3,000 but rose as high as 4,291 in May, so any move above 5,000 would be an initial indication that an economic recovery is underway. Above 10,000 would appear to be positive proof that the economy was completely back on track, barring the hyperinflationary scenario, of course.

In summary: 1) Increasing bank credit and overall debt. 2) Rising state and local property tax revenues. Possibly increasing aggregate tax revenues as well. 3) Consecutive quarters featuring four-percent plus GDP gains not created by government spending, reduced imports and consumer spending subsidies. 4) Employment to population ratio over 60 percent. 5) Rapidly increasing price of gold over $1,500 per ounce. 6) The Baltic Dry Index exceeding 5,000. If anyone else has any suggestions, please feel free to list them.

A perfect picture

The end of the March bear market rally appears to be approaching confirmation. That’s a perfect picture of an A-B-C corrective wave.  Mike Shedlock goes into more detail, whereas I will merely note that the S&P500 is right smack in the middle of the 1,000 to 1,100 mark that Bob Prechter anticipated would be an excellent shorting opportunity back in July.

Escape from New York

New York tries the California model as yet again, mainstream economists demonstrate their irrelevance by completely failing to consider the primary factors involved. I know nothing about New York’s revenue estimation models, but I can guarantee you that they don’t take into account any change in taxpayer behavior based on changes in the rates, much less changes in their income levels:

New Yorkers are fleeing the state and city in alarming numbers — and costing a fortune in lost tax dollars, a new study shows. More than 1.5 million state residents left for other parts of the United States from 2000 to 2008, according to the report from the Empire Center for New York State Policy. It was the biggest out-of-state migration in the country. The vast majority of the migrants, 1.1 million, were former residents of New York City — meaning one out of seven city taxpayers moved out…. What’s worse is that the families fleeing New York are being replaced by lower-income newcomers, who consequently pay less in taxes.

It’s simply incredible that a profession which is largely built around the concept of equilibrium pricing staunchly refuses to consider the effects of the cost of debt and taxation. This is just the most recent example; in RGD I cited an even more dramatic tax migration from the city of Baltimore. Of course, the fact that mainstream economists don’t bother to include either debt or taxation in their models makes their decision to exclude the price of housing, food, and fuel out of the “Core CPI” statistic a little more comprehensible. After all, you’re no more likely to eat, drive or own a house than you are to pay taxes or buy things on credit.

By the way, the WND publicist has embarked upon a fairly aggressive radio campaign, so I’m doing something like two radio shows a day, starting today. If you want to follow along and listen to me say pretty much the same thing over and over again, the schedule is posted at the RGD blog. The link on the right under the book cover, cleverly entitled “RGD Radio Schedule”, will take you to the page which will be updated on a daily basis.

A brief note to the ankle-biters

On this fine afternoon, I find myself contemplating just what, precisely, could possibly be the purpose for your collective existence, which to the observer appears to testify against intelligent design and natural selection alike. I don’t pretend to understand what sickness of the soul causes you to repeatedly bash your heads against the unforgiving wall of my logic, or what compulsive disorder drives you to put yourselves in a position to be humiliated over and over again by my superior knowledge and intellect, as no sooner are you shot down than you rise, with all the sublime, shambling grace of a mindless zombie, and stumble back into the fray.

Are my ankles so sweet that you cannot resist snapping at them? Do your psychological scars run so deep that you cannot control your masochistic longings for brutal correction?

For years, I have told myself that even if your tedious and petty objections can only sharpen my arguments in the manner that butter sharpens steel, at least your desire to catch me in error, no matter how small that error might be, could nevertheless serve a useful purpose. Even the most flawlessly honed body benefits from its intestinal bacteria, after all. Although, unlike your more intelligent counterparts whose criticisms are thoughtful, substantive, and most of all relevant, you are not capable of understanding anything I write well enough to critique it in a meaningful manner, I assumed you were not only inclined to identify simple errors of basic fact, but were also capable of doing so.

It appears, however, that you have collectively failed at even this humble task. And this naturally raises a question. Is it possible that you could be more completely useless?

A few nights ago, I was reading Calculated Risk and noticed a link to historical pre-FDIC bank failure data. I followed it, being curious to know how far the official information parted from 1941 source material I had used in writing RGD. As I suspected, there were a few minor discrepancies as well as the usual Legend of the 4,000*. (The actual number of failed banks in 1933 is closer to 2,666, but the government always enjoys a nice round number.)

However, to my surprise, the number of failed bank deposits 1931 was much larger than I recalled it being. I checked my trusty and oft-updated bank failure spreadsheet and confirmed that the two not only did not match, but were not even close. The site said 1,690,232 and the spreadsheet said 160,232. The disturbing similarity made me suspect that the latter was supposed to be the former, albeit with a missing digit, and a check of the 1941 document confirmed the error. I had dropped the nine in when first typing the number into the spreadsheet… which significantly altered the percentage of bank failures about which I’d repeatedly written on this blog, in my column, and worst of all, in the book that was going to be announced the next day!

I couldn’t remember which chart I had put in the book. Which chart, dammit? Was it the year-by-year one, in which case the error would look like an absolute howler since the percentage of failed bank deposits would not be 0.34% but 3.6%? Or was it the cumulative chart wherein the difference between $68 billion and $90 billion would be visually negligible in comparison to the $666.6 billion in the neighboring column? And then, of course, there was the small matter of whether this error might call some of my conclusions about the similarity of the historical and present economic contractions into question.

Fortunately, Figure 6.3. Failed Bank Deposits and Losses in 2009 Dollars turned out to be the cumulative chart rather than the year-by-year one, which did not make the book. It was incorrect, but not embarrassingly so. The listing in the appendix couldn’t be helped, since the 160,232 number was directly in the table, but who reads the third appendix anyhow? Also, in that context it’s quite obviously a typo. And fortuitously, correcting the error also took care of a synchronicity problem that had been bothering me from the start. Since my belief is that 2010 compares 1931, why didn’t the bank failure data line up properly? And why was I following Milton Friedman’s lead in tracking the deposits from 1930 when the whole thing began in 1929?

Interestingly enough, exchanging the 1929 data for the incorrect 1931 data only required changing a single digit besides the year: “The amount of failed bank deposits as a percentage of total bank deposits is averaging 2.3 percent per year over the last two years, which is more than twice as high as the 1.01.1 percent annual failure rate in 19301929 and 19311930.” And now the bank failure comparisons are properly aligned with the beginnings of the economic contractions, which is nice.

Still, the typo involved in transferring the information from the book to the spreadsheet notwithstanding, I couldn’t believe that I hadn’t noticed an order of magnitude difference in the amount of failed deposits, especially when this meant that losses were more than 200 percent of failed deposits. This is theoretically possible since not all bank assets are deposits and actual losses are always higher than FDIC-estimated deposits, but the highest estimated actual loss to deposits in 2009 is only 107 percent so that should have been sufficient to signify that something was wrong. Ergo, mia culpa. I have, of course, created an errata page for the book and would appreciate it if any further errors are brought to my attention so that I can update it.

But, to return to my original point, if those of you who have dedicated yourselves to identifying and drawing attention to even the pettiest of my errors cannot be relied upon to catch such a relatively large and potentially significant mistake, you leave me with little choice but to conclude that you are, in fact, entirely worthless.

Okay, that was timely

Two days ago, I wrote this on the RGD blog: “You can safely expect similar “surprises” to take place in the United States and Europe over the next three quarters.” This consumer confidence report would appear to be the first of many to come:

The Consumer Confidence Index, released by The Conference Board, sank unexpectedly to 47.7 in October — its second-lowest reading since May. Forecasters predicted a higher reading of 53.1. A reading above 90 means the economy is on solid footing. Above 100 signals strong growth.

The animals spirits, they descend.

WND depression poll

It’s interesting to see that an overwhelming number of WND’s readers – 88% at this point! – believe that the U.S. is headed for another Great Depression. I very much doubt they’re all readers of my column either. It would seem that neither the stock market rally nor the endless stream of happy talk from the politicians and the financial media has convinced many people of anything. Of course, what are mere words when banks like Citi are jacking up interest rates on credit cards to 29.99% and First Premier is charging 79.9% when depositors can’t get 2% on their savings accounts. Neither the Fed nor the politicians are going to be able to get the banks lending when no one in their right mind can afford to own a credit card. As Mike Shedlock points out, this isn’t a bad thing, it is in fact a necessary thing.

It’s pretty clear that those voting aren’t regular readers of my column, though, since 39% selected the option that says Obama is the most to blame. Obama isn’t even in the top 20 of those who are most to blame for the developing depression, although no doubt it will be a major part of his legacy. This event was a long time in the making and although Obama’s ill-considered actions have only made things worse, there was nothing he could have done to stop it. In fact, if he had acted properly, everyone would already be conscious that the depression is upon us and many people would be blaming him for that.

My answer is: “Yes, the Depression is, in fact, already here”. And even if the BEA avoids springing a UK-style surprise to the downside later this week, no pumped-up reports of “better-than-expected” 3.3% GDP growth later this week is going to change that.

I’ll be on the radio with our old friend Jerry Hughes discussing this and other things from 4-5 PM eastern. Listen in via the Internet broadcast.

History’s verdict

Economics and Moral Courage, by Llewellyn Rockwell, is one of the most intellectually inspiring articles I have ever read. It is a beautiful reminder of the transience of what we think is worldly success and accomplishment:

While Mises worked at the Chamber of Commerce because he was denied a paid position at the University of Vienna, [Hans] Mayer served as one of three full professors there, along with socialist Othmar Spann and Count Degenfeld-Schonburg. Of Spann, Mises wrote that “he did not teach economics. Instead he preached National Socialism.” Of the count, Mises wrote that he was “poorly versed in the problems of economics.”

It was Mayer who was the truly formidable one. Yet he was no original thinker. Mises wrote that his “lectures were miserable, and his seminar was not much better.” Mayer wrote only a handful of essays. But then, his main concern had nothing to do with theory and nothing to do with ideas. His focus was on academic power within the department and within the profession….

[Mayer] thrived before the Nazis. He thrived during the Nazi takeover. He helped the Nazis purge the Jews and the liberals from his department. Note that Mayer was no raging anti-Semite himself. His decision was a result of a series of discrete choices for position and power in the profession against truth and principle. For a time, this seemed harmless in some way. And then the moment of truth arrived and he played a role in the mass slaughter of ideas and those who held them.

Perhaps Mayer thought he had made the right choice. After all, he maintained his privileges and perks. And after the war, when the Communists came and took over the department, he thrived then too. He did all that an academic was supposed to do to get ahead, and achieved all the glory that an academic can achieve, regardless of the circumstances…. He played the game and that was all he did. He thought he won, but history has rendered a different judgment. He died in 1955. And then what happened? Justice finally arrived. He was instantly forgotten. Of all the students he had during his life, he had none after death. There were no Mayerians. Hayek reflected on the amazing development in an essay. He expected much to come out of the Wieser-Mayer school, but not much to come out of the Mises branch. He writes that the very opposite happened. Mayer’s machine seemed promising, but it broke down completely, while Mises had no machine at all and he became the leader of a global colossus of ideas.

If we look at Mark Blaug’s book Who’s Who in Economics, a 1,300-page tome, there is an entry for Menger, Hayek, Böhm-Bawerk, and, of course, Ludwig von Mises. The entry calls Mises “the leading twentieth-century figure of the Austrian School” and credits him with contributions to methodology, price theory, business-cycle theory, monetary theory, socialist theory, and interventionism. There is no mention of the price he paid in life, no mention of his courageous moral choices, no mention of the grim reality of a life moving from country to country to stay ahead of the state. He ended up being known only for his triumphs, about which not even Mises was ever made aware during his own life.

And guess what? There is no entry at all in this same book for Hans Mayer.

Mayer was the typical academic intellectual dwarf and richly deserves to be forgotten by history, but to me the ultimate villain of the piece is Friedrich von Wieser. Can you imagine having the opportunity to anoint either Ludwig von Mises or Joseph Schumpeter as your successor and then somehow deciding to choose neither of them? That has got to be the worst employment decision in the history of economics, and quite possibly academics. It may even have been the most calamitous if one thinks through how much unnecessary economic pain and devastation could have been prevented.

As brilliant and revolutionary as Mises was, I think I would have preferred to hire Schumpeter to head the department. His History shows that his perspective was unusually broad and saddling him with the bureaucratic responsibilities would have kept Mises free to focus entirely on research. Then Schumpeter could have gotten rid of Spann, hired Hayek, and you’d have had the greatest economics department in history despite its small size. And with that collection of highly functioning brainpower assembled in one place, it’s quite possible that they would have achieved sufficient prestige to prove capable of preventing the Keynesian ascension. What a tremendous opportunity for Mankind missed. And what an interestingly esoteric possibility for an alternate history novel….

Beyond EPIC FAIL

This account of a debate between Thomas Woods and Tom McInerney, ING Chairman & CEO Insurance Americas, fairly well sums up the disastrous ignorance of the global financial elite. Keep in mind, the clueless wonder is an Econ major from Colgate with an MBA from Tuck:

The extent to which [McInerney], ING Chairman & CEO Insurance Americas was outmatched, though, was revealed in this almost embarrassingly funny episode. McInerney had mentioned that Bernanke was a diligent and knowledgeable student of the Great Depression. So, when it came time for the Q&A, one audience member asked Woods to briefly explain the Austrian view of Great Depression and how it might differ from Bernanke’s view. After Woods did this, McIerney took the stage, and as if he were about to unload a devastating blow against Woods, said to him, “this might seem like a bit of an attack. Don’t take it too personally.” And then…. he began to rant about … the relatively small size of the country of Austria. I kid you not.

Some audience members began to laugh; others cringed, as McInerney dug his hole deeper while under the illusion that he was unleashing a deadly zinger. Woods kept trying to stage whisper that Austria had nothing to do with the school of Austrian economics, but McInerney, undeterred, plowed on. Thus, when Woods took the stage he said, “this might seem like an attack, but don’t take it too personally…” And then Woods commented that we may as well say we shouldn’t listen to Milton Friedman, since the GDP of Chicago is pretty low.

And this sort of thing is just one of the many, many reasons that I’m deeply unimpressed with appeals to academic, professional, or scientific authority. Perhaps McInerney should have pleaded the Courtier’s Reply as it’s almost, though not quite, as deeply stupid as his soliloquy on the Austrian economy.

And it gets worse. Thomas Woods comments: “Of course people are right to observe that relatively few people get exposed to Austrian economics. The point here is that I had just finished a 40-minute presentation on the subject.”

No wonder McInerney’s company needed a bailout. I have little doubt it will soon need another one.