Tag: economics

Paul Krugman, mean girl

Kyle Smith of Forbes notes Paul Krugman’s unusual style:

Reading Paul Krugman isn’t like reading most other economists. In a field whose notoriously poor track record in predicting the future (or even quantifying what has already happened) tends to generate a becoming modesty, he is utterly certain about everything. Breaking with the fraternal nature of the academic community, he is extraordinarily combative. Ever-snarky but never witty, his writing emits a sour smell of contempt.

Another way he stands out among academics: He repeatedly cites the authority of the mob as support for his positions.

This is an odd tactic for someone who would impress upon you the empirical rigor of his thinking. Like a Mean Girl given to saying, “Everyone is wearing wedges this summer” or “the in-crowd knows that animal prints are super-hot right now,” he is an alpha who is constantly looking over his shoulder to reassure himself that a pack is following closely behind. At times reading “The Conscience of a Liberal” is like a dip into the psychodrama of Teen Vogue or “Glee.”

There is an important secret to Krugman’s success.  It is essentially that of EL James, JK Rowling, or Britney Spears. He tells people what they want to hear and he does so in a manner that is sufficiently dumbed-down that even the simplest reader can follow it.  It is a talent, but as anyone who has read Krugman critically will know, it is not indicative of being right about anything.  All that matters to most of his fans is that he takes a firm position and shouts in a confident manner.

I mean, one really has to read his attempt to take down Austrian economics to believe it, as it is readily apparent that Krugman has no idea what it is.

The biggest bubble

Arguably today’s most important economist, Steve Keen, writes about the biggest bubble of them all on Zerohedge

Let’s start by taking a closer look at the data than Alan [Greenpan] did. There are a number of surprises when one does – even for me. Frankly, I did not expect
to see some of the results I show here: as I used to frequently tell my
students before the financial crisis began, I wouldn’t dare make up the
numbers I found in the actual data. That theme continues with margin
debt for the USA, which I’ve only just located (I expected it to be in
the Federal Reserve Flow of Funds, and it wasn’t – instead it’s recorded
by the New York Stock Exchange). The first surprise came when comparing the S&P500 to the
Consumer Price Index over the last century – since what really tells you
whether the stock market is “performing well” is not just whether it’s
rising, but whether it’s rising faster than consumer prices. Figure 1 shows the S&P500 and the US CPI from the same common date-1890—until today. In contrast to house prices, there are good reasons to expect stock
prices to rise faster than consumer prices (two of which are the
reinvestment of retained earnings, and the existence of firms like
Microsoft and Berkshire Hathaway that don’t pay dividends at all). I
therefore expected to see a sustained divergence over time, with of
course periods of booms and crashes in stock prices.

That wasn’t what the data revealed at all. Instead, there was
a period from 1890 till 1950 where there was no sustained divergence,
while almost all of the growth of share prices relative to consumer
prices appeared to have occurred since 1980. Figure 2
illustrates this by showing the ratio of the S&P500 to the CPI –
starting from 1890 when the ratio is set to 1. The result shocked me –
even though I’m a dyed in the wool cynic about the stock market. The
divergence between stock prices and consumer prices, which virtually
everyone (me included) has come to regard as the normal state of
affairs, began in earnest only in 1982.

Until then, apart from a couple of little bubbles in stock prices in
1929 (yes I’m being somewhat ironic, but take a look at the chart!) and
1966, there had been precious little real divergence between stock
prices and consumer prices.

My causal argument commences from my definition of aggregate demand
as being the sum of GDP plus the change in debt—a concept that at
present only heretics like myself, Michael Hudson, Dirk Bezemer and
Richard Werner assert, but which I hope will become mainstream one day.
Matched to this is a redefinition of supply to include not only goods
and services but also turnover on asset markets. This implies a causal link between the rate of change of debt
and the level of asset prices, and therefore between the acceleration
of debt and the rate of change of asset prices—but not one between the
level of debt and the level of asset prices. Nonetheless there
is one in the US data, and it’s a doozy: the correlation between the
level of margin debt and the level of the Dow Jones is 0.945.

For those who didn’t follow, what Keen is saying is that the stock market has been one giant debt-inflated bubble since 1980.  And it means that when the change of debt goes negative, asset prices are going to contract at a speed proportional to the rate of the debt contraction.  This, of course, is why the Fed has been pumping so desperately for five years, and also why it was always doomed to eventual failure.

What I find particularly significant is that Keen has reached a very similar conclusion about the stock market that Karl Denninger and I both independently reached about the economy through a different approach, which involved calculating the dollar amount of debt required to buy one dollar of economic growth.  By any of our three methods, it readily becomes apparent that there has been no genuine economic growth in the USA since 1980, give or take a year.

That sense of national decline that most Americans sense isn’t an illusion, rather, it is the idea that the US economy has expanded in any material manner over the last 30 years that is the illusion.  It is actually a debt-funded mass delusion that is no more substantial than drug-fueled hallucinations.

A failure to comprehend

I’m sure you recall the various academics and would-be academics at Pharyngula crying about what PZ Myers described as the “depressing” state of reality in American academia.  The accomplished genetic scientist writes in Woe is us academics:

Yeah, that’s the reward for earning a Ph.D. Most of you won’t get employed in academia, and most of you who do will get the terrifyingly fragile job of adjunct. And if you do manage to get a real tenure-track position, after 4-6 years of graduate school and a post-doc or two, you’ll get paid $40-50K/year, and be damned grateful for it.

The comments to these posts are full of the lamentations of angry, highly credentialed, but unemployed Obama-voting progressives who consider any limitation on immigration to be racist, bigoted, and overtly evil.  Which is why, despite opposing the administration-endorsed Senate bill on “immigration reform”, I found myself laughing when reading this description of the bill by Bill Keller at the New York Times.

Any foreigner who gets a graduate degree from an American university in
science, technology, engineering or mathematics (STEM in the vernacular)
and has a job offer can apply for a green card — even if he or she
studied for a field that is already crowded with native job applicants.
The bill would award permanent residence to anyone with a Ph.D. in any
subject from any university in the world, if he or she has a job offer
in that field.

If the credentialed geniuses in academia think things are difficult for them now, just wait until they have to start competing with PhDs from Bangladesh and Zimbabwe who are willing to work for $5k per year and a green card.  It is ironic that the only thing standing between them and the complete economic devaluation of the credentials they so treasure is the Republican House that they so despise.

The immigration bill multiplies the blessings of diversity with the blessings of free trade.  Imagine how much USA will benefit if wages for PhDs are reduced by 90 percent!

Milton Friedman: heretic Keynesian

I find it fascinating that as time has gone on, more and more economists are coming around to my view, which I explained in The Return of the Great Depression, that Milton Friedman was not an opponent of Keynesianism, as was always taught in the economics department of my university, but rather, a practitioner of a heretical form of it.  The freshwater vs saltwater conflict was an entirely internecine battle between Keynesians, it was not on the level of Hayek vs Keynes, let alone Mises vs Marx.

In an excerpt from his new book, David Stockman writes about how Friedman’s activities as an influential economist completely contradicted his very good essays on human liberty:

At the end of the day, Friedman jettisoned the gold standard for a
remarkable statist reason. Just as Keynes had been, he was afflicted
with the
economist’s ambition to prescribe the route to higher national income
and prosperity and the intervention tools and recipes that would deliver
it. The only
difference was that Keynes was originally and primarily a fiscalist,
whereas Friedman had seized upon open market operations by the central
bank as the
route to optimum aggregate demand and national income.

There were massive and multiple ironies in that stance. It put the
central bank in the proactive and morally sanctioned business of buying
the government’s
debt in the conduct of its open market operations. Friedman said, of
course, that the FOMC should buy bonds and bills at a rate no greater
than 3 percent
per annum, but that limit was a thin reed.

Indeed, it cannot be gainsaid that it was Professor Friedman, the
scourge of Big Government, who showed the way for Republican central
bankers to foster
that very thing. Under their auspices, the Fed was soon gorging on the
Treasury’s debt emissions, thereby alleviating the inconvenience of
funding more
government with more taxes.

Friedman also said democracy would thrive better under a régime of free
markets, and he was entirely correct. Yet his preferred tool of
prosperity
promotion, Fed management of the money supply, was far more
anti-democratic than Keynes’s methods. Fiscal policy activism was at
least subject to the
deliberations of the legislature and, in some vague sense, electoral
review by the citizenry.

By contrast, the twelve-member FOMC is about as close to an unelected
politburo as is obtainable under American governance. When in the
fullness of time,
the FOMC lined up squarely on the side of debtors, real estate owners,
and leveraged financial speculators—and against savers, wage earners,
and equity
financed businessmen—the latter had no recourse from its policy actions.

For me, Milton Friedman is, like Margaret Thatcher, a tragic figure of history, an well-intentioned individual with a genuine love of human freedom who nevertheless betrayed his ideals with his professional actions.

The downside of corporate profits

As PJ O’Rourke points out in Don’t Vote It Just Encourages the Bastards, a high rate of profits not always a harbinger of economic good news:

[Adam] Smith spotted the exact cause of the 2008 financial meltdown not just before it happened but 232 years before, probably a record for advice to sell short. In Book II, chapter 1 of The Wealth of Nations, Smith wrote, “A dwelling-house, as such, contributes nothing to the revenue of its inhabitant… If it is to be let to a tenant for rent, as the house itself can produce nothing, the tenant must always pay the rent out of some other revenue.” Smith therefore concluded that, although a house can make money for its owner if it’s rented, “the revenue of the whole body of the people can never be in the smallest degree increased by it.” Bingo. Subprime mortgage collapse.

Smith was familiar with rampant speculation, or “overtrading,” as he politely called it. The Mississippi Scheme and the South Sea Bubble had both collapsed in 1720, three years before his birth. In 1772, while Smith was writing The Wealth of Nations, a bank run occurred in Scotland. Only three of Edinburgh’s thirty private banks survived. The reaction of the Scottish overtraders to the ensuing credit freeze sounds familiar. “The banks, they seem to have thought,” Smith said, “were in honor bound to supply the deficiency, and to supply them with all the capital which they wanted to trade with.”

According to Smith, the phenomenon of speculative excess has less to do with free markets than with high profits. “When the profits of trade happen to be greater than ordinary,” he said, “overtrading becomes a general error.” And rate of profit, Smith claimed, “is always highest in the countries that are going fastest to ruin.”

Judging by how America invested in 2007 and voted in 2008 that would be us.

In this vein, it may be pertinent to note that both corporate profits and their stock prices reached record highs in 2013.  Both are actually higher than the previous peak in 2007.

 
Considering the recent political and geopolitical events, with the Supreme Court solidifying the moral breakdown of the country, the Senate doing its best to cement the existing demographic fracturing, and foreign nations as diverse as Ecuador, Russia, and Switzerland all openly demonstrating their contempt for the administration’s imperial overreach, it should not come as a tremendous surprise to see that certain economic indicators are flashing signs of an incipient crisis.

Nate’s take on metals

In which he addresses the nervous Goldie-come-latelies:

You’re seeing lots of
leveraged folks being forced to sell. This is literally a forced
collapse. When this sort of thing is happening… you’re near the
bottom. It may not be the actual bottom… but you’re near it. When it
turns… we’ll be on a long term bull market in gold that is going all
the way to 3500 or so around 2015… and that’s assuming my
hyper-inflation prediction does not hold. That’s just the technicals.
If you start looking at actual claims on gold verses actual inventory…
its a much different picture… which could literally result in 1oz
coins being worth about 100k each in today’s dollars.

This is why I have repeatedly warned people not to look at metals as an “investment”.  If you’re paying attention to the daily, or even monthly, gold price, you might as well be day-trading equities. Gold, like land, is about inter-generational wealth, not short-term money making. It will be around when the most stable extant bank finally fails.  It will be valuable when the last of the current political entities collapses into barbarism and chaos. It is not an investment, it is insurance.

Those who bought in at $500 or less are simply looking at the dramatic price action and shrugging.  Perhaps it will drop to $1k next, or leap up to $5k. If you’re not leveraged and you’re not trading, it doesn’t matter which happens to come next. It’s rather like being an owner of Apple stock in the 1980s and fretting over where its price is today.  If you want to make money, then do something productive and earn it; buying X rather than Y and hoping the price goes up isn’t being productive.

Don’t put your faith in gold.  It won’t save you from anything except perhaps abject poverty. Don’t put your trust in it; it is a mindless substance. But it is more substantial and lasting than either credit money or fiat money.  And it will hold its core value in periods of inflation and deflation alike, regardless of how it is presently priced in the currency du jour.

Inflation vs Deflation XII

Nate closes out the Great Inflation Debate with his final entry:

So at long last we understand how hyper-inflation works.  It is caused
by hyper-velocity.  Meaning folks are spending their money as soon as
they get it.  I’m not going to go much into the differences in Weimar
and today… because honestly the differences are actually smaller than
Vox indicates.  See we have the worlds leading reserve currency.  
Companies and governments have enormous amounts of cash on hand ready to
dump.  As I showed previously… the Fed has no idea how much cash is
actually out there in the international market.  We know that there is
roughly 2 trillion in corporate cash reserves in the domestic market…
but we’re told its actually as much as 5 or 6 trillion in the
international market.. and that’s on the low end.  Kids… that isn’t
even counting what the governments around the world are hoarding.
 Remember one of the benefits of being the foremost reserve currency is
that oil is priced in dollars…  so to buy oil you first have to buy
dollars. That’s important  Its a big deal.  So there is a lot of demand
for dollars out there.  And a lot of dollars hoarded up.

And thus we see that the engine is certainly sufficient to put the
train in motion.  In fact there is probably enough cash out there to
blow it to hell and gone.  No.. its not like Weimar.  Its different.
 Its very different.  But history doesn’t repeat.  It rhymes.

A common, but often ignored, phenomenon is that even during
hyper-inflation the central bankers think that there isn’t enough money
to go around.  Why?  Because I have explained it is velocity driving the
problem.  Not an increased supply in money.  Remember that central
bankers are all worshipers of John Maynard Keynes.  Damn his eyes.  So
they see complex economic situations as simplistic equations that can be
manipulated with god-like precision.  They have equations that they
really believe accurately can describe something as complex as an
economy.  To much X?  Add a little Y.  To much V?  take away some Q.  I
know this sounds insane… because well… it is… insane.
 Keynesianism is far more idiotic than you probably think it is.

I leave it to the readers to decide which case they found more convincing. Of course, time will be the only meaningful judge, as for all we know, the current state of monetary disinflation could, at least in principle, continue until the sun grows cold.  In this regard, I somewhat disagree with Nate, in that if hyperinflation doesn’t at least begin to appear by 2016, I don’t think it would be necessary for him to concede. In any event, as one reader commented, there are no winners in this debate, everyone, including Ben Bernanke and Goldman Sachs, looks to lose out in some way.  It is better to be a shopkeeper in peacetime than a king in chaos; those whose times are ignored by the historians because “nothing happened” are the fortunate ones.

It might be interesting, however, to learn if your views were modified at all as a result of the debate.  By which I mean if you were formerly inclined to expect deflation but now consider hyperinflation more likely, or vice-versa.

Nate is putting the debate into epub format which will be cleaned up a little for typos and then made available as a free ebook for future reference.

The dangerous fragility of debt

As long as we’re on the subject of debt, this interview with Nassim Taleb seems fitting. He explains to REASON why the credit money system is intrinsically delicate and prone to fracture and collapse:

reason: Most people would say when you have a system and if there’s a contagion in it, if there’s a cancer in it, if there’s some kind of stressor that starts taking over, it’s going to spread to the whole system. This is what we hear about the banking system, the financial crisis. You’re arguing that a robust or an antifragile system is capable of seeing this part of the system being cancered and learning from it.

Taleb: To cite the great Yogi Berra, a good antifragile system is a system in which all mistakes are good mistakes. And the bad system is one, again to paraphrase Yogi Berra, where you tend to make the wrong mistakes. Let’s compare the banking system to, say, transportation. Every plane crash makes the next plane crash less likely and our transportation safer. Now, with the banking system, [a failure] leads to increased probability of failure of an entire system. That’s a bad system.

reason: What’s the best way to stop that so you’re not allowing the problem to replicate throughout the system?

Taleb: What fragilizes an overall system? Three things: One, centralization. Decentralization spreads mistakes, makes smaller mistakes. Decentralization is where we converge with libertarians. A second one is low debt. The third is skin in the game.

reason: Paul Krugman, one of your great friends or nemeses, just recently wrote that these trillion-dollar deficits don’t matter.

Taleb: All these economists, let’s put it this way: Risk is not their thing.

Debt leads to fragility. We’ve discovered since the Babylonians that debt has systemic consequences whereas equity doesn’t. Let’s say that you have two brothers. One of them borrowed and they both had predictions about the future—forecasts. One brother borrows. The other issues equity. The one who borrows will go bust if he makes a mistake. The one who issues equity will fluctuate but will be able to survive a forecast error.

reason: But is it also true that the brother with equity can never really have that big payday?

Taleb: For him! But overall the system is well distributed. There’s an accounting equality. Debt traditionally has blown up systems and has been very good for governments to wage war. I’m not against credit. I’m against leverage.

reason: So you give me a loan and I say I’m going to pay you back and that gives me the ability to get something in the short run that will help me produce more in the long run. That’s OK?

Taleb: Banking started [like this]: You’re going to Aleppo, Syria, and Florence and you’re going to send me some silk. You trust me, and my correspondent in Aleppo would pay you the minute I get my silk—that kind of transaction. That’s called letter of credit, where you have debt conditional on some commercial transaction being completed. And it also allows people to finance some inventory, provided the buyer is a committed buyer. That kind of facilitation of commerce is how it all started—the letter of credit—and it developed very well.

Before that we had debt in society and it led to blowups in Babylon, and then they had to have debt jubilees. Then of course the Hebrews also had debt jubilees. And of course, they say neither a borrower nor a lender be. The Romans didn’t like debt. The Greeks didn’t like debt, except for a few intellectuals. Intellectuals for some reason, like Mr. Krugman, like debt.

Later on debt came back to Europe with the Reformation and it was mostly to finance wars. The industrial revolution was not financed by debt. California was not financed by debt; it was financed by equity. So debt is not necessary. You can use it for emergencies. Catholic societies—Aquinas was against debt and his statements were stronger than the Islamic fatwa against debt.

We have learned through history that debt in the form of leverage can blow things up. Debt fragilizes. Now what we have had in this economy is a growth of debt mostly financed indirectly by governments. Because if you blow up, we’re going to be behind you.

The current system isn’t capitalism, which is decentralized and equity based.  This is a centralized, debt-based economic system, which as Taleb notes, is extremely vulnerable in a structural sense.

Inflation vs deflation XI

I’ll start off this last round in
the debate by pointing out that I have most certainly not claimed that
federal spending somehow doesn’t count as inflation. I was simply
pointing out that the Federal Reserve’s attempt to inject money into
the economy has been effectively limited to one delivery vehicle because
the banks and households have proven to be surprisingly ineffective channels for doing so.
Again, Nate inadvertently shows how his refusal to accept the intrinsic relationship between credit and money renders his analysis
incorrect.
I very much agree that “for the
purposes on inflation it doesn’t matter who’s spending the new
money”. And I agree that “government spending is merely the
delivery method for injecting it into the economy”, but what Nate
is failing to mention here is that government spending isn’t the only, or
even the primary, delivery method used by the Federal Reserve. The
significant thing is that government spending is the only delivery method of the
four the Fed has been attempting to utilize for the past five years
that has worked at all. Despite the larger part of the Fed’s efforts
being directed at the financial sector, that credit sector has
continued to shrink. So has the household sector despite the
attempts to replace the housing sector bubble with an education
bubble. The corporate sector has responded, a little, but the $1.8
trillion increase since 2008 is barely more than half the contraction in
the financial sector.
Nate claims that prices are rising
everywhere across the board and that it doesn’t matter where the
government spends the new money. Both assertions are incorrect. Gold
prices are down 24 percent since the start of the year. Home prices
are up 1.1 percent in that same time frame, but are still down 29
percent from their 2006 peak. Gasoline prices are up from January,
but have been trending down since the spring of 2012. And the
inflated stock market is showing every sign of a steep, long-overdue
price correction. But these are merely symptoms, and short-term
symptoms at that. I see them as reflections of the credit
disinflation, Nate sees them as signs of incipient hyperinflation.
Only time will tell who was correct, so there is no point in further
belaboring the price issue.
Nor do I see any point in providing an
extended explanation of why Ben Bernanke appears to be signaling an
end to the quantitative easing program, or the significance of the
initial indications that Shinzo Abe’s massive attempt to print money
in Japan is failing, because Nate took things in a rather different
direction with his focus on the idea that hyperinflation is a
psychological phenomenon rather than a material one. Those who are
interested can find effective summaries of those two
not-insignificant events on Zerohedge. Nate wrote:
Hyperinflation is what happens when
people decide that the fiat money they have in their pockets and in
their accounts is no longer going to be honored in the future and
start spending it as quickly as possible.  That is the
unstoppable train of inflation.  The printing presses cannot be
stopped because the people will not stop spending the money as soon
as they get it.
But this perspective on hyperinflation again fails to
account for credit, which is how most people are spending most of
their money these days. Even when literal credit cards aren’t
involved, they are paying their bills with direct bank debits and
debit cards that draw from their credit money account. If one
considers the recently reported fact that 68 percent of Americans
possess less than $800 in savings, it should be clear that they
simply don’t have any fiat money in their pockets. To quote the
report: “After paying debts and taking care of housing, car
and child care-related expenses, the respondents said there just
isn’t enough money left over for saving more.” Emphasis added.
Nate’s unstoppable train simply doesn’t have enough of an engine to
leave the station, especially when the credit money that is in those
accounts begins vanishing in the inevitable bail-ins. 
In considering the possibility of hyperinflation versus the likelihood of deflation, it is important to do something we have not yet done in this debate, which is to examine the differences between the present situation and the most famous historical hyperinflation. As has been previously noted, in the USA, L1 total credit has remained very close to flat since 2008, increasing only 11.2 percent in five years. By contrast, in the period leading up to the Weimar hyperinflation, the Reichsbank debt increased from 3 billion to 55 billion marks between 1914 and 1918, and to 110 billion by 1920.  
“Businessmen found it very profitable to borrow money from the bank and buy up goods, shares and companies. Their debt was wiped out within weeks by the rapid inflation, and the businessman remained holding the valuable assets he had bought. The net result was a huge “private inflation” caused by the rapid expansion of credit…. By October 1923, 1% of government income came from taxes and 99% from the creation of new money.”
It should be readily apparent that Weimar represented a very different scenario than the one we observe today.  We are not seeing an increase in private borrowing, but rather, a net contraction. This means the only way
hyperinflation can even theoretically begin in the present circumstances is if
the Federal Reserve elects to permit the debtors in the various debt
sectors to pay off their debts rather than encouraging them to default by raising interest rates, and uses the
government to begin electronically injecting dozens of trillions of
dollars into the economy through the mainstream equivalent of food stamp
cards.
Is it possible? Theoretically. Is it
improbable. I think so, which brings this entire debate back to the
beginning, which is that one’s opinion on hyperinflation versus
deflation depends entirely on one’s belief that the Federal Reserve
is willing and able to choose the former over the latter. Setting
aside the fact that there are already those who believe that Bernanke
has followed the Depression-era Fed’s lead in choosing the latter on
the basis of his cryptic remarks concerning “tapering”, it is my
contention that the Fed is not only unable to massively inflate, but
that it is totally unwilling to do so.
Nate will have the last word, but since you’ve indulged his
imagination concerning the widespread abandonment of the dollar,
perhaps you’ll indulge mine concerning the motivations and mindset of the Federal Reserve in the present environment. Inflation and hyperinflation benefit
borrowers. Deflation benefits lenders, as they are repaid in
increasingly valuable currency. Default also benefits lenders as long as the collateral backing the loan exceeds the value of the outstanding debt.
So, in closing, I will simply ask you one simple question: at this point in time, is the
Federal Reserve a net borrower or a net lender?
By way of example, let me propose a hypothetical scenario that is perhaps a little outlandish,
if not completely in the zone of economic science fiction. The Ciceronian
political cycle predicts aristocracy, not tyranny, as the post-democratic political system. And what would be a more effective way to legally
establish a wealthy aristocracy with a relative minimum of societal disorder
than to encourage vast indebtedness, then trigger mass defaults by raising interest rates,
which then results in the acquisition of title to all of the defaulted collateral?  Even the most hard core libertarian couldn’t find anything to complain about such an action; (merely the idiocy of the centralized structure that permitted it to happen), and it would be a damn sight more legal than three-quarters of the activities with which the administration’s agencies occupy themselves these days.