Tag: economics

A note to Paul Krugman

Paul Krugman writes on his blog:

Hmm. I’m fairly accustomed to having speaking events disrupted by Larouchies (when I was in Cambridge a while back we had a guy yelling about banana fungus, among other things, who had to be shouted down by the audience).

But last night at Baruch the problem was Austrian economics/Ron Paul people who just wouldn’t stop talking.

On the whole, I might prefer the banana fungus.

I wrote the following reply and much to my surprise, it passed NYT moderation:

Dr. Krugman, I own all your books and have quite enjoyed several of them, particularly “The Accidental Theorist”. You are an engaging writer and have done some fascinating and genuinely ground-breaking work in the area of currency attacks.

Unfortunately, you literally do not know what you are talking about whenever you attempt to discuss Austrian economics. In your 1998 Slate essay entitled “The Hangover Theory”, it is perfectly clear that you have never read any Austrian economic theory because you are demonstrably unfamiliar with both the relevant economists and Austrian terminology. (For example, Schumpeter was an Austrian national and an economist, but he was not an Austrian economist.) What you have been criticizing and belittling is nothing more a strawman of your own concoction.

When even The Economist is describing the global financial crisis and the developing Great Depression 2.0 as a failure of academic economics, it should be clear to everyone that your appeal to academic authority is nonsensical. Your refusal to learn from the school of Menger, Bohm-Bawerk, Mises, Hayek, and Rothbard is precisely why your policy prescriptions for the Japanese and U.S. economies have reliably failed for more than ten years.

The biggest problem is your theory-based inability to understand that debt not only matters, it is the single most important variable in the modern economic equation. The fact that Keynes left it out of his general theory and Samuelson subsequently left it out of his practical application has badly crippled your ability to understand the present situation. It does not behoove an intellectual to dismiss what he does not know, so therefore I encourage you to give Austrian business cycle theory a sincere shot before casually dismissing it again.

UPDATE: We have our first one-star Amazon review by someone who admits he didn’t read the book! It took longer than I thought, but one Jonathan Birge has produced a beauty that really has to be read to be believed. The astounding thing is that the guy read my criticism of Krugman’s critique of what he imagines Austrian economics might be, and somehow managed to reach this conclusion:

Styling himself an Austrian economist, a reading of his criticism against Krugman makes it clear that Vox is well out of his depth, so embarrassingly so that one need read no further. On pages 163-164, he make an ludicrous strawman rebuttal of an argument of Krugman’s. To be specific, he misreads Krugman’s statement that all income is spending (and vice versa) to mean that every dollar of one’s income one must spend. He then spends the next several paragraphs ackwardly informing us of the obvious, such as that when one doesn’t buy a factory, that doesn’t mean they must buy something else. I almost feel bad for Vox, as he gloats in his victory over an argument nobody would ever be dumb enough to make. (And I would think nobody would be dumb enough to think somebody with a Nobel Prize would make it, either.) He accuses Krugman of not understanding simple things like time-preference or the effects of debt, of essentially being a base moron.

Of course, what Krugman means is that one person’s income must come from somebody else’s spending, an obvious tautology. Sadly, I don’t think Vox was trying to pull anything. I think Vox really believes he understands this stuff enough to write about it, when it’s seems all he knows how to do is reference other works in a pseudo-academic tone and parrot the names of concepts he’s read….

(For the record, I’m not defending Krugman or Keynesian economics. I’m a libertarian myself, and subscribe to Austrian economics to the limited extent I understand it. I actually came to this book thinking I’d like it and learn a lot from it. Unfortunately, I’m compelled to review it poorly. I’ve never written a review on a book I didn’t read completely, but sometimes it’s justified when the author makes such egregious errors in the first chapter one peruses. You don’t need to finish an entire turd sandwich to know the last bite is going to taste as bad as the first.)

By “limited” Jonathan clearly means “not even a little”. Now, Five points if you can spot what the kid got hopelessly wrong about what I wrote. Ten points if you can spot what he got completely wrong about what Krugman wrote. And twenty-five points if you can spot what major aspect of a modern economy, besides debt and time-preferences, Krugman revealed his theoretical model is not taking into account.

The time-preferences of criticism

Swamp Rat is more than a little impatient:

I know you’re not an ordinary boob, but that doesn’t necessarily mean that you’re not a boob. I’m willing to concede the possibility that I don’t understand your criticism. Perhaps you can spell it out for me and those like me more clearly.

The vast majority of people either do not grasp the concept of CA or reject it as counter-intuitive, but all schools of economic thought (save Marxian) embrace it. That doesn’t mean it’s valid of course, but you need to do more than express vague doubts if you want to be taken seriously by anyone outside of your fan club.

Specifically where do these economists go wrong and why do you think so?

It’s true that the vast majority of people don’t understand Comparative Advantage, but that’s mostly because so few people have ever read Ricardo. I have to point out how tiresome and ridiculous it is when people nonsensically assert that relatively simple and straightforward concepts, such as science, evolution by natural selection, or comparative advantage, are somehow beyond the capacity of anyone known to possess both the relevant information and the sufficient intelligence to understand them due to some ineffable magic qualities that no one is ever able to identify. Now, I suppose it is theoretically possible that I don’t understand Ricardo despite having proved my grasp of Smith, Marx, Keynes, Friedman, Mises, and Hayek beyond any reasonable doubt, but I doubt even my most vehement critics would consider it to be likely.

That being said, I don’t expect anyone to take my criticism of Comparative Advantage seriously at this point, due to the fact that I have not yet articulated it in any substantive manner. I know Swamp Rat can’t possibly understand it because he doesn’t know what it is. I am quite confident that he will understand it when I publish it; whether he agrees or not will depend upon how convincing a case I am able to present. The extent of what I have only described as my “increasing skepticism” and “budding criticism” of free trade is a single column in which I described some of growing doubts about a concept I have never seriously questioned in 25 years of reading about economics. (It’s in the archives, written sometime last year.)

In the meantime, there is no shortage of economic data to demonstrate that free trade is not strongly correlated with either economic growth or higher incomes for U.S. workers. (It has clearly benefited Korean, Taiwanese, and Chinese workers, but therein lies one seed of my criticism.) The U.S. indubitably engages in freer trade now than it did in the 1960s, and yet GDP growth rates are lower and average wages have been declining since 1973. There are certainly other factors involved, but the obvious indication is that whatever the positive aspects of CA might be, they are being observably outweighed by these other factors. I had hoped to write a fourth appendix addressing Ricardo’s theory in RGD, but I simply ran out of time. As I’m still in the process of working through some of the problems, it may be a little while before I’m able to post a substantive criticism here. But as many of my critics have learned, the fact that I am not ready to present a case should never be confused with the idea that I don’t have a strong one or notion that what I will eventually present is going to be largely the same as the cases that have been made previously by others.

Speaking of economics, here is a link to yesterday’s interview with Mike McSorley, in which CA may or may not have come up. I’m sorry that I’m not sure, but to be honest, with all these interviews, I’m finding it difficult to keep straight with whom I discussed what. I’m a little disappointed that I didn’t realize the new third-quarter total credit market debt number was released by the Fed yesterday. At $52617.3 billion, it shows that total credit has been essentially flat since Q4 2008; it’s down half a percent in 2009.

This means that the debt-deleveraging process has barely gotten started despite the 8-percent decline in bank credit. This puts total Debt/GDP at 369 percent, as the latest GDP revision has current dollar GDP at $14,266.3 billion

Yes, the books are that cooked

You may recall that I warned you to expect further revisions to the third quarter GDP numbers. Japan’s massive reduction of reported growth won’t be the last:

Japan’s Government today hit the Tokyo market with a “ridiculous” revision of its previous estimates for third-quarter gross domestic product (GDP), effectively admitting that the country’s economic rebound may have been only a mirage. The new figures revealed a misreading of corporate investment, which, it now emerges, shrank rather than grew between July and September. There was a similar confusion over deflation, with new numbers showing that the GDP deflator fell 0.5 per cent in the quarter, rather than rising 0.2 per cent as previously reported.

As a result, GDP rose by 1.3 per cent in the third quarter, compared with the previous estimate of 4.8 per cent.

In fact, I won’t be the least bit surprised if the numbers eventually turn negative over time. Remember, GDP is simply an abstract estimate, and as such, it is less important than unemployment. Although you’d be forgiven for thinking otherwise courtesy of the statistical obsessions of modern Keynesians, Keynes’s master work was not actually the general theory of GDP, CPI, and the targeted discount rate. There has not been any economic growth; since GDP measures government spending, all of the “growth” that has been reported is nothing more than the stimulus spending. In fact, if you compare the amount of the spending to the amount of the reported growth, you’ll soon see that a) the numbers don’t add up, and, b) if they did add up, (i.e. if the entire amount of government spending was included in the GDP equations), then the economy is contracting much faster than would seem possible.

Easy read

Voodoojock reviews RGD on Amazon:

The first thing that stands out about this book is the delivery. It’s fluid, conversational, and devoid of economic jargon that permeates most books on the subject. The book also exhibits none of the haughty arrogance displayed in books more suited for overworked graduate students of economics than public consumption. The graphs illustrate and illuminate rather than confound and confuse. There are ample anecdotes used to illustrate Day’s points. Having read von Mises’ “Theory of Money and Credit”, “The Anti-Capitalist Mentality”, “Socialism”, and Rothbard’s “America’s Great Depression”, “Return of the Great Depression” is about as easy to read and understand as Hazlitt’s “Economics in One Lesson”.

As far as the book’s content goes, it’s thoroughly researched and uses cites numerous sources to illustrate his points. Though Day is a student of the Austrian School of economics, the manner in which he methodically examines the historical events and the personalities involved displays no trace of any personal bias.

In tangentially related news, Ben Bernanke decides that perhaps it is possible for a central bank to do what his predecessor declared impossible after all by detecting a financial bubble in the process of expanding.

“On the heels of a burst housing-and-credit bubble, Mr. Bernanke now calls financial booms “perhaps the most difficult problem for monetary policy this decade.” With Asian property prices soaring and gold prices busting records almost daily, the debate comes at a critical time. Mr. Bernanke wants to use his powers as a bank regulator to stamp out bubbles, but the Senate Banking Committee, which will grill him later this week, is considering stripping the Fed of its regulatory power.”

This is extraordinarily disingenuous rhetoric from the Fed chairman. Mr. Bernanke can stamp out the bubbles without having any regulatory power over the banks at all. Raise interest rates, reduce the money supply and the bubbles will pop in minutes, if not seconds.

Recovery!

The 0.2% decline in U3 unemployment isn’t necessarily the good thing it is commonly assumed to be:

Mara Proctor used to design limestone hearths and columns for luxury homes near Kansas City, drawing on her college education and six years of training. These days, she’s leading customers around a store that sells sculptured snowmen and Santa figurines. It isn’t by choice. Until a few weeks ago, Proctor was among the record 5.9 million Americans who have been jobless for at least six months. Now she belongs to a subset of that group: Out-of-work professionals and managers, engineers and teachers who have turned, in desperation, to holiday-season jobs as sales clerks.

Retailers report a surge in applications this year from professionals who had never applied for such jobs before.

As Pat Buchanan points out, it is insane to import 1.5 million immigrants when tens of millions of citizens are already out of work. Or rather, it is insane to do so if you have any interest at all in the well-being of the citizenry. On the other hand, since education is deemed to be so important, it’s obviously beneficial to the buyers of sculptured snowmen to have such a highly trained saleswoman at their service.

This is also the result of the higher education bubble. I don’t remember who said it, but he was correct in pointing out that expanding higher education to the masses doesn’t mean that you won’t have sales clerks any more, it simply means that you’ll have sales clerks with PhDs. As always, it’s about the supply and demand, and impoverished immigrants will always win out over middle class Americans for the simple reason that they will accept a lower wage. One thing the Ricardians always fail to recognize is that the benefit to the overall economic system from free trade does NOT accrue to those parties who were previously at an overwhelming advantage.

Sander’s sensible move

This is one of the few times you will ever see me speak well of a socialist politician’s actions:

U.S. Senator Bernie Sanders said on Wednesday that he was placing a hold on Ben Bernanke’s nomination for a second term as Federal Reserve chairman, a move that could slow the confirmation process. If the hold is not withdrawn, the move by Sanders, an independent from Vermont, means that Senate leaders will not be able to bring up the nomination for a vote by unanimous consent. Instead, they may need to garner 60 votes in order to consider the nomination.

There is no question that Bernanke should not be reconfirmed. He is a charlatan cut from precisely the same cloth as the fraudulent Climategate “scientists”, who are claiming to be saving the world from global warming in much the same way that Bernanke claims to have saved the USA from a second Great Depression. He didn’t, he hasn’t, he has only made the situation much worse through his bankers-first policies of extend and pretend.

Mike Shedlock presents a dialogue that is a great case against Bernanke:

Bernanke: For many Americans, the financial crisis, and the recession it spawned, have been devastating — jobs, homes, savings lost. Understandably, many people are calling for change.

Mish: Ben, the reason people are calling for a change is that you and the Fed wrecked the economy. You did not see a housing bubble, nor did you foresee a recession. I would also like to point out your selective memory loss about your role in bailouts.

Bernanke: Yet change needs to be about creating a system that works better, not just differently. As a nation, our challenge is to design a system of financial oversight that will embody the lessons of the past two years and provide a robust framework for preventing future crises and the economic damage they cause.

Mish: No Ben, we need a system that works differently. You have proven beyond a shadow of a doubt that you and the Fed are incompetent and cannot be trusted. Ben, here is a compilation of your own statements made from 2005-2007 proving you have no idea what you are talking about.

Understand that the Federal Reserve system is going to collapse at some point regardless of what action is taken by the Congress. But Fed’s end will be much less catastrophic to the U.S. economy if it is intentionally and deliberately shut down as happened with each of the three previous American central banks than if it is left alone to collapse under the weight of its horrific economic contradictions. Denying a second term to Bernanke would be small first step towards winding down the current monetary system and replacing it with something more stable.

And when even something as flimsy and rife for abuse as a pure paper government currency is more stable, you know the present system can’t possibly survive.

WND column

The Dire Sign of Dubai

In 2007, the international financial elite knew very well that there were serious problems with the world’s largest banks. Perfectly good loans were being called, long-standing corporate relationships were being cast aside for short-term benefit and there was a palpable perception of something wicked on its way. While news of the so-called credit crunch was duly reported by all the major newspapers, few outside the financial world had any idea that consequences such as the meltdown of 2008 were rapidly approaching.

But if you knew what to look for, it was fairly obvious that something big and ugly was developing, which was why I wrote that “the United States was fast approaching an interesting juncture” in my WND column published March 24, 2008. In a similar manner, what appears to be the minor matter of a Dubai-based corporation requesting a six-month moratorium on its debt payments looks very much like a warning that the next stage in the global financial crisis will be upon us soon.

UPDATE – Karl Denninger notes the irony of an Arab government being more free market-oriented than the USA:

Dubai’s government said it hasn’t guaranteed the debt of Dubai World, the state-controlled holding company struggling with $59 billion in liabilities, and that creditors must help it restructure.

“The company received financing based on its project schedule, not a government guarantee,” Abdulrahman Al Saleh, director general of the emirate’s Department of Finance, said in an interview with Dubai TV, when asked whether the government was backing the debt. “Lenders should bear part of the responsibility.”

Dubai and debt-deleveraging

I expect the fears of a Dubai World default to be the first indication of many debt-deflationary shocks to come. The reason for what would appear to be a big overreaction to what is a relatively small problem is that everyone who is anyone in the financial world is thinking that if the legendary sovereign fund of Dubai can’t afford to service its debts, then who possibly can?

On Wednesday, Dubai World, the government investment company behind some of the emirate’s most ambitious projects, said it was seeking to delay repayment on a tranche of its debt.

The company has $60bn (£35.9bn) of liabilities from its various companies including Nakheel, the property firm behind the Palm Jumeirah, the world’s biggest artificial island, and the Nakheel Tower, the world’s tallest building at 1km high. It also owns DP World, the ports operator that bought P&O Ferries. Nakheel is due to make a $3.52bn Islamic bond repayment, plus charges, on December 14. The company also unveiled a restructuring programme, to be headed by Aidan Birkett, Deloitte’s managing partner for corporate finance.

Traders feared that the request for a six-month standstill was a sign that the Dubai Government was struggling with its other debts – and that the full impact of the financial crisis globally may not yet be over.

As I wrote at the beginning of RGD, it is not over. It has only begun. It may be worthwhile to remember that Austria’s Creditanstalt bank didn’t declare bankruptcy until May 1931, 19 months after Black Tuesday. It has been less than 14 months since the U.S. Congress created the Office of Financial Stability in order to establish the Troubled Asset Relief Program.

“Mandatory reading”

Steveo reviews RGD on Amazon:

Nagging doubts about the economy? You can either trust those same bought & paid for priestly economists that the government trots out every day or you can read Vox Day’s book, “The Return of the Great Depression” and find out what’s in store.

On a tangential note, the FDIC is now reporting what I was saying six months ago. The DIF is insolvent and the reserve ratio is officially negative. Based on their third-quarter figures, actual losses are still exceeding estimated losses, but by a ratio closer to 1.5 than the 1.95 reported in 2008 and the first quarter of 2009. I suspect the reason for this declining ratio is not due to the assets of the banks that failed in the third quarter being in better shape, but because the recognition of actual losses to the FDIC are being delayed through the increasing use of loss-share agreements with the banks taking over the assets of the failed banks.

Am I that good?

Or are they just that predictable?

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 2.8 percent in the third quarter of 2009, (that is, from the second quarter to the third quarter), according to the “second” estimate released by the Bureau of Economic Analysis. In the second quarter, real GDP decreased 0.7 percent. The GDP estimate released today is based on more complete source data than were available for the “advance” estimate issued last month. In the advance estimate, the increase in real GDP was 3.5 percent (see “Revisions” on page 3).

You may recall my warning that the 3.5 percent figure in the Advance report would be revised downward on the day it was published. Now, according to the BEA’s newly revised estimate, only 1.3 percent of GDP growth was NOT provided by Cash for Clunkers. So, if you consider the even larger stimulus provided by the $8k housing credit, which is not separately accounted for, it is quite obvious that economic activity is still contracting even if the GDP statistic is not. This won’t be the last revision for 3Q09… and I’m not talking about the scheduled third report, formerly known as the Final one, either.

UPDATE – And in the “Why I should never be allowed on the radio” category, we have tonight’s performance on a national show. I explained how the economic pain of a contraction shouldn’t be confused with the actual cause of the problem by using the analogy of a sexually transmitted disease. Halfway through, I stopped and said “Okay, that’s probably a terrible analogy.” The host concurred and said that he preferred to compare a contraction to chemo. In retrospect, I don’t think that actually works as well, however, because the salient point is that the damage is actually done during the good times and the resulting pain is merely the natural consequence of the damage.