Tag: economics

You don’t say

The headline on Drudge made me laugh.

“‘WE ARE ON THE VERGE OF A GREAT, GREAT DEPRESSION‘”

Really now? I am… so very surprised!

“Interest rates are amazingly low and that, thanks to Ben Bernanke, is driving everything,” Yastrow said. “We’re on the verge of a great, great depression. The [Federal Reserve] knows it. We have many, many homeowners that are totally underwater here and cannot get out from under. The technology frontier is limited right now. We definitely have an innovation slowdown and the economy’s gonna suffer.”

This was all entirely predictable. It was, in fact, predicted. My timing was a little off, as usual. I thought the media would start realizing the reality of the situation towards the end of 2010, not the middle of 2011. But the situation remains precisely the same one I described in the Introduction to The Return of the Great Depression and I see no reason to change a word of it.

“Due to the sizeable bear market rally that began in March 2009, many, if not most, economic observers are presently convinced that the global economic difficulties of last autumn are largely behind us now, courtesy of the aggressive, expansionary actions of the monetary and political authorities.

They are wrong. It is not over. It has only begun.

I believe that what we have witnessed to date is merely the first act in what will eventually be recognized as another Great Depression.”

Cracks in the Euro

A Greek official finally admits the obvious:

Greece must take tough measures to deal with its debt crisis or it will have to return to the drachma, the EU’s Fisheries Commissioner Maria Damanaki said on Wednesday. “I am forced to speak openly,” Damanaki was quoted as saying in a statement by the semi-official Athens News Agency. “Either we agree with our lenders to a programme of tough sacrifices … or we return to the drachma.”

I’m hoping Italy will return to the Lira, myself. I still have a few of them sitting around somewhere in the old filing cabinet. Anyhow, this “forced restructuring” is the only valid option since the ECB, the EU, and the bond-holding banks have repeatedly refused to cut Greece’s debts in a manner sufficient to permit repayment.

Be very afraid

It would seem the solution to cowbell is MORE COWBELL:

“Today there are very substantial risks, to be sure, but the economy is growing, unemployment is falling and financial conditions are normalized,” said Summers, who was director of the White House National Economic Council in the Obama administration from 2009 to 2010.

Summers said the “central irony” of a financial crisis is that it’s caused by too much confidence, borrowing and lending, and is resolved by more confidence, borrowing and spending.

There is no irony there because it isn’t a solution. This is exactly what I meant by “buying time” and what others have meant by “extend and pretend”. There is little chance that Summers actually believes this, but the financial charlatans of the world now have no choice but to keep clinging to the tiger’s tail while hoping for a miracle.

A tacit admission of depression

Karl translates Alan Blinder’s unusually frank remarks in the Wall Street Journal:

The only reason we have not recognized an economic Depression is because of utterly unsustainable government borrowing and spending of money it does not have and which it has no hope or intent to ever take in via taxes in the future. In other words, the Government has been lying to you.

There has been no economic recovery and we are in an economic Depression right now and have been since 2008.

There was no economic recovery after the 2001 Nasdaq collapse. The government borrowed and spent about 5% of GDP at the time every year to fake a recovery and we ran a debt-based false “recovery” when in fact we were in a five year long recession marked by an orgy of false “wealth” through bubbling home prices.

Now we’re borrowing and spending 12% – more than double that amount – a year to fake a recovery that has shown up in stock prices, and it mathematically must end the same way.

This is exactly what I attempted to warn everyone of in my economic columns in 2008 and in RGD. GDP is a terrible measure of economic growth because it is so easily gamed through the G component, government spending. What the 78% increase in government debt since the second quarter of 2008 has done is to create $4.1 trillion of fake growth. Needless to say, this is substantial in a $14 trillion economy.

The ironic thing is that if the pre-Keynesian measures that Keynes himself utilized in determining economic growth and contraction are used, it would already be recognized that we were in a depression due to the number of jobless people across the country. But due to the development of sophisticated statistical measures, the government is now able to claim that there is “real” economic growth even as the employment-population ratio continues to fall. Even many economists have forgotten that metrics such as GDP and U3 are merely measures of an observable underlying reality.

But as I have repeatedly pointed out, the map is not the territory, and unfortunately, the present economic map is becoming increasingly inaccurate.

Hitting the limit

The Secretary of the Treasury announces that the United States has maxed out its credit card:

Treasury Secretary Timothy Geithner has informed lawmakers that the government has officially hit the debt limit. Geithner made the announcement in a Monday morning letter to congressional leaders that said he was reducing the government’s investment in the two government employee pension funds as the nation entered a “debt issuance suspension period.”

The truth is that there is no way that refusing to take on new debt will lead to default. It doesn’t even make any sense. Think about it: does obtaining a new credit card mean that you are less likely or more likely to not pay the balance on your existing credit card? Attempts to associate the debt limit with default are simply dishonest, as an inability to obtain new debt is not synonymous with a lack of new revenue.

Killing Ireland to threaten Spain

This article by a professor of economics at Dublin College is easily the most informative summary of the disaster presently facing Ireland, and by extension, the financial world.

The one thing you need to understand about the Irish bailout is that it had nothing to do with repairing Ireland’s finances enough to allow the Irish Government to start borrowing again in the bond markets at reasonable rates: what people ordinarily think of a bailout as doing.

The finances of the Irish Government are like a bucket with a large hole in the form of the banking system. While any half-serious rescue would have focused on plugging this hole, the agreed bailout ostentatiously ignored the banks, except for reiterating the ECB-Honohan view that their losses would be borne by Irish taxpayers. Try to imagine the Bank of England’s insisting that Northern Rock be rescued by Newcastle City Council and you have some idea of how seriously the ECB expects the Irish bailout to work.

Instead, the sole purpose of the Irish bailout was to frighten the Spanish into line with a vivid demonstration that EU rescues are not for the faint-hearted. And the ECB plan, so far anyway, has worked. Given a choice between being strung up like Ireland – an object of international ridicule, paying exorbitant rates on bailout funds, its government ministers answerable to a Hungarian university lecturer – or mending their ways, the Spanish have understandably chosen the latter.

I didn’t realize that Geithner, the ex-NY Fed Secretary of the Treasury, was so directly involved in saddling the Irish taxpayer with the losses that would have otherwise been taken by the banks that were bailed out. I don’t see how it is possible to read this and still convince oneself that the world’s economic and financial problems of 2008 are in the past it’s perfectly clear that the global financial system hasn’t been fixed in any way, shape, or form, it is only that extend-and-pretend has gone from the national to the intercontinental level.

As I noted yesterday, despite my very contrarian predictions of a continued decline in housing prices, I actually appear to have underestimated the speed, and likely the eventual extent, of the collapse. In the same way, my predictions that the banks and governments of the world would reinforce their failure by taking it to the next level appears to have somewhat on the conservative side as well.

Ireland and Greece are already toast. They are almost guaranteed to default sometime within the next two years. What sort of domino effect this will kick off can’t be accurately predicted, but it seems reasonable to assume that the bankruptcy of an entire nation or three will be more calamitous than the mere failure of a single Austrian Creditanstalt.

Too optimistic, again

Well, you can’t say I didn’t repeatedly warn you about this housing “double-dip” coming. The problem, of course, is that it’s not just a dip.

Home values posted the largest decline in the first quarter since late 2008, prompting many economists to push back their estimates of when the housing market will hit a bottom.

I suppose there must be a silver lining in what some consider to be the ongoing hyperinflation… without it, you might be able to buy a house for $30k soon.

Econ doesn’t stick

This may explain why today’s economists are so hapless; they simply don’t know the relevant core principles:

Unfortunately, however, most students seem to emerge from introductory economics courses without having learned even the most important basic principles. According to one recent study, their ability to answer simple economic questions several months after leaving the course is not measurably different from that of people who never took a principles course.

What explains such abysmal performance? One problem is the encyclopedic range typical of introductory courses. As the Nobel laureate George J. Stigler wrote more than 40 years ago, “The brief exposure to each of a vast array of techniques and problems leaves the student no basic economic logic with which to analyze the economic questions he will face as a citizen.”

Another problem is that the introductory course is increasingly tailored not for the majority of students for whom it will be their only economics course, but for the negligible fraction who will go on to become professional economists. Such courses focus on the mathematical models that have become the cornerstone of modern economic theory. These models prove daunting for many students and leave them little time and energy to focus on how basic economic principles help explain everyday behavior.

But there is an even more troubling explanation for students’ failure to learn fundamental economic concepts. It is that many of their professors may have only a tenuous grasp of these concepts, since they, too, took encyclopedic introductory courses, followed by advanced courses that were even more technical.

It may sound cool, at least to dorks, to be a quant or a wonk. But all the technical expertise in the world doesn’t do you any good if you don’t get the core concepts right. That’s why, in RGD, I attempted to begin at the beginning and leave as much jargon and econometrics out of it as was reasonably possible. I was fortunate, as about half my econ professors had a fairly sound grasp of the core concepts. But given the more common nature of those who didn’t, it doesn’t surprise me to learn that their sort are in the majority. As I’ve mentioned before, I once met a nominal econ major from a big state school who had never heard of Keynes or the General Theory.

For those uninterested in the omniderigence debate

It’s not as if there are a dearth of other matters to discuss, such as the potential consequences of refusing to raise the debt ceiling:

Proponents of the “just say no” approach argue that refusing to raise the debt ceiling won’t automatically lead to a default. In the past, they point out, Congress has waited several months after the debt limit was reached before authorizing an increase, and the economy did not collapse. Sen. Pat Toomey (R., Pa.) has proposed legislation in the Senate designed specifically to prevent a default by directing the Treasury Department to prioritize interest payments on the national debt over all other forms of spending in the event that the debt ceiling is reached.

As Veronique de Rugy and Jason Fichtner write in The Washington Times, the United States is estimated to owe about $205 billion in interest this year, to be paid out of revenues totaling about $2.17 trillion. Under Toomey’s plan, after the interest was paid off Congress would be left with $1.97 trillion to spend on actual programs. That’s about $1.5 trillion less that what President Obama requested in his (first) 2012 budget, but enough to cover Social Security ($741 billion), Medicare ($488 billion), and Medicaid ($276 billion), with about $400 billion left for other programs, including national defense….
Such a strategy carries a number of self-evident risks, namely that the doomsayers are right and uncertainty over the debt limit would spark a run on Treasury bonds, sending interest rates soaring and plunging the United States (and the world) economy into a second Great Depression, at which point a political squabble over which side was to blame would be the last thing the American public wanted to hear.

Here’s the problem. America and the world economy are already in the second Great Depression, the fact is merely being papered over by the $5 trillion that has been pumped into the global financial system by the Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England since 2006. The only thing providing the illusion of economic growth and recovery is a continued expansion of debt and spending. Once it stops, the game is over.

So, the “risk” isn’t really a risk at all, since the worst outcome is guaranteed regardless of whether the ceiling is raised or not. It would have been better to take the medicine back in 2008, but better 2011 than 2016, when the collapse might be to such an extent that it would take down multiple governments.

By the way, according to WND, Republicans are backing away from their commitments to keep the debt ceiling in place. Only 102 of the 142 House Republicans previously on board with WND’s “No More Red Ink” campaign are still planning to vote against it.

Prediction #7: Home prices

NAR released its March numbers:

The national median existing-home price for all housing types was $159,600 in March, down 5.9 percent from March 2010.

That certainly didn’t take long. From my 2011 economic predictions: The national median existing-home price will fall below 160k from the present 170,600..

This is an interesting tidbit from the report: “NAR’s housing affordability index shows the typical monthly mortgage principal and interest payment for the purchase of a median-priced existing home is only 13 percent of gross household income, the lowest since records began in 1970.”

And yet many people still can’t afford to sell their homes, much less consider buying new ones. I’ll be getting into the updated details of the inflation vs deflation debate sometime in the next week, but keep in mind that continually plunging real estate prices despite easy money and historical affordability are not an indicator of inflation. And before anyone starts yammering about gold prices – do you seriously think I’m not aware of them when I was recommending it at $300? – here’s some homework for you. What is the ratio of the size in dollars of the global gold market versus the size in dollars of the U.S. residential real estate market?