Tag: economics

Aristocratic tiger-riders

In the introduction to the third edition of FA von Hayek’s A Tiger by the Tail, Austrian economist Joseph Salerno observes:

Inflating aggregate money expenditure leads to a short-run increase in employment that causes an inappropriate distribution of resources whose inevitable correction ensures another depression. Such a correction can be postponed, but never obviated, only by repeatedly neutralizing relative price changes through accelerating inflation.

Those who deny Hayek’s analysis—as all contemporary mainstream macroeconomists and policymakers do—and promote ever-increasing spending as the panacea for our present crisis live in the simplistic Keynesian fantasy land from which scarcity of real resources has been banished and in which the scarcity of money and credit is the only constraint on economic activity. As Hayek pointed out, such people do not merit the name “economist”:

“I cannot help regarding the increasing concentration on short-run effects—which in this context amounts to the same thing as a concentration on purely monetary factors—not only as a serious and dangerous intellectual error, but as a betrayal of the main duty of the economist and a grave menace to our civilization.”

Of course, as we were reminded in 2008, and again in 2014, not only does the postponed correction always eventually arrive, but the nominally palliative measures become increasingly ineffective. The Left is not entirely wrong to focus on the evils of income and financial inequality, because today they are not the result of capitalism and free enterprise, but the neo-feudal largesse distributed by the federal government to the financial aristocracy through the central bank.

I had always wonder why the Ciceronian cycle predicted the rise of aristocracy rather than the conventional expectations of post-democratic dictatorship. But in light of the post-2008 crisis events, it makes a good deal more sense.

ISIS drops the gold bomb

The Islamic State has barely been around for a year and already it has a stronger, more stable currency than either the USA or the European Union:

Islamic State is set to become the only ‘state’ to back its currency with gold (silver and copper) as it unveils the new coins that will be used in an attempt to solidify its makeshift caliphate. ISIS says the new currency will take the group  out of “the oppressors’ money system.” As Zaid Benjamin notes, ISIS releases details of its new currancy with golden 1 & 5 dinar, silver 1, 5, 10 dirham and copper 10 & 20 fils

They don’t permit usury and they back their currency with gold. In the long term, Osama bin Laden may have been right about who was the strong horse and who was not. The fact that an ideologically weakened, demographically dying West, which is no longer Christian nor ethnically homogenous, nor nationalistic, still has a technological edge, is not likely to make the difference in the long run.

To paraphrase Tom Kratman: always bring a gun to a gunfight and always bring a religion to a religious war.

This move by ISIS may be particularly effective now that the USA has all but destroyed the international banking system with FATCA and the SWIFT sanctions. Look for Russia and China to follow suit before too long.

Mailvox: Vee have vays

Uff making you borrow, hein? JD asks about the prospective new Attorney General:

Wikipedia reports that the Black woman being considered to replace Eric Holder as Attorney General spent seven years on the Board of Directors of the Federal Reserve Bank for New York. Fed alum as Attorney General.  Is that ominous?

It depends. If she’s a black woman of the sort you see at the DMV, everything should be fine. I would absolutely approve of such an appointment; that sort of AG isn’t about order children burned to death or automatic weaponry sold to Mexican cartels. All she’ll demand is to be left alone in the near vicinity of a well-stocked vending machine. If, on the other hand, she’s a true-believing freshwater Chicago School monetarist, Americans may soon find themselves being prosecuted for the federal crime of Willful Failure to Borrow.

That would be one way to boost L1, anyhow.

Two more checks in the deflation box

Check one. When banks are charging their depositors to hold their money, this is strongly indicative of deflation:

Just three months ago, Mario Draghi (President of the European Central Bank) embarked on his own Quixotic folly by taking certain interest rates into NEGATIVE territory. Draghi convinced himself that he was saving Europe from disaster. And like Don Quixote, everyone else has had to pay the price for his delusions.

On November 1st, the first European bank has passed along these negative interest rates to its retail customers. So if you maintain a balance of more than 500,000 euros at Deutsche Skatbank of Germany, you now have the privilege of paying 0.25% per year… to the bank.

We’ve already seen this at the institutional level: commercial banks in Europe are paying the ECB negative interest on certain balances.And large investors are paying European governments negative interest on certain bonds.

Check two: When debtor nations are finding it harder and harder to pay interest on their outstanding loans despite historically low interest rates, this is also indicative of deflation.  Ambrose Evans-Pritchard describes the battle between the ECB and the Bundesbank over continuing the European version of quantitative easing:

The North is competitive. The South is 20pc overvalued, caught in a debt-deflation vice. Data from the IMF show that Germany’s net foreign credit position (NIIP) has risen from 34pc to 48pc of GDP since 2009, Holland’s from 17pc to 46pc. The net debtors are sinking into deeper trouble, France from -9pc to -17pc, Italy from -27pc to -30pc and Spain from -94pc to -98pc. Claims that Spain is safely out of the woods ignore this festering problem. 

We have been seeing some inflationary artifacts during the last five years of credit disinflation, but that is the result of the massive credit money pumping. According to mainstream economic theory, there should have been 10x or more inflation, but instead, all those efforts to monetarily refuel the global economy have uselessly run off, like gasoline poured over a stone. There has been some asset inflation, as can be seen in the stock market, but when the crash comes – and it will come – that will put a conclusive end to the inflation/deflation debate.

Ay caramba

Spain’s industrial output has collapsed to 1976 levels. This is why the EU is going to collapse in the next ten years; it has completely failed on its promises of delivering economic prosperity. All it truly ever had to offer was a medium-term credit bubble in exchange for the mass sacrifice of national sovereignty.

Why economists ignore private debt

Actually, from most of the models I’ve seen, mainstream economists completely ignore public debt as well. After all, since credit owed is (mostly) endogenous, what does it matter how much Peter owes Paul? That’s the main reason so few of them saw 2008 coming. The article is focused on Australia, but it is globally applicable.

There is a reason why mainstream economists ignore private debt while focusing intently upon public debt. Neoclassical economic models assume markets operate in a static state of equilibrium, but these models are based on a slew of preposterous assumptions which are never met in the real world. The banking and financial system is modelled by assuming that money, debt and banks do not exist! The element of time is also removed, making it difficult for economists to understand the inter-temporal allocations of debt.

This is like an astronomer or astrophysicist building a model of our solar system absent the sun, moon and gravity – an inadequate framework that will inevitably produce glaring mistakes. By using a circular form of logic, private domestic and external debts are assumed to be the outcome of rationally-derived contracts, so the level of debt is deemed to be efficient by definition. In contrast, public debts are considered to be managed by ‘irrational’ government planners, who cannot make optimising decisions; a clear fallacy based on stereotypes of the competency of financial actors within the economy.

In the post-1970s era, neoliberal economic policy has dominated mainstream perspectives. A major goal of government has led to an unyielding mantra that public debts must be reduced by running surpluses where possible. The obsession with public debt and deficits has blindsided policymakers to the rapid accumulation of private debts. For instance, the severe mid-1970s recession was caused largely by the collapse of the dual commercial and residential real estate bubbles, inflated by sharply accelerating private debts, but the economics profession failed to take notice.

Unfortunately, this made no difference, with the 1981 Campbell Report advocating further deregulation of the banking and financial sector. By the time of the 1997 Wallis Report, neoclassical economists had the benefit of hindsight when examining the mid-1970s dual commercial and housing bubbles, the 1981 Sydney housing bubble, the 1987 stock market bubble and crash, the late 1980s dual commercial and housing bubbles, and the lead-up to the largest stock market bubble in Australian economic history, the Dot-Com era.

With Australia’s economic history littered with asset bubbles, irrational exuberance, recessions and depressions, what were the recommendations of the Wallis Report? More financial deregulation! Mainstream economists in Australia (and elsewhere) are wilfully blind to countervailing evidence which demonstrates the harms caused by financial deregulation.

The reason that financial deregulation is advocated becomes obvious: booming private debts enhance the power, profit and authority of the horde of private monopolists, usurers, speculators, rent seekers, free riders, financial robber barons, control frauds, inheritors and indolent rich.

The college experience isn’t worth it

Not if you’re going to be paying for it for the rest of your life:

Stats from the Department of Education show outstanding student loans total more than $1 trillion. A report from The Institute for College Access in late 2013 revealed the average new graduate starts his or her life with $29,400 in student loan debt. College as we know it is clearly unaffordable.

So my question is: Why do people keep embarking on the “traditional college experience” when they know it’s going to put them tens — sometimes hundreds — of thousands of dollars in debt?

And while some people say these 18-year-old kids don’t know what they’re getting themselves into, let’s not pretend we don’t know better. I distinctly remember asking my friend how he would pay off the roughly $70,000 debt he would incur to obtain a major in Ancient Greek and Latin at a liberal arts college in the Midwest. His answer? A simple shrug and flippant “It’s not something I have to worry about right now — hopefully they’ll be forgiven by the government.” Now that he’s still waiting tables four years after graduation, I’d say it’s well past time to start worrying.

I can’t pretend I completely understand how these people feel after the fun is over and the repayments begin, but I can say that I really don’t feel bad for them.

Why not? Because I worked hard to avoid taking out loans. My wonderful parents and grandmother helped me pay for my education, but in the end, it was a few decisions I made that saved me the burden of borrowing money I would never have been able to pay back. Unlike the majority of my friends who went to schools less than an hour from their parents’ homes and chose to live on campus rather than commute, my college roommates were named Mom and Dad. I chose state schools that were half, sometimes one-quarter, of the cost of the schools my friends were attending and worked a part-time on-campus scholarship job in addition to full-time hours at my retail job.

In fairness, it should be pointed out that there is an entire predatory industry, aided and abetted by the federal government, the public school system, and far too many parents, encouraging graduating seniors to make stupid and short-sighted decisions.  This doesn’t excuse the terrible decisions they are making, but it does help explain them.

I’m a little curious about what I can only presume is a new editor at TIME. They’ve been running some surprisingly good columns of late.

The incredible shrinking labor force

The BLS is engaging in the customary statistical shenanigans to produce an artificially low unemployment rate. Zerohedge explains:

While by now everyone should know the answer, for those curious why the US unemployment rate just slid once more to a meager 5.9%, the lowest print since the summer of 2008, the answer is the same one we have shown every month since 2010: the collapse in the labor force participation rate, which in September slid from an already three decade low 62.8% to 62.7% – the lowest in over 36 years, matching the February 1978 lows. And while according to the Household Survey, 232,000 people found jobs, what is more disturbing is that the people not in the labor force, rose to a new record high, increasing by 315,000 to 92.6 million!

In other words, if the BLS wasn’t monkeying with the labor force participation rate but left it at the peak level from 1998 to 2000, the unemployment rate would be 11.7 percent. Instead, we are expected to believe that in a disinflationary economy, people are actually LESS interested in working.

The cost of foreign interventions

Take these numbers and cram them down the throats of everyone who declares the USA absolutely has to intervene in the latest round of Levantine slaughter:

By the end of the year, Congress will have appropriated more money for Afghanistan’s reconstruction, when adjusted for inflation, than the United States spent rebuilding 16 European nations after World War II under the Marshall Plan.

A staggering portion of that money — $104 billion — has been mismanaged and stolen. Much of what was built is crumbling or will be unsustainable. Well-connected Afghans smuggled millions of stolen aid money in suitcases that were checked onto Dubai-bound flights. The Afghan government largely turned a blind eye to widespread malfeasance. Even as revelations of fraud and abuse stacked up, the United States continued shoveling money year after year because cutting off the financial spigot was seen as a sure way to doom the war effort.

As the Pentagon winds down its combat mission there at the end of the year, it’s tempting to think of the Afghan war as a chapter that is coming to an end — at least for American taxpayers. But, as things stand, the United States and its allies will continue paying Afghanistan’s bills for the foreseeable future. That commitment was solidified Tuesday as the American ambassador in Kabul and Afghanistan’s security adviser signed a bilateral security agreement that will keep a small contingent of NATO troops there for at least two years.

The United States and NATO partners recently agreed to spend $5.1 billion a year to pay for the army and police, until at least 2017. Western donors are expected to continue to give billions more for reconstruction and other initiatives, recognizing that Afghanistan won’t be weaned off international aid anytime soon. In fact, the government appears to be broke.

The actual figure is $109 billion. That is nearly $1,000 per taxpayer. And what did you get for your money? It’s one thing to say “we must do this” or “we must do that”. But then, recollect that it’s going to cost you over $1,000 in order to feel good about pretending to prevent one group of murderous foreigners from killing another group of foreigners, who not infrequently were previously murdering the other group.

And, of course, that doesn’t count the $42.50 you’ll be spending every year on the Afghan army and police. Or the social and economic costs of importing the inevitable allies and refugees to the USA and settling them there.

The myth of austerity

The Geneva Report observes that the global economy is more awash in debt than during the financial crisis of 2008:

Contrary to widely held beliefs, the world has not yet begun to delever. Global debt-to-GDP is still growing, breaking new highs. Figure 1 shows the evolution of total debt (excluding the financial sector) for our global sample (advanced economies plus major emerging market economies). While there was a pause during 2008-09, the rise of the global debt-GDP ratio recommenced in 2010-2011.  Data in the report also show that debt-type external financing (leverage) continues to dominate equity-type financing (stock market capitalisation).

The chart they provide on global debt-to-GDP makes it perfectly clear how much worse the debt situation has gotten. There is actually 20 percent more global debt-to-GDP during this period of supposed “deleveraging” than there was when the crisis began.

There is definitely some funny business going on in the economic statistics. As you may know, I track the Fed’s L1 report, and I noticed an anomaly in the most recent report. Whereas the non-financial corporate credit sector was reported at an all-time high of $9.6 trillion in Q1-2014, in Q2 it rapidly declined to $7.4 trillion. But this decline was eliminated from the past data through historical revisions, thus hiding what would otherwise be a bigger decline in total credit market debt outstanding ($1,860 billion) than we saw from Q1-2009 through Q1-2010 ($948 billion).

This suggests that the inevitable transformation from credit disinflation to credit deflation may have already begun.