Tag: economics

It appears Americans are cutting back on their Christmas spending this year:

That it has been one of the most lacklustre shopping seasons in recent years has already been repeatedly covered, with average holiday spending expected to decline for the first time since the Great Financial Crisis of 2008, all this despite record promotions and an ever earlier start to Black Friday. However, while the early start to shopping season has missed expectations, driven primarily by an unprecedented weakness in traditional bricks and mortar outlets, there was some hope that the last stretch into Christmas and the New Year would provide a much needed, last minute bump. Those hopes were dashed last night when Shoppertrack reported that retail traffic plummeted by an unprecedented 21% last week, and in-store sales decreased 3.1% from the year before, dashing retailers’ hopes that the final stretch before Christmas would offset soft sales numbers earlier in the holiday shopping season.

Now, I wonder why that might be? I know we’re celebrating in a more modest fashion than in previous years. And I’m not at all surprised that we’re not the only ones.

Anyone else scenting a familiar odor? That rancid aroma of greed, fraud, cigarettes, and overpriced cologne? It smells like 1999 to me:

Pinterest is a lovely website. It provides something the internet has never had before (virtual window shopping and muffin JPEG fetishism) in a snappy, tidy package. It’s very popular, particularly within the inscrutable Midwestern Mystery Zone, which baffles most tech companies, small and large alike. It’s aspirational picture-collecting at its most refined, and certainly could end up being the way people plan future purchases. Maybe. Someday. There’s no way to be sure.

And then there’s Snapchat, the pubescent pic-sharing app du jour, enough of a phenomenon to tilt teens away from Facebook, and a cultural spike unto itself. It’s fun! It’s a very fun, very smart, very simple toy—and there’s nothing wrong with that. The world needs things that are amusing and little else, lest we all be crushed beneath cloud services and spreadsheets. Fun is fine, and it’s certainly proven popular for Snapchat’s founders.

But these are both massive maybes bridging chasms of financial uncertainty. Maybe Pinterest will drive sales, and be able to keep a cut for itself. Maybe Snapchat will be able to turn its huge demographic reach among vulnerable young minds into revenue, and hold on to its trend status. Maybe. But that’s almost $8 billion (estimated) dollars pinned on a maybe, the sort of breathless, thoughtless speculation bubble dreams are made of. It’s $8 billion in maybe snapped against two companies that haven’t even tried to make money.

In the immortal words of Public Enemy’s Chuck D: “Here we go again….”

Or in other words, Paul Krugman discovers debt. On May 12 of 2012, Paul Krugman confessed that he had no idea what Steve Keen was talking about with regards to how debt deflation reduces demand:

“Keen then goes on to assert that lending is, by definition (at least as I understand it), an addition to aggregate demand. I guess I don’t get that at all. If I decide to cut back on my spending and stash the funds in a bank, which lends them out to someone else, this doesn’t have to represent a net increase in demand. Yes, in some (many) cases lending is associated with higher demand, because resources are being transferred to people with a higher propensity to spend; but Keen seems to be saying something else, and I’m not sure what. I think it has something to do with the notion that creating money = creating demand, but again that isn’t right in any model I understand.” (Minsky and Methodology (Wonkish), March 27, 2012)

However, it has become so obvious that without growing debt, people cannot afford to pay for things, (thereby reducing demand), that even Paul Krugman has finally noticed, Neo-Keynesian models of exogenous debt be damned. But, as is his wont, Krugman pretends to have known this all along:

“Start with the point I’ve raised several times, and others have raised as well: underneath the apparent stability of the Great Moderation lurked a rapid rise in debt that is now being unwound … Debt was rising by around 2 per cent of GDP annually; that’s not going to happen in future, which a naïve calculation suggests means a reduction in demand, other things equal, of around 2 percent of GDP.” (Secular Stagnation Arithmetic, December 7, 2013)

And notice his comment about debt rising by around two percent of GDP annually; is he finally paying attention to L1 only 11 years after I first warned about it? This is an astonishing development and may represent the first big cracks in the epic Keynesian wall of delusion concerning the exogenous, and therefore innocuous, nature of domestic debt.

In RGD, I demonstrated that debt not only effects demand, but prices as well. That’s why we can be certain that housing prices will not recover anytime soon and college tuitions cannot continue to rise, as their elevated price levels are almost entirely the result of the post-2001 explosion of easy credit. In fact, I even explained the connection between debt and demand in my proposed modification of the core mechanism of the Austrian Business Cycle on a post entitled The Limits of Demand back in June 2009:

“I suggest the cycle can be better understood if we broaden our
perspective when looking at the middle phase of the cycle and consider
how the expansion of bank credit will also lead to malinvestment for
reasons that are not dependent upon the shifting production ratio
between capital goods and consumer goods by utilizing a price-based
variant of the Keynesian acceleration principle. This begins with
recognizing the obvious causal connection between increased bank
credit and price distortions, since cheap credit permits consumers to
purchase goods at prices they could not otherwise have afforded; this is
what cheap credit is expected to do and is the reason loan
consolidations and other forms of consumer credit are advertised on
television. The easy availability of cheap credit permits the purchase
of houses, college tuitions, and cars by a much broader range of buyers
than would otherwise be the case, so as the law of supply and demand
dictates, an increase in the availability of debt will lead to an
increase in demand which will necessarily drive the price of those goods
being purchased by debt higher relative to the price of goods not being
purchased by debt.”

The converse of the bolded text is of course also true, hence my expectation of economic contraction following the debt-deflation as well as my observation of economic stagnation as a result of the current debt-disinflation. But then, I don’t have a Nobel Prize or anything.

David Stockman excoriates the House Republicans for their capitulation on the budget:

House Republicans “capitulated” in agreeing to the two-year budget deal reached last night and left the country to deal with an unsustainable fiscal situation until the peak of the presidential primaries in 2015, when nothing will get done, former federal budget director David Stockman told CNBC on Wednesday.

“First, let’s be clear—it’s a joke and betrayal,” Stockman, who served under President Ronald Reagan, said on “Squawk on the Street.” “It’s the final surrender of the House Republican leadership to Beltway politics and kicking the can and ignoring the budget monster that’s hurtling down the road.”

Stockman added that the budget deal means lawmakers would take a “two-year vacation” from dealing with the country’s fiscal situation and revisit it in 2015 at around the same time as the Iowa straw polls. Without an incumbent in the presidential race, both political parties will be too busy to touch the budget, he said. While some hailed the budget deal as a breakthrough in Washington’s political gridlock, Stockman compared the accord to “kicking the can” into “low Earth orbit.”

“There’s plenty of room, but they’re unwilling to make the tough choices,” he said. “Now, I understand Democrats doing that. The only hope of getting our fiscal situation under control is if the House Republicans stand up. And they’ve totally capitulated.”

Of course they did. With traitorous leaders like John Boehner and Eric Kantor, the House Republican “leadership” has far more in common with Obama than with the Republicans they nominally represent. They will “capitulate” on immigration too if they think they can get away with it and still preserve their political careers.

The US political system has completely failed. Many, perhaps even most, “representatives” no longer even pretend to represent anything but the interests of the financial institutions. This became apparent in 2008, and is now obvious in Washington’s every response to the financial crisis its credit money system and profligate spending have created.

The only possible way out was to let the credit money system default and collapse, but instead, the short-sighted, cowardly politicians bought the bankers’ threats to implode the economy and tied the political system to the financial system in what I expect will be a vain attempt to salvage it. And in doing so, I believe they have ensured the eventual destruction of both.

In Q1 2009, debt/GDP was 368 percent. The Q3 Z1 report came out on Monday. Total Credit Market Debt Outstanding was $58.082 trillion. The BEA reported Q3 GDP at $15.819 trillion. So, despite all of the economic pain, widespread unemployment, four rounds of quantitative easing, and two emergency fiscal stimulus plans, debt/GDP has been reduced all of 0.27 percent, to 367 percent.

(To put this in historical perspective, in 1951, debt/GDP was 132.5 percent and the government sector owed 55.9 percent of it.)

So, five years since the beginning of the crisis, we haven’t even begun the process of clearing the excess debt. And the cancer has gotten considerably worse in the meantime. In 2008, the government sector was responsible for 14.6 percent of $51.3 trillion in debt. In 2013, the government sector owes 25.7 percent of $58.1 trillion. Thanks to the capitulating Republicans, the next two years will see that grow to around 30 percent of $60 trillion… if they are successful in staving off a crash.

Look at what happened between 1933 and 1950. That’s why I believe the Great Depression 2.0 is going to be an order of magnitude worse than its predecessor.

The Greatest and Most Important Living Economist is reduced to wild conjecture in a vain attempt to explain away the fact that no amount of stimulus is working as expected anywhere in the world.

[I]f Mr. Summers is right, everything respectable people have been saying about economic policy is wrong, and will keep being wrong for a long time. Mr. Summers began with a point that should be obvious but is often missed: The financial crisis that started the Great Recession is now far behind us. Indeed, by most measures it ended more than four years ago. Yet our economy remains depressed.

He then made a related point: Before the crisis we had a huge housing and debt bubble. Yet even with this huge bubble boosting spending, the overall economy was only so-so — the job market was O.K. but not great, and the boom was never powerful enough to produce significant inflationary pressure. Mr. Summers went on to draw a remarkable moral: We have, he suggested, an economy whose normal condition is one of inadequate demand — of at least mild depression — and which only gets anywhere close to full employment when it is being buoyed by bubbles.

I’d weigh in with some further evidence. Look at household debt relative to income. That ratio was roughly stable from 1960 to 1985, but rose rapidly and inexorably from 1985 to 2007, when crisis struck. Yet even with households going ever deeper into debt, the economy’s performance over the period as a whole was mediocre at best, and demand showed no sign of running ahead of supply. Looking forward, we obviously can’t go back to the days of ever-rising debt. Yet that means weaker consumer demand — and without that demand, how are we supposed to return to full employment?

Again, the evidence suggests that we have become an economy whose normal state is one of mild depression, whose brief episodes of prosperity occur only thanks to bubbles and unsustainable borrowing.

It’s really quite remarkable what lengths reasonably intelligent people will go to in order to hold onto their conceptual models while ignoring the obvious. The idea that “population growth” is responsible is obviously ridiculous in light of the vast number of people out of work; older people consume considerably more than younger people with no money do anyhow.

The mainstream economists are flailing around with no answers, completely ignoring the fact that this is the very problem of excess credit that was predicted for decades by those whose models take it into account. We’re not mysteriously trapped into a normal state of mild depression, we’re simply choked with debt, government interference, and debt-based malinvestment.

The debt has to be cleared from the system. There are two ways out. Hyperinflation or debt-default. The latter is the better, wiser, and safer choice.

As many suspected at the time, the pre-2012 election unemployment rate was even more fraudulent than is customary:

In the home stretch of the 2012 presidential campaign, from August to September, the unemployment rate fell sharply — raising eyebrows from Wall Street to Washington. The decline — from 8.1 percent in August to 7.8 percent in September — might not have been all it seemed. The numbers, according to a reliable source, were manipulated.

And the Census Bureau, which does the unemployment survey, knew it.

Just two years before the presidential election, the Census Bureau had caught an employee fabricating data that went into the unemployment report, which is one of the most closely watched measures of the economy. And a knowledgeable source says the deception went beyond that one employee — that it escalated at the time President Obama was seeking reelection in 2012 and continues today.

“He’s not the only one,” said the source, who asked to remain anonymous for now but is willing to talk with the Labor Department and Congress if asked. The Census employee caught faking the results is Julius Buckmon, according to confidential Census documents obtained by The Post. Buckmon told me in an interview this past weekend that he was told to make up information by higher-ups at Census.

Those of you who have read RGD will recall that in the chapter entitled “No One Knows Anything”, I pointed out that the various numbers reported by the BLS and the BEA cannot possibly be legitimate. GDP, CPI, U3, all of them are fiction. The margins of error are greater than the difference between reported growth and reported contraction, thereby rendering Keynesian theory unworkable in practice. And they are extraordinarily expensive fictions, because material policies with effects in the trillions are being made and justified on the basis of those known and confirmed fictions.

This is just one more proof of the superiority of the Austrian logical approach to Keynesian pseudo-pragmatism. I once likened the attempts to manage the economy as trying to steer a car with a sledgehammer: it’s not very precise and you’re probably first going to wreck the steering wheel and then the car. But trying to manage the economy on the basis of numbers you know are manufactured is like trying to steer a car with a sledgehammer while wearing the wrong prescription sunglasses.

The Great Depression 2.0 is not coming. We are now in the fifth year of it, regardless of what the BLS and the BEA are telling you.

Karl Denninger explains QE and its consequences for the economy:

Let’s simplify “QE” and “low interest rates” generally into the most-basic view — a lending transaction for $100,000.  We’ll say, for the sake of argument, that this is to buy a house, although the purpose of the loan is not really material.  We’ll further start with an interest rate of 7% — not particularly high in the historical context, nor particularly low….

We’ll take this $100,000 and borrow it for 30 years @ 7%.  This produces a payment of $661.44 per month for 360 months (30 years of 12 months each.)  The total paid is $238,119.87 over that time, so just over $138,000 is paid in interest, or just over $4,100 a year on average (this is misleading, however, as at the start of the loan most of the payment is interest and that falls off over time.)  We will further assume that this 7% rate reflects a reasonable return for the risk that you will not pay and that inflation will occur — that is, the rate is negotiated between the lender and borrower using all known facts and no lies or distortions.

Now let’s assume we “lower rates” (by any mechanism) but the risk does not materially change.  We lower them to 4% by employing “QE”.

The payment is now $475.83, or a total of $171,298.51 over 30 years.  Note that approximately $65,000 in interest was saved by the borrower… The borrower saves that $66,821.36 and can thus spend it on something else but every one of those dollars is not collected by the lender and thus he cannot spend them.

Net benefit?   Uh uh. 

Every dollar benefiting one person comes out of someone else’s back side.

Remember that Bernanke and Yellen have admitted that “savers might be harmed somewhat” by these policies.  They want you to think of “savers” as the little old lady who is stupid and has all of her money in CDs at the local bank — indeed, Yellen, Bernanke and Congress have even used that precise example.

But in fact that is intentionally misleading too.

Who do you think actually owns all that paper?  For example, the FHA, Fannie and Freddie paper?

Let me give you a hint: If you have an interest in some sort of “stable” means of income or support against catastrophe, ordinary or otherwise, you can find one of the persons who own that paper by getting up and going into the bathroom, staring into the mirror!

Are you a teacher?  Firefighter?  Cop?  Have any sort of pension at all?  Have a life insurance policy?  An annuity?  Have any sort of insurance at all?

That is where all those loans are.  They’re in bond mutual funds, they’re in insurance companies, they’re in pension plans and they’re in various entities that have long-dated obligations — because these are long-dated instruments.

This is why the pension plans and cities are all going bankrupt now. Their fate was obvious several years ago, and mathematically sealed long before that, but those preordained consequences are now coming to pass because QE is continually devouring the value of their remaining assets.

Keynesian manipulation of the economy has always been a short-sighted strategy dependent upon putting off today’s pain until tomorrow and counting on dying before tomorrow dawned. The magical thinkers don’t understand this; they simply cannot fathom why something that worked yesterday isn’t working today, hence their prescriptions for more of the same even when the same is causing the very problem they are intent on solving.

It’s interesting, because I’ve yet to hear anyone even attempt to describe a scenario where QE will be successful. All I’ve ever heard is that “we’ll stop when the economy magically recovers”.  Okay, fine, but that raises the obvious question: as a result of what?  People can’t spend money they don’t have. People can’t use credit they can’t repay. People can’t retire on bankupt pensions.

It appears Mr. Keynes’s long run has finally arrived.