Tag: economics

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.

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?

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.

1. U-3 unemployment will climb above 10 percent. The real unemployment rate will be much higher, but it will be masked by a decline in the Labor Force Participation rate below 64 percent. The employment-population ratio will fall below 58 percent for the first time since 1984.

2. Real GDP growth for 2011 will fall short of the 3.4 percent predicted by Goldman Sachs. It will remain positive in initial reports throughout the year, but the final quarter will eventually be revised down into negative territory. The legitimacy of GDP as a valid metric for economic growth will increasingly be called into question as the positive numbers are belied by actual conditions.

3. The 2011 federal deficit will exceed the projected $1.27 trillion despite the Republican House majority. This will likely be the result of emergency spending required for an economic or military crisis.

4. More than 230 banks will fail or be seized by the FDIC. This will represent around 1.2% of total deposits. Bank of America will be effectively nationalized to prevent it from failing.

5. TOTLL will decline below $6.3 trillion on an unadjusted basis. (Below $5.9 trillion adjusted.)

6. The two government sectors will not be able to maintain their present rate of debt expansion which presently averages around $450 billion per quarter. As the financial and household sectors continue to decline, all sectors credit market debt outstanding, (Z1), will fall below $50 trillion for the first time since 2007.

7. The national median existing-home price will fall below 160k from the present 170,600.

8. There will be a serious Euro crisis, most likely brought about by a sovereign default or a nation announcing it will be leaving the Euro. Italy is the most likely candidate.

9. One U.S. state and at least three major cities (100k population plus) will attempt to file for bankruptcy or federal bailout. (It’s unclear if states can file for bankruptcy and public employee unions will oppose the city filings.)

Bonus: Sitemeter-recorded visits to the blog will increase from 2,370,028 visitors in 2010, (197,502 per month) to 2,750,000.

You might reasonably object that these predictions are essentially the same as they were last year. And while that’s true, you should also observe that very little has substantially changed since one year ago. The downside factors have increased somewhat thanks to Europe’s problems, the growing budget deficits and the uncovering of the mass mortgage fraud, but aside from anemic G-driven GDP growth, and higher gold and stock market prices, I don’t see much that’s been added on the upside.

A sluggish recovery is still the story.  There are negative rumors, but of a double-dip recession, not a large-scale depression.  The most recent GDP for Q3 was reported at 13,278.5 and it’s highly unlikely that Q4 will be reported any lower.  INCORRECT.

The 2010 deficit is presently being reported at $1.47 trillion.  CORRECT.

Sitemeter reported 2,367,971 visitors in 2010, (197,331 per month), a 21.9 percent increase from 2009. CORRECT.

Fresh from presenting a FIFTH Neo-Keynesian definition of inflation in the form of “core inflation”, Paul Krugman finally begins to pay attention to the actual issue at hand:

I’d like to highlight one aspect of this discussion that has been striking me: the conservative focus on the evils of increasing the money supply. You hear it all the time: the Fed is printing money! Danger, Will Robinson! In some comments on this blog I see assertions that the true measure of inflation isn’t prices, it’s what happens to the quantity of money.

Now, one thing you might immediately say is that for those who care about, know, actually buying things — you can’t eat money — it’s prices of goods that matter; and for the past three decades, as shown above, there has been remarkably little relationship between the standard monetary aggregates and the inflation rate.

But here’s an even more basic question: what is money, anyway?

As I’ve shown in the first two inflation videos on Channel Vox, it’s absurd for Krugman to talk about “the inflation rate” when he can’t settle on one single reliable definition of inflation. However, he would have been correct to say that the relationship between the standard money aggregates and those various definitions is questionable, but he ignores the fact that the monetarists utilize, (or, as it suits them, refuse to utilize) a fudge factor called “velocity” in order to explain the variances in that relationship.

About which more anon. I would have already released the third video if I hadn’t lost my voice last week. I hope to record it soon, but I doubt I’ll be able to get it down before Christmas. Regardless, I find it ironic that Austrian theory is logically strong enough that even a blind squirrel like Krugman can stumble onto the foundation of some of its definitions despite his willful ignorance of its teachings.

“The truth is that these days — with credit cards, electronic money, repo, and more all serving the purpose of medium of exchange — it’s not clear that any single number deserves to be called “the” money supply.”

Of course, Krugman still manages to miss the obvious conclusion, which is that either the inflation rate depends upon whatever metric most merits being described as the money supply or else there is no such thing as inflation. As for his statement that one can maintain a reasonable monetary policy without knowing what money actually is, one need only point to the track record of the Federal Reserve in maintaining price stability and full employment to shatter that assertion.

The present state of Spain’s real estate market should suffice to explode that theory:

A better known real estate debacle is a sprawling development in Seseña, south of Madrid, one of Spain’s “ghost towns.” It sits in a desert surrounded by empty lots. Twelve whole blocks of brick apartment buildings, about 2,000 apartments, are empty; the rest, only partly occupied. Most of the ground floor commercial space is bricked up.

The boom and bust of Spain’s property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units — about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.

At the same time, coastal villages were transformed into major residential areas for vacationing Spaniards and retired, sun-seeking northern Europeans. At its peak, the construction sector accounted for 12 percent of Spain’s gross domestic product, double the level in Britain or France.

But almost overnight, the market disappeared. Many immigrants went home. The national unemployment rate shot up to 20 percent. And the northern Europeans stopped buying, too.

A number of mainstream analysts believe that the downturn has reached its bottom and things are turning around. However, it defies reason to believe that a 12.8% decline in prices is enough to offset the preceding 500% increase, especially when the banks that financed the boom haven’t booked their existing losses from the bust yet. My suspicion is that we are getting very, very close to the end of the reactive bounce in Europe and the USA alike. All of the conventional signs of Wave 2 bullishness appear to be present now and the rejection of the omnibus spending bill indicates that Congress is not going to play along with the Fed’s plan to replace private debt and spending with public debt and spending.

Those who think the Fed can print money ad infinitum have forgotten that it requires the government to play along and take on more debt that can be monetized. While I don’t expect an actual reduction in public debt, I do expect a rate of increase that is insufficient to keep pace with the private contraction.

UPDATE: Thanks to Wikileaks, we now know that the central bankers were lying and those of us who identified the crisis as being a solvency issue rather than a liquidity problem were right all along. Notice the date of March 2008, while Bernanke was still making speeches about how the Federal Reserve would solve the liquidity problem in May.

“Monday, 17 March 2008, 18:27
C O N F I D E N T I A L LONDON 000797
SIPDIS
NOFORN
SIPDIS
EO 12958 DECL: 03/17/2018
TAGS ECON, EFIN, UK
SUBJECT: BANKING CRISIS NOW ONE OF SOLVENCY NOT LIQUIDITY
SAYS BANK OF ENGLAND GOVERNOR”