I love this phrase: “All serious economists…”
Are there any “funny” economists?
If so, I’ve never met them. So what does this phrase mean? It means “the narrow set of mainstream economists who agree with my point of view at this time”. The little qualifier “serious” is intended to convey to the reader that there are “serious” economists on the one hand and “wacky” “non-serious” economists on the other whose views should not be treated “seriously”. Like, say, Murray Rothbard or Ron Paul.
The Baseline Scenario quotes a commentator who uses the phrase in the context of regulating the TBTF institutions that privitise profits and socialise losses.
Let me use the phrase in a slightly different context:
All serious economists believed there would be no GFC in 2006. All serious economists were wrong.
All serious economists believed the housing crisis would be confined to sub-prime in 2007. All serious economists were wrong.
All serious economists predicted continued declines in stockmarkets worldwide at the beginning of 2009. All serious economists were wrong.
All serious economists think stimulus spending works to “cure” an economy languishing after years of too-cheap credit and debt. All serious economists are wrong.
All serious economists believe the global economy has turned a corner in 2009 due to the trillions in govt spending. All serious economists are wrong.
All serious economists in the USSR believed only serious economists studied Marxist-Leninist thought. All serious economists in the USSR were wrong.
All serious economists in the UK and Australia believe Keynesian economics holds the answers to the major economics questions today. All serious economists in the UK and Australia are wrong.
All serious economists in the West think paper money backed by nothing can last as real money, instead of gold. All serious economists in the West are wrong.
To pick up a brilliant point made by Peter Schiff in the video to the previous post below (but not understood by those on the brain-dead panel):
Inflation is simply debasement of the currency, or increases in the money supply. Inflation is occurring, just not where you expect it. It’s occurring in govt pork and govt employee numbers and in govt contractors making big bucks off govt spending.
Banks are lending massive amounts of new money – to governments around the world. They are the only entities the banks can find who will pay them back (even if it has to be in worthless paper currency – ha ha ha!).
Therefore, the “de”-flation that we should have seen occur to “cure” the credit bubble has been deferred – by way of an increase in brain-dead govt employees!
This is unlikely to “cover” for the loss in private sector activity because govt spending is generally unsustainable and therefore has a lower “velocity of money” than genuine private sector investment. However, these ridiculous “heroin stimulus packages” do cover up (temporarily and only to some degree) the deflation we should have had, coming out of the “credit boom” years.
Because of the massive distortions and misallocations caused by (1) the classic ABCT credit-fuelled Ponzi-boom and (2) now the ridiculous unsustainable govt spending, crowding out the private sector’s access to cheap capital for real sustainable projects that the public actually wants, we are now going to get (at the end of the day) much higher unemployment.
Higher unemployment is baked into the cake because of the massive stimulus spending. Take any specific “stimulus” measure, be it “Cash for Clunkers” in the US or the “First Home Buyer’s Grant” or incentives for home insulation or solar panels. Now, simply ask yourself:
What happens when the “stimulus spending” stops?
Most of the “stimulus spending” simply brings forward future consumption patterns - it re-allocates inter-temporal spending patterns, but doesn’t actually increase the total consumption over time.
I explained all of this in much more detail several months ago here. I see the balance of the forces being slight deflation rather than hyperinflation, but the dynamics are the same. I see possible inflation (possible hyperinflation) in 2012-2015, but that’s a long way off – and I mightn’t even be alive then (here’s hoping!).
Only Austrians such as the brilliant Peter Schiff understand that you can have very high inflation and very high unemployment because of preceding bad investments and unsustainable economic activity, leading to an economic dead-end rather than to ongoing economic activity.
When you build on Ponzi-quicksands, you fall into Ponzi-quicksands.
The fact that the best politician in the world is relegated to “kook” status in his own “Land of the Free, Home of the Brave” country proves conclusively to me that there is no God.
Here is his brilliant analysis of the real causes of the Lost Decade:
This past week we celebrated the end of what most people agree was a decade best forgotten. New York Times columnist and leading Keynesian economist Paul Krugman called it the Big Zero in a recent column. He wrote that “there was a whole lot of nothing going on in measures of economic progress or success” which is true. However, Krugman continues to misleadingly blame the free market and supposed lack of regulation for the economic chaos.
It was encouraging that he admitted that blowing economic bubbles is a mistake, especially considering he himself advocated creating a housing bubble as a way to alleviate the hangover from the dotcom bust. But we can no longer afford to give prominent economists like Krugman a pass when they completely ignore the burden of taxation, monetary policy, and excessive regulation.
Afterall, Krugman is still scratching his head as to why “no” economists saw the housing bust coming. How in the world did they miss it? Actually many economists saw it coming a mile away, understood it perfectly, and explained it many times. Policy makers would have been wise to heed the warnings of the Austrian economists, and must start listening to their teachings if they want solid progress in the future. If not, the necessary correction is going to take a very long time.
The Austrian free-market economists use common sense principles. You cannot spend your way out of a recession. You cannot regulate the economy into oblivion and expect it to function. You cannot tax people and businesses to the point of near slavery and expect them to keep producing. You cannot create an abundance of money out of thin air without making all that paper worthless. The government cannot make up for rising unemployment by just hiring all the out of work people to be bureaucrats or send them unemployment checks forever. You cannot live beyond your means indefinitely. The economy must actually produce something others are willing to buy. Government growth is the opposite of all these things.
Bureaucrats are loathe to face these unpleasant, but obvious realities. It is much more appealing to wave their magic wand of regulation and public spending and divert blame elsewhere. It is time to be honest about our problems.
The tragic reality is that this fatally flawed, but widely accepted, economic school of thought called Keynesianism has made our country more socialist than capitalist. While the private sector in the last ten years has experienced a roller coaster of booms and busts and ended up, nominally, about where we started in 2000, government has been steadily growing, because Keynesians told politicians they could get away with a tax, spend and inflate policy. They even encouraged it! But we cannot survive much longer if government is our only growth industry.
As for a lack of regulation, the last decade saw the enactment of the Sarbanes-Oxley Act, the largest piece of financial regulatory legislation in years. This act failed to prevent abuses like those perpetrated by Bernie Madoff, and it is widely acknowledged that the new regulations contributed heavily not only to the lack of real growth, but also to many businesses going overseas.
Americans have been working hard, and Krugman rightly points out that they are getting nowhere. Government is expanding steadily and keeping us at less than zero growth when inflation is factored in. Krugman seems pretty disappointed with zero, but if we continue to listen to Keynesians in the next decade instead of those who tell us the truth, zero will start to look pretty good. The end result of destroying the currency is the wiping out of the middle class. Preventing that from happening should be our top economic priority.
Shove that up your pipe and smoke it, JQ.
I’ve commented previously that mainstream economists wish Austrian economics was dead, wish Austrian analysts never existed, and wish Austrian predictions on the GFC would be wiped off the face of the earth forever.
Austrians show mainstream economists up for the egocentric little blind bureaucrats they really are – sycophants to the bankers and the Establishment.
No one likes to look in the mirror and see a shallow status-seeking shill staring back at them. To know a small group of economists nailed the GFC and are laughing at Keynesian stupidity day after day (check out the US unemployment figures! Ha Ha Ha!) – this is, understandably both frightening and infuriating.
Still, it is amazing how much the useless academics (publishing useless articles in their obscure journals) obsess about the “influence” of the Austrian School. If it’s so “out-dated” why criticise it at all?
There is NOT ONE working Austrian Professor of economics at ANY prestigious university in either the UK or Australia. Not one. Clearly the academic culling has been as successful as… well… as any govt-backed genocidal operation has been (they’re generally pretty successful judging by history).
The last remnents, the last holdouts against Fabian socialism still annoy the academic Daleks. They still scream “Exterminte! Exterminate! Exterminate!” to try to “cleanse” the academy of any ideological impurities.
So much for academic freedom in academia! You would get more open-minded discussion in a Catholic convent compared to the average economics dept in Australia.
John Quiggin, Australia’s poor attempt to produce a Paul Krugman, reloads and shoots blanks at the Austrian target, yet again.
Why he bothers when no one in Australia actually understands Austrianism is beyond me.
It’s not taught in ANY university in Australia. It’s not even mentioned in any curriculum. I speculate that most economics students in Australia, if pressed, would think ”Austrian School” is a school of anti-Semitic Fascist Nazi propaganda promoted during the Second World War, rather than a school of libertarian thought associated with liberal Jews such as Ludwig von Mises and Murray Rothbard.
This probably says something about both the quality of university education in Australia and the reflexive associations most Anglos still have to the terms “German” or “Austrian” philisophical thought.
Getting back to mainstream zealot JQ, he states the following:
But the Austrians balked at the interventionist implications of their own position, and failed to engage seriously with Keynesian ideas.
The result (like orthodox Marxism) is a research program that was active and progressive a century or so ago but has now become an ossified dogma. Like all such dogmatic orthodoxies, it provides believers with the illusion of a complete explanation but cease to respond in a progressive way to empirical violations of its predictions or to theoretical objections.
Whether he’s being deliberately misleading here or just stupid I don’t know. Austrians scream for a return to the gold standard to stop the mad credit-fuelled misallocation of resources that inevitably leads to financial crises – they do not support “mopping up” the crises afterwards with even cheaper credit or more crazy stimulus spending by govt. What’s inconsistent about that? What’s dogmatic about that? Where’s the Keynesian engagement with Austrians?
To quote WP’s summation of Murray Rothbard’s position on money production:
Rothbard believed the monopoly power of government over the issuance and distribution of money was inherently destructive and unethical. The belief derived from Ludwig von Mises and Friedrich Hayek’s Austrian theory of the business cycle, which holds that undue credit expansion inevitably leads to a gross misallocation of capital resources, triggering unsustainable credit bubbles and, eventually, economic depressions. He therefore strongly opposed central banking and fractional reserve banking under a fiat money system, labeling it as “legalized counterfeiting” or a form of institutionalized embezzlement and therefore inherently fraudulent.
He strongly advocated full reserve banking (“100 percent banking”) and a voluntary, nongovernmental gold standard or, as a second best solution, free banking (which he also called “free market money”).
“Given this dismal monetary and banking situation, given a 39:1 pyramiding of checkable deposits and currency on top of gold, given a Fed unchecked and out of control, given a world of fiat moneys, how can we possibly return to a sound noninflationary market money? The objectives, after the discussion in this work, should be clear: (a) to return to a gold standard, a commodity standard unhampered by government intervention; (b) to abolish the Federal Reserve System and return to a system of free and competitive banking; (c) to separate the government from money; and (d) either to enforce 100 percent reserve banking on the commercial banks, or at least to arrive at a system where any bank, at the slightest hint of nonpayment of its demand liabilities, is forced quickly into bankruptcy and liquidation. While the outlawing of fractional reserve as fraud would be preferable if it could be enforced, the problems of enforcement, especially where banks can continually innovate in forms of credit, make free banking an attractive alternative.”
JQ can’t have it both ways. He can’t say the Austrians are “dogmatists” screaming mindlessly for a return to the gold standard and also that we “want” to scream for paper monetary stimulus at the end of the credit cycle, but for ideological reasons can’t bring ourselves to do so (rubbish).
If pushed, I’d prefer the term gold standard “dogmatist” to “sell out” any day of the week.
He goes on to add, bizarrely, that ”the [Austrian] label has been increasingly associated with gold bugs, critics of fractional reserve banking, neo-Confederates and general fringeness.” In other words, maddies and psychos.
Support for the gold standard is not mindless dogma (unlike Keynesianism which is). To quote again from the WP article on the Austrian School’s view of inflation:
The Austrian School has consistently argued that a “traditionalist” approach to inflation yields the most accurate understanding of the causes (and the cure) for inflation. Austrian economists maintain that inflation is by definition always and everywhere simply an increase in the money supply (i.e. units of currency or means of exchange), which in turn leads to a higher nominal price level for assets (such as housing) and other goods and services in demand, as the real value of each monetary unit is eroded, loses purchasing power and thus buys fewer goods and services.
Given that all major economies currently have a central bank supporting the private banking system, almost all new money is supplied into the economy by way of bank-created credit (or debt). Austrian economists believe that this bank-created credit growth (which forms the bulk of the money supply) sets off and creates volatile business cycles (see Austrian Business Cycle Theory) and maintain that this “wave-like” or “boomerang” effect on economic activity is one of the most damaging effects of monetary inflation.
According to the Austrian Business Cycle Theory, it is the central bank‘s policy of ineffectually attempting to control the complex multi-faceted ever-evolving market economy that creates volatile credit cycles or business cycles, and, as a necessary by-product, inflation (especially in asset markets). By the central bank artificially “stimulating” the economy with artificially low interest rates (thereby permitting excessive increases in the money supply), the government-sponsored central bank itself allows debasement of the means of exchange (inflation), often focused in asset or capital markets, resulting in “false signals” going out to the market place, in turn resulting in clusters of malinvestments, and the artificial lowering of the returns on savings, which eventually causes the malinvestments to be liquidated as they inevitably show their underlying unprofitability and unsustainability.
Austrian School economists therefore regard the state-sponsored central bank as the main cause of inflation, because it is the institution charged with the creation of new currency units, referred to as bank credit. When newly created bank credit is injected into the fractional-reserve banking system, the credit expands, thus enhancing the inflationary effect.
The Austrian School also views the “contemporary” definition of inflation as inherently misleading in that it draws attention only to the effect of inflation (rising prices) and does not address the “true” phenomenon of inflation which they believe is the debasement of the means of exchange. They argue that this semantic difference is important in defining inflation and finding a cure for inflation. Austrian School economists maintain the most effective cure is the strict maintenance of a stable money supply. Ludwig von Mises, the seminal scholar of the Austrian School, asserts that:
“Inflation, as this term was always used everywhere and especially in this country, means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term `inflation’ to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise. The result of this deplorable confusion is that there is no term left to signify the cause of this rise in prices and wages. There is no longer any word available to signify the phenomenon that has been, up to now, called inflation. . . . As you cannot talk about something that has no name, you cannot fight it. Those who pretend to fight inflation are in fact only fighting what is the inevitable consequence of inflation, rising prices. Their ventures are doomed to failure because they do not attack the root of the evil. They try to keep prices low while firmly committed to a policy of increasing the quantity of money that must necessarily make them soar. As long as this terminological confusion is not entirely wiped out, there cannot be any question of stopping inflation.”
Following their definition, Austrian economists measure the inflation by calculating the growth of what they call ‘the true money supply’, i.e. how many new units of money that are available for immediate use in exchange, that have been created over time.
This interpretation of inflation implies that inflation is always a distinct action taken by the central government or its central bank, which permits or allows an increase in the money supply. In addition to state-induced monetary expansion, the Austrian School also maintains that the effects of increasing the money supply are magnified by credit expansion, as a result of the fractional-reserve banking system employed in most economic and financial systems in the world.
Austrian School economists claim that the state uses inflation as one of the three means by which it can fund its activities, the other two being taxing and borrowing. Therefore, they often seek to identify the reasons for why the state needs to create new money and what the new money is used for. Various forms of military spending are often cited as reasons for resorting to inflation and borrowing, as this can be a short term way of acquiring marketable resources and is often favored by desperate, indebted governments. In other cases, the central bank may try avoid or defer the widespread bankruptcies and insolvencies which cause economic recessions or depressions by artificially trying to “stimulate” the economy through “encouraging” money supply growth and further borrowing via artificially low interest rates.
Accordingly, many Austrian School economists support the abolition of the central banks and the fractional-reserve banking system, and advocate instead a return to money based on the gold standard, or less frequently, free banking. Money could only be created by finding and putting into circulation more gold under a gold standard.
“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves. This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” 
Advocates argued that the Gold Standard would constrain unsustainable and volatile fractional-reserve banking practices, ensuring that money supply growth (“inflation“) would never spiral out of control. Ludwig von Mises asserted that civil liberties would be better protected:
“It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the nonobservance of old customs by kings.”
Notice how nuanced, how detailed, how sensible the arguments are for a return to gold. Austrians sensibly look at history, see the madness of government, the repeated financial crises caused by over-issuance of paper money and conclude that a gold standard (a monetary system that has applied for 99% of human history) is a better alternative than the certainty of destruction caused by govt manipulation of property rights.
Is it ”gold buggerism” to point this out? Is it madness to point out the embezzlement inherent in fractional reserve banking?
Apparently, according to JQ.
JQ is one weird dude. He recognises the success of many Austrians predicting the GFC (and perhaps deeply resents it). He recognises that nearly all mainstream economists failed dismally in predicting anything during this period (including the GFC).
What he doesn’t point out is that (probably) around 70% of practising academic economists in Australia would label themselves as Keynesians, neo-Keynesians or post-Keynesians (or some other variant of quasi-Socialist-Fascist thought), that the other 30% would probably label themselves as mainstream neo-classical economists and that NOT ONE OF THEM would label themselves as “Austrian” and NOT ONE OF THEM would have a clue what Austrianism is all about.
Which is why Australia as a nation is doomed to financial catastophe after financial catastrophe, why JQ’s home state of Queensland is a basket case (despite JQ’s sage socialist advice) and why virtually every state in Australia is headed for a fiscal and/or environmental Armageddon.
And why JQ is not counted amongst the 12 economists in the world who accurately predicted the GFC, but why I did predict the GFC (ha ha ha!) - despite having the burden of a full time non-academic job, despite being ridiculed and rejected for my “gold bug” beliefs in Oz, and despite there being no work for any Austrian economist in the whole of Australia.
JQ, with all his time and academic resources, is essentially a useless redundant fool amongst many useless redundant fools in academia sucking off the teat of the govt’s payroll, whilst screaming at the alleged venalities and corruptions of the private sector – whilst failing in his own job to warn of the precise nature of the GFC and STILL failing to provide accurate predictions regarding GDP, unemployment, stockmarket trends or any other vital piece of economic data needed by the govt and businesses. Talk about useless! Talk about redundant!
Notice how he hasn’t made ONE PREDICTION about 2010 on his own website, but instead issues a steady stream of arrogant “advice” about this policy prescription (ETS please) or that govt policy (no Qld asset sales!). Perhaps making economic predictions is beneath him, but base advocacy of socialism isn’t. Or perhaps he’s too gutless to make them, exposing himself to the reality that his Keynesian theories are useless outside the Dalek-infested world of tenured academia.
For an economist to be afraid (or be incapable) of making real world economic predictions – now that’s true economic Karma!
According to Edmund Conway of the UK Telegraph, the blame should be spread around.
The blame clearly and undeniably lies at the door of the Pricks of Threadneedle Street.
Here’s Conway’s attempt to channel the bankers’ mea culpa:
Who is really to blame for the financial and economic crisis? The answer is as frustrating as it is obvious: everyone and no one. In some sense all the members of both the public and City practitioners must take some responsibility for the worst slump since the Great Depression. Whether it is the bankers, the finance ministers, the hedge fund managers, the regulators or the members of the public who borrowed too much, we are all to a greater or lesser degree culpable for the crisis. In the broadest sense of all, human nature is to blame – whether it is the irrationality that tends to cause and magnify business cycles or our inability to challenge the status quo.
But without doubt some are more guilty than others. As far as some are concerned, the fault lies most specifically with the financial system and the bankers who created the toxic debt instruments, and, furthermore, lined their own pockets with the proceeds.
However, in what may in time be judged as a seminal contribution to the debate, the Institute of Economic Affairs has now published one of the most detailed analyses on the causes of the crunch, and their powerful conclusion is the opposite: that it was governments and regulators who erred. Moreover, that the people most often berated for their part in the crisis – the hedge fund managers and those who run tax havens – are among the least guilty. Meanwhile, the regulators have secured a massive reward for failure, in the form of more funding and new responsibilities.
A letter to The Daily Telegraph, signed by some of the country’s most renowned economists, outlines precisely what went wrong and spells out the need for a radical overhaul to ensure it never happens again:
“Perhaps the most important point: central banks should have done more to ensure both prices and debt did not balloon out of control. In the early years of this millennium, following the dotcom bubble, central bankers ought to have kept interest rates higher. Likewise, those in surplus nations should have tried to encourage their public to save slightly less. Instead, the cabal of central bankers, led intellectually by Federal Reserve chief Alan Greenspan, ignored the massive imbalances that built up between nations and the asset bubbles inflating closer to home, judging that they could easily mop up after their explosion.
“The Bank of England and Financial Services Authority are to blame here: there are a whole variety of counter-cyclical policies they could have used – for instance compelling banks to keep more liquid cash or to build up more capital – but they refused to do so. Whatever they claim now about overhauling the system, the fact is that they had powers to do so before, but simply did not act.
“The IEA argument is that the shadow institutions – the hedge funds, private equity and tax havens – are becoming the scapegoats for the crisis. But in fact the real problems were to be found in the big banks and insurers, which were tightly overseen by national authorities. Much as we may disapprove of these other cogs in the financial system, it is unfair to blame them for the crisis.
“This proposal, together with the second, that banks should be allowed to fail, are among the more controversial propounded by the IEA. Their idea is to call for a more free banking system, in which customers are aware that banks are not always supported, and that in the event of a bank’s failure depositors will become creditors whose cash is not guaranteed.”
“One lesson from the crisis is that central banks must make sure they do not focus on one thing. Had the Bank of England paid more attention to the growth of money, it might have done more to prevent the debt bubble expanding. That said, the European Central Bank, which has a more explicit monetary focus than the Bank, has also been found lacking in its approach to monetary policy.”
Why do the Brits go to water when they try to point out the venality of mafioso bankers, or the idiocy of government, or the brainlessness of those who happen to be in power for no other reason other than their surname or their kindergarten education? What is it about the “born to rule” class structure that strangles commentators when they need to identify those who were to blame for the biggest catastrophe the Brits have seen since the Great Depression?
I would prefer it if the economists would say: “One lesson from the crisis is that central banks have proven themselves to be the very definition of a moral hazard. Central banks should be simultaneously killed off in a mass orgy of public humiliation and ridicule (preferably in the middle of a town square, like the old days). Banks should then be broken up and allowed to fail like any other business. For depositors, the warning should be ‘caveat emptor’. And for bankers, the warning should be ’Jail for Fraud, like any other common crook.’”
As you begin to appreciate the gravity of the situation Charles lays out in a most eerie fashion what the most likely scenario awaits us and builds a strong case for why he believes the dollar will collapse. At this point most readers not familiar with economics or America’s history of debt may begin to panic and pass out from fear, as Charles’ arguments are extremely convincing. From a long term perspective there is very little to argue about, our fiat pyramid of debt has to and will eventually collapse – the only question is of timing. This question is crucial to properly answer as it will spell out the direction of the next several years. While Charles attempts to answer the question with an open mind, his views can be best described as inflationist and he firmly believes that the forces in charge of our destiny will turn to the only tool available to them - currency depreciation. Once again, in the long run this may be true, but for the time being America finds itself in a unique situation where our dollar is still the reserve currency and is still trusted around the world. Certain technical reasons also suggest that the dollar may strengthen in the coming months not so much due to any internal policy, but the systemic failures in other parts of the world. Still, as Charles poignantly argues our status as the reserve currency is on borrowed time and can change with a blink of an eye. For this reason the book’s last section presents advice valuable for every American regardless of what one’s prognostication may be.
Charles is partial to value, a concept easy to grasp when you realize just how worthless the dollar can become. Therefore common sense approaches involving gold, silver and oil are presented. Charles makes a deliberate effort to provide options for any would be investor regardless of experience and if you are under the impression that you must build a ten ton safe and start hoarding gold ingots then you are mistaken, it is easier than you could ever imagine. Several sections are also devoted to address other popular investment strategies like equities and treasuries and why you should think twice before you invest in these increasingly risky asset pools. A rather amusing analogy between America’s credit strength and a shady uncle constantly looking to borrow should be reprinted and distributed all over the Internet.
The Dollar Meltdown is a unique and valuable book, offering the complexities of economics in order to explain where we are and how we got here while presenting investment strategies for those people interested in taking control of their financial feature. If you prefer eating glass over reading economic text or think Wall St. is a prerequisite before making investments, then this book is a must read for you and your family.
“Trader Mark” poses this interesting question: Is America a Ponzi scheme that works?
To quote from the article:
America is a uniquely attractive place to live: a lifestyle superpower. But it cannot afford to be complacent, for three reasons.
First, other places, such as Australia, Canada and parts of Western Europe, have started to compete for footloose talent.
Second, rising powers such as India and China are hanging on to more of their home-grown brains. There is even a sizeable reverse brain drain, as people of Indian or Chinese origin return to their homes. But neither India nor China attracts many completely foreign migrants who wish to “become” Indian or Chinese.
Third, since September 11th 2001 the American immigration process has become more security-conscious, which is to say, slower and more humiliating. Even applicants with jobs lined up can wait years for their papers. Many grow discouraged and either stay at home or try their luck somewhere less fortress-like.
The stakes are high. Immigration keeps America young, strong and growing. “The populations of Europe, Russia and Japan are declining, and those of China and India are levelling off. The United States alone among great powers will be increasing its share of world population over time,” predicts Michael Lind of the New America Foundation, a think-tank.
By 2050, there could be 500m Americans; by 2100, a billion. (I am not sure how Earth would support 500M or 1 billion Americans consider 300M use 25% of all it’s resources!) That means America could remain the pre-eminent nation for longer than many people expect.
My take on this article: The question is not whether a Ponzi scheme can work (all Ponzi schemes that get off the ground work to some degree). The essential questions are (1) can a Ponzi scheme work indefinitely (answer: no, no Ponzi scheme has ever worked indefinitely) and (2) has the U.S. Ponzi scheme just irreversibly burst (answer: yes, immigration levels are falling dramatically if you count illegals and, incredibly, net repatriations of money to Mexican relatives have in many cases reversed - poor Mexican relatives are now in many cases giving money back to newly homeless Mexican families living in the US!).
Once a Ponzi scheme bursts, you cannot ever put it back together because the suckers have dried up and are unwilling to finance the earlier entrants. The latter entrants always have to subsidise the earlier entrants. Once there are no more “latters” the whole thing blows up.
The U.S. is simply running out of “latters”. It’s over, in my view.
The new Ponzi schemes will continue in places like Cambodia, Vietnam and (perhaps) Australia and New Zealand. Until environmental and population problems mean the “latters” again have to go elsewhere.
But the U.S. in my view has just run out of suckers. The price for entry into the scheme is too high and the rewards too low. Everyone sees the Ponzi scheme is a fraud and once that’s exposed it’s all over for any Ponzi scheme. The illusion is shattered – and once the love’s lost, there ain’t no goin’ back.
Paul Krugmaniac is nothing if not consistent. His career has been a study in obsequiousness to the current power oligarchy and shameless self-promotion at the cost of truth, integrity and any other noble virtue a human can possess.
Then, he shamelessly denies he promoted the housing Ponzi scheme by flippantly saying his advocacy of low interest rates and a new trillion-dollar Ponzi scheme in housing was supposed to be taken as a joke (in other words, the writings of a Nobel Prize-winning economist should not be taken seriously when he doesn’t want to be).
Then, he remains deathly silent about the bubble until it’s too late to do anything about it.
Then, he screams for govt bailouts and govt spending to ensure the US govt ends up bankrupt and the US dollar is worthless.
Then, when that doesn’t work, he claims that his remedy would work if only the US govt bankrupted itself even more quickly and claims that anyone (including Ben Helicopter Bernanke) who wants to ease up on the madness is “deeply irresponsible“.
Finally, when he realises the disaster he’s caused, when he sees the stimulus not working, when he understands that the Ponzi scheme he helped created has blown up in the face of the American people, he doesn’t run in shame, he doesn’t apologise, he doesn’t reflect on the madness of his policy prescriptions for both the U.S. and Japanese economies over the last two decades, he doesn’t offer to return his Nobel Prize, he doesn’t offer to kill himself as a sacrifice to the God of Economic Karma… no.
Plunging prices of houses and CDOs … don’t produce any corresponding macroeconomic silver lining. … This suggests that we’re unlikely to see a phoenix-like recovery from the current slump. How long should recovery be expected to take?
Well, there aren’t many useful historical models. But the example that comes closest to the situation facing the United States today is that of Japan after its late-80s bubble burst, leaving serious debt problems behind. And a maximum-likelihood estimate of how long it will take to recover, based on the Japanese example, is … forever. OK, strictly speaking it’s 18 years, since that’s how long it has been since the Japanese bubble burst, and Japan has never really escaped from its deflationary trap.
This line of thought explains why I’m skeptical about the optimism that’s widespread right now about recovery prospects. The main argument behind this optimism seems to be that in the past, big downturns in the world’s major economies have been followed by fast recoveries. But past downturns had very different causes, and there’s no good reason to regard them as good precedents.
Living in a crisis-ridden world
Looking back at U.S. commentary on past currency crises, what’s striking is the combination of moralizing and complacency. Other countries had crises because they did it wrong; we weren’t going to have one because we do it right.
As I’ve stressed, however, crises often – perhaps usually – happen to countries with great press. They’re only reclassified as sinners and deadbeats after things go wrong. And so it has proved for us, too.
And despite the praise being handed out to those who helped us avoid the worst, we are not handling the crisis well: fiscal stimulus has been inadequate, financial support has contained the damage but not restored a healthy banking system. All indications are that we’re going to have seriously depressed output for years to come. It’s what I feared/predicted in that 2001 paper: “[I]ntellectually consistent solutions to a domestic financial crisis of this type, like solutions to a third-generation currency crisis, are likely to seem too radical to be implemented in practice. And partial measures are likely to fail.”
Maybe policymakers will become wiser in the future. Maybe financial reform will reduce the occurrence of crises: major financial crises were much rarer between the end of World War II and the rise of financial deregulation after 1980 than they were before or since. Meanwhile, however, the fact is that the economic world is a surprisingly dangerous place.
The title of his blog is “The Conscience of a Liberal”. It should be renamed “The Shameless Chutzpah of a Know-Nothing Soulless Self-Promoter”.
Steve Keen (Australia’s top academic economist) takes a look back at 2009 – and squints at 2010 here on his blog.
Although I have the utmost respect for Keen as an economist and as a superb modeller, I can’t help myself. I have to pick apart some of the comments he makes on his blog. If I respected him less, I wouldn’t bother.
I rarely comment on Paul Krugmaniac’s repetitive calls for the govt to spend itself into oblivion because (1) it’s so boringly repetitive and (2) my attention is easily distracted away from a quasi-socialist one-trick pony.
An interesting comparison could perhaps be made between my light-hearted, casual predictions and Keen’s more cautious, sober, somber tone on his blog. He cares about his professional reputation, his academic legacy and so keeps trying. I consider the whole ”science” of economics a joke, so cannot bring myself to bother.
My predictions are contained here. I trust even the casual reader can see that I treat both my predictions and economic predictions generally with a grain of salt (or perhaps – more accurately - with the respect I accord any fiat currency, which is to say none).
There are two reasons for this light-hearted disrespect for economic predictions.
The first comes from the Austrian School insight that mathematical modelling of the ever-evolving market economy is futile and betrays a fundamentally naive view of market participants (that they can be mathematically modelled like rats) and a fundamentally egocentric view of bureaucrats (that they can predict what is inherently incapable of prediction).
Let me give you a few examples in the tradition of von Mises.
Assume a very well-respected govt bureaucrat modelled the economy and made the “accurate” assessment that gold would double in the next five years. Once this “prediction” got out into the market and other analysts reached the same conclusion, the price would likely rise quickly now – possibly even double now – because of the mere existence of the prediction.
How, in such a “recursive” modelling environment, do economists still treat modelling seriously?
George Soros tries (ineffectually) to capture this concept with the term “reflexivity” - but I prefer the Austrian School’s characterisation of the economy as ever-evolving, and therefore not amenable to mathematical modelling at all.
Keynesians (and even Steve Keen) have a tendency to get lost in equations and don’t appreciate or understand the “heterogeneity of capital” – an Austrian concept meaning that investment cannot be combined and agglomerated into a total number. The most important feature of entrepreneurship is the kind of investments made.
The country that produces iPhones or eco-friendly resorts in Bhutan has “better” capital investment than the country that produces toxic cancer-causing asbestos or nuclear weapons commissioned by a paranoid central govt – even if the sum “total” of investment is triple in the latter country compared to the former.
Businessmen and investors seem to “get” this intuitively, but economists seem stuck in a rut, worrying pointlessly about numerical GDP and investment totals. Who cares if we produce more or less nuclear weapons, toxic toys or cut down more rainforest? It’s all “bad” investment if the price signals stimulating the investment are corrupted by bad govt policy or by corrupt banking practices.
I tried to provide an insight into this “qualitative” approach here and here. We are literally killing ourselves on bank and govt stimulated malinvestments. It’s madness, but until we return to sound money there’s no way we can determine what investments are fundamentally sustainable and sound, and what investments are Ponzi-style speculative, wasteful, unsustainable malinvestments.
I’m much more concerned (terrified?) of the malinvestments, the qualitative “mistakes” that govts and fractional reserve banking stimulate and encourage, than the quantitative outcomes of these malinvestments.
Curiously Steve Keen recognises - even rails against – this clear monetary corruption, this insidious, incestuous link between govt and bankers, but doesn’t give up on his attempts to model the economy – despite this corruption.
I gave up years ago on modelling when I realised the markets were completely rigged. This was proven in 2009.
Keen recognises that the “logical” outcome for house prices in Australia in 2009 should have been a decline and identifies the corrupt govt’s manipulative and unsustainable doubling of the FHBG as the cause of the remarkable resilience in house prices – but doesn’t conclude that economic prediction is a complete waste of time in this corrupt environment, but rather tries again by analysing stockmarket trends from the Great Depression!
A few hypotheticals for Steve Keen to consider:
(1) If Helicopter Ben gave every single American $5 million in 2010, would Keen’s predictions still have validity? Answer – no. I guarantee the stockmarket would not follow the trends set in the Great Depression regardless of American debt levels. They may follow the German stockmarket trends during the Weimar Republic and face complete monetary collapse – but that’s a different story.
If this doesn’t seem a “reasonable” hypothetical, consider the trillions Ben already gave the bankers in 2008-2009. By rights, the US bankers on Wall Street should either be in jail or homeless, dancing on the streets for food. Instead they’re sipping champagne in Zurich and throwing wild parties in New York.
So much for “economic” modelling of bank profitability!
(2) If Robot Rudd gave every Australian family $1 million for home upgrades or renovations, I guarantee house prices would spike up – regardless of the level of mortgage debt in this God-forsaken country.
If this doesn’t seem a “reasonable” hypothetical, consider that the Rudd govt guaranteed every bank depost in Australia in 2008-2009, bought $8 billion in toxic RMBSs that the market wouldn’t touch, doubled the FHBG and gave subsidies to home improvements (insulation etc) in the billions. If this is not deliberately and cynically distorting the “natural” market dynamics in the housing market, I don’t know what is!
The key issue is to ask: If the govt tries to fight the natural adjustment process, what malinvestments will result from this distortion? What will the consequences necessarily be? It will be to create zombie banks, zombie companies, zombie govt employees, a zombie economy… and lots of useless economic activity that will be unsustainable in the long run.
Understandably, given the tension between his desire to provide accurate, reputation-enhancing predictions and his poor track record in 2009, Keen’s vision isn’t very clear on 2010.
Curiously, in this particular post, he doesn’t explain why he’s going on a trek from Parliament House to Mt Kosciousko. For those who don’t know, he lost a bet with Rory Robertson of Macquarie Bank over Australian house prices. Keen predicted decline. Robertson didn’t. Robertson won.
Despite his brilliance as a modeller, he underestimated the madness and corruption of central government. You can never “endogenise” the stupidity of government, the madness of Treasury, the influence of bankers, the venality of the political process.
Why doesn’t he give up on predictions entirely, admit the govt is corrupt and an agency of the big banks and state that he will return to making predictions once the govt turns away from corrupt, cynical manipulation of the economy? Probably because he knows that the corrupt, cynical manipulation of the economy never stops – at least until complete Weimar Republic-style chaos ensues (the sooner the better in my view).
When Keen finally gets around to actually reading Rothbard and von Mises, I think he will become a much better economist. And investor (he sold his house in 2009, and probably regrets the decision).
I have a tip for Keen – buy farmland and gold and guns.
Food and real money and protecting your family from predators and parasites never goes out of fashion.
To those readers who have tolerated my rage against the machine, thanks for sticking with me.
As the Buddha stated just before his death, “Everything is Change” – so I am quietly confident things will get better in 2010 (they could hardly get worse).
I leave you with Lew Rockwell’s sage words regarding God’s money and the connection between faith, truth and sound money:
Fiat money with central banking… tempts corrupt politicians and bureaucrats, and it also further corrupts them. It is the great occasion of sin of our public life. The tragedy is that their use of the printing press not only corrupts them; it imposes dreadful and intolerable costs on the rest of society, in the form of price inflation and business cycles.
We’ve seen the corruption grow worse over time. We are living now in the 37th year of fully fiat money with central banking. The politicians of the past were a bit reticent to use all the power they had. They are becoming ever more brazen. The sense of shame seems to be gone forever, their consciousness completely papered over by the ominous power they possess. The pundit class is following them, believing that there are no limits.
In truth, all these bills must be paid. To realize that is to realize the necessity of radical reform. It can be overwhelming to contemplate the glorious results of a full gold standard reform. Inflation would stop eating away our purchasing power. The business cycle would be tamed. International trade would not be disrupted by wild swings in currency values. But of all the benefits, this one is the greatest: it would stop arbitrary rule, dead in its tracks. It would force the government to curb its ways. It would shore up our freedoms.
For this reason, the policy of sound money is very much linked with morality. The Hebrew scriptures, in the nineteenth chapter of the book of Leviticus, warns “you shall have just balances, just weights…” The twenty-fifth chapter of Deuteronomy issues a similar warning: “You shall not have in your bag differing weights, a large and a small.” Proverbs says the same: “A false balance is abomination to the LORD: but a just weight is his delight.” Another passage says: “Diverse weights, and diverse measures, both of them are alike abomination to the LORD.”
All of these relate in some degree to the need for sound money and condemn the act of fraud and monetary debasement. The consequences of monetary sin cannot be contained to the sinners only. They are spread out all over the whole of society, destroying its economic basis and corrupting the morals of society. They foster crazed illusions that we can magically generate wealth through the act of printing money, and the attempt to do so has catastrophic consequences. As Mises wrote: “Inflation is the fiscal complement of statism and arbitrary government. It is a cog in the complex of policies and institutions which gradually lead toward totalitarianism.”
I find it sickening that there are so few voices outside the Austrian School that will stand up to this policy. And I fear that the consequences of this policy will be felt for many decades into the future. There is still time to reverse course. There is nothing inevitable about despotism. We are not being forced down this road. We can embrace freedom. If we understand that freedom is inseparable from sound money, we can embrace that too. Until then, we will continue to place our trust in the political establishment to do what is right. Call me a gold bug if you will, but I trust hard money far more than our rulers. And that, ultimately, is the choice we must make.
Merry Christmas and Happy New Year. Let us pray for sound money to return in our lifetimes.
You’d think mainstream economists and commentators in the UK would reflect on the fact that output has declined 6% during this recession, the worst since the 1950s (possibly the 1930s), on the fact that financial deregulation only a few short years ago may just have something to do with the current recession, on the fact that the Japanese experience proves low interest rates and massive government spending does nothing other than the delay the necessary adjustments the economy needs to get back on track, on the fact that Keynes was an intellectual lightweight whose ideas have wrought destruction in every country (the UK, the US, Japan) where they have been tried.
But no, this piece by Keynesian disciple Robert Skidelsky in Ft.com proves the British establishment learns nothing, and are willing to walk off a cliff rather than admit they are dumber than the local storekeeper when it comes to economics.
Check out this gem:
Even the normally sober Martin Wolf has fallen for this line (FT, December 16 2009). The pre-crisis UK economy, he says, was a “bubble economy”. The bubble made UK output seem larger than it actually was! This is old-fashioned Puritanism: the boom was the illusion, the slump is the return of reality. However, experience of past recessions suggests that, once the corner is turned, output recovers vigorously from slump conditions (as do prices). Between 1933 and 1937 the UK economy expanded by 4 per cent a year, much higher than its “trend” rate of growth. Yet in 1931 orthodox economists were denying there was an output gap at the bottom of the greatest depression in history.
Based on the wholly fallacious idea that financial deregulation had nothing to do with a false boom (and therefore a bust), Skidelsky looks around, sees the “mad” years of 2000-2007 as “normal” and the adjustment phase after the credit-fuelled boom as the “aberration” and wants to return to normality.
A simple look at credit growth, debt-to-GDP ratios, personal debt levels, and the growth in housing prices and mortgage debt would all irrefutably prove that the UK went through an unprecedented credit-fuelled boom which was completely unsustainable. 2000-2007 was the aberration. 2008-? is the long painful adjustment period, made worse by Skidelsky’s admonitions to return to madness.
Fortunately, the private economy is having none of this, is rapidly reducing its debt levels to stave off mass insolvency, and is leveraging down.
Skidelsky hilariously characterises this necessary de-leveraging as irrational “money hoarding”:
In a slump there is no natural tendency for the rate of interest to fall, because people’s desire to hoard money is increasing. So printing enough money to “satisfy the hoarder” is the only way of getting interest rates or the exchange-rate down.
Err…no. In a slump, there are fewer speculative opportunities and therefore people stop borrowing. They sensibly save their money, recognising that borrowing in this environment would be madness. This “increases” savings (“hoarding” in Skidelsky’s derogatory term), reduces factor prices and eventually allows borrowing to be resumed for profitable activities.
To quote Rothbard (pp. 40-41):
In their stress on the liquidity trap as a potent factor in aggravating depression and perpetuating unemployment, the Keynesians make much fuss over the alleged fact that people, in a financial crisis, hoard money instead of purchasing bonds and contributing toward lower rates. It is this “speculative hoard” that constitutes the “liquidity trap,” and is supposed to indicate the relation between liquidity preference and the interest rate. But the Keynesians are here misled by their superficial treatment of the interest rate as simply the price of loan contracts. The crucial interest rate, as we have indicated, is the natural rate—the “profit spread” on the market. Since loans are simply a form of investment, the rate on loans is but a pale reflection of the natural rate. What, then, does an expectation of rising interest rates really mean? It means that people expect increases in the rate of net return on the market, via wages and other producers’ goods prices falling faster than do consumer goods’ prices. But this needs no labyrinthine explanation; investors expect falling wages and other factor prices, and they are therefore holding off investing in factors until the fall occurs… Far from “speculative” hoarding being a bogy of depression, therefore, it is actually a welcome stimulant to more rapid recovery.
For a simpler explanation of the Austrian analysis, look at my five rules for the Ponzi-economy here.
This piece proves beyond a reasonable doubt that some members of the British establishment are literally insane, and are leading the British economy over a cliff. Why is it that no Keynesian zealot can ever swerve out of the way of an economic obstacle? They must all be zealot-zombies.
It’s mildly reassuring when another analyst is suicidal about the future. It reassures me that I am not totally alone.
I disagree with Faber on two points however.
First, it’s unlikely we will see hyperinflation and the “pure” monetisation of the trillions in US debt. No hyperinflationist thinks through the precise mechanism of monetisation. To increase the budget deficit by even more, the US govt will have to increase its own debt levels. Bonds yields will likely spike at some point. Then the Fed will try to buy the bonds to keep prices up (yields low). This will allow relatively limited leakage of money to the US govt’s friends, but in no way plug the hole left by the collapse in the housing bubble. Not only will govt spending not replace the hole left by Peak Credit, govt spending further distorts the economy, resulting in more failed private businesses the further away you get from the US govt’s largesse.
You’ll end up with millions of debt-slaves sycophantically praying to the bankers and the Fed govt, running around doing the bidding of their Masters, and economic chaos and widespread starvation beyond the tiny green gated communities of bankers and govt employees.
Kabul is a good future model for the major Western economies (especially the US): There are some massive luxury (tasteless!) villas going up in Kabul. I’ve seen them. They are the houses for the govt ministers and associated hangers-on from the opium trade. Nearby are the hotels the UN employees frequent. Beyond these few blocks, hundreds beg for food from aid agencies and there’s complete chaos. But within these tiny communities connected close to the corrupt govt, the opulence is incredible. Govt banquets are frequent, whilst literally right outside the banquet halls, local Afghanis are starving.
That is our future. Kabul is our future.
And remember – Kabul is a city now created by the US. It is what the US govt “wanted” to create (or at least what it did create after taking over).
So that’s the best the US and UK govts can do today when “creating” a city. That’s the proof regarding what they are capable of. Sad, but true.
So that’s what they will continue to produce at home.
“Kabul” does not spell hyperinflation to me. It spells stag-deflation with a possible sudden depreciation of the US dollar at some point – but not hyperinflation. So I still think US govt bonds and gold are a better bet than US stocks if I was forced to choose. Of course, long-term, farmland, security services, and govt jobs will all be highly sort after. But I wouldn’t be buying canned food just yet. You don’t want it to go out-of-date before you need to eat it.
Second, there will be war, but it won’t be to distract people from their debt problems. It will be over the rapidly diminishing supply of food and water and oil. The malinvestments caused by the decade-long low-density housing boom in the West have actually caused massive environmental destruction as well as financial chaos. Literally millions of acres of fertile arable land across the US and Australia and other countries has been re-zoned and “redeveloped” (destroyed) for what is euphemistically termed a “more intensive use” (i.e. “for speculative property development”) – just at the time when unprecedented climate change has destroyed many “food basins” around the world (Myanmar, Thailand, Cambodia, Australia, China, Europe and the US have all experienced tsunamis, typhoons, hurricanes or drought in their vital farming areas).
CCD is also a massive threat to our food supply. It is still a problem that no media organisation wants to talk about. The cause is unknown (I suspect GM crops, but who knows?).
No one seems to have connected up the housing boom and bust with massive unprecedented and irreversible environmental destruction.
But they will. Eventually.
Greenspan warns the US to rein in spending. Two decades too late.
Based on Greenspan’s appalling record of prediction, this means that US bond yields will remain low throughout 2010 (at least) and that demand for US bonds will remain high.
“The safest (and probably only) way for a country to weather contagion in a sovereign debt crisis is to maintain low levels of debt in both the public and private sector through appropriate fiscal and monetary policy and robust macro-prudential regulation.”
This gets today’s “blindingly obvious” insight award.