Tag: economics

Paul Krugman is feeling stabbed in the back by Ben Bernanke and his signals that the Fed is going to begin “tapering” the quantitative easing that is the only thing presently propping up the markets:

Lately, Fed officials have been issuing increasingly strong hints that
rather than doing more, they want to do less, that they are eager to
start “tapering,” returning to normal monetary policy….

So what do they think they’re doing? One answer might be that the Fed has quietly come to agree with critics
who argue that its easy-money policies are having damaging side-effects,
say by increasing the risk of bubbles. But I hope that’s not true,
since whatever damage low rates may do is trivial compared with the
damage higher rates, and the resulting rise in unemployment, would
inflict. 

In any case, my guess is that what’s really happening is a bit
different: Fed officials are, consciously or not, responding to
political pressure. After all, ever since the Fed began its policy of
aggressive monetary stimulus, it has faced angry accusations from the
right that it is “debasing” the dollar and setting the stage for high
inflation — accusations that haven’t been retracted even though the
dollar has remained strong and inflation has remained low. It’s hard to
avoid the suspicion that Fed officials, worn down by the constant
attacks, have been looking for a reason to slacken their efforts, and
have seized on slightly better economic news as an excuse….

It’s sad and depressing, in both senses of the word. The fundamental
reason our economy is still depressed after all these years is that so
many policy makers lost the thread, forgetting that job creation was
their most urgent task. Until now the Fed was an exception; but now it
seems to be joining the club. Et tu, Ben?

When I published The Return of the Great Depression back in 2009, many readers found it hard to believe that the Keynesians, and the Neo-Keynesians, paid absolutely no attention to debt.  But it is now 2013 and the leading Neo-Keynesian, the Nobel prizewinner, is STILL paying absolutely no attention to it despite the fact that the Fed’s Z1 statistics quite clearly underline what the Fed has been doing and why it is going to stop doing it sooner or later.

It doesn’t even make sense to claim that the reason the economy is depressed is because many policy makers forgot that job creation is their most urgent task.  What does that even mean? Government policy doesn’t create productive wealth-producing jobs; the most it can do is create incentives to move such jobs from one place to another.

But that’s a tangent to be explored another time.  For me, the most remarkable thing is that Bernanke is practically pointing to the giant credit pyramid and the leading lights of the mainstream media are STILL pretending that the vast, crumbling edifice is of no significance whatsoever… even as they openly express their concerns about the damaging effect of rising interest rates.  Krugman’s position isn’t merely wrong, it’s entirely incoherent.

If the credit-pumped Dow Jones hitting new highs is a sign of
economic recovery, then what does it mean when the credit-pumped Nikkei collapses by one-fifth in three weeks?

• JAPAN’S NIKKEI 225 FALLS 20% FROM MAY 22 HIGH
• JAPAN’S TOPIX INDEX FALLS AS MUCH AS 5.1%
• NIKKEI 225 FALLS 6%, EXTENDING LOSSES 

I’m sure Paul Krugman already has his usual explanation ready to hand.  Abe printed a lot of money, sure.  But he simply didn’t print enough….

Meanwhile, my inflation/deflation debate opponent sends me the following admission by an international banker:  

“If you look at it historically, there has never been a period when the Fed has started to take back stimulus that has left the markets untouched.  And this time it is a bigger exercise. We have moved markets from 2009 to 2013 on stimulus and now we are trying to take a step into a world which is more driven by natural growth. That transition will not be easy.” – Hans Peterson, global head of investment strategy at Swedish bank SEB.

Everything between 2009 and 2013 was “stimulus”.  They flat out admit it… and you know people STILL won’t listen to us.

 C’est la vie.  They were warned.

Karl Denninger doesn’t see much more good news in the current Z1 release than I do.  It’s not overtly bad, at first glance, but even if the pattern of corporate debt expansion combined with household contraction isn’t immediately problematic, it is clear that the continued expansion of government sector debt is only keeping the economy in a state of disinflation.

Consumer debt has gone exactly nowhere.  The so-called “recovery” has been carried by business debt that has grown at a rate roughly double that of economic expansion, and the government is growing debt at a rate more than triple that rate…. Note that the absolute level of debt to GDP, however, refuses to go under 350%; it has now started rising again but is entirely coming from two sectors — business credit and the Federal Government. The problem with this paradigm is that we’re doing the same thing that led to the 2008 blowup — we’ve learned exactly nothing.  In real terms our GDP is in fact contracting by about $500 billion a quarter, after adjusting for debt expansion — that’s $2 trillion a year, more or less.

I prefer to look at what I call Zn, which is Z1 estimated as if it had continued to grow at the sixty-year historical rate of 2.36 percent that was required to fuel the post-WWII economic growth.  Regardless of when one begins, Zn tracked Z1 very, very closely until 2008, and the gap is still widening.  Although Z1 grew 1.28 percent, (47 percent of which was federal government debt), that didn’t prevent the disinflationary gap from growing another $1.1 trillion in Q1.

The credit demand gap is now approaching $25 trillion, which is not only more than the entire annual GDP, but amounts to 43 percent of total outstanding credit market debt.  And federal sector debt, which in 2005 was less than half the household sector debt, now virtually equals it in size.

Just when the central bankers think they’re out, economic reality keeps pulling them back in:

Since the crisis began, there have been several apparent economic springs, prompting the Fed to cease asset purchases, only to be forced back to the printing press again when the economy flagged. What may be different this time is that central bankers as a breed are losing their nerve in the pursuit of unconventional monetary policy. Some now openly question its effectiveness in stimulating the real economy. Others worry about its distributional consequences, with debtors favoured at the expense of savers. Still others worry about the re-emergence, in the hunt for yield, of asset price bubbles. They also worry about loss of independence, with QE now quite widely seen as a form of government financing. In almost all cases, there is growing concern about the sheer scale of balance sheet expansion.

Are these worries well founded? Most certainly. But are they enough to justify a return to a more normal interest rate environment? Not as long as deflation and a weak economy remain the primary risks for many advanced economies.

Central banks seem caught on a treadmill of money printing, where even the merest hint of exit threatens another financial crisis. This, in turn, would require a further dose of money printing to blow away the consequent economic fallout. There’s no escape.

Well, there are two, to be precise.  Ice and fire.  Inflation or deflation.  I hope to return to the subject next week; this is a rather busy one for me.  But it is interesting to see mainstream reports about central bankers losing faith in the effectiveness of Neo-Keynesian stimulation.

And yet, somehow I doubt he’ll admit that his neo-Keynesian advocacy of more government spending, more money printing, and more debt is incorrect when Abenomics, as applied Keynesian stimulus in Japan is known, fails.  We already know that when it fails, it will be for the same reason that Obama’s $787 billion stimulus package failed: it was too small.

These days we are, in economic terms, all
Japanese — which is why the ongoing economic experiment in the country
that started it all is so important, not just for Japan, but for the
world. In a sense, the really remarkable thing about “Abenomics” — the sharp
turn toward monetary and fiscal stimulus adopted by the government of
Prime Minster Shinzo Abe — is that nobody else in the advanced world is
trying anything similar. In fact, the Western world seems overtaken by
economic defeatism….

It would be easy for Japanese officials to make the same excuses for
inaction that we hear all around the North Atlantic: they are hamstrung
by a rapidly aging population; the economy is weighed down by structural
problems (and Japan’s structural problems, especially its
discrimination against women, are legendary); debt is too high (far
higher, as a share of the economy, than that of Greece). And in the
past, Japanese officials have, indeed, been very fond of making such
excuses.

The truth, however — a truth that the Abe government apparently gets —
is that all of these problems are made worse by economic stagnation. A
short-term boost to growth won’t cure all of Japan’s ills, but, if it
can be achieved, it can be the first step toward a much brighter future.

So, how is Abenomics working? The safe answer is that it’s too soon to tell. But the early signs are good — and, no, Thursday’s sudden drop in Japanese stocks doesn’t change that story.

What is the difference between Keynesianism and Neo-Keynesianism?  The true Keynesian believes that there is a time for government spending to contract.  The Neo-Keynesian says: in times of growth, spending must be maintained in order to preserve economic growth.  And in times of contraction, spending must be increased in order to kickstart it.

I have been following the mini-scandal of sorts in economics ever since the revelation that debt stars Carmen Reinhart and Kenneth Roghoff committed a basic Excel error in their famous paper that served as the basis for their very good 2009 book, This Time It’s Different.  I refrained from jumping into it right away because I think it is usually best to hear what both sides have to say before attempting to reach any kind of judgment on the matter.

Also, from my neo-Austrian perspective, the basic idea that economic statistics can provide legitimate and meaningful guidelines for policy actions is a dubious one at best. The recent artificial boost to GDP by means of counting R&D expenditures twice, (to put it very, very crudely), is only one of many examples of the futility of attempting to derive economic principles from analyzing government-produced statistics.

Even so, I tended to suspect that the Neo-Keynesians were exaggerating the significance of the error, since the idea that beyond a certain amount, the addition of more debt will tend to reduce one’s ability to spend is not exactly logically controversial.  The fact that Krugman and others immediately attempted to turn the matter into a policy debate was also suspicious, since the Reinhart and Roghoff paper was hardly the only one published on the subject. And, as it happens, Reinhart and Roghoff’s response indicates that their admitted mistake was considerably less significant than the Keynesians and the inflationistas would like to pretend it is.

LAST week, we were sent a sharply worded paper by three researchers from the University of Massachusetts, Amherst, at the same time it was sent to journalists. It asserted serious errors in our article “Growth in a Time of Debt,” published in May 2010 in the Papers and Proceedings of the American Economic Review. In an Op-Ed essay for The New York Times, we have tried to defend our research and refute the distorted policy positions that have been attributed to us. In this appendix, we address the technical issues raised by our critics.

These critics, Thomas Herndon, Michael Ash and Robert Pollin, identified a spreadsheet calculation error, but also accused us of two “serious errors”: “selective exclusion of available data” and “unconventional weighting of summary statistics.”

We acknowledged the calculation error in an online statement posted the night we received the article, but we adamantly deny the other accusations.

They neglected to report that we included both median and average estimates for growth, at various levels of debt in relation to economic output, going back to 1800. Our paper gave significant weight to the median estimates, precisely because they reduce the problem posed by data outliers, a constant source of concern when doing archival research that reaches far back into economic history spanning several periods of war and economic crises.

When you look at our median estimates, they are actually quite similar to those of the University of Massachusetts researchers. (See the attached table.)

Moreover, our critics omitted mention of our paper “Public Debt Overhangs: Advanced-Economy Episodes Since 1800,” with Vincent R. Reinhart, published last summer, in The Journal of Economic Perspectives. That paper, which is more thorough than the 2010 paper under attack, gives an average estimate for growth when a country’s debt-to-G.D.P. ratio exceeds 90 percent of 2.3 percent — compared to our critics’ figure of 2.2 percent. (Also see the comparisons posted by the blogger known as F. F. Wiley, including his chart, a copy of which accompanies this essay.)

Despite the very small actual differences between our critics’ results and ours, some commenters have trumpeted the new paper as a fundamental reassessment of the literature on debt and growth. Our critics have done little to argue otherwise; Mr. Pollin and Mr. Ash made the same claim in an April 17 essay in The Financial Times, where they also ignore our strong exception to the claim by Mr. Herndon, Mr. Ash and Mr. Pollin that we use a “nonconventional weighting procedure.” It is the accusation that our weighting procedure is nonconventional that is itself nonconventional. A leading expert in time series econometrics, James D. Hamilton of the University of California, San Diego, wrote (without consulting us) that “to suggest that there is some deep flaw in the method used by RR or obvious advantage to the alternative favored by HAP is in my opinion quite unjustified.” (He was using the initials for the last names of the economists involved in this matter.)

Above all, our work hardly amounts to the whole literature on the relationship between debt and growth, which has grown rapidly even since our 2010 paper was published. A number of careful empirical studies have found broadly similar results to ours. But this is not the definitive word, as a smaller number of just as scholarly papers have not found a robust relationship between debt and growth. (Our paper in The Journal of Economic Perspectives included a review of that literature.)

Researchers at the Bank of International Settlements and the International Monetary Fund have weighed in with their own independent work. The World Economic Outlook published last October by the International Monetary Fund devoted an entire chapter to debt and growth. The most recent update to that outlook, released in April, states: “Much of the empirical work on debt overhangs seeks to identify the ‘overhang threshold’ beyond which the correlation between debt and growth becomes negative. The results are broadly similar: above a threshold of about 95 percent of G.D.P., a 10 percent increase in the ratio of debt to G.D.P. is identified with a decline in annual growth of about 0.15 to 0.20 percent per year.”

It’s important to understand how deep we are into uncharted waters here, as only 8 percent of the postwar observations in advanced economies exceeded 90 percent of GDP and levels over 120 percent are almost unheard of.  But regardless, as Reinhart and Roghoff point out, there are only four options: slow growth and austerity for a
very long time, elevated inflation, financial repression and debt
restructuring.  And the only one that offers any possibility of success without massive social disruption and violence is the last one.

More importantly, as we’ll be discussing in the next round of the Inflation/Deflation debate, policy makers may not have anywhere nearly as much choice in the matter as they believe they have.

As Zerohedge notes, US Government Debt/GDP presently stands at 104.8 percent, up from 103 percent three months ago.