Tag: economics

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.

Even in response to public criticism, it seems a little strange to have to explain what is quite literally textbook economics doctrine to someone writing for the Economic Policy Journal. Yesterday, Robert Wenzel claimed “Vox Popoli is caught in the quicksand hailing Denninger nonsense” and attempted to explain himself thusly:

First off, credit is not money. Money in the United States at present is the dollar. The Federal Reserve can create more money by buying credit instruments, but they could buy anything. First off, credit is not money. Money in the United States at present is the dollar. The Federal Reserve can create more money by buying credit instruments, but they could buy anything. It is also true that because of the fractional reserve system, banks create money in Fed orchestrated fashion by issuing credit, but again the banks could buy any asset, including, Salavdor Dali paintings or stock equity, and expand the money supply. The key factor to understand is that it is not credit creation, but the money creation that is at the heart of an expanding money supply. If the Treasury borrowed money but it was bought by investors, without any involvement by the Fed, the money supply wouldn’t expand at all.

And what is a “dollar”? A dollar is presently a credit instrument, specifically, a credit instrument known as a Federal Reserve Note. This is what Mises defines as “credit money”, and not, as is commonly assumed, “fiat money”, nor is it “commodity money”, as was the case with the historical dollar, which was defined in 1792 as 24.056 grams of silver. Wenzel clearly doesn’t realize that the entire inflation/deflation discussion revolves around the very question he ignores, namely, the current nature of the dollar. Further to this point, as I have repeatedly pointed out, most purchases are not made by currency, but by credit. That is why the inflationary effect of the rapid increase in the M2 money stock, 9.65% in the last year alone, is not showing up in prices to the extent one would normally tend to expect, thus leading to dubious claims of a sudden and simultaneous fall in monetary velocity. The real reason for the unexpectedly moderate effect of this rapid M2 expansion is that the $9.5 trillion increase in the money supply is dwarfed by the $53 trillion in outstanding credit, which has remained stubbornly flat since 2008. To be fair to the inflationistas, however, it should be pointed out that we’re not seeing any significant price deflation yet because the Federal Reserve and the federal government have been fighting deflation to a standstill over the last three years with the combination of the large increase in M2 and the 92% increase ($4.8 trillion) in the federal debt. Note that since 2008, this expansion in federal credit is more than twice the size of the expansion in the M2 money stock.

Second, the interest rate maintained by the Fed is not “zero-percent…presently” and it never has been during the crisis. The current effective Fed Funds rate is 0.07%.

This is technically correct… and also happens to be silly and misleading pedantry. The 0.07% Fed Funds rate is effectively free money, especially since the rate was historically over 5%, going as high as 20% in the early 1980s. I also note that the $640 billion that was loaned to 532 European banks yesterday was generally considered to be free money although it has a nominal interest rate of 1%. To put it into practical terms, Best Buy selling new PlayStation 3 consoles for $4.20 instead of $299.99 isn’t quite free, but it is perfectly reasonable to describe it that way.

I have no idea where Denninger or Vox Popoli get the idea that credit “shifts demand forward”. Credit transfers money from one person to another. If someone invests, say, in a newly issued Treasury Bill, he is foregoing consumption but the money ends up with the government which then spends it. Money invested in a capital good creates future consumer goods, but that doesn’t mean that there is no current demand. It merely means that the current demand is for the capital goods.

This is an astonishing admission and reveals that Wenzel quite literally does not know basic economic theory. One finds numerous references to the way in which credit time-shifts consumption by pushing the demand curve outward in various economic textbooks ranging from old ones like Paul Samuelson’s 1948 Economics to Greg Mankiw’s 2009 Principles of Economics.

For example, Samuelson writes about the time-shifting aspects of credit when he wrongly attempts to distinguish between internal and external debts:

Borrowing and Shifting Economic Burdens Through Time. Still another confusion between an external and internal debt is involved in the often-met statement: “When we borrow rather than tax in order to fight a war, then the true economic burden is really being shifted to the future generations who will have to pay interest and principal on the debt.” As applied to an external debt, this shift of burden through time might be true…. If we borrow munitions from some neutral country and pledge our children and grandchildren to repay them in goods and services, then it may truly be said that external borrowing represents a shift of economic burden between present and future generations.
– Economics, p. 424 (1948)

If one realizes that Samuelson’s distinction between internal and external debt is only meaningful in a nationalistic context, it should be obvious that the distinction is irrelevant with regards to the question of whether demand is being pulled forward or not. Another example can be seen in a textbook published 61 years later, as Greg Mankiw first references the concept of pulling demand forward in an indirect manner:

[T]he political response to rising inequality—whether carefully planned or the path of least resistance—was to expand lending to households, especially low income households. The benefits—growing consumption and more jobs—were immediate, whereas paying the inevitable bill could be postponed into the future. Cynical as it might seem, easy credit has been used throughout history as a palliative by governments that are unable to address the deeper anxieties of the middle class directly. Politicians, however, prefer to couch the objective in more uplifting and persuasive terms than that of crassly increasing consumption. In the U.S., the expansion of home ownership—a key element of the American dream—to low- and middle- income households was the defensible linchpin for the broader aims of expanding credit and consumption….

In the end, though, the misguided attempt to push home ownership through credit has left the U.S. with houses that no one can afford and households drowning in debt Ironically, since 2004, the home ownership rate has been in decline.
– Principles of Economics, p. 431 (2009)

It’s not ironic in the slightest, though, since this is precisely what economic theory dictates and was, in fact, the basis of my own 2002 prediction of the coming collapse of the real estate markets. The demand curve was shifted outwards by the extension of easy credit, pricse rose and home sales increased for a period of time, after which both prices and home sales crashed. Many readers will recall that exactly same thing happened – and that I predicted it at the time – with the automotive and home-buying incentive programs pushed by the Obama administration in 2009. Mankiw eventually proceeds to present the explicit mainstream doctrine to which Denninger referred in his original post:

Why Credit Cards Aren’t Money It might seem natural to include credit cards as part of the economy’s stock of money. After all, people use credit cards to make many of their purchases. Aren’t credit cards, therefore, a medium of exchange?

At first this argument may seem persuasive, but credit cards are excluded from all measures of the quantity of money. The reason is that credit cards are not really a method of payment but a method of deferring payment. When you buy a meal with a credit card, the bank that issued the card pays the restaurant what it is due. At a later date, you will have to repay the bank (perhaps with interest). When the time comes to pay your credit card bill, you will probably do so by writing a check against your checking account. The balance in this checking account is part of the economy’s stock of money.

Notice that credit cards are very different from debit cards, which automatically withdraw funds from a bank account to pay for items bought. Rather than allowing the user to postpone payment for a purchase, a debit card allows the user immediate access to deposits in a bank account. In this sense, a debit card is more similar to a check than to a credit card. The account balances that lie behind debit cards are included in measures of the quantity of money.
– Principles of Economics, p. 624 (2009)

Note that it doesn’t matter if the concept is described as “deferring payment”, “pulling demand forward”, “shifting the demand curve outward”, or “time-shifting economic burdens”. These are four different ways to describe the same phenomenon, and regardless of how it is phrased, it has long been used to attempt to justify the economically incorrect juristic claim that credit is not money.

Finally, defaults, in and of themselves, have nothing to do with deflation/inflation in the system. If the Fed buys Treasury bills and creates money to do so, the money is out in the system. If the Treasury defaults on the Bills issued that doesn’t mean the amount of money in the system shrinks. A credit default is thus not “the equivalent of burning paper currency.”

This statement merely shows that Wenzel has no understanding of how the monetary system actually works. He clearly pays no attention to the Federal Reserve’s Z1 report, otherwise he would recognize that the 19.6% reduction ($3.3 trillion) in financial sector debt and 4.8% reduction ($663 billion) in household sector debt are a) the result of defaults and b) have had a profound effect on the deflation/inflation in the system being the reason behind the massive increase in federal debt and the expansion of the money supply.

Denninger nonsense, and apparently Vox Popoli’s, is complex, but when pulled apart at any strand, it doesn’t hold up. It has taken six paragraphs to refute two Vox Popoli confused paragraphs. Denninger and Vox Popoli make bold statements without the logic to back them up. It takes many statements to refute their bold ones because the foundation has to be established.

As I said, I am not going to debate these characters on every point. They shift too much without consistency or substance, you could spend decades trying to refute them and they will simply come out with some new statement that doesn’t reference their earlier points.

I will only refute them when I see major whoppers or new major characters spouting their nonsense. Just know that their arguments in general are disjointed, tend to ignore reality and tend to use technical terms and/or themes in a manner not used by anyone else on the planet—thus adding even more layers of complexity and confusion to their arguments.

It is more than a little amusing to see someone who neither knows nor understands Keynes, Samuelson, or even Mankiw, let alone Mises, attempt to claim that Karl Denninger and I, two of the very few observers who correctly predicted the present crisis, are spouting nonsense or presenting disjointed arguments. The fact that he doesn’t understand them does not make them nonsensical. And his genuine belief that we are using “technical terms and/or themes in a manner not used by anyone else on the planet” only serves to conclusively prove his ignorance of economic theory. While I’m tempted to cut Wenzel some slack due to his support of Ron Paul, that is unfortunately not my idiom. So, to end my response with all the tender mercy of Van Helsing driving home a stake, I shall conclude by quoting Ludwig von Mises:

In a developed monetary system, on the other hand, we find commodity money, of which large quantities remain constantly in circulation and are never consumed or used in industry; credit money, whose foundation, the claim to payment, is never made use of;* and possibly even fiat money, which has no use at all except as money.
– The Theory of Money and Credit, p. 103 (1953)

*I emphasize the bolded text for the benefit of those who may have forgotten the central point of Karl’s original post.

Karl Denninger explodes the myth of “time-shifting” expenditures:

We have here a problem in understanding basic economics, a rather odd thing for someone who believes in the central premise that inflation is “always and everywhere a monetary phenomena.” Wenzel is not alone; classical economists (most of them anyway) ignore debt (that’s credit on the other side!) because they assume that the function of debt is simply to time-shift. That premise only holds true if you ever intend to (and do) pay the debt off. Of course there’s this problem — the American Government has never done that, and over the last 30 years (from 1980 forward) debt has grown faster than GDP has in every quarter until the crash and now it’s doing it again.

This puts the lie to “time shifting” and makes the additional credit in point of fact a naked short on the currency. And what is a naked short? It’s counterfeiting! What happens when you counterfeit something? It’s illegal to counterfeit shares of stock or money because the value of each instance of that thing goes down as you’re representing in the market that there are more of them.

Heh wait a second….. that’s exactly what unbacked emission of currency does, right!

Bingo.

This is a clever and succinct means of explaining what so many people find inexplicable. It should be obvious that credit is a form of money, for the obvious reason that you can exchange it for goods. I further note that it is presently of near-equal value with cash. (This is a reference to the zero-percent interest rate presently maintained by the Federal Reserve.)

The conventional response has been to claim that all credit does is shift demand forward… but that can only be true if the credit is repaid. A credit default is therefore the equivalent of burning paper currency. This is why I have often stated that the inflation/deflation question hangs on the matter of whether the governments can and/or will print faster than they default.

And a look at history shows literally hundreds of sovereign defaults and a very few attempts to print away the deficits, which means that the default option is the likely choice in the end.

This news may help explain how it works: “523 banks borrow €489bn from ECB – bonds and markets rise”.

Now ask yourself, what did those banks buy with those $640 billion borrowed? Stock and bonds, perhaps?

Zerohedge notes the circular nature of the Italian bailout:

The EU was already embarrassed into releasing a press release that it could procure €150 billion in Eurozone contributions to the IMF rescue, now that the UK is out of the picture and the December 9 Eurosummit agreed upon total of €200 billion including non-Eurozone contributors (mostly the UK with €30.9 billion) has been “adjusted.” Now we find that the rabbit hole goes even deeper into Bazooko’s Circus because according to a just released update, of the remaining meager €150 billion in funding, Germany will be responsible for €41.5 bn, France at €31.4 billion, and Italy will need to provide €23.5 billion. To, you know, bailout Italy.

This could catch on! If you’re in debt, just bail yourself out! I’m beginning to think we should start administering drug tests to the mainstream economists and the European finance ministers. I mean, I understand the theoretical importance of animals spirits and the confidence game, but seriously, who is this supposed to fool?