Tag: economics

Of bailouts and bullet- biting

It may be illuminating to compare what I wrote in RGD to the various ways countries mentioned in it have responded to the debt crisis. Consider the following quote from the book:

“According to Austrian theory, the effects of the housing bust on the overall economy should be much greater in countries like Estonia, Spain, and Ireland than in Austria, Germany, and Poland, and to the extent that inexpensive debt was made available to that and other sectors of the economy, we would expect to see that signs of the resulting economic contraction are similarly greater as well. Therefore we should see unemployment rising faster, prices falling further, GDP contracting more, and government deficits growing larger in the three housing boom countries than in the three non-boom ones.”

From today’s NYT on the Spanish bank bailout:

Two weeks after Prime Minister Mariano Rajoy of Spain vowed “there will be no Spanish banking rescue,” and after days of delay in which Mr. Rajoy pressed European officials for sounder rescue terms, Spain has now joined Greece, Ireland and Portugal as the latest bailout recipient. Catastrophe averted? Hardly.

Spain, check. Ireland, check. But no Estonia? What happened there? Why hasn’t Estonia required a bank bailout? The answer can be found in the rationale given by Fitch Ratings decision to affirm the little country’s credit rating.

“The rating decision reflects “the country’s near seamless transition to full membership of the euro zone starting on 1 January 2011, coupled with a more balanced economic recovery and the continued deleveraging of the private sector”…. Estonia was the only euro-area member to report budget surpluses for the last two years and had the lowest public debt among the region’s 17 members in 2011 at 6 percent of gross domestic product.”

Translation: Estonia is the only one of the three housing boom countries I noted in RGD that chose to bite the bullet and accept economic contraction and debt default rather than attempt to put off dealing with it in the interest of its banking sector. As even Paul Krugman has begrudgingly noted, they’ve hit bottom and are now in an ongoing process of recovery. But first they took a 20 percent hit to GDP, which is very much in line with what I said would have to be the case in RGD. All the multiple bailouts in Europe and the USA have accomplished is ensure that the trough will have to be bigger and deeper in the end.

WND column

Obama and the Debt Delta

When people who are fat and flabby begin to get in shape by lifting weights, they are often surprised to discover that, although they lose inches off their waistline, they don’t actually weigh any less. This is because muscle is much denser than fat, and an amount of muscle takes up about one-third the space as the same amount of fat. The change in a person’s shape is a qualitative one rather than a quantitative one, and such changes will often have a bigger result on how he looks and feels than simply losing weight while maintaining the same fat-to-muscle ratio.

Although Paul Krugman and a few other mainstream economists are finally beginning to admit that the U.S. economy is not only in a depression, but has been in a depression for some time now, their neo-Keynesian models, which are entirely quantitative, still do not permit them to understand how or why that is the case. With their singular focus on gross domestic product, or GDP, they completely fail to even try to understand how qualitative changes in outstanding credit market debt have a significant effect on the economy.

Paying $5.21 for a dollar

Karl Denninger notes the latest Z1 report:

We’re where we were in Q3 2007 on a ratio basis, which is hardly “healthy” by any stretch. And if you look closely you’ll see that the debt number is going up — and faster than the GDP one is. Where’s it going up? In Federal Government, that’s where. We’re simply shifting where the debt resides. Are we making any material progress? No. In fact, last quarter we added more debt than we did GDP. Therefore, we’re still going backward.

That’s not quite true when viewed from a larger perspective. By my calculations, the debt/GDP ratio has fallen from 3.75 to 3.48 since Q2-2008. The problem, however, is that the debt-shifting that Karl describes is even more significant than most people who know about it grasp. The federal government has not only increased its outstanding debt by 105.76 percent, but as I will show in my column tomorrow, it has provided 168 percent of the $3.3 trillion in post-crisis credit growth. This means that when people talk about the economy needing $3 in new debt to purchase $1 in GDP growth, they are failing to account for the decline in private credit. In other words, the federal government has needed to take on $5.21 in new debt in order to purchase $1 in new nominal GDP.

But that’s not what I found most interesting about the latest report. First, the amount of possible statistical shenanigans appears to be increasing. I keep track of the numbers according to the initial reports, and whereas the federal government number is always static from quarter to quarter, the other numbers tend to change dramatically. The biggest change I’ve seen was in State and Local Governments, which showed a mysterious $500 billion increase (+23.77 percent) in Q3-2011, but the one that caught my attention is the sudden growth in corporate debt during 2011. Corporate debt had been basically flat from 2008 through the first quarter of 2011, but for last three quarters it has suddenly averaged 3.62 percent quarterly debt growth. It was 4.46 percent in Q1-2012, which is between 2x and 3x normal. The last time we saw this sort of corporate debt growth, it ran 3.16 percent for a year, ending in the second quarter of 2007.

I don’t know if this could be some sort of indication that federal government is feeding loans to corporations or if it suggests that corporations go on debt binges prior to economic crises. I tend to doubt the former since the financial sector is still contracting and I’d have to do a lot more research before I could possibly conclude the latter. Either way, it doesn’t strike me as being an entirely innocuous development.

Two methods, same diagnosis

Karl Denninger calculates how much excessive credit exists in the US economy:

[T]here is no recognition here or elsewhere that the problem is overspending compared to taxation, and counterfeiting credit into the economy by private banks. That’s what led to the mess in the first place and nothing has been done to withdraw that excessive credit — indeed, the distortions to maintain that excessive credit have become extreme as the market would otherwise force it back out all on its own! How bad is this? In the United States alone it’s $37 trillion in size, or about 70% of the total credit in the system today! How did I compute that? Simple — I added up the “extra” credit between GDP and credit growth in the below chart from 1980 to 2008.

Those who have read RGD know that I use a different method, which is the Z1/GDP ratio. It is a little more accurate than Karl’s method, being inherently more up-to-date, but it is better seen as a supplement to his method than a substitute. Z1 is presently $54,134.3 billion, which is currently 3.5x more than the $15,454 billion GDP. So, after four years of economic stagnancy, the debt ratio has marginally improved from 375 percent down to 350 percent. (Note that by my method, we can see that about 10 percent of the $37 trillion excess calculated by Karl has already been eliminated.) Since the historical post-Depression norm that the economy can sustain is around 150 percent, this means the amount of excess credit currently present in the system is around $31 trillion.

In other words, all of the economic pain that the global economy has been through over the last four years is about one-tenth of the amount that is eventually in store for it. Contra most observers’ perceptions, the situation is not getting worse, and at least in the United States it has objectively gotten a little better. The problem is that the situation was much, much worse, and orders of magnitude larger, than anyone who wasn’t looking at the debt figures realized. While it may be shocking to learn that there has been no real economic growth in the USA since 1980, a coldly analytical look at the shabby state of the national infrastructure tends to support the statistics.

The drachma is not catastrophe

As for the Euro, on the other hand…. Ambrose Evans-Pritchard contemplates the upcoming Greek exit from the Euro:

The danger for Euroland is slow contagion later once the sanctity of monetary union is violated, compounding the underlying crisis as Portugal, Spain, and Italy sink deeper into (policy-driven) debt-deflation.

Fitch boss David Riley told a banking form in the City that the Greek saga is “knocking down the central pillars underpinning monetary union”.

EU leaders said successively:

1) There would be no bail-outs.

2) Sovereign defaults inside EMU were inconceivable.

3) EMU exit was out of the question, lunatic, and so forth.

Every one of these claims has been shown to be untrue….

Mr Papademos said withdrawal from the euro would be “catastrophic”
for Greece. This is a religious incantation, or possibly just a threat.
It would be catastrophic if EU leaders and the IMF chose to make it
catastrophic. That is a political decision. Such shroud-waving borders
on political blackmail.

We hear this sort of language before every devaluation crisis.
Argentina in 2001-2002, Mexico’s Tequila crisis in 1994-1995, the East
Asian crisis in 1997-1998, not to mention countless others through
history, including the UK’s two liberations from dysfunctional
fixed-exchange systems in 1931 and 1992.

The reality is that the Euro is intrinsically catastrophic and has been from the start. It’s never been about the economics, but rather, providing a first step towards a single unified European state of the sort previously constructed by Charlemagne, Napoleon, and Hitler. And, like its three predecessors, it is rapidly collapsing, albeit under the weight of its structural inconsistencies rather than any external pressures. Pritchard has made some serious blunders along the way, mostly because he made the mistake of paying too much attention to the mainstream economic experts, but he is entirely correct to remark that “Remaining in the euro is demonstrably catastrophic already.”

Exit Europa

Most Americans want US troops out of Europe:

The Rasmussen polling organization is out with a shock poll that the entire Washington establishment needs to study: 51 percent of voters surveyed said they wanted all US troops out of Europe, now. Only 29 percent favored keeping the troops where they are. US troops have been in Europe since World War Two. In the Cold War, they not only kept the Russians out; they gave the rest of the Old World the confidence that Germany would not come storming back for a rematch. The presence of US troops helped give western Europe its longest era of peace since Roman times.

Since the end of the Cold War the US presence in Europe has made much less sense to the average American, but foreign policy junkies like yours truly think that it still serves a purpose. Not only do those troops provide security in new NATO countries like Poland and the Baltic republics; US bases in Europe are important in dealing with terror and other problems in the Middle East and without the US presence in Europe it is unlikely that NATO in its present form can survive.

Being a sophisticated foreign policy junkie, but not, apparently, a historian or an economist, Walter Russell Mead completely fails to understand the crucial point. It’s not that “the arguments for the US presence in Europe are credible, clear and compelling”, it’s something else that entirely supersedes them. You’re BANKRUPT, dude! The USA cannot afford to pay for the US presence in Iraq, in Afghanistan, in South Korea, or in Europe. It’s done. It’s over. Even the slow-witted American public has finally figured it out.

And the more Hispanics and other third-worlders that enter the country, the less the average American is going to give a damn about the wet dreams of foreign policy junkies.

WND column

The Naked Economy

Facebook represents the ultimate test of two ideas. The first is that traffic once attracted, can successfully be monetized. Facebook is presently earning only $4 per user per year. Its investors are gambling that it can increase annual revenue per user before its users get bored and begin to fade away. The second is that there is real value created in passing personal information back and forth between people. It is the second idea that is the more troubling one. While I personally doubt that Facebook, which in my opinion has a dreadful interface, poor performance and a reprehensible privacy policy, can increase its user revenue faster than it loses users, the ultimate fate of Facebook doesn’t really matter to anyone but its investors and those who were hoping its IPO would somehow magically reinvigorate the stock markets. The second issue is the much larger one, because it calls into serious question the direction in which the U.S. economy has been heading for the last 30 years.

WND column

Immigration and Unemployment

Long before there was a Republican Party, the idea that free trade and immigration foster economic growth was a staple among many Americans. Even today, there are few on the right side of the political spectrum who have bothered to review this centuries-old logic or examine the considerable amount of empirical evidence that has been gathered from decades of quasi-free trade or 47 years of mass foreign immigration.

Last month’s unemployment report was not good. While the U3 unemployment rate was only 8.1 percent, which is bad but not disastrous, the number of Americans not working was actually much higher than it would appear due to the statistical games being played by the Bureau of Labor Statistics. Since the unemployment rate is calculated by dividing the number of unemployed people by the total number of people in the labor force, the BLS keeps the rate down by reducing the size of the labor force. For example, in the April unemployment report, it was reported that the size of the civilian labor force shrank from 154.7 million to 154.5 million.

No-Growth Nation

I no longer pay any attention to the headline unemployement rate, which is presently reported at 8.1 percent for U3. But it is relatively meaningless due to the statistical shenanigans that are being played with the labor force participation rate, as various commentators are now noting. For me, the more important and less easily gamed statistic is the EPR, or Employment-Population Ratio, which has remained essentially flat, between 58.5 and 58.2 percent, since October 2009. Needless to say, this is not indicative of a growing economy, since it reflects a ratio not seen in the USA since the recession of the early 1980s. One wonders how low the EPR has to fall before people begin to connect their unemployment to the 60 million population increase since 1990 – more than the entire population of the UK – most of which is the result of the post-1986 immigration wave.

Suffice it to say that the present economic depression will eventually kill the claim that immigration is good for the economy as dead as the 1970s recession killed the Keynesian claim that it was impossible to simultaneously have inflation and unemployment.

Mailvox: the fifty trillion dollar question

KJ offers the opportunity to ask a question of some European functionaries:

The former and long-serving vice chancellor of Germany (Dr Joschka Fischer) and the EU’s High Representative for Common and Security Policy (Dr. Javier Solana) are here… debating the economic situation (and potential solutions). The Spaniard is (in summary) saying the situation is looking pretty shit right now and it could be fixed by Germany “opening up” to the rest of poorer/less-productive Europe (when pressed he confessed that includes offering up more of its – i.e. Germany’s – money).
The German is (in summary) saying the situation is looking pretty shit and what we need is to centralise and consolidate political power in Europe. Lol! 4th Reich anyone!? According to both, the Euro breaking up would just be catastrophic. We can ask questions but I don’t have the heart to ask any. It’s so depressing listening to this glossy, typical politic speak from which no straight answers can be extracted. Do you questions for the German Vice Chancellor or EU’s High Representative?

I wrote back: Yes. Since inflation or default are the only way to escape debt of this magnitude, which is the vice-chancellor’s preference? If you get a second question, ask why the successful bank defaults in Iceland have not been permitted to take place in the EU.

Completely admits that historic 1920s inflation destroyed the German middle class, and admits not a result of market developments but intentionally by German central bank to write off war debt, so accepts inflation is going to have to play its part in the current situation!! Greek default, (and kicking them out), is not an option apparently, not forthcoming as to why other than that it would be “hugely detrimental to the rest of Europe”. No luck on the second question; earlier on he had alluded to “endless lawsuits” and “serious capital restrictions” to anyone taking the opt-out of paying their debts which he implied would make that option not viable. I didn’t hear Iceland mentioned at all.

This lends further support to what most of us here have always assumed, that the central banks and governments will inflate. The question is, can they do so? This is where the question of the nature of money, and if credit is more properly considered money or simply the accounting of money, becomes the 50 trillion dollar question. Nate and I will be debating this in the reasonably near future, but I’ll leave you with this thought: given their performance over the last four years, what are the chances that the core monetary assumption of the central banks and governments is correct?