Tag: economics

Depressionistas

HH dives in:

I’m just over halfway through RGD, and I’m really enjoying the read and the information. I’ve just become interested in economics, and I haven’t yet read much from many of the people you discuss in your book, but it blows my mind how Krugman could seriously believe any of what he writes. It would seem more reasonable to think that he has a mental illness or is a sociopath.

And it belatedly occurs to me that perhaps I shouldn’t have sent a copy of RGD to so confirmed a pessimist as Derbyshire:

“The car has already hit the tree and the bumper is already in the process of buckling inward, so there is no time to turn the wheel or fasten seat belts. It is too late to do anything but scream.”

Thus writes Vox Day in his recent book The Return of the Great Depression. Are things really that bad? And going to get that much worse?

I’m betting that they are. That’s a novice bet, as I am not a trained economist. I base it on a complete lack of seriousness among our political classes. It is obvious that our governments, at all levels, are spending far too much; yet there is little evidence of anyone being willing to do anything about it.

I completely understand those who don’t buy into the economic crisis talk; I can remember back in college how Marxists were supposed to have predicted 12 of the last two crises. But this isn’t the usual airy conjecture about the effect of the rise of Japan or the implications of the Chinese currency peg. This is relatively hard economics based on straightforward math. Unless you seriously believe that an economy can support an INFINITE amount of debt, there is a breaking point. Precisely where that is happens to be unknown, but that doesn’t mean the point does not exist.

But it appears, as per Derb, that I am no longer an outlier… alas. It would appear that my days as a rogue contrarian economist defying the staid order of the mainstream Neo-Keynesian orthodoxy in a bold and sexually thrilling manner are at an end.

Day vs Krugman

On Hayek vs Keynes. Krugman redefines the concept of bizarre:

First, Hayek was as bad on the Depression as I thought. The claim that “many of the troubles of the world at the present time are due to imprudent borrowing and spending on the part of the public authorities” — in 1932! — is bizarre.

Yes, this graph of sovereign defaults from 1921 to 1980 quite clearly shows that there was absolutely no problem with imprudent borrowing and spending by the public authorities.  Here is the list of the 25 sovereign defaults covering the time that Hayek and Keynes were debating; from 1930 to 1934.  Notice that the bulk of them happened to come precisely in 1932.

Mexico, Ecuador, Bolivia, Brazil, Chile, Dominican Republic, Peru, Turkey, Liberia, Austria, Bulgaria, Colombia, Costa Rica, El Salvador, Germany, Greece, Hungary, Nicaragua, Panama, Paraguay, Cuba, Guatemala, Romania, Uruguay, Yugoslavia.

And the Keynesian “solution” to the problem didn’t help much either, since there were 14 more sovereign defaults before WWII ended in 1945:  Colombia, Poland, Brazil, Austria, Czechoslovakia, El Salvador, China, Germany, Austria, Japan, Poland, Turkey, Hungary, Japan.

The only thing that is bizarre here is Paul Krugman’s inability to connect “imprudent borrowing and spending by the public authorities” with historical sovereign defaults. Now consider how much panic has rocked the markets due to two mere threats of sovereign defaults by two very small nations, Dubai and Greece. Think about how many banks failed or were nationalized after the credit crunch of 2008. Then think about the possibility that no less than 25 nations default on their debts before 2014. Do you think that just might, perhaps, have some effect on the international financial system? Krugman’s Keynesian know-it-all act was always ridiculous, but now he’s fast approaching self-parody with his astonishing inability to comprehend that debt really is a problem despite the Keynesian model’s insistence otherwise.

You’re crude, Mr. Krugman

And ignorant. And most importantly, demonstrably and provably wrong.

I’m Gonna Haul Out The Next Guy Who Calls Me “Crude” And Punch Him In The Kisser….

All through this debate, a recurring theme among anti-Keynesians has been that Keynesians like me or Brad are ignorant primitives who don’t know anything about modern macro. It’s really hard to see where that comes from, since I’ve done plenty of intertemporal optimizing in my time

Bring it on, Internet tough guy. Tell you what. I won’t even duck. And then, in the immortal words of one River Tam, my turn.

Oh, and as for why people think you are an ignorant primitive, this display certainly belongs on the list.

Kicking the Krugster

David Brooks is ever so polite as he expresses his doubts about the Neo-Keynesians call for a Third Stimulus, but there’s no question as to whom he is putting his genteel, moderate boot:

These Demand Siders have very high I.Q.’s, but they seem to be strangers to doubt and modesty. They have total faith in their models. But all schools of economic thought have taken their lumps over the past few years. Are you really willing to risk national insolvency on the basis of a model?

Moreover, the Demand Siders write as if everybody who disagrees with them is immoral or a moron. But, in fact, many prize-festooned economists do not support another stimulus. Most European leaders and central bankers think it’s time to begin reducing debt, not increasing it — as do many economists at the international economic institutions. Are you sure your theorists are right and theirs are wrong?

The Demand Siders don’t have a good explanation for the past two years.

No, they don’t. Nor will they have one for the next ten years. They’ll have an explanation all right – the bitter-end liquidationists didn’t let us spend enough money – but it won’t be a good one or a correct one.

UPDATE – And Krugman is forced to immediately start lying in response. “Funny, I thought we had a perfectly good explanation: severe downturn in demand from the financial crisis, and a stimulus which we warned from the beginning wasn’t nearly big enough. And as I’ve been trying to point out, events have strongly confirmed a demand-side view of the world.”

Krugman hopes we’ve all forgotten that he calculated a $600 billion stimulus was needed before the Obama administration championed the $787 billion stimulus passed by Congress.

Interview with Vox Day part II

UPDATED (July 2): AS PROMISED, YOUR DOUBLE DOSE OF DAY. You’ve read the first part of my Vox Day interview on WND. Now to the sequel, exclusive to Barely A Blog:

• Ilana: To mention the Fed today as anything but a hedge against inflation is to qualify as “Worst Person in the World.” Early Americans were not nearly as baffled about what the Fed did. Comment with reference to the on-and-off attempts to eradicate this Federal Frankenstein. What good would an audit of the money mafia do?

Vox: Keith Olbermann should have stuck to sports. He has no idea what he’s talking about when it comes to economics. The Fed isn’t a hedge against inflation, it is the primary engine of inflation just as its three predecessors were. A genuine audit of the Fed will immediately end its political viability and probably its existence, which is why the Fed is fighting so desperately against the Ron Paul bill. But the end result is inevitable. The Fed can’t hide behind fictional statistics forever, as with the Soviet Union, people eventually begin to notice that they are not, in fact, wealthy and well fed.

Interview with Vox Day

The lovely and libertarian Ilana Mercer turns it around and interviews me about The Return of the Great Depression. This is the first part of a two-part interview:

The “infamous Internet Superintelligence,” Vox Day, author of “The Return of the Great Depression,” needs no introduction. My WND colleague and fellow libertarian dishes it out on the impending depression, D.C. dummies (down to their position under The Bell Curve) and a dark future. As always, Vox makes this glum stuff fun.

Ilana: Republican President George Bush was as good if not better than Clinton and Carter at laying the legislative foundation for the minority mortgage meltdown. Comment with reference to the thesis of your book (and mention some other Republicans who’d like ditto-heads to forget their political pedigree).

Vox: Like Carter and Clinton, George W. Bush pushed government programs designed to boost homeownership among low-income families that couldn’t afford to meet the debt obligations they were assuming. These programs were focused on minorities, particularly Hispanics, which is why the four states where the majority of defaults have been located to date are California, Arizona, Nevada and Florida. However, it should be kept in mind that these inept and bipartisan housing programs were not the cause of the core problem; they were merely a consequence of the overall problem of debt chasing a dwindling pool of borrowers.

I would be remiss if I did not point out, as noted in the book, that the heavy lifting on where the home defaults happened was done by Steve Sailer.

The parable of the wise parents

Okay, it’s more of an anecdote than a parable. But it’s an important one anyhow:

Our daughters are 15 and 17. Most of their friends are very concerned about their parents’ financial situations and tell me their parents have too much debt. Whether their parents know it or not, these kids know exactly what is going on and they are scared.

My oldest daughter told me this week that her friend “K”‘s mother is jealous of me. I asked her why, and she said her friend’s mother thinks I never worry about money and seem carefree. I told my daughter that is only because we don’t have debt.

I reminded her of the years when her friend K’s family went on cruises while we were tent camping in a state park. I told her that her dad and I made a decision when we first got married that we weren’t going to buy anything, not even a car, until we had the cash to buy it.

We previously had a mortgage, but we paid it off in 13 years. I told her we just didn’t want the stress. She gave me a hug and walked away without saying anything.

What you give your kids isn’t limited to the material possessions you give them. In fact, those are the least important things you can provide.

Ignorant and slackminded

I was not at all impressed by the lunatic defense of economic credentialism by an economist employed by the very institution that is most responsible for the incoming Great Depression 2.0. But then I read this astonishingly ignorant appeal to morality by Fred Clark and I had to admit that Kartik Athreya may have had a point in insisting that at least some bloggers shouldn’t write about economic matters:

I’m not an economist, but we’ve got five applicants for every single job opening. If you tell me that the best response to that situation is to lay off hundreds of thousands of teachers, I will not accept that this means that you’re smarter and more expert than I am. I will instead conclude — regardless of your prestige or position or years of study — that you’re a moral imbecile. And knowing what I know about your inability to make moral judgments I will have no reason to trust you to make complicated macroeconomic ones.

No, Fred, it’s perfectly clear that you’re not an economist and you don’t know a damn thing about economics. I’ve read a lot of nonsense since the credit crunch began in the summer of 2008, most of it written by economists, but this is remarkably stupid even by those standards. There is simply no defense for either the infantile moral posturing or the spectacular ignorance revealed by it. The misplaced Keynesian faith in animal spirits notwithstanding, economics is not magic. It is complicated, yes, and there are a few special exceptions to the law of supply and demand, but that law is not significantly more flexible than the laws of physics. What the clueless Clark doesn’t recognize is that the federal government has massively and permanently distorted the signals of the labor market for a long period of time, leading to an incredible malinvestment of human capital into various industries, including the education industry. Now that the artificially extended limits of demand have been reached in that and many other industries, the education bubble is in the process of popping precisely as Austrian theory predicts, leaving hundreds of thousands of teachers, (or more accurately, hundreds of thousands of non-teaching admininstrative bureaucrats employed by the school districts), whose labor is no longer necessary or affordable at their current rates by deeply indebted communities.

Morality has nothing to do with the correct conclusion that when a glass is already full, you cannot pour more water into it. It’s simply an observable matter of fact. And if a full glass happens to be shrinking, then water is going to have to come out of it. Taking exception to such basic logic does not make you a moral exemplar, rather, denying it makes you an intellectual imbecile. Based on the evidence here, logic also dictates that no economist, or even economically aware individual, need concern themselves with what Mr. Clark thinks of their moral judgments or anything else.

If Clark wishes to wax indignant over gross and destructive immorality, he should focus his ire on the Fed, on the banks, and on the politicians who constructed a fraudulent financial system that was mathematically certain to fail and inflict millions of job losses on teachers, real estate agents, government employees, Fortune 500 corporations, and small family businesses alike. The salient fact is not whether 9.7% unemployment is high enough or not, but that utilizing more government intervention to prevent that rate from rising higher is guaranteed to extend and exacerbate the trauma to the labor force.

The reason the economic contraction confounds so many political bloggers like Slacktivist regardless of their party allegiance is that the problem cannot possibly be characterized as a Democratic problem or a Republican problem. It is, instead, a fundamentally structural problem with the financial system that dates back to the establishment of the fourth U.S. central bank. The long run has arrived and it has rendered the conventional liberal vs conservative debate completely irrelevant. Ironically, the solution is to be found in the example set by a Democratic president, Andrew Jackson. If Democrats want to find an plausible answer, they need to look to their party roots, not their present ideology.

UPDATE: the comments are even better. This was my favorite: “If Krugman and DeLong are right (and Paul Krugman is always right) then short-term government borrowing and spending should be a high priority right now.”

Paul Krugman is always right? That’s an intriguing statement.

1. Paul Krugman recommended investing in real estate and stocks while making fun of gold investors in 2002.
2. Paul Krugman thought the Fed should inflate a housing bubble in 2002.
3. Paul Krugman declared a $600 billion stimulus plan was required in November 2008. In 2009, he complained that the Obama adminstration’s $787 billion stimulus plan was too small.
4. And he was a bit late in recognizing the obvious.

You can’t teach an old economist new models

While Thomas Sowell is generally right as to his theme of government intervention converting the crash of 1929 into the Great Depression, he is woefully incorrect with regards to the details of how and why it happened:

The widespread belief is that government intervention is the key to getting the country out of a serious economic downturn. The example often cited is Pres. Franklin D. Roosevelt’s intervention after the stock-market crash of 1929 was followed by the Great Depression of the 1930s, with its massive and long-lasting unemployment.

This is more than just a question about history. Right here and right now, there is a widespread belief that the unregulated market is what got us into our present economic predicament, and that the government must “do something” to get the economy moving again. FDR’s intervention in the 1930s has often been cited by those who think this way.

What is on that one page in Out of Work that could change people’s minds? Just a simple table, giving unemployment rates for every month during the entire decade of the 1930s. Those who think that the stock-market crash in October 1929 is what caused the huge unemployment rates of the 1930s will have a hard time reconciling that belief with the data in that table.

Although the big stock-market crash occurred in October 1929, unemployment never reached double digits in any of the 12 months after that crash. Unemployment peaked at 9 percent, two months after the stock market crashed — and then began drifting generally downward over the next six months, falling to 6.3 percent by June 1930.

This was what happened in the market, before the federal government decided to “do something.” What the government decided to do in June 1930 — against the advice of literally a thousand economists, who took out newspaper ads warning against it — was impose higher tariffs, in order to save American jobs by reducing imported goods.

This was the first massive federal intervention to rescue the economy, under Pres. Herbert Hoover, who took pride in being the first president of the United States to intervene to try to get the economy out of an economic downturn. Within six months after this government intervention, unemployment shot up into double digits — and stayed in double digits in every month throughout the entire remainder of the 1930s, as the Roosevelt administration expanded federal intervention far beyond what Hoover had started.

While Thomas Sowell was among the economists I liked and respected most in college, I knew that he had lost his fastball when he wrote a column defending Michelle Malkin’s In Defense of Internment that contained some factual errors regarding Pearl Harbor. When I emailed him information demonstrating that both he and Malkin were factually incorrect and her conclusions were false, he basically hemmed and hawed and said that it really didn’t matter because he likes her work. After that, I pretty much ceased to pay attention to his columns. But a number of people have emailed me this column on the Great Depression, thinking that I would approve of it. And while the cited example of historical employment statistics is a really useful one that I wish I had included in RGD, I have already shown that Sowell’s contention here about the root cause of the unemployment to be false there.

For many years, it was supposed that the Smoot-Hawley tariff of 1930 played a major role in the economic contraction of the Great Depression. As more economists are gradually coming to realize, this was unlikely the case for several reasons. First, the 15.5 percent annual decline in exports from 1929 to 1933 was less precipitous than the pre-tariff 18.3 percent decline from 1920 to 1922. Second,
because the amount of imports also fell, the net effect of the $328 million reduction in the balance of trade on the economy amounted to only 0.3 percent of 1929 GDP. Third, the balance of trade turned negative and by 1940 had increased to nearly ten times the size of the 1929 positive balance while the economy was growing.”
– The Return of the Great Depression, p. 192

Because Sowell subscribes to neo-classical economic theory, he has no idea why the Great Depression occurred and he still hasn’t recognized that we are in the Great Depression 2.0. His instincts are sound enough; he knows that government intervention can’t solve the problem but because his economic model doesn’t account for debt, he can’t figure out what the core problem is. So, like most free market-oriented mainstream economists, he casts about for something that the government did that fits his model and assumes that it must be the causal factor, even when the evidence clearly shows that it was, at most, a trivial factor.

The thing that is so patently absurd about the Smoot-Hawley tariff theory of the Great Depression is that America was not an import/export-based economy 80 years ago. The percentage of imports and exports as a percentage of GDP was so small that not even shutting them down completely could have caused such a massive contraction in the 1930s American economy. Debt was the problem then and debt is the problem now. The federal stimulus exacerbated the problem then, and the global stimulus is exacerbating the problem now. And given the relative size of historical debt+stimulus to present debt+stimulus, it should not be hard to understand why the Great Depression 2.0 will be worse than its historical predecessor.

One year on, Krugman concedes

“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.”
– Vox Day, The Return of the Great Depression, June 29, 2009

“We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.”
– Paul Krugman, The Third Depression, June 28, 2010

It looks like my predictions are running a little ahead of schedule again. RGD readers will recall that I didn’t have the mainstream economists starting to whisper about the possibility of a Great Depression 2.0 until the end of 2010. This is supposed to be the time for talking Double-Dip and W-shaped Recovery. But then, Krugman has always been rather more dyspeptic than the rest of his colleagues. I await with interest for all of those who said that my forecast was incorrect because I dared to contradict a FAMOUS ACADEMIC and NOBEL-PRIZE WINNER to explain this mysterious failure of credentialism.

Krugman is wrong about the historical use of the term depression, of course, (depression was synonymous with recession until after the Great Depression ended), just as he is wrong about the reason the global economy is sliding further into contraction. Fame and credentials are no substitute for the knowledge of history combined with a reliable theoretical model. Longtime readers who are investors may recall that my 2002 recommendation to buy gold and avoid real estate has worked out just a little better than Krugman’s 2002 recommendation to buy real estate and avoid gold.