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.
Tag: economics
WND column
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?
Paul vs Paul
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?
WND column
It may be one of the greatest and most courageous speeches ever spoken. It is arguably one of the most important speeches ever given in the United States, considering the current fragility of the national economy and the central position that the financial system presently plays in American society. Earlier this month, Robert Wenzel of the Economics Policy Journal spoke to the New York branch of the Federal Reserve. In his speech, he called the central bankers to account for their complete failure to provide the economy with either of their two responsibilities set by the U.S. Congress, price stability and full employment.
The Greatest Speech Ever Given
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.
A brilliant solution
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.
Lest you think I jest
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.
Medieval Pre-Keynesianism
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.