Tag: economics

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.

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.