Tag: economics

Mailvox: the Fed evades

JH asks a Federal Reserve official about the decline in private borrowing:

I solicited advice from you quite a while ago on a debt deflation question to ask a Fed Reserve speaker at a work function, and as you predicted, he pretty much dismissed drawing any conclusions from the Fed Z1 report which showed that without government debt growth the US was in severe debt contraction. The speaker said the contraction was a temporary result of there not being enough good people or businesses worth investing in presently. On some level this may be true, but he still completely avoided discussing the implications of continued credit contraction to the overall economy.

It’s a pity JH wasn’t allowed a follow-up question, as the obvious one was as follows: how do you explain this “temporary result of there not being enough good people or businesses worth investing in presently” in light of the fact that a) there are more people in the USA than ever before, and b) the fact that there has NEVER been a comparable contraction in private credit in the post-war era.

The other question I would have liked to ask the Fed official is this. How long do you think government sector credit can continue to expand and prevent Z1 from falling if the household and financial sectors continue to decline?

Well, Hitler was from Austria….

Oh sweet Mises, even Krugman at his most obstinately ignorant hasn’t descended to these depths regarding the Austrian School of Economics:

Ever wonder how one of the most educated and advanced nation in Europe ended up with Hitler as a leader in 1933? Well, you have thank Austrian Economics for that- at least partially. You see, after ww1 the allies made Germans pay exorbitant and ruinous reparations. The only way to escape these compensations was through hyperinflation- wiemar style.

But here is the fun part.. after a few years of such hyperinflation they decided to cool down and “normalize” the economy- using the advice of people like Friedrich von Hayek and his “Austrian” School Of Economics. The guy who led this effort, Heinrich Brüning, whose austerity measures resulted in a massive increase in unemployment- from 15% to over 30% in less than two years.

No, you really don’t. At all. The Austrian School of economics had as much to do with the rise of the National Socialists to power in Germany as Victoria’s Secret or My Pretty Pony did. First, as anyone who has ever read The Economic Consequences of the Peace will know, hyperinflation was not only a predictable consequence of the war reparations, but could not be utilized to reduce the German debt because it was subject to recalculations that were completely under the control of the Allied commission. Inflating their way out of the debt was never an option for the Germans; there was no escape except default. This was already obvious to everyone back in 1929, which is why the Young plan reduced the reparations payments and was followed by a moratorium in 1931. Note that the Young plan went into effect three months before Brüning even took office for the first time. Second, Austrian economics had no influence on German politics, which was dominated by socialism of varying stripes. In fact, the very name “Austrian” was given as a deprecating insult to the school by the empiricists of the dominant German Historical School during the Methodenstreit at the end of the 19th century.

Third, Heinrich Brüning’s attempt to rein in the Weimar hyperinflation was not based on Friedrich von Hayek’s advice. Hayek and the Austrians were hardly the first to notice the pernicious effects of inflation and Hayek didn’t even publish his first book until 1929. Moreover, he was in London at the London School of Economics while Brüning was Chancellor of the Weimar Republic. The ironic thing is that this inept Advocatus Diaboli appears to think that Brüning should have pursued a Keynesian approach, nowithstanding the fact that the the German edition of The General Theory of Employment, Interest, and Mony was not published until September 1936, four years after Brüning left office. Keynes’s own words on the German economic tradition during the period that included the Weimar years are also somewhat pertinent to the subject:

“The orthodox tradition, which ruled in nineteenth century England, never took so firm a hold of German thought. There have always existed important schools of economists in Germany who have strongly disputed the adequacy of the classical theory for the analysis of contemporary events. The Manchester School and Marxism both derive ultimately from Ricardo, a conclusion which is only superficially surprising. But in Germany there has always existed a large section of opinion which has adhered neither to the one nor to the other. It can scarcely be claimed, however, that this school of thought has erected a rival theoretical construction; or has even attempted to do so. It has been sceptical, realistic, content with historical and empirical methods and results, which discard formal analysis…. Thus Germany, quite contrary to her habit in most of the sciences, has been content for a whole century to do without any formal theory of economics which was predominant and generally accepted.”

Keynes is describing the importance of the Historical School here, the same German Historical School that gave the name to its provincial theoretical rivals. Attempting to blame the end of Weimar hyperinflation, much less the rise of Adolf Hitler, on the Austrian school or even the slightly more plausible Manchester school reveals a near-complete ignorance of economic history.

Krugman catches up

What’s going on here? It means that we’re either overstating inflation (and hence understating income gains) or overstating economic growth. Both the BEA (which measures GDP and related) and the BLS (which does consumer prices) work hard and honestly at their tasks; the difference probably arises (I’m sure someone has done this more carefully) in how you value new or improved goods. My sense has always been that the GDP accounts overdo their hedonics, but that’s very much a matter of opinion. Maybe the real point here is to remember, always, that economic statistics are a peculiarly boring sub-genre of science fiction; extremely useful, but not to be treated as absolute truth.

From RGD Chapter 4, No One Knows Anything: “Another indication that GDP growth may be exaggerated stems from comparing the data for the GDP deflator, which purports to correct GDP for inflation, with the Consumer Price Index, which is more commonly used as the primary measure of inflation. If one chooses 1983, the base year of index to which all of the historical CPI data are chained, one will find that the GDP deflator reports inflation of 79.1 percent over the last 26 years, while the CPI figure shows 114.1 percent inflation over the same period. While the two statistical measures are based on different criteria, their comparison shows the inverse of what one would tend to expect since CPI reflects the price of imported goods while the GDP deflator does not. And, as anyone who has been paying attention to the balance of trade over the last two decades will recognize, foreign imports tend to cost less than domestically manufactured products. Another oddity is the way in which an increase in the price of imported oil reduces the GDP deflator, thereby exaggerating GDP growth when the price of oil rises and reducing it when it drops. It’s interesting to note that when GDP is corrected for inflation using the CPI rather than the deflator, the real U.S. economy appears to be significantly smaller than it is presently believed to be. For example, whereas the GDP deflator shows growth from $3.1 trillion to $8.0 trillion over the last 26 years in 1983 dollars, using GDP-CPI would indicate a real 2009 GDP of only $6.6 trillion.”

My conclusion, of course, is that inflation has been erroneously defined and economic growth has been significantly overstated. This will become readily apparent once it is no longer possible to conceal the bad debts that are still being recorded as positive assets on the corporate and government books. And it is more than a little amusing to see Krugman admit that economic statistics are “a sub-genre of science fiction” and “not to be treated as absolute truth” considering the way in which he attempts to use them to macromanage the global economy.

Mailvox: the inactive aspect of demand

Jed requests an explanation:

Vox, can you explain [that “not buying something is at least potentially an economic activity”]?

How is not playing baseball considered playing baseball when one is merely sitting in the stands? This only works from a socialistic standpoint which is exactly why Democrats saw no problem including it in their law.

First, the baseball analogy is a bad one. The logical error that Jed commits there is his assumption that economic activity = buying something. This is not only incorrect, since X!=not X, but indicates a failure to understand what economics is. This failure is further evidenced by the incoherent assertion that it “only works from a socialistic standpoint”, whereas the truth is that because economic concepts always work, socialism itself does not.

Now for the explanation. Recall the basic supply and demand curve. Since the demand curve is the expression of the buyers’ willingness to buy at various price points, it by definition takes into account the decisions of those who are actively choosing not to buy at a price above their buy point. They are engaging in exactly the same economic activity in not-buying that they are in buying, the only difference is that the price point happen to be above their action trigger.

This isn’t as confusing as it sounds at first. For example, no one has a hard time understanding that a woman has gone shopping even if she didn’t end up buying anything while she was out at the mall. This is why, in the introduction to RGD, I pointed out that Leonard Read’s famous story of the pencil only told half the story as “The story on the demand side is arguably even more amazing, as the myriad assignments of personal value for a pencil made by the millions of people who buy pencils and by the tens of millions who elect not to buy them are all factored into an incredibly massive but ever-changing computation that always manages to produce a definite price for every single transaction that takes place at millions of different points in the space-time continuum.”

This doesn’t mean that every non-purchase can be considered economic activity, only decisions to not make a possible purchase can. One has to be somewhere along the demand curve in order to qualify. Thus, a decision to not purchase U.S. health insurance by someone in Indonesia is not economic activity because the Indonesian is not a potential participant in that market. But the decision by individuals in Chicago or Raleigh to not purchase health insurance is economic activity because they are potential participants in the market since they would be interested in purchasing health insurance if the price fell low enough.

Now, none of this can be used to justify the Commerce Clause given the principle of non-infinity and the fact that it is supposed to be a specific exception to a restriction, not a free Federal do whatever the hell you want card. But the basic concept of the non-buyer as economic participant is a perfectly sound one.

Pat Buchanan on China and free trade

The growing power of China and the decline of an indebted America is just one small aspect of the strong historical case against free trade:

Revalue your currency, we demand of the Chinese, stop running these trade surpluses at our expense, start practicing free trade, and abandon these mercantilist and protectionist policies. But why should they? Why should China abandon a trade policy that is working marvelously well for them, and adopt a trade policy that is failing dismally for us? Does that make sense?

Why should any nation emulate the U.S. trade policy of the Bush-Clinton-Bush era that has stripped us of a third of our manufacturing jobs and made us dependent on China and the world for the needs of our national life and the borrowed money to pay for them?

Why would China, seeking to make herself an independent and self-sufficient nation, adopt a policy that cost us our independence? And what are the Chinese doing in their ascendancy to first power on earth that we did not do in ours?

One of the interesting things that readily becomes apparent when reading Rothbard’s An Economic Perspective on the History of Economic Thought is that virtually everything the free traders – and I was once one of them – believe about economic history is wrong. They have various theoretical problems too, to be sure, but history provides an easier means of undermining the primary intellectual engine for totalitarian globalism than comparatively esoteric economic theory. Of course, the weakness of the free trade case is very easily seen in the way that they immediately retreat from their previous analogies and arguments as soon as their weaknesses are demonstrated.

Regarding number seven

The final NAR prices are in.  And while it wasn’t as close as 2008, it wasn’t too far off, especially since prices did plunge below $165,000 in February before bouncing back.

“7. The national median existing-home price will not rise 4% from $172,600 to $179,500 as predicted by NAR’s lead economist Lawrence Yun, but will fall below 165k instead.”

From the article entitled 2010 weakest year for home sales since 1997:  The median price for a home sold in December was $168,800, down 1 percent from a year ago.

Krugman attacks logic, hilarity ensues

Paul Krugman inadvertantly reveals a glimpse into his reasoning process:

My wife and I were thinking of going out for an inexpensive dinner tonight. But John Boehner, the speaker of the House, says that no matter how cheap the meal may seem, it will cost thousands of dollars once you take our monthly mortgage payments into account. Wait a minute, you may say. How can our mortgage payments be a cost of going out to eat, when we’ll have to make the same payments even if we stay home? But Mr. Boehner is adamant: our mortgage is part of the cost of our meal, and to say otherwise is just a budget gimmick.

O.K., the speaker hasn’t actually weighed in on our plans for the evening. But he and his G.O.P. colleagues have lately been making exactly the nonsensical argument I’ve just described — not about tonight’s dinner, but about health care reform.

in 1997 Congress enacted a formula to determine Medicare payments to physicians. The formula was, however, flawed; it would lead to payments so low that doctors would stop accepting Medicare patients. Instead of changing the formula, however, Congress has consistently enacted one-year fixes. And Republicans claim that the estimated cost of future fixes, $208 billion over the next 10 years, should be considered a cost of health care reform.

But the same spending would still be necessary if we were to undo reform. So the G.O.P. argument here is exactly like claiming that my mortgage payments, which I’ll have to make no matter what we do tonight, are a cost of going out for dinner.

Krugman’s column is based upon three assertions. Number one, that the large divergence in the cost of a mortgage versus an inexpensive dinner is comparable to the cost of future fixes versus the total cost of health care reform. Let’s consider that one first. The average monthly mortgage payment is around $1,750. An inexpensive dinner for two is around $50. Krugman tells us the cost of fixing Medicare for 10 years is $208 billion. The CBO’s revised estimate for health care reform, which does NOT include the Medicare fix, is $1,055 billion. (The Republicans say that the total will be $2,600 billion, but we’ll go with Krugman’s favored estimate just to be fair to him.)

So, the Nobel Prize-winning economist Krugman is claiming that 1750/50=208/1055, or that 35=0.197. And you wonder why the economy is in such dire straits…

Number two, Krugman is assuming that the Medicare fix is as inevitable as a mortgage payment. But this quite clearly isn’t the case; whereas not making the mortgage payment entails losing the house, (or at least it did back when mortgage banks held legitimate title to houses and were actually willing to foreclose on properties and write off the bad loan), the possibility that doctors might elect not to see Medicare patients hardly makes increasing Medicare payments a necessity. There are other options available that don’t require spending the money, which is not the case when it comes to making mortgage payments.

Number three, Krugman declares that “the modern G.O.P. has been taken over by an ideology in which the suffering of the unfortunate isn’t a proper concern of government, and alleviating that suffering at taxpayer expense is immoral, never mind how little it costs.” But if this were actually the case, then the modern G.O.P. would simply solve the budgetary problem by not spending the $208 billion instead of insisting that it be counted as part of the cost of health care reform. Even if we ignore the fact that this is the fiscally responsible decision as well as the Constitutionally correct thing to do since Medicare is not a legitimate function of the federal government, Krugman’s failure to realize that the Republicans are not advocating this only underlines his complete logical incoherence.

Far be it from me to defend the Congressional Republicans, but for all their ill-conceived enthusiasm for illegitimate military adventures, a war on logic is not one in which they are presently engaged. It is instead Paul Krugman who is waging a public one-man crusade against it.

You might consider a new model

Mike Shedlock borrows future Fed chairwoman Janet Yellen’s economic model to extrapolate the future:

Here is a summary of what will happen based on projections of Yellen’s model:

The Fed created 3.5 million jobs.
The Fed bloated its balance sheet by $2.3 trillion to do so.
It takes $657,142.86 in balance sheet additions to create a single job.
It takes the same $2.3 trillion to lower the unemployment rate .5%
The Fed’s balance sheet will reach $18.4 trillion by the time the unemployment rate drops to 5.9%
It will take another 3.5 years to get to a “full employment” situation with an unemployment rate of 5.9%.

If Yellen’s model holds, Nate’s hyperinflationary scenario would certainly appear to be in full E-F-F-E-C-T. Of course, at that point, the Fed would own literally the entire U.S. economy, Federal debt would increase from $8 trillion to $22 trillion and the Employment-Population ratio would fall to 52.3 percent. So, I’m just going to go out on a limb and predict that it will not, in fact, hold.

Doesn’t it just fill you with confidence that the people who hold such power over the economy and your own economic well-being are so unspeakably competent?

Phantom income, real bonuses

You almost have to admire the insane insouciance of the bankers, who boldly invent fake profits in order to pay themselves gargantuan profit-shares as bonuses:

The giant US banks have been bailed out again from huge potential writeoffs by loosey-goosey accounting accepted by the accounting profession and the regulators. They are allowed to accrue interest on non-performing mortgages until the actual foreclosure takes place, which on average takes about 16 months.

All the phantom interest that is not actually collected is booked as income until the actual act of foreclosure. As a resullt, many bank financial statements actually look much better than they actually are. At foreclosure all the phantom income comes off the books of the banks.

This means that Bank of America, Citigroup, JP Morgan and Wells Fargo, among hundreds of other smaller institutions, can report interest due them, but not paid, on an estimated $1.4 trillion of face value mortgages on the 7 million homes that are in the process of being foreclosed.

That does explain the slowdown in foreclosures rather nicely, doesn’t it. This is amazing news and makes the Enron accounting look downright angelic in comparison. It’s the equivalent of Intel booking income from the sales of millions of chips, then admitting 16 months later that it never actually sold anything. And it would certainly be an incredible way to launch a startup and take it public, assuming you could get it done in 16 months.

I’ve been reading the most excellent An Austrian Perspective on the History of Economic Thought, specifically the chapter on the pre-Salamancan scholastics, and I have to admit that the medieval anti-usury arguments Rothbard criticizes are looking more and more reasonable in the light of the way modern banks have taken the core concepts of credit and interest that were originally derived from natural law and private property rights and turned them into a fraudulent and usurious monstrosity that completely defies reality, reason, and logic.

By the way, there will definitely be a future Voxiversity on Rothbard’s History. It is approximately 61.8 times more interesting and informative than AGD was.

Dynamic government, mutating law

It’s ultimately a fool’s game to put any trust in a government program because the law, especially when created and enforced by an interventionist government, is necessarily dynamic. That means that you can’t count on the rules which presently influence your decisions remaining static since the rulemakers will change them any time they believe it will benefit them to do so:

People’s retirement savings are a convenient source of revenue for governments that don’t want to reduce spending or make privatizations. As most pension schemes in Europe are organised by the state, European ministers of finance have a facilitated access to the savings accumulated there, and it is only logical that they try to get a hold of this money for their own ends. In recent weeks I have noted five such attempts: Three situations concern private personal savings; two others refer to national funds.

The most striking example is Hungary, where last month the government made the citizens an offer they could not refuse. They could either remit their individual retirement savings to the state, or lose the right to the basic state pension (but still have an obligation to pay contributions for it). In this extortionate way, the government wants to gain control over $14bn of individual retirement savings.

The Bulgarian government has come up with a similar idea. $300m of private early retirement savings was supposed to be transferred to the state pension scheme. The government gave way after trade unions protested and finally only about 20% of the original plans were implemented.

A slightly less drastic situation is developing in Poland. The government wants to transfer of 1/3 of future contributions from individual retirement accounts to the state-run social security system. Since this system does not back its liabilities with stocks or even bonds, the money taken away from the savers will go directly to the state treasury and savers will lose about $2.3bn a year. The Polish government is more generous than the Hungarian one, but only because it wants to seize just 1/3 of the future savings and also allows the citizens to keep the money accumulated so far.

The fourth example is Ireland. In 2001, the National Pension Reserve Fund was brought into existence for the purpose of supporting pensions of the Irish people in the years 2025-2050. The scheme was also supposed to provide for the pensions of some public sector employees (mainly university staff). However, in March 2009, the Irish government earmarked €4bn from this fund for rescuing banks. In November 2010, the remaining savings of €2.5bn was seized to support the bailout of the rest of the country.

The final example is France. In November, the French parliament decided to earmark €33bn from the national reserve pension fund FRR to reduce the short-term pension scheme deficit. In this way, the retirement savings intended for the years 2020-2040 will be used earlier, that is in the years 2011-2024, and the government will spend the saved up resources on other purposes.

How many more places does this have to happen before Americans begin to realize that the same thing is absolutely going to happen with their local, state, and federal pensions, as well as their entitlement programs. The fact that government officials often refer to pensions and entitlements as “sacred obligations” doesn’t mean that they won’t eliminate the payouts or grab the funds, in fact, the need to place a legally meaningless adjective in front of the noun underlines the fact that they do not consider the legal obligations to bind them in any way.