Of Peter, Paul, and Peng

Fortunately, as all we good Keynesians know, there is no problem with large quantities of government debt because when interest on the debt is paid out of taxation, there is no direct loss of disposable income.  It’s literally textbook economics!

“The interest on an internal debt is paid by Americans to Americans;
there is no direct loss of goods and services. When interest on the debt
is paid out of taxation, there is no direct loss of disposable income;
Paul receives what Peter loses, and sometimes – but only sometimes –
Paul and Peter are one and the same person…. In the future, some of
our grandchildren will be giving up goods and services to other
grandchildren. That is the nub of the matter. The only way we can impose
a direct burden on the future nation as a whole is by incurring an
external debt or by passing along less capital equipment to posterity.”

– Paul Samuelson, Economics, 1948

So, the USA is in good shape despite Debt/GDP passing 100 percent earlier this year. Or is it?

Foreign demand for
U.S. Treasury securities rose to a record level in February, indicating
that international investors remain confident in U.S. debt despite
budget wrangling in Washington. The Treasury
Department said Monday that foreign holdings of U.S. Treasury securities
increased 0.3 percent in February from January to a record $5.66
trillion. It was the 14th straight monthly increase.

Stolen gold in Cyprus

They took the credit money.  Now the EU is going after the real money as well:

First they purloin the savings and bank deposits in Laiki and the Bank of Cyprus, including the working funds of the University of Cyprus, and thousands of small firms hanging on by their fingertips.

Then they seize three quarters of the country’s gold reserves, making it ever harder for Cyprus to extricate itself from EMU at a later date.

The people of Cyprus first learned about this from a Reuters leak of the working documents for the Eurogroup meeting on Friday.

It is tucked away in clause 29. “Sale of excess gold reserves: The Cypriot authorities have committed to sell the excess amount of gold reserves owned by the Republic. This is estimated to generate one-off revenues to the state of €400m via an extraordinary payout of central bank profits.”

This seemed to catch the central bank by surprise. Officials said they knew nothing about it. So who in fact made this decision?

Pay no mind to the crashing gold prices, down more than $200 in less than a week. Look at what the elite financial institutions are doing, which is to say, getting their hands on as much of the so-called “barbarous relic” as they can manage.  At this point, Portugal, Italy, and any other EU member state has to be thinking about exiting the Euro before the Eurofascists can attempt to seize their gold.

UPDATE: At Goldman Sachs, a vice-president calls his clients: “Panic! Sell! Sell! Run to the safety of cash! Sell now! Sell it all!”  (hangs up, calls gold desk)  “Yeah, pick up another 10,000 ounces.”


Inflation vs Deflation X

Nate posts his latest entry in the Great Debate:

I know I said I would finally be explaining Hyper Inflation here, and I will be.  But there are a couple of points that Vox has made that I simply cannot let stand.  So as much as I loathe the call and response style of written debate, it appears I must resort to it.  I beg your indulgence….

Given that Vox acknowledges that there was a period of time when credit was contracting… and prices were going up, the actual timing of that period, be it July of 08 or Q1 09 is irrelevant.  He acknowledges that it happened.   The rest of this is elaborate hand waving.  Vox here is suggesting that the fact that the federal government is spending the new money, and that it somehow doesn’t count as inflation.   I am beginning to see the problem here.   Vox has literally just said, “Yeah but it doesn’t matter because its government spending.”  If we were arguing about the health of an economy… yes… we could certainly point to the distinction and say, “Its not real growth.”   But we’re not debating that.  We’re debating inflation vs deflation.  Inflation is never real growth.  That’s the point.  Of course its government spending.  Unless Vox wants to claim that inflation isn’t possible in a communist regime, then he must acknowledge for the purposes of this debate, the sector the increase is happening in doesn’t matter.  That just tells you who got to spend the money that was stolen from you.

Read the rest at his place.  My response, as usual, will be within one week.  At this point, all I will say is that in addition to the economics, the astute reader may also detect an aspect of the socio-sexual hierarchy in action.  I must certainly confess to an amount of wry appreciation for the irrational confidence of the alpha.


Captain Capitalism reviews RGD

It is nice to see that people are still reading RGD, even if its timelines are obviously outdated, to say nothing of incorrect.  I simply did not expect the Federal Reserve and the European Central Bank would fail to learn the lesson of the Bank of Japan and prove so stupidly unwilling to force the banks to take their medicine, thereby risking not only their banking systems, but their currencies as well as the very existence of their political unions.  But even so, the underlying principles outlined in the book remain operative, as Captain Capitalism, the author of Enjoy the Decline, points out in his review of The Return of the Great Depression:

First, the book is an outstanding, thorough, but succinct analysis and comparison of the various economic philosophies that are duking it out today.  He compares and contrasts Austrian, Keynesian, the Chicago School and Marxism in ways that shows he’s actually read vastly more books on economics and philosophy than I have and can use words like “praxeology” in a sentence.  This makes him “one of those guys” who while would be considered a Buzz Killington at a party, is the guy you’d probably defer to when it came to matters of economic history and technicality.  Second, like reading other economists, you always pick up a trick or two you weren’t aware of or observe mistakes you may have made (for example his explaining what the GDP deflator is NOT the same as the CPI may not help you pick up chicks at a bar, but will provide for some interesting adjustments to modern day RGDP).  This has not only further advanced my understanding of economics, but plugged some minor holes in my own economic theories and philosophies I’ve procrastinated plugging.  Third he writes very well and very dense, efficiently packing as much information into the fewest and optimal amount of words.  The introduction alone is a perfect synopsis that would benefit everybody in terms of “what economics is.”

I haven’t changed my mind about the eventual outcome or that we are now in the Great Depression 2.0.  I still don’t think we’re facing Fallout IV, and as the Great Debate should suffice to indicate, I remain utterly unconvinced about the inevitability of Whiskey Zulu India.

Speaking of Buzz Killington, what I find interesting is that whereas absolutely no one was interested in hearing about my book when it was first published, now people who have heard of it will seek me out in order to help them understand one facet or another of the ongoing crisis.  That is, I suspect, another negative economic indicator: the desire of people to talk about economics on social occasions.


The perpetual motion money machine

As she is one-half of the Reinhart-Roghoff team that has done some excellent work concerning why what Alan Greenspan once called the New Economy was not, in fact, anything new or different, I’m always interested in what Carmen Reinhart has to say.  I don’t necessarily agree with her on policy prescriptions, but her diagnostic take is usually insightful. She was interviewed by Der Spiegel last week:

SPIEGEL: Ms. Reinhart, central banks around the world are
flooding the markets with cheap money in order to spur economies and
support governments. Are these institutions losing their independence?
Reinhart: No central bank will admit it is keeping rates low to
help governments out of their debt crises. But in fact they are bending
over backwards to help governments to finance their deficits. This is
nothing new in history. After World War II, there was a long phase in
which central banks were subservient to governments. It has only been
since the 1970s that they have become politically more independent. The
pendulum seems to be swinging back as a result of the financial crisis.
SPIEGEL: Is that true of the European Central Bank as well?
Reinhart: Less than for other central banks, but yes. And the crisis isn’t over yet — not in the United States and not in Europe.
SPIEGEL: But the danger of such a central bank policy is already well known: It can lead to high inflation.
Reinhart: True. But it is certainly more difficult for a central
banker to raise interest rates with a debt to gross domestic product
ratio of over 100 percent than it is when this ratio stands at 39
percent. Therefore, I believe the shift towards less independence of
monetary policy is not just a temporary change.
SPIEGEL: As a historian who knows the potential long-term
consequences very well, doesn’t such short-sighted decision-making
frighten you?
Reinhart: I am not opposing this change, I am just stating it.
You have to deal with the debt overhang one way or the other because the
high debt levels are an impediment to growth, they paralyze the
financial system and the credit process. One way to cope with this is to
write off part of the debt.
SPIEGEL: You mean some kind of haircut?
Reinhart: Yes. But we are in an environment where politicians are very reluctant to do write-offs. So what happens is that money is transferred from savers to borrowers via negative interest rates.
SPIEGEL: In other words: When the inflation rate is higher than
the interest rates paid on the markets, the debts shrink as if by magic.
The downside, though, is that this applies to the savings of normal
people.
Reinhart: The technical term for this is financial repression.
After World War II, all countries that had a big debt overhang relied on
financial repression to avoid an explicit default. After the war,
governments imposed interest rate ceilings for government bonds.
Nowadays they have more sophisticated means.

The dangerous phase of the crisis that we have now entered is that even mainstream economists who understand the debt-related nature of the problem – and recall that back in 2008-2009, the only people who recognized that it was based on debt were outsiders like Steve Keen and me – are still supporting, however unenthusiastically, the attempt of the central banks to inflate their way out of the problem, even though some of them know it isn’t going to work.

Why? Because they are desperate.  They know that the alternative is either default and a short but savage depression that will absolutely ruin most of the world’s wealthy and powerful or the collapse of the global financial system and quite likely a fair amount of the various political structures as well. So, they are hoping against hope that the central banks will be successful in inflating their way out, but if one looks at the debt statistics, it is perfectly clear that the strategy is failing because debt/GDP is still growing.

“In the EU-27 the government debt-to-GDP ratio increased from 80.0 % at
the end of 2010 to 82.5 % at the end of 2011, and in the euro area from
85.4 % to 87.3 %…. In the EU-27, total government revenue in 2011 amounted to 44.7 % of GDP
(up from 44.1 % of GDP in 2010), and expenditure to 49.1 % of GDP (down
from 50.6 % in 2010).”

That’s the savage austerity of which the European Keynesians are complaining. Tax revenues are up 0.6 percent and government spending is down 1.5 percent, but the debt/GDP went up 2.5 percent anyhow.  This is why default, and the concomitant deflation, is inevitable, no matter how much the financial powers-that-be are desperately fighting it off.

The situation is even worse in the USA and Japan, where the government debt/GDP ratios have risen to 103 percent and 230 percent.  And while we don’t know when the financial engine, increasingly clogged with debt, is going to seize up, we can be certain that sooner or later it will.  It is very unlikely that either Europe or the USA are going to be given more than 20 years to muddle along and continue piling on the debt in the manner that Japan has.


The gold drain

Does something very nasty this way come?

Over the last 90 days without any announcement, stocks of gold held at Comex warehouses plunged by the largest figure ever on record during a single quarter since eligible record keeping began in 2001 (roughly the beginning of the bull market)….

JP Morgan Chase’s reported gold stockpile dropped by over 1.2 million oz.’s, or rather, a staggering $1.8 billion dollars worth of physical gold was removed from it’s vaults during the last 120 days.  Scotia Mocatta’s gold stockpile removals were nominal in size when compared to JPM’s, but registered in at over 650k oz’s of gold, or over $1 billion dollars worth of physical gold was removed from its vaults over the last 90 days.

I don’t know precisely what this signifies, but it would appear to indicate a certain lack of confidence in the system among the wealthy global elite.


More minorities, more unemployment

It has always seemed more than a little strange to me that so many Americans blithely assume that browns, blacks, and yellows who relocate to the United States are going to take on all the characteristics of white Americans by the sole virtue of their geographic relocation:

Black Entertainment Television (BET) founder Bob Johnson said Tuesday
that the nation would “never tolerate white unemployment at 14 or 15
percent” and yet unemployment for the black community has been double
that of white Americans for over 50 years….

Johnson said the challenge was to figure out why the unemployment
rate for blacks has been so high, “and if that doesn’t change,
somebody’s going to have to pay— 34 million African-Americans are not
going to leave this country, millions of African-Americans who don’t
have jobs.”

“Somebody’s going to have to pay for them. Somebody’s going to have
to take care of them, and if somebody’s going to have to take care of
them, that money’s got to come from somebody. And whoever’s paying for
it is going to be upset about it, and they’re going to start looking for
somebody to blame,” Johnson said.

It has been understood for decades that the lesser cultural differences between white Protestants and white Catholics have been sufficient to create very different outcomes in various European countries. Hence the phrase “Protestant work ethic”.

In light of this, is it not worth considering the possibility that the “new normal” of higher unemployment rates and lower labor force participation rates is at least in part the inevitable result of the 1965 and 1986 immigration acts, which have resulted in the massive influx of people with different cultures, and observably different work ethics, than white Protestant Americans?

In 1991, the Employment-Population Ratio in the USA was four points higher than in Mexico, 61-57.  It was 53 in Nigeria, 50 in France, and 45 in Italy.  This is usually blamed on lack of economic development and capital, but it seems to me that since economic development and capital are consequences of human action, not causes, it is more likely that one reason for the previously advantaged state of the US economy was the result of the unique composition of its predominantly Protestant European labor force.

Now, there are obviously a wide variety of other factors involved, but all things being equal, does it really make sense to imagine that importing workers from countries that are less productive and less inclined to work is going to increase productivity and decrease unemployment in the long run?  We already know that women are less inclined to work, and work fewer hours when they do, than men.  So, ogic suggests that the more the labor force moves away from being male, white, and Protestant, the more unemployment there will be and the lower the employment-population ratio is likely to fall.

The “New Normal” of eight percent unemployment and sub-60 percent EPR isn’t necessarily the result of the financial shenanigans or even free trade, it is also partly the result of immigration from countries where the population is less inclined to work hard. Johnson’s comments also lead to the obvious conundrum: if there are fewer people working less hard, how are they going to be able to pay for the increasing number of people not working at all?


Inflation vs Deflation IX

Nate begins the eighth installment in the series by getting some things factually incorrect. To begin with, Z1 did not begin to decline in July 2008, as it peaked at $52.9 trillion in Q1 2009, a figure it did not reach again until Q3 2011, when it hit $53.8 trillion. 2008 merely served as the warning sign, as total credit growth ceased to keep pace with its 60-year historical rate, thus triggering two quarters of 10 percent growth in the federal debt sector in the latter part of the year. Gold and silver prices certainly did rise during that time, as did the stock market, but this was the result of the near-unprecedented increase in federal spending which was taking place at that time; even as the Household and Financial sectors contracted, the Federal sector expanded by $3.3 trillion.

Merely that Federal expansion, you will note, is considerably greater than the increase in savings over the same period. In fact, it is $1.2 trillion more than the total amount of extant currency plus demand deposits. And note that the government economists appear to have been keenly aware of the warning provided by the debt disinflation, (which you may recall was characterized as the “credit crunch” at the time), as the massive increase in government borrowing preceded the actual debt deflation by three quarters.

As Mises and others have remarked, inflation does not affect every sector of the economy at once. That is the whole reason it is desired by certain economic actors; they expect to benefit disproportionately from being able to spend less expensive money at its previous value. Nate’s tangent into malinvestment isn’t completely irrelevant, as real estate was certainly one of the primary areas of malinvestment, along with the health care and higher education sectors, but isn’t of particular importance because my case is not dependent upon housing prices. I have merely pointed it out because it shows that the inflation, despite massive reinflationary efforts, hasn’t been enough to counteract four years of ongoing credit contraction across the economy.

Nate is looking at Z1 – or to be more precise, L1 – as a whole rather than in its component parts. This is not unreasonable, but unless one looks at the component parts, one cannot understand the importance or the consequences of the shift in the nature of the credit market that has seen the federal element double from 10.3 percent of the entire credit market to the current 20.6 percent.

What Nate sees as evidence of inflation, the modestly higher prices in the gold, silver, and equity markets, is largely limited to the areas of direct federal intervention.  This is why health care and higher education prices are still rising to new heights, while real estate prices are struggling to get back to where they were.  The areas that are reaching new heights are where the outstanding $11.6 trillion in government credit is flowing.  That is where the malinvestment is still being directed.

I will not dig further into Nate’s answers. I don’t know the answer to them either, the point was to direct attention to what Nate sees as significant, which is the total amount of savings and the cash in the various banks. What Cyprus should have sufficed to demonstrate was that the greater part of the “savings” he cites do not exist in any material capacity except as debt claims.  As has been repeatedly pointed out here, deposits are legally defined as debts owed by the bank to the depositor and therefore qualify as credit money even before they are subsequently loaned out, and “multiplied”.

Now, Nate concludes with citing the 56 recorded historical incidents of hyperinflation. It is true that hyperinflation is possible within a nominal credit money system, (especially in the broader sense in which Mises and I question the existence of true fiat money), but that is not to say that all credit money systems are created alike.

I note that each of these hyperinflationary scenarios were very short-lived and tended to be closely tied to serious political upheaval.  The longest period is two years, which happened twice in China during the 1940s.  Note, however, that these hyperinflations tended to take place AFTER the wars or major political upheavals; the frequency with which they take place after independence is gained by a nation is reminiscent of the high inflation that plagued the American colonial currencies and the Continental Dollar.  If any hyperinflation were to take place, history suggests it would likely take place after the collapse and political chaos; it would be a result of it, not a cause.

What Nate omits to mention is that there have been even more sovereign defaults, which he concedes are deflationary, than hyperinflations since the first hyperinflation on his list took place in 1919.

Nate is correct to say that one must be careful not to mistake “can’t” with “won’t”. But his flight analogy fails, because I am not claiming that something must be lighter than air to fly in defiance of the 56 airplanes soaring overhead, but rather, pointing to a particular vehicle, constructed from empty shipping containers and bound together with string, chewing gum, and tefillin straps, watching the pilot repeatedly taxi up and down the tarmac, and expressing my doubts that it is going to take flight.

We have seen massive increases in virtual every monetary measure. We have been told to expect considerably inflation. And yet, we are still not seeing a rise in general prices concomitant with the size of the expansion. Ben and Mario are monetizing the debt like mad. Kuroda is acting even more aggressively. To the extent their efforts to expand the limited amount of inflation they have created in the financial markets and move money out of the bank reserves and into the general economy have failed, the situation appears to be more “can’t” than “won’t”.

Remember, it’s not enough to merely print the money. The amount printed and distributed has to be greater than the continuing contraction of private credit and the evaporation of bank deposits.  And keep in mind that the combined $4.2 trillion decline in outstanding Household and Financial sector credit since 2009 alone exceeds, by a factor of nearly four, the ENTIRE AMOUNT of U.S. currency presently in circulation.

The amount of credit outstanding is simply too great for helicopter dropping of actual cash and coins to be able to compensate for much of it. And simply flipping an electronic switch and adding a zero to everyone’s bank account isn’t going to change anything at all because the entire financial system depends upon inflation working its way gradually through it.

Nate is correct to note that people are becoming increasingly drawn to holding cash in the hand, but he is forgetting that when cash becomes more valuable in this manner, it is strongly indicative of a deflationary environment, not an inflationary one.  In an inflationary environment, one wants to take on more debt and hold less cash. In a deflationary environment, one wants to avoid debt and hold more cash.  The intellectual gymnastics notwithstanding, one’s true position on this matter can be ascertained by one’s material preferences and actions.

“In fact, a money that is continually depreciating becomes useless even for cash transactions. Everybody attempts to minimize his cash reserves, which are a source of continual loss. Incoming money is spent as quickly as possible, and in the purchases that are made in order to obtain goods with a stable value in place of the depreciating money even higher prices will be agreed to than would otherwise be in accordance with market conditions at the time. When commodities that are not needed at all or at least not at the moment are purchased in order to avoid the holding of notes, then the process of extrusion of the notes from use as a general medium of exchange has already begun. It is the beginning of the ‘demonetization’ of the notes.”
– Mises, The Theory of Money and Credit, p. 227


Debt is cash

We’re not talking monetary theory anymore.  We’re talking actual government wages:

“”The Portuguese government is considering a plan to pay
public workers and pensioners one month of their salary in treasury
bills rather than cash after a high court ruled out wage cuts, a person
familiar with the situation said Sunday.




“This is one of the ideas being considered,” the person said.



By paying one month of salary in T-bills to public workers and
pensioners, the government would save an estimated €1.1 billion in
expenses, narrowing the budget gap significantly.”

Incidentally, this plan makes perfect sense: with every central bank
openly monetizing its debt, it has effectively made debt and cash
equivalent.

Things are rapidly getting very weird in the economic sense. Cyprus. Ireland. Portugal. And having driven away its high-income earners, France is showing signs of attempting to expand its tax reach beyond its borders. Paul Krugman is praising capital controls.

And, as Karl Denninger points out, it probably won’t be long before the federal government uses the insolvency of the state and local pension plans to make a play for seizing all those luscious, previously untaxed assets in millions of retirement plans.


Immigrants are good for the economy

So much for that tremendously sophisticated theory:

In Stockton, Calif., which has just entered into Chapter 9 bankruptcy,
41 percent of the people do not speak English at home and 21 percent
cannot speak it very well, according to the U.S. Census Bureau.

The problem facing immigration advocates is that once they admit that the quality and quantity of the immigrant population has an effect on the economy, their entire rational for replacing the native population goes out the window.  They were able to successfully deceive the public in 1965 and 1986, but not any longer.  The effects of the foreign pigeons invading to roost and crap all over the US economy can no longer be denied.

How many more cities have to go bankrupt before it becomes obvious to everyone that immigration is not an intrinsic element of economic growth.  It is more than a little ironic that in the name of free trade, Americans have somehow managed to accept a system that involves the free movement of labor as well as restrictions on the movement of capital.