Tag: economics

Best paraphrase:

Krugman: You want to go back decades ago in time.

Ron Paul: You want to go back a thousand years, two thousand years, to Roman and Greek times!

It’s interesting to see that Krugman understood exactly what Paul was saying and attempted to deny his support for the Emperor Diocletian’s policies, although Diocletian-style inflation precisely what he’s advocating. And if we’re not sure where the line between money and non-money is, how on Earth can we expect to correctly manage the economy through the use of precise interest rates?

The greatest economics-related speech, at any rate. I kid you not. I found myself sounding like a Spirit-infused Southern Baptist listening to a fiery old preacher thundering from the pulpit as I read it:

Thank you very much for inviting me to speak here at the New York Federal Reserve Bank.

Intellectual discourse is, of course, extraordinarily valuable in reaching truth. In this sense, I welcome the opportunity to discuss my views on the economy and monetary policy and how they may differ with those of you here at the Fed.

That said, I suspect my views are so different from those of you here today that my comments will be a complete failure in convincing you to do what I believe should be done, which is to close down the entire Federal Reserve System

My views, I suspect, differ from beginning to end. From the proper methodology to be used in the science of economics, to the manner in which the macro-economy functions, to the role of the Federal Reserve, and to the accomplishments of the Federal Reserve, I stand here confused as to how you see the world so differently than I do.

I simply do not understand most of the thinking that goes on here at the Fed and I do not understand how this thinking can go on when in my view it smacks up against reality.

Please allow me to begin with methodology, I hold the view developed by such great economic thinkers as Ludwig von Mises, Friedrich Hayek and Murray Rothbard that there are no constants in the science of economics similar to those in the physical sciences.

In the science of physics, we know that water freezes at 32 degrees. We can predict with immense accuracy exactly how far a rocket ship will travel filled with 500 gallons of fuel. There is preciseness because there are constants, which do not change and upon which equations can be constructed..

There are no such constants in the field of economics since the science of economics deals with human action, which can change at any time. If potato prices remain the same for 10 weeks, it does not mean they will be the same the following day. I defy anyone in this room to provide me with a constant in the field of economics that has the same unchanging constancy that exists in the fields of physics or chemistry.

And yet, in paper after paper here at the Federal Reserve, I see equations built as though constants do exist.

And the close, Sweet Mises, the close! It is unbelievable! If you can read Robert Wenzel’s speech to the New York Federal Reserve without involuntarily emitting one “that’s right”, “amen”, or “halle-fucking-lujah”, you simply do not belong at this blog. I sent him the following email:

Please allow me to compliment you, no, praise you, for giving what henceforth must be known as The Greatest Speech Ever Given in the field of economics. It was as if Daniel not only entered the lions’ den without fear, but voluntarily, to preach to the beasts of the merits of vegetarianism. The English language simply does not possess the words to describe how magnificent your speech was.

Former FDIC head Sheila Bair fixes the economy:

Under my plan, each American household could borrow $10 million from the Fed at zero interest. The more conservative among us can take that money and buy 10-year Treasury bonds. At the current 2 percent annual interest rate, we can pocket a nice $200,000 a year to live on. The more adventuresome can buy 10-year Greek debt at 21 percent, for an annual income of $2.1 million. Or if Greece is a little too risky for you, go with Portugal, at about 12 percent, or $1.2 million dollars a year. (No sense in getting greedy.)

Think of what we can do with all that money. We can pay off our underwater mortgages and replenish our retirement accounts without spending one day schlepping into the office. With a few quick keystrokes, we’ll be golden for the next 10 years…. And while that deal blew bigger holes in the deficit, my proposal won’t cost taxpayers anything because the Fed is just going to print the money. All we need is about $1,200 trillion, or $10 million for 120 million households. We will all cross our hearts and promise to pay the money back in full after 10 years so the Fed won’t lose any dough.

One rather gets the idea that Sheila has a certain lack of confidence in Ben Shalom’s ability to successfully extricate the U.S. economy from the 30-year debt bubble the Fed created. The frightening thing is that her Swiftian solution differs only in its degree from the strategy that Bernanke is actually utilizing. Bernanke is trying to continuously inflate just enough to prevent massive default and deflation, but this is akin to bailing water rather than fixing the big hole in the bottom of the boat… and without any land in sight.

On April 5th, I made the seemingly absurd claim that “problem isn’t that [Paul Krugman’s] solutions are old, failed policies from the 1930s, but that they are old, failed policies from the 13th century” in reference to the inflation created by Gaikhatu Khan’s paper currency in 1294.

Absurd, one might well have concluded. Crackpottish. Surely it must be exaggeration for rhetorical effect, at the very least.

And yet, on that very same day, Paul Krugman published an article in the New York Times entitled Not Enough Inflation, in which he declared:

[L]arge parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.

In short, far from fearing that more action against unemployment might lead to an uptick in inflation, the Fed should actually welcome that prospect.

I rest my case.

From The Discoverers by Daniel Boorstin:

Following the example of the more advanced people they had conquered, the Tartars began issuing their own paper currency, and after 1260, when Kublai Khan completed his conquest of China, he made it the regular institution reported by Marco Polo. In Marco Polo’s day the notes were still passing at full face value, but in the last years of the Mongols’ Yüan dynasty (1260–1368), floods of paper money once again signaled inflation. When the first emperor of the new Ming dynasty (1368–1644) took over, he cut back the paper money in circulation, and finally succeeded in stabilizing the currency.

From its beginnings in China, printing bore this guilty association with unsound currency. For centuries printed paper money appeared to be the only form of printing known to European travelers. A paper-money debacle closer to the West added to the ill-repute of printing. In Tabriz, capital of Mongol-conquered Persia, both Venice and Genoa kept commercial agents during the early years of the fourteenth century. The extravagance of the Mongol ruler Gaikhatu Khan from 1291 to 1295 put pressure on his treasury, which he tried to relieve by issuing paper currency. Block-printed in 1294 in Chinese and Arabic, each of his notes bore the date of the Muslim era, a warning to forgers, and the cheerful prediction that now “poverty will vanish, provisions become cheap, and rich and poor be equal.” But the magic did not work. After only a few days of compulsory use of the paper, commerce was disrupted, markets closed, and the Khan’s financial officer was reported murdered.

We like to flatter ourselves that we know so much more than our predecessors. And yet, the idea that printing more money will lead to economic growth as well as reductions in poverty and income inequality can be seen in almost every Paul Krugman column that mentions the money supply. The problem isn’t that his solutions are old, failed policies from the 1930s, but that they are old, failed policies from the 13th century.

The only difference between the treasury of Gaikhatu Khan and the Federal Reserve is that the latter has had the sense to slowly increase the money supply, thus delaying its eventual day of reckoning. But the cold, hard, mathematics means that day will eventually come.

There is considerable talk about inflation these days, since gasoline prices are hitting historic highs and the Federal Reserve has been increasing the money supply at a very rapid rate. And yet, if we actually take the time to look at a range of data, one thing becomes very clear: the increase in prices simply hasn’t kept pace with the increase in either of the primary measures of the monetary stock.

Annual delta, February 2011 to February 2012

M1: +341.8 billion, +18.2 percent
M2: +882.3 billion, +9.9 percent
US avg gas price: +22 cents, +6 percent
National median home price: +0.3 percent
CPI-U: +2.9 percent

This gap in relative deltas cannot be explained without bringing the credit markets into the equation. And it should be fairly obvious, if not tautological, that an increase in debt is inflationary whereas a decrease in debt is deflationary, as per the law of supply and demand. So why are we still seeing some price inflation despite the contraction in the private debt sectors?

The answer is simple. The rapid 23 percent annual expansion in public debt has allowed the economy’s overall debt level to remain essentially flat for the last four years. In other words, despite all of the foreclosures and defaults, there has been no debt contraction and therefore no deflation… yet. Even so, the only place that the Fed’s herculean attempt to raise price levels by printing, borrowing, and spending money has really been effective is in the stock market, or more precisely, in Apple stock.

Just ask the bookies:

In a candid admission to MPs, Professor Steve Nickell said he turned to the betting shop to find out whether Euro is likely to fail in the course of his work at the Office of Budget Responsibility.

Professor Nickell is one of the independent experts brought in by George Osborne, the Chancellor, to make sure Britain’s economic estimates are robust. Asked whether he thought the euro was likely to fail, he told the Treasury Select Committee the department itself did not “attach probabilities”.

“I go and look at William Hill and they actually have the odds of these sorts of things,” he said. “Last time I looked, the odds of Greece not using the euro by the end of the year were of the order of 40 per cent.”

This reminds me of the time that I talked with an acquaintance about a meeting he’d had the day before in London. He was lamenting the sheer idiocy of the men with whom he had been meeting and I was a little shocked when he happened to mention that he’d been meeting with the Bank of England. Totally confidence inspiring.

Zerohedge on what would be student loan defaults, if students could still default on loans:

Back in late 2006 and early 2007 a few (soon to be very rich) people were warning anyone who cared to listen, about what cracks in the subprime facade meant for the housing sector and the credit bubble in general. They were largely ignored as none other than the Fed chairman promised that all is fine (see here). A few months later New Century collapsed and the rest is history: tens of trillions later we are still picking up the pieces and housing continues to collapse. Yet one bubble which the Federal Government managed to blow in the meantime to staggering proportions in virtually no time, for no other reason than to give the impression of consumer releveraging, was the student debt bubble, which at last check just surpassed $1 trillion, and is growing at $40-50 billion each month. However, just like subprime, the first cracks have now appeared. In a report set to convince borrowers that Student Loan ABS are still safe – of course they are – they are backed by all taxpayers after all in the form of the Family Federal Education Program – Fitch discloses something rather troubling, namely that of the $1 trillion + in student debt outstanding, “as many as 27% of all student loan borrowers are more than 30 days past due.” In other words at least $270 billion in student loans are no longer current (extrapolating the delinquency rate into the total loans outstanding). That this is happening with interest rates at record lows is quite stunning and a loud wake up call that it is not rates that determine affordability and sustainability: it is general economic conditions, deplorable as they may be, which have made the popping of the student loan bubble inevitable.

The inability of students to default on student loans has bought the financial system a little more time, perhaps a year or two, but as is always the case with economics, the negative consequences can only be delayed, they cannot be put off indefinitely.

There are two very big problems here. The first is that the inability to write off these delinquent loans means that the banks are adding to their already large pool of fictitious paper assets. The second is that these hopelessly indebted students are never going to become homeowners, thus reducing the demand for housing and thereby adding to the forces causing housing prices to decline. This further adds to the fictitious paper assets of the banks, which already stands around 40 percent.

In other words, the presently perceived inflation rests on tremendously precarious grounds. We have reached the point where we now have a Potemkin money supply, even if we have not yet reached the level of the Soviet absurdity where the workers pretend to work and the government pretends to pay them.