Tag: economics

Alt Investors interview

Rahul interviewed Vox Day on December 14, 2011

Rahul: The first thing I wanted to get into is the argument of inflation vs deflation. I believe that we agree on many issues, but I know for sure we disagree on this topic. Why do you believe we’re going to face a deflationary depression.

VD: Because I believe the amount of credit created money, which is stored up in notional derivatives, and loans and that sort of thing, are going to decline faster than the central banks of the world are able to create money through the banks and push them out of the system.

Rahul: So what about the U.S. dollar then. We have Peter Schiff saying that the dollar is garbage. Since we artificially have low interest rates, a huge debt, and a trade account deficit, that will cause a run on the dollar.

VD: Because Peter Schiff has an amateurish understanding of the technical economic aspects of inflation as they relate to a debt-based currency. I was on his show; I like Peter and have a lot of respect for him. When it comes to the detailed aspects of economics, he doesn’t know what he’s talking about. He’s an investor and a good one. Everyone says look they’re printing money, and look at M2. They’re right, and M2 has increased. However, that’s only part of the equation. The unsophisticated way to look at the inflation/deflation question is to erroneously assume that money is paper. The central bank can print paper, and sophisticated people would say it’s all electronics (Fed would just flip a switch). What money really is, you can find this in Mises, is that money is the combo of paper money and bank credit. When you buy something, do you have to pay in paper?

Rahul: No.

VD: Off course not. How are you paying for it. You’re paying for it in credit. That’s an invented currency. It trades completely fungible. It’s completely fungible with paper currency and the electronic bank money. If you look at the data for the past 3.5 years, the total credit debt outstanding is flat at 53 trillion. M2 has increased a bit, but that’s 9 trillion. The amount of M2 has dwarfed by the outstanding bank credit. That amount, if it increased at its 50 year historical rate of 8.8%……known as Z1, we would have 72 trillion. We don’t. It’s still stuck at 53 trillion. That means it’s an active form of deflation. The only reason that this isn’t visible to everyone is that most of the deflation is hidden off the books in the financial institutions.

Rahul: Ok then. So what do you think about gold then? We have all these libertarians saying that gold will go to 10K /oz because we’re going to go back on some sort of gold standard. What’s your take on that?

VD: My take is that gold is much better as a wealth protector than it is than an investment. People think gold is good in inflation and bad in deflation. We had inflation throughout the 1980s at the same time that we had plunging gold prices. Now we’ve been seeing deflation…..even the inflationistas admit that there was deflation in 07-08. And yet gold prices went up. Gold, in some ways……for those who consider gold true money, then they should view it as anything that makes gold valuable is deflation. I think gold is a good safeguard of wealth even if you believe in inflation or deflation. Gold will still hold its value. The currency can disappear in either inflation, because it becomes worthless, or in deflation, where the financial system collapses because the debts can’t be paid off.

Rahul: Ok. Switching topics. Let’s look at Europe. Do you believe that the Euro countries will go back to their original currencies, like the Greeks going back the Drachma, or do you see a EuroTarp situation?

VD: Well I think they’re going to try a EuroTarp and it will fail. The Euro will break apart. I’ve been saying this for 10 years. I’m not surprised by the problems of the Euro. The only thing that surprises me that it’s 1.30 against the USD. 2.5 years ago, it was 1.15. It should be below .88 against the dollar.

Rahul: Why do you think it’s that high?

VD: I believe that the Fed is sending a lot money to Europe to prop up their currency.

Rahul: Allright. One last question. How will the U.S. get out of the depression? Krugman always talks about WWII getting us of the last depression. Will we have WWIII to bail us out or a Reagan style candidate to get us of this mess.

VD: Well, first of all, Krugman has no freaking clue what he’s talking about. He’s an absolute ignoramus on this matter. Before I got into economics, I was into military history. My grandfather fought in the south pacific. What got the U.S. out of the depression was that the rest of the industrialized world was blown to pieces. The US was the only country to have a functional industrial infrastructure. Therefore, we had 10 years to sell them consumer and capital goods to rebuild their infrastructure. It’s not even worth discussing. WWIII won’t get us out because WWII didn’t.

Rahul: So what will get us out of this mess?

VD: Collapse. What most likely going to happen is the financial system will collapse. The societal system will hopefully hold up. Currencies usually have a life of 70 years. It’s not the end of the world if the Euro dies. This isn’t the first attempt of a European monetary union. There have been at least five. This will collapse. The dollar will eventually collapse. This always happens. They will end up putting this back together.

Rahul: Will the SDR be the world’s reserve currency?

VD: It’s hard to say. I wouldn’t think so. What else is there? The central banks are allergic to a gold standard for the obvious reason that they can’t run their credit boom game very easily on a gold standard. They can do it, but they can’t do it to the same extent. Gold isn’t a magical cure all. We had a depression on a gold standard and we had problems with it. That doesn’t mean I’m against it. It’s much better and I’m for it. It isn’t a magical panacea that is going to usher us into unending prosperity. We still have to make stuff people want and sell it. That’s where wealth comes from. The whole idea that we can play games with money and that sort of thing, and somehow live off of that, is absurd. It’s a hangover from 40 years of a large credit boom. Since we’ve had a large credit boom, the bust will be magnified.

Mailvox: context is king

Druidhouse perceives a nonexistent contradiction:

in the interview you say that WWII didn’t get us out of the depression, but rather that the fact that the u.s. was the only manufacturing facility left standing and that europe and the rest of the world were in rubble, thereby giving us a monopoly for a while on manufactured goods. but it was precisely WWII that left Europe’s infrastructure in ruins and america’s unscathed which gave us that monopoly. you are expressing a contradiction. and there’s nothing wrong with my reading comprehension.

I am not expressing a contradiction here. While there is nothing wrong with Druidhouse’s reading comprehension, or more to the point, his listening comprehension, his confusion stems from his ignorance of what “WWII got us out of the depression” means in the economic context.

In that context, which of course is the context in which the Alt Investors interview took place, “WWII got the USA out of the Great Depression” is a Keynesian and Neo-Keynesian argument in which it is asserted that the huge increase in government expenditure involved in the production of war material led to the post-war economic growth. It absolutely does NOT mean that “winning the war and surviving with the only intact industrial infrastructure” led to economic growth.

This should be obvious, since the economists who make the “WWII solution to depression” argument are not advocating World War III and the destruction of the European and Chinese industrial infrastructures, but rather increased government expenditure. It is a particularly stupid argument, of course, since Germany, Japan, Great Britain, and the Soviet Union also vastly increased their defense spending without realizing any post-war economic growth as a result… and it was not even necessary for the USA to enter the war to ensure the destruction of the German, Russian, French, Italian, and British infrastructures.

Interview

Here is the interview with Alt Investors I did yesterday for those who might be interested. There are a few moments with some very bad buzzing on the line that lasts about five seconds each time, so consider yourself warned.

Since there has been an amount of interest in the topics being discussed, I wouldn’t mind having a transcript of it. If anyone is bored enough to type it up, please send it to me and I’ll post it here.

Mailvox: this is not the multiplier you’re looking for

Albatross gets caught attempting to pull the old switcheroo:

There are two senses in which the multiplier is used. In one sense, the multiplier is used as a statistic about government spending (i.e. suppose the government spends one dollar more, if GDP increases by 1 dollar, you have a multiplier of one). In this case, you wouldn’t understand my point. In another case, the multiplier refers to a theoretically posited increase in private sector activity because the government enables an “injection” into the economy (this is the sense in which the money multiplier exists). I meant the second sense and most Keynesians mean the second sense. You can’t understand Keynes’s thought experiment vis a vis burying money (since no gov’t money need be spent) unless you understand the injection multiplier as opposed to the statistical multiplier. I can go into further details if you’d like but I this is enough for you to understand why we came to different extensions from your conclusion.

Albatross failed to recognize which multiplier was the subject at hand. The entire 2008-2009 debate over the multiplier, and the context of the ECB study to which the linked article was referring, solely concerned the “fiscal multiplier”, which does not render Albatross’s point difficult to understand so much as entirely irrelevant. For example, here is The Economist’s article on it, to which Paul Krugman subsequently responded in his post entitled “Multiplying Multipliers”.

The debate hinges on the scale of the “fiscal multiplier”. This measure, first formalised in 1931 by Richard Kahn, a student of John Maynard Keynes, captures how effectively tax cuts or increases in government spending stimulate output. A multiplier of one means that a $1 billion increase in government spending will increase a country’s GDP by $1 billion.

The size of the multiplier is bound to vary according to economic conditions. For an economy operating at full capacity, the fiscal multiplier should be zero. Since there are no spare resources, any increase in government demand would just replace spending elsewhere. But in a recession, when workers and factories lie idle, a fiscal boost can increase overall demand. And if the initial stimulus triggers a cascade of expenditure among consumers and businesses, the multiplier can be well above one.

The multiplier is also likely to vary according to the type of fiscal action. Government spending on building a bridge may have a bigger multiplier than a tax cut if consumers save a portion of their tax windfall. A tax cut targeted at poorer people may have a bigger impact on spending than one for the affluent, since poorer folk tend to spend a higher share of their income.

Crucially, the overall size of the fiscal multiplier also depends on how people react to higher government borrowing. If the government’s actions bolster confidence and revive animal spirits, the multiplier could rise as demand goes up and private investment is “crowded in”. But if interest rates climb in response to government borrowing then some private investment that would otherwise have occurred could get “crowded out”. And if consumers expect higher future taxes in order to finance new government borrowing, they could spend less today. All that would reduce the fiscal multiplier, potentially to below zero.

However, it must be noted that the notion of potentially reducing the fiscal multiplier below zero is practically – I should not have said theoretically – unthinkable, for the obvious reason that there has never been a time since the original publication of The General Theory that any of the developed economies has come anywhere close to reaching full employment, except for revised definitions of “full employment” that all fell well short of an economy operating at full capacity. No Keynesian or Neo-Keynesian spends any time whatsoever considering theoretical sub-zero stimuli, for the obvious reason that they tend to render the entire Keynesian perspective either unnecessary or counterproductive. The usual Keynesian claim is that fiscal multipliers reliably range from 1.5 to 3x… which has been shown empirically to be untrue.

Furthermore, Albatross not only erroneously attempted to apply the “injection multiplier” to a discussion that explicitly concerned the “fiscal multiplier”, but also defined the injection multiplier incorrectly. The injection multiplier is not “a theoretically posited increase in private sector activity because the government enables an “injection” into the economy” but rather “any injection into the economy via investment capital, government spending or the like [that] will result in a proportional increase in overall income at a national level.” It includes, but is not limited to, the definition he provided.

Returning to the orginal point, it’s not at all surprising that the fiscal multiplier has been determined to reliably be less than one. As I noted in RGD, Robert Barro’s study of federal spending in WWII demonstrated that even in the most commonly cited Keynesian success story, “the estimated multiplier for defense spending is 0.6-0.7”.

John Maynard is still dead

But that doesn’t mean we can’t occasionally give his corpse another whack with the shovel:

In the midst of the European debt crisis, economists at the European Central Bank just produced a paper that looks at how growth in the size of government affects economic performance. The authors, António Afonso and João Tovar Jalles, provide “evidence on the issue of whether ‘too much’ government is good or bad for economic progress and macroeconomic performance, particularly when associated with differentiated levels of (underlying) institutional quality and alternative political regimes.”

Here are some key findings.

We analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size […] Our results show a significant negative effect of the size of government on growth. […] Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).

Basically, an increase in government spending (whether financed by taxes or by borrowing) reduces economic growth.

This is contra everything that is ever taught about GDP in mainstream economics. TheoreticallyPractically, it should not be possible that an increase in G could ever lead to a decrease in C+I+G+(X-M). The situation isn’t that supply-side economics is voodoo economics, it is that all mainstream economics is voodoo… except that it doesn’t work even when the target genuinely believes in it.

And for those who want to speak good economica, it can be phrased thusly: The multiplier is less than one.

The D word

There it is. And right in the most mainstream of the mainstream newspapers:

It’s time to start calling the current situation what it is: a depression. True, it’s not a full replay of the Great Depression, but that’s cold comfort. Unemployment in both America and Europe remains disastrously high. Leaders and institutions are increasingly discredited. And democratic values are under siege.

Krugman is just wrong about one thing here. It’s not a full replay of the Great Depression, it’s a bigger, wider, and deeper one. Which, of course, is why I described it as the Great Depression 2.0 two years ago in The Return of the Great Depression.

Hide the decline

Economic statisticians can utilize the climate scientists’ trick too:

The jobless rate declined to 8.6 percent, the lowest since March 2009, from 9 percent, Labor Department figures showed today in Washington. Payrolls climbed 120,000, with more than half the hiring coming from retailers and temporary help agencies, after a revised 100,000 rise in October. The median estimate in a Bloomberg News survey called for a 125,000 gain…..

The decrease in the jobless rate reflected a 278,000 gain in employment at the same time 315,000 Americans left the labor force. The labor participation rate declined to 64 percent from 64.2 percent.

This appears to be nothing more than the usual statistical shenanigans. By claiming that the labor force is shrinking, those who have left it are not counted as jobless, therefore unemployment is considered to have fallen, therefore more people are employed even though a smaller percentage of the growing population has jobs than before.

However, the more important number, the EPR, did continue to tick upwards to an unadjusted 58.7 percent, the same as last month. This means that the jobs situation is marginally better than one year ago, when it was 58.4 percent.

WND column

Weekend at Bernanke’s

It’s perfectly understandable why so few people are paying attention to the crisis that is threatening the global financial system, even though the professionals are biting their nails like little children about to embark upon their first rollercoaster ride. In addition to all the confusing and esoteric terminology being thrown around more freely than medical terms on a hospital show – before being introduced to “House,” I didn’t realize that all medical conditions, no matter how rare, are treated with either surgery or steroids – it is hard to distinguish between the gravity of a Dubai corporation asking for a loan extension and the Italian government collapsing for the 343rd time since Mussolini fled Rome.

There is a certain amount of crisis fatigue now, even among those of us who pay close attention to the ups and downs of the global markets and the economic statistics. One can only anticipate disaster so many times before being tempted to throw up one’s hands and assume that the global economy is going to muddle through somehow, all apparent reason and evidence to the contrary.

Mailvox: ah, innocence

Evil Kirk has a touching faith in the technocrats:

Evil Kirk: 11/21/11 6:47 AM:

The crash already came and went. If you view crashes in the 1929 sense or the “It’s a Wonderful Life” sense, you’re out of date and just worrying over a bogeyman. You aren’t going to wake up tomorrow to bank runs and general panic. We are largely in a post-radical economic discontinuity age. Too much is known, temporary technocratic leadership is too readily accepted, and people in general are too savvy and suspicious to tolerate radical discontinuity.

I just had to post this publicly to ensure it was on the record. It is indeed amusing and indicates the mindset of someone who I suspect doesn’t track a single economic statistic, let alone the ones I do. And here I’d thought the public mocking of the concept intrinsic in Reinhart and Rogoff’s best-selling book had finally killed off the theme “this time it’s different”.