Tag: economics

It’s not that a gold standard won’t help governments address problems, it’s that it won’t permit them to create a lot of them:

Federal Reserve Chairman Ben Bernanke on Tuesday took aim at proponents of the gold standard, saying that such a system handicaps the government’s ability to address economic conditions.

Bernanke spoke in the first of a series of four public lectures at George Washington University that is the central bank’s latest effort to counter a raft of negative public sentiment that has arisen from its handling of the financial crisis. The former Princeton economics professor delivers a second lecture on Thursday and two more next week.

“Since the gold standard determines the money supply, there is not much scope for the central bank to use monetary policy to stabilize the economy,” Bernanke said. “Under a gold standard, typically the money supply goes up and interest rates go down in a period of strong economic activity – so that’s the reverse of what a central bank would normally do today.”

It is the reverse of what central banks do today… and given the negative consequences of what the central banks have done, one would think that was a good thing. The fact that Bernanke even feels the need to createaddress the subject is a strong indication that the solution of central bank-created money is failing. Again.

Student loan debt, which cannot be discharged in bankruptcy, is nearly twice as bad as previously reported:

The latest report by the Federal Reserve Bank of New York shows how dire the financial situation has become for college students with outstanding loans.

According to numbers released by the bank this week, 1 in 4 borrowers with outstanding student loans had a past-due balance in the third quarter of 2011. Those figures are higher than most previous estimates because, in its recent calculations, the New York Fed deliberately left out borrowers who are temporarily exempt from making payments, like those still in school or within the usual six-month period after graduation when they’re not required to make payments. By removing those borrowers from the equation, the percentage of past-due student loan balances sits at 27% of all outstanding student loans….

The estimated student loan balance in the third quarter last year was $870 billion, which increased 2.1% from the previous quarter and is more than both Americans’ total credit card balance ($693 billion) and auto loan balance ($730 billion). About $580 billion of the total is owed by Americans who are younger than 40.

That debt isn’t going to be repaid, not when “almost half of student loan borrowers are either deferring their student loan payments or are in forbearance”.

If you think the global economic contraction is over, you’re not paying attention. The Fed and the other central banks are still fighting their desperate delaying game, but once more, the cracks are starting to show.

Argentina takes the easy and straightforward approach to reducing inflation:

Since 2007, when Guillermo Moreno, the secretary of internal trade, was sent into the statistics institute, INDEC, to tell its staff that their figures had better not show inflation shooting up, prices and the official record have parted ways. Private-sector economists and statistical offices of provincial governments show inflation two to three times higher than INDEC’s number (which only covers greater Buenos Aires). Unions, including those from the public sector, use these independent estimates when negotiating pay rises. Surveys by Torcuato di Tella University show inflation expectations running at 25-30%.
PriceStats, a specialist provider of inflation rates which produces figures for 19 countries that are published by State Street, a financial services firm, puts the annual rate at 24.4% and cumulative inflation since the beginning of 2007 at 137%. INDEC says that the current rate is only 9.7%, and that prices have gone up a mere 44% over that period (see chart).

INDEC seems to arrive at its figures by a pick-and-mix process of tweaking, sophistry and sheer invention. Graciela Bevacqua, the professional statistician responsible for the consumer-price index (CPI) until Mr Moreno forced her out, says that he tried to get her to omit decimal points, not round them. That sounds minor—until you calculate that a 1% monthly inflation rate works out at an annual 12.7%, whereas 1.9% monthly compounds to 25.3%.

Threatening letters sent by the government to independent economists also shed light on INDEC’s methods. One was told that since the cost of domestic service was “a wage, not a price”, he should not have included it in his CPI calculations. “They have put a lot of effort and lawyers into such arguments,” he says.

What is remarkable is that one can quite reasonably rationalize this exercise in statistical fiction under the economic doctrine of “rational expectations”, which is the insane neoclassical idea that it’s not an increase in the money supply or debt outstanding or even a change in the level of prices that matters, but rather the expectation of future price changes on the part of consumers. So, if the government simply adjusts those expectations downward by lying about the current rate of inflation, then the subsequent behavior of consumers will cause prices to fall in line with those expectations regardless of how much the government ends up actually printing or borrowing.

Wikipedia reports this interesting fact about the concept: “Chicago economists applied rational expectations to other areas in economics like finance, which produced the influential efficient market hypothesis.” The EMH, it should be needless to say, has turned out to be a complete and utter flop, as demonstrated by Robert Prechter and numerous others using a wide variety of means.

What I find rather amusing about this article from The Economist is the clear implication that it is only an Argentine tactic and other government agencies, such as the Bureau of Labor Statistics and the Bureau of Economic Analysis in the United States, have not been playing exactly the same game for decades. Of course, as those who have read RGD will know, U.S. statisticians have been continually devising new and “improved” versions of CPI, each of which purports to show “true” inflation while methodically lopping off various sectors of the economy that are showing price changes such as those “volatile food and energy” sectors.

Consider this. The entire rise-and-fall in housing prices have had no effect whatsoever on U.S. CPI despite the fact that according to the latest statistics, $69.5 billion new home sales and $756.7 billion in existing home sales take place every year, representing around 5.5% of the $15 trillion in transactions that make up reported U.S. GDP.

I’m genuinely curious how those who regularly – and wrongly – equate Wall Street and the financial industry with “capitalism” are going to explain the latest government measures intended to prop up the great zombie beasts of the various stock and bond markets:

When back in August, Europe declared a short selling ban of any financials (here we are willing to channel Romney, and make a $10,000 bet with anyone that said ban will never be lifted), and which as we predicted has had no favorable impact on bank stocks which have since tumbled, we suggested that the next step will also be the final one: the passage of laws prohibiting sales of any kind. As usual we were partially joking. And as so often happens, we are about to be proven right again. As the FT reports in its headline article today, whose gist is simple enough, that Europe is on the verge, it is the tactically-placed final paragraph that is of particular curiosity. It says the following: “Speaking on the fringes of a start-of-year retreat of her Christian Union lawmakers in the city of Kiel, Ms Merkel said she would consider calls from her party colleagues for legislation to bar institutional investors such as insurance companies from selling bonds when ratings were downgraded, or fell below investment grade.” Allow us to recopy and repaste the key part: “legislation to bar institutional investors such as insurance companies from selling bonds.”

And there you have it: after everything else has failed, the state, not the politically independent, if at least on paper central bank, is about to formally enter the capital markets. And yes, first it will be a ban of selling on downgrades, then it will be a ban of selling on any downtick, and finally it will be a ban of selling anything and everything.

I don’t recall anything about it only being legal to buy things at a certain price or more under a capitalist system. In fact, the idea of government-fixed pricing has rather more in common with socialism, if I recall correctly, although there is nothing very socialist about the idea of fixing prices in order to protect private government-guaranteed profits. As I’ve pointed out before, that smacks of the standard practice of the royal mercantilists.

Is it progress to go from royal mercantilism to democratic marketilism? Instead of the king’s ministers picking the lucky winners, now the federal bureaucrats do.

This should be completely self-evident. And yet, the “free trade” crowd will no doubt ignore this empirical evidence, just as they have ignored the last 200 years of the logic:

A shocking report has shown that 160,000 Britons have missed out on jobs over the past ten years because they were taken by foreign labour. The true scale of the link between migration and the dole was revealed today in an independent study by the Migration Advisory Committee (Mac). There are 23 fewer jobs for British workers for every 100 migrants from outside the EU, the Government’s immigration advisers said.

If American labor is replaced at the same rate, then the 37.5 million immigrants since 1980 rendered approximately 8.6 million Americans jobless as of 2006. However, the situation is actually much worse than reported here because it doesn’t account for foreign immigration from within the EU, which accounts for two-thirds of the immigration into the UK. Factoring that in, we can estimate that approximately 25.8 million Americans are presently unemployed due to foreign immigration.

Therefore, it is both empirically and logically obvious that it is the post-1986 mass migration that is at least partly responsible for the wage stagnation and consistent decrease in the employment-population rate that has been occurring since the late 1990s.

Incorrect.  A close miss, but still a miss. The U3 unemployment rate peaked at 9.8 percent in 2011.  It was, as expected, masked by a decline in the Labor Force Participation rate to 63.9 percent.  Even so, the employment-population rate only fell to 58.1 percent in July before recovering to 58.5 percent in November.

Correct.  The first three quarters of 2011 were all below 2%, so this one can be called even though the initial Q4 report isn’t out yet.

Correct.  The deficit in the fiscal year of 2011 was $1,295 billion.  And the only reason it is that close was the delay in bumping up the debt ceiling, which has already been reached again.  So much for the oft-heard assumption that a Tea Party-inspired Republican House would solve the spending problem.

Incorrect.  Not even close.  Only 92 banks failed this year, none of them giants.  Bank of America’s stock took a hit, but it is still staggering around, hemorrhaging red ink.  I suspect the flat stock market prevented this from getting out of hand.

Incorrect again.   The Fed managed to keep bank lending propped up; TOTLL is still holding tight at $6.9 trillion, although it is still below peak.

Incorrect, unless Federal debt falls more than $762 billion in Q4.  Although its rate of growth did slow down considerably during the first two quarters, federal debt outstanding leaped 4 percent in the third quarter alone and exceeded $10 trillion for the first time thanks to the debt ceiling hike.  The state and local sector is a bit of a mess, since some serious revisions in the last Z1 report suddenly show that a sector which has been showing flat for three years growing 23.8 percent in from Q2 to Q3.  Z1 itself showed $1.3 trillion in growth from Q2, but most of that was historical revisions and is now at $53.8 trillion.  The numbers look increasingly sketchy, but regardless, my prediction of a sub-50 all sectors Z1 was wrong.

Correct.  Home prices fell to 156,100 in February.  As of the November report, they presently stand at 164,200

Correct.  Greece has technically defaulted even though it’s being spun as a “restructuring”, and although no nation has announced that it is leaving the Euro yet, there is definitely a serious Euro crisis taking place, as the IMF-led overthrow of the governments of Greece and Italy demonstrates.

Incorrect.  One big county and one state capital too small to count as major aren’t enough.

Overall, the score is 4-4, with the bonus tipping the balance in my favor, 5-4.  Not very good, and I’m disappointed with the Z1 revisions rendering the historical statistics potentially useless now.  That was a little worse than last year’s 5-3 scorecard.  In light of another mediocre performance, I’ll have to think about whether I’m going to bother making any quantifiable predictions for 2012, other than to say that I expect it to be more chaotic and contractionary than 2011 was.

Paul Krugman is once again desperately trying to rewrite history, resurrect a rotting Keynesian economics, and cover his exposed posterior:

Unfortunately, in late 2010 and early 2011, politicians and policy makers in much of the Western world believed that they knew better, that we should focus on deficits, not jobs, even though our economies had barely begun to recover from the slump that followed the financial crisis. And by acting on that anti-Keynesian belief, they ended up proving Keynes right all over again.

In declaring Keynesian economics vindicated I am, of course, at odds with conventional wisdom. In Washington, in particular, the failure of the Obama stimulus package to produce an employment boom is generally seen as having proved that government spending can’t create jobs. But those of us who did the math realized, right from the beginning, that the Recovery and Reinvestment Act of 2009 (more than a third of which, by the way, took the relatively ineffective form of tax cuts) was much too small given the depth of the slump. And we also predicted the resulting political backlash.

He is not only at odds with conventional reality, but with history as well. Krugman is being shamelessly dishonest here. As I, and others, have chronicled, the stimulus package that he now claims was too small was actually $187 billion bigger than the $600 billion stimulus his “back-of-the-envelope calculations” recommended and described as “huge”.

Keynes was not right. He, and his General Theory, are still dead. Keynesian economists are not only still completely and entirely wrong, but are still in complete denial about the problem of debt, as I shall subsequently demonstrate in a forthcoming post.