Tag: economics

Paul Krugman and the Permanent Slump

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.

The BLS employment numbers are fake

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.

Who are the savers being harmed?

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.

Confessions of a Credit Easer

A mea culpa from the manager of the Federal Reserve’s mortgage-backed security purchase program:

Confessions of a Quantitative Easer

We went on a bond-buying spree that was supposed to help Main Street. Instead, it was a feast for Wall Street.

I can only say: I’m sorry, America. As a former Federal Reserve official, I was responsible for executing the centerpiece program of the Fed’s first plunge into the bond-buying experiment known as quantitative easing. The central bank continues to spin QE as a tool for helping Main Street. But I’ve come to recognize the program for what it really is: the greatest backdoor Wall Street bailout of all time.

Five years ago this month, on Black Friday, the Fed launched an unprecedented shopping spree. By that point in the financial crisis, Congress had already passed legislation, the Troubled Asset Relief Program, to halt the U.S. banking system’s free fall. Beyond Wall Street, though, the economic pain was still soaring. In the last three months of 2008 alone, almost two million Americans would lose their jobs.

The Fed said it wanted to help—through a new program of massive bond purchases. There were secondary goals, but Chairman Ben Bernanke made clear that the Fed’s central motivation was to “affect credit conditions for households and businesses”: to drive down the cost of credit so that more Americans hurting from the tanking economy could use it to weather the downturn. For this reason, he originally called the initiative “credit easing.”

My part of the story began a few months later. Having been at the Fed for seven years, until early 2008, I was working on Wall Street in spring 2009 when I got an unexpected phone call. Would I come back to work on the Fed’s trading floor? The job: managing what was at the heart of QE’s bond-buying spree—a wild attempt to buy $1.25 trillion in mortgage bonds in 12 months. Incredibly, the Fed was calling to ask if I wanted to quarterback the largest economic stimulus in U.S. history.

This was a dream job, but I hesitated. And it wasn’t just nervousness about taking on such responsibility. I had left the Fed out of frustration, having witnessed the institution deferring more and more to Wall Street. Independence is at the heart of any central bank’s credibility, and I had come to believe that the Fed’s independence was eroding. Senior Fed officials, though, were publicly acknowledging mistakes and several of those officials emphasized to me how committed they were to a major Wall Street revamp. I could also see that they desperately needed reinforcements. I took a leap of faith.

In its almost 100-year history, the Fed had never bought one mortgage bond. Now my program was buying so many each day through active, unscripted trading that we constantly risked driving bond prices too high and crashing global confidence in key financial markets. We were working feverishly to preserve the impression that the Fed knew what it was doing.

It wasn’t long before my old doubts resurfaced. Despite the Fed’s rhetoric, my program wasn’t helping to make credit any more accessible for the average American. The banks were only issuing fewer and fewer loans. More insidiously, whatever credit they were extending wasn’t getting much cheaper. QE may have been driving down the wholesale cost for banks to make loans, but Wall Street was pocketing most of the extra cash.

If you’ve read RGD, (published in 2009), then you are aware that even at the time it was obvious that the neither the Fed nor the White House was trying to help home buyers. They could have simply written off the debts owed by mortgage holders, but instead, they funneled trillions to Wall Street.

This proves, once more, that the Federal Reserve has zero interest in fixing, saving, or otherwise improving the US economy. It has other objectives, other goals, and it is a category error to even discuss the Fed’s future actions in terms of whether they will be good for the economy or not.

To do so is like discussing whether the future run/pass ratio of the New England Patriots will be good for the New York Yankees. It’s not even relevant to the discussion except perhaps as an unintended consequence.  And notice that they changed the name from credit easing to quantitative easing just to make the concept harder to grasp for the average American. Simple, but effective, because MPAI.

Obama’s economic end game

Post-Obamacare, it is only a matter of time before other American industries eventually go the way of electronics retail in Venezuela. But it could work! Just think about how many plasma TVs Best Buy could sell if every American under the age of thirty was compelled to buy one on pain of a substantial fine!

Thousands of Venezuelans lined up outside the country’s equivalent of Best Buy, a chain of electronics stores known as Daka, hoping for a bargain after the socialist government forced the company to charge customers “fair” prices.

President Nicolás Maduro ordered a military “occupation” of the company’s five stores as he continues the government’s crackdown on an “economic war” it says is being waged against the country, with the help of Washington.

Members of Venezuela’s National Guard, some of whom carried assault rifles, kept order at the stores as bargain hunters rushed to get inside.

“I want a Sony plasma television for the house,” said Amanda Lisboa, 34, a business administrator, who had waited seven hours already outside one Caracas store. “It’s going to be so cheap!”

It’s a one-track road downhill once the government embarks upon the road of “fixing” the economy. Of course, the wealthier the society is when the process begins, the longer it takes to break the economy and the fewer people understand what is happening as they live through it.

Most people still don’t realize that America is considerably less wealthy than it was in 1990, because the illusion of being permitted to spend someone else’s money leads them to believe that they genuinely have more wealth. It’s like watching a child running around with Daddy’s credit card, thinking he’s rich, only on a national scale.

Explaining the college bubble

Richard Cantillon explains some of the effects of the college bubble in An Essay on Economic Theory… in 1730.

The Labor of the Plowman is of Less Value than that of the Artisan

A LABORER’S SON, AT SEVEN to twelve years of age, begins to help his father either in keeping the herds, digging the ground, or in other sorts of country labor that require no art or skill.

If his father has him taught a trade, he loses his assistance during the time of his apprenticeship and is obligated to clothe him and to pay the expenses of his apprenticeship for many years. The son is thus dependent on his father and his labor brings in no advantage for several years. The [working] life of man is estimated at only 10 or 12 years, and as several are lost in learning a trade, most of which in England require seven years of apprenticeship, a plowman would never be willing to have a trade taught to his son if the artisans did not earn more than the plowmen.

Therefore, those who employ artisans or professionals must pay for their labor at a higher rate than for that of a plowman or common laborer. Their labor will necessarily be expensive in proportion to the time lost in learning the trade, and the cost and risk incurred in becoming proficient.

The professionals themselves do not make all their children learn their own trade: there would be too many of them for the needs of a city or a state and many would not find enough work. However, the work is naturally better paid than that of plowmen.

The key is in the second to last sentence. The problem that the USA and many other countries are facing is that they have encouraged too many young men, and far too many young women, to pursue college degrees, so there is now a massive surplus of degree-holders for the needs of the various nations where academic credentials have been subsidized and fetishized.

In a free and sustainable economy, the number of college students would be significantly reduced due to the combination of the cost and opportunity cost of a college education. But because demand has been artificially inflated by student loans, government grants, and the willingness of parents to go into debt on behalf of their children, the level of current malinvestment  in college education is extraordinarily high. The fact that student loan debt can no longer be legally discharged was the first indication that the education bubble had reached its terminal point of expansion.

Longer lifespans and longer working lives justify spending more time and money in acquiring professional skills than in Cantillon’s day, but not indefinite amounts of either. And unless the student acquires skills that increase the value of his labor during that time, the entire process is a waste of both.

The irony is that the average college student is probably less valuable than the unskilled plowman now, because while he still lacks any useful skills, he also is unwilling to work hard at anything he is actually capable of doing.

UPDATE: “In 2008 there was $730 billion of student loan debt outstanding, of
which the Federal government was responsible for $120 billion. Five
short years later there is $1.2 trillion of student loan debt outstanding
and the Federal government (aka YOU the taxpayer) is responsible for
$716 billion. Using my top notch math skills, I’ve determined that
student loan debt has risen by $470 billion, while Federal government
issuance of student loan debt has expanded by $600 billion.”

No reason

The Fed is testing susceptibility to counterparty credit risk in 2014. Just to, you know, be on the safe side. Nothing to worry about here. No problems are anticipated. Hey, look there, green shoots!

Lenders including JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C) will have to show they can survive the demise of a trading partner or a plunge in value of high-risk business loans in the 2014 version of U.S. stress tests.

The scenarios for the annual tests, outlined by the Federal Reserve in a statement yesterday, reflect some of the most pressing threats seen by regulators as they gauge the ability of the U.S. financial system to withstand economic shocks. Bankers will have to show what would happen to the value of leveraged loans they hold, the impact of another housing bust and how they’d fare if a firm that owes them substantial sums collapses.

The test was designed in part to build resiliency against what some see as emerging asset bubbles, said a Fed official who spoke on a conference call with reporters. The counterparty failure test aims to prevent a repeat of the 2008 crisis, when distress at Lehman Brothers Holdings Inc. and American International Group Inc. threatened to destroy their biggest trading partners.

Of course, regular readers here know another way to spell “a plunge in value of high-risk business loans”. C-R-E-D-I-T-D-E-F-L-A-T-I-O-N.

Mailvox: the Fed imbalance

JD asks about the Fed’s balance sheet:

Fed balance sheet may not return to normal until 2019?  What does this mean to lay people?  Would you enlighten The Dread Ilk, please?

The short version is that quantitative easing, which is the Federal Reserve’s euphemism for “printing money” under the current monetary regime, is not working in terms of returning the economy to full employment or stimulating economic growth. However, the Fed doesn’t dare stop QEn because doing so would almost instantly crash the stock market and hurl the global financial system into crisis, if not collapse. So, the program is going to continue indefinitely, which we already know due to the appointment of Janet Yellen, who is even more expansionary-minded than the man named Helicopter Ben.

Wikipedia has a good definition of quantitative easing: “Quantitative easing (QE) is an unconventional monetary policy used by central banks to prevent the money supply falling when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base. This is distinguished from the more usual policy of buying or selling government bonds in order to keep market interest rates at a specified target value.

“Expansionary monetary policy typically involves the central bank buying short-term government bonds in order to lower short-term market interest rates. However, when short-term interest rates are at or close to zero, normal monetary policy can no longer lower interest rates. Quantitative easing may then be used by monetary authorities to further stimulate the economy by purchasing assets of longer maturity than short-term government bonds, and thereby lowering longer-term interest rates further out on the yield curve. Quantitative easing raises the prices of the financial assets bought, which lowers their yield.”

This is why the stock market is up considerably since early 2009 and why corporate borrowing is up when the other private borrowing sectors are down. The reason that the QE program has continued for nearly five years now is that it hasn’t had the triggering effect that it was supposed to have in 2009 or any subsequent year. This is exactly what I have been talking about for years, in pointing out that the Fed cannot expand the money supply in the same way that was done in Weimar Germany and in Zimbabwe, because there are material and significant differences in the way the Fed “prints” money and the way past governments have printed money.

The Fed won’t simply print money in the traditional manner because the coterie of investment institutions they serve can’t profit that way; it is all inflationary downside without a leveraging upside. The US government could certainly do it, of course, and all it would have to do is completely shake off the chains of Wall Street first. So, needless to say, printing trillions of dollars and distributing them to the citizenry is not going to happen.

Given that they STILL haven’t taken the simple step of forgiving mortgage debt to free up disposable income, it should be obvious that they’re not going to indiscriminately hand out cash to everyone either.

My case for debt-deflation doesn’t rest on the physical impossibility of money printing, but on the improbability of Wall Street voluntarily giving up the goose that has laid so many dollar-filled eggs for 100 years. I think they will kill the economy before they give up control, especially since widespread bankruptcies and foreclosures taking place under the present regime would put huge swaths of U.S. property in their hands. It is very much a heads they win, tails you lose situation.

As for 2019, they might as reasonably have given a date of fiver. If you look at L1, it is very clear that all QE has done for the last five years is prevent the bottom from falling out completely while encouraging an astonishing amount of malinvestment via the corporate and federal sectors. So, I anticipate more of the same until the household sector defaults begin, which should set off the third, and more serious, stage of the financial crisis.

Timing? I don’t do timing. How will the crisis be resolved? I don’t know. These things cannot be known until they happen. All we can know for certain is that the present course of credit disinflation and substitution of private debt for public debt is not going to continue indefinitely, since it would result in the complete socialization of the national economy by 2030.

The MIN campaign

From Wikipedia circa 2023:

Moar Inflation Now (MIN) was an attempt to spur a grassroots movement to stoke inflation, by encouraging personal borrowing and unrestrained spending habits in combination with expansionary public measures, urged by Fed Chairwoman Janet Yellen and Secretary of the Treasury Paul Krugman. People who supported the mandatory and voluntary measures were encouraged to wear “MIN” buttons, perhaps in hope of evoking in peacetime the kind of solidarity and voluntarism symbolized by the V-campaign during World War II.

The campaign began in earnest with the establishment by the Federal Reserve, of the National Commission on Inflation, which Yellen closed with an address to the American people at Jackson Hole, asking them to send her a list of ten inflation-increasing ideas. Ten days later, Krugman declared deflation “public enemy number one” before Congress on October 13, 2017, in a speech entitled “Moar Inflation Now”, announcing a series of proposals for public and private steps intended to directly affect supply and demand, in order to increase inflation to the desired rate of 10 percent per annum. “MIN” buttons immediately became objects of ridicule; skeptics wore the buttons upside down, explaining that “NIW” stood for “No I Won’t,” or “Not In Weimar,” or “Need Immediate Wank.”

In his book What the Fucking Fuck Was I Thinking?, Ben Bernanke admitted that the thought “This is unbelievably stupid” crossed his mind when Moar Inflation Now was first presented to the Clinton administration by his successor at the Federal Reserve. However, according to revisionist self-historian Paul Krugman, increasing the money and credit supplies was never meant to be the centerpiece of the pro-inflation program and the mass corporate bankruptcies, collapse of the US debt markets, and subsequent catastrophic failure of the global financial system only prove how much worse the economic situation would have been without the triumphant success of the MIN campaign.

Debt-deflation in action

Detroit pensioners will receive 16 cents on their expected retirement dollar:

On Friday, city financial consultant Kenneth Buckfire said he did not have to recommend to Orr that pensions for the city’s retirees be cut as a way to help Detroit navigate through debts and liabilities that total $18.5 billion. Buckfire said it was clear that the city did not have the funds to pay the unsecured pension payouts without cutting them.

“It was a function of the mathematics,” said Buckfire, who said he did not think it was necessary for him or anyone else to recommend pension cuts to Orr.

Are you saying it was so self-evident that no one had to say it?” asked Claude Montgomery, attorney for a committee of retirees that was created by Rhodes.

“Yes,” Buckfire answered. Buckfire, a Detroit native and investment banker with restructuring experience, later told the court the city plans to pay unsecured creditors, including the city’s pensioners, 16 cents on the dollar. There are about 23,500 city retirees.

The secured creditors, by which is meant the banks, received 75 cents on their dollar. In light of this, you may wish to keep in mind that as a bank depositor, you are a similarly unsecured creditor who is loaning money to institutions that no longer have to mark their assets to market. I estimate that the average bank assets are 40 percent lower than recorded, so you should understand that the amount of money you have in the bank is likely 60 percent of what you see on your statement.

At best.

The Detroit pensioners are fortunate the banks were willing to take a 25 percent haircut. If not, they would have received even less, perhaps even nothing.

This is why we are seeing the likes of Paul Krugman waxing increasingly hysterical as they call for More Inflation Now! With the Federal sector finding it increasingly difficult to prop up Z1/L1, (L1-G actually fell for the first time since Q2 2008), and the three main private sectors average 1.1 percent quarterly growth between them, the economic winds are blowing rather cold again.