Tag: economics

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.

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.