DEBT AND DELEVERAGING: A FISHER, MINSKY, KOO APPROACH
by ilene - November 18th, 2010 3:34 pm
DEBT AND DELEVERAGING: A FISHER, MINSKY, KOO APPROACH
Courtesy of The Pragmatic Capitalist
The following paper by Paul Krugman is an excellent analysis of the current situation in the United States. Professor Krugman accepts Richard Koo’s “balance sheet recession” and draws similar conclusions to Koo – primarily that government must maintain large deficits in order to offset the lack of spending by the private sector. The key component missing in both Krugman and Koo’s argument is the idea that a nation that is sovereign in its own currency cannot default on its “debt”. Nonetheless, the conclusions we all come to are similar – a temporary deficit is not only necessary, but an economic benefit during a balance sheet recession:
“In this paper we have sought to formalize the notion of a deleveraging crisis, in which there is an abrupt downward revision of views about how much debt it is safe for individual agents to have, and in which this revision of views forces highly indebted agents to reduce their spending sharply. Such a sudden shift to deleveraging can, if it is large enough, create major problems of macroeconomic management. For if a slump is to be avoided, someone must spend more to compensate for the fact that debtors are spending less; yet even a zero nominal interest rate may not be low enough to induce the needed spending.
Formalizing this concept integrates several important strands in economic thought. Fisher’s famous idea of debt deflation emerges naturally, while the deleveraging shock can be seen as our version of the increasingly popular notion of a “Minsky moment.” And the process of recovery, which depends on debtors paying down their liabilities, corresponds quite closely to Koo’s notion of a protracted “balance sheet recession.”
One thing that is especially clear from the analysis is the likelihood that policy discussion in the aftermath of a deleveraging shock will be even more confused than usual, at least viewed through the lens of the model. Why? Because the shock pushes us into a world of topsy-turvy, in which saving is a vice, increased productivity can reduce output, and flexible wages increase unemployment. However, expansionary fiscal policy should be effective, in part because the macroeconomic effects of a deleveraging shock are inherently temporary, so the fiscal response need be only temporary as well. And the model suggests that a temporary rise in government spending not only won’t
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Ron Paul Comments On QE2, Says Fed Will Self Destruct, Shocked That Krugman Has “Any Credibility Whatsoever”
by ilene - November 8th, 2010 12:36 pm
Ron Paul Comments On QE2, Says Fed Will Self Destruct, Shocked That Krugman Has "Any Credibility Whatsoever"
Courtesy of Zero Hedge
Pic credit: William Banzai7
There were few surprises in today’s commentary by Ron Paul on QE2: the only man in Congress (with Grayson now gone) who is sufficiently intelligent to realize that the primary culprit behind the US economy’s boom-bust cycle is the Federal Reserve, continues to press for the termination of Ben Bernanke’s public "service" which has resulted in a collapse in American purchasing power in the 100 years since the first Jekyll Island meeting. Yet Paul takes a ‘John Lennon’ approach to the problem, believing that active intervention may not even be needed, as the Fed ends up cannibalizing itself: "I think the Fed will self-destruct. People will desert the dollar. I think the Chinese are hinting that already. They are not wanting our dollars as much as raw materials. This is a deeply flawed monetary system. Here we have a small group of people who can create $600 billion with the stroke of a pen… I don’t know where people are coming from to think that this can work. What really astounds me me is how tolerant the people are, the people in Congress and the financial market, where did this authority come from? Now somebody outside of the government can spend trillions of dollars and not think anything about it. It doesn’t work, it’s a failure. And next year it will be more. Bernanke is very clear on what he is going to do - he is going to create money until he gets economic growth and there is no evidence to show that just creating money causes economic growth." All logical and expected. Which is why nobody will endorse the Paul stance, it as it means an end to the trillion dollar wealth transfer system from the middle class to the kleptocracy.
Yet the funniest thing is Ron Paul’s commentary on that irrelevant, and now completely discredited Fed puppet, Paul Krugman,
Krugman is the exactly the opposite of a free market economist. I would think by now he would have been totally discredited and it’s tragic – i pray every night that his views will just disappear because what he wants to do is more of the bad stuff…He is leading the intellectual charge for the
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Krugman Dementia Alert: Former Enron Consultant Says Jim Rogers “Has Been Absolutely Wrong About Everything”
by Zero Hedge - November 7th, 2010 9:50 am
Courtesy of Tyler Durden
While we approach the topic of Paul Krugman with the same eagerness one approaches a clogged up, never cleaned, bathroom at a frat party that is about 50 years past its due date, (pretty much like Keynesianism) this one just put us over the top. In his latest pointless drivel on the economy, instead of reverting to his usual mode of praying to John Keynes, bitching at those who dare call for accountability and the punishment of all those, such as Krugman, responsible for what is now a $4 trillion taxpayer monetary bailout tab, and begging for trillions, then quadrillions, then quintillions, then an infinite amount of money, the Op-Ed writer has instead decided to start a mudslinging campaign against none other than Jim Rogers, the co-founder of George Soros’ Quantum Fund, who has been pretty much spot on with his calls for decades.
A quick compare and contrast – Jim Rogers, whose fortune is in the hundreds of millions, contrary to Krugman, who only has a worthless statue given to him by the same idiots who thought that Obama was worthy of being awarded for his "peace" initaitives, has always had to put his money where his mouth is, while the other one’s only notable claim to fame is being a consultant, and a corrupt and massively conflicted one at that, for that icon of Keynesian free markets- Enron, which Krugman could not find enough words to praise, before it was uncovered that, just like Krugman’s Keynesian ideal, was a fraud, a disaster, and the biggest bankrupty at the time, in the making. We could go on and on, and recapitulate Gonzalo Lira’s thesis of why Krugman is either an "Imbecile or a Fraud" but luckily our readers are sufficiently intelligent and they can figure this out on their own. Which begs the question: just how dumb does Krugman take his readers to be, when he says something as patently imbecilic as the following: "And please note that inflationistas like Rogers have been wrong about absolutely everything this cycle (and the last cycle, and the cycle before that)." While this statement is so wrong and obtuse, it merely confirms that Krugman must obviously be an idiot if he believes that any of those unfortunate enough to read his meandering garbage will not spot who has been wrong…
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Krugman: “The Question Is Whether Our Economy Is Governed By Any Kind Of Rule Of Law”
by ilene - October 17th, 2010 3:50 pm
Krugman: "The Question Is Whether Our Economy Is Governed By Any Kind Of Rule Of Law"
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Courtesy of Washington’s Blog
Paul Krugman writes:
The mortgage mess is making nonsense of claims that we have effective contract enforcement — in fact, the question is whether our economy is governed by any kind of rule of law.
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True to form, the Obama administration’s response has been to oppose any action that might upset the banks, like a temporary moratorium on foreclosures while some of the issues are resolved. Instead, it is asking the banks, very nicely, to behave better and clean up their act. I mean, that’s worked so well in the past, right?
The response from the right is, however, even worse …. conservative commentators like those at The Wall Street Journal’s editorial page have come out dismissing the lack of proper documents as a triviality. In effect, they’re saying that if a bank says it owns your house, we should just take its word. To me, this evokes the days when noblemen felt free to take whatever they wanted, knowing that peasants had no standing in the courts. But then, I suspect that some people regard those as the good old days.
I’m happy that someone as prominent as Krugman is weighing in on the side of the rule of law.
I’ve been hammering on that topic for years:
- Fraud Finally Being Discussed in Polite Company … Now Where Are the Prosecutions?
- A Free Market Is Not Possible Without Strong Laws Against Fraud
- The Economy Will Not Recover Until The Perpetrators Of Our Crises Are Held Accountable
- Economist James Galbraith: Economists Should Move into the Background, and "Criminologists to the Forefront"
- Senior S&L Regulator Says Government Engaging in Massive Cover-Up of Economic Crisis: “The Entire Strategy Is to Keep People from Getting the Facts”
- No Wonder the Economy Isn’t Improving
- The Root of the Economic Crisis: Dishonesty
Pic credit: Jesse’s Americain Cafe
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The Marriage of Mercantilism and Corporatism: When Free Trade Is Not ‘Free’
by ilene - September 13th, 2010 10:45 pm
The Marriage of Mercantilism and Corporatism: When Free Trade Is Not ‘Free’
Courtesy of JESSE’S CAFÉ AMÉRICAIN
"The consequences of this policy are also stark and simple: in effect, China is taxing imports while subsidizing exports, feeding a huge trade surplus. You may see claims that China’s trade surplus has nothing to do with its currency policy; if so, that would be a first in world economic history. An undervalued currency always promotes trade surpluses, and China is no different." Paul Krugman
And he is exactly right. As regular readers know this matter of Chinese mercantilism and its toleration and acceptance by the West has been a key observation and objection here since 2000. Any economist who does not understand that devaluing and then maintaining an artificially low currency peg with a trading partner distorts the nature of that trade should review their knowledge of algebra.
And yet it was in 1994 during the Clinton Administration that China was permitted to obtain full trading partner "Most Favored Nation" status, while vaguely promising to float their recently devalued currency some day, and address the human rights issues that were endogenous to their non-democratic, totalitarian government.
"From 1981 to 1993 there were six major devaluations in China. Their amounts ranged from 9.6 percent to 44.9 percent, and the official exchange rate went from 2.8 yuan per U.S. dollar to 5.32 yuan per U.S. dollar. On January 1, 1994, China unified the two-tier exchange rates by devaluing the official rate to the prevailing swap rate of 8.7 yuan per U.S. dollar." Sonia Wong, China’s Export Growth
This served Mr. Clinton’s constituents in Bentonville quite well, and has some interesting implications for the Chinese campaign contributions scandals. It supported the Rubin doctrine of a ‘strong dollar’ while facilitating the financialization of the US economy and the continuing decline of the middle class wage earners, under pressue to surrender a standard of living achieved at great cost. "How I Learned to Stop Worrying and Love the Currency Collapse." and China’s Mercantilism: Selling Them the Rope
Not to limit this, George W. ratified the arrangement when he took office, and so it has gone on for almost fifteen years…
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How Keynesian Archduke Krugman Recommended A Housing Bubble As A Solution To All Of America’s Post Tech Bubble Problems
by ilene - September 8th, 2010 7:20 pm
How Keynesian Archduke Krugman Recommended A Housing Bubble As A Solution To All Of America’s Post Tech Bubble Problems
Courtesy of Tyler Durden
The year is 2002, America has just woken up with the worst post dot.com hangover ever. Paul Krugman then, just as now, writes worthless op-eds for the NYT. And then, just as now, the Keynsian acolyte recommended excess spending as the solution to all of America problems. Only this one time, at band camp, Krugman went too far. If there is one thing that everyone can agree on, it is that the Housing Bubble is arguably the worst thing to ever happen to America, bringing with it such pestilence and locusts as the credit bubble, the end of free market capitalism, and the inception of American-style crony capitalism. Those who ignored it, even though it was staring them in the face, such as Greenspan and Bernanke, now have their reputation teetering on the edge of oblivion. So what can we say of those who openly endorsed it as a solution to America’s problems?
Enter exhibit A: New York Times, August 2, 2002, "Dubya’s Double Dip?" Name the author: "The basic point is that the recession of 2001 wasn’t a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble." If you said Krugman, you win. Indeed, the idiocy of Keynesianism knew no bounds then, as it does now. The solution then, as now, to all problems was more bubbles, more spending, more deficits. So we have the implosion tech bubble: And what does Krugman want to create, to fix it? Why, create a housing bubble… Well, at least we know now how that advice played out.
And now what? He wants another trillion in fiscal stimulus… Quadrillion? Sextillion (arguably this cool sounding number is at least 2-4 years away before the Fed brings it into the daily vernacular)?…
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New Job Opportunity – Spitting at the Moon
by ilene - September 5th, 2010 3:00 pm
New Job Opportunity – Spitting at the Moon
Courtesy of Mish
In multiple posts Paul Krugman is saying "I told you so". For example, please consider Nobody Could Have Predicted
Pictures support the view that stimulus worked as long as it lasted, boosting the economy — which is the same conclusion Adam Posen drew from Japan’s experience in the 1990s: Fiscal policy works when it is tried.
But the stimulus wasn’t nearly big enough to restore full employment — as I warned from the beginning. And it was set up to fade out in the second half of 2010.
So what was supposed to happen? The invisible cavalry were supposed to ride to the rescue.
I never understood why the Obama administration thought this would happen so soon; history tells us that the effects of a financial crisis on private spending are normally protracted. And sure enough, the cavalry has not arrived.
Stimulus and Full Employment
The idea we can stimulate the economy to full employment is about as silly as silly gets. Krugman wanted double the stimulus we got. Well, we got zero benefit unemployment-wise from the stimulus and in my book infinity times zero is still zero.
Yes, unemployment fell from 10.1% to 9.5% but all of that decrease, if not more than all of that decrease, was a result of a falling participation rate. The bottom line is neither the Fed increasing its balance sheet by $trillions nor a $1.4 trillion deficit did a thing to lower unemployment.
Of course the Keynesian clowns will holler things would have been worse in the absence of stimulus. Really?! Would banks be lending more? Would small businesses be hiring?
Full Employment Made Easy
Krugman wants full employment. I suppose the government could easily employ everyone who does not have a job. Then again, didn’t we effectively do just that?
Here is a snip from "Contained Depression" that suggests we did.
We are certainly in a depression. However, 40 million people on food stamps as of August 2010, masks that depression. The cost of the food stamp program is on schedule to exceed $60 billion in fiscal 2010. For comparison purposes, there was just over 11 million on food stamps in 2005.
Please note there are 14.6 million unemployed, but of them 4.5 million of them are receiving regular unemployment
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KRUGMAN: LET THE LAWYERS IN CONGRESS SPEND ANOTHER $800B
by ilene - August 30th, 2010 8:31 pm
KRUGMAN: LET THE LAWYERS IN CONGRESS SPEND ANOTHER $800B
Courtesy of The Pragmatic Capitalist
Paul Krugman was on CNBC today calling for more stimulus. He wants to give
First of all, it’s clear that Krugman is still suffering from neo-classical bewilderment. Despite the operational evidence pointing to the contrary it’s clear that Krugman still believes we are living in a gold standard world where the USA’s deficits really are funded by taxes and bond markets. Unfortunately for Mr. Krugman, we now live in a non-convertible fiat monetatry system where the USA is the monopoly supplier of currency. Nonetheless, he still seems to make the connection that we can afford to spend even though it’s obviously not for the correct reasons.
Second, Mr. Krugman has no qualms about giving Congress the last call on where this money gets spent. This is astonishingly naive in my opinion. The efficiency of the original stimulus package was low to say the least and the latest CBO figures show that the impacts on the economy have been enough to keep us afloat, but far from enough to solve the actual problems. What we have here is a balance sheet recession due to a debt bubble and implosion. So, what we need is balance sheet repair. We don’t need more solutions that merely kick the can down the road. We don’t need to stimulate loan growth or to stimulate the banking sector. We don’t need to prop up the housing sector or to stimulate auto sales. If we’re going to let Congress pass a stimulus bill we should put money in the pockets of the people who need it. If we’re going to spend money on these plans we should actually target the problems as opposed to letting Congress chop up $800B so they can send 75% of it towards programs that will not even resolve the problem.
Mr. Krugman appears to be towing the political party line here by saying that tax cuts won’t help resolve the problem. As usual, he’s letting his politics get in the way of his thinking. I absolutely do not think…
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The Dark Side of Deficits
by ilene - August 28th, 2010 6:30 pm
The Dark Side of Deficits
Courtesy of John Mauldin at Thoughts from the Frontline
Secular Bull and Bear Markets
It’s Not the (Stupid) Economy
The Consequences of a Credit Crisis
The Dark Side of Deficits
LA, Europe, Kansas City, and Houston
In the pre-crisis days, I used to write about things like P/E ratios, secular bull and bear markets, valuations, and all of the things we used to think about in the Old Normal. But what about those topics as we begin our trip through the New Normal? It’s time to reconvene class and think through what might change and what will remain the same. I think this will be a fun read – and let me tip my hand. I come out on the side of a new secular bull that gets us back to trend – but not just yet. The New Normal has to have its turn first. (Note: this will print out longer than usual, as there are a lot of charts.)
And speaking of first, I once again need some help from readers. I will be in "jail" next week for the Muscular Dystrophy Society. I need you to help bail me out. You can go to https://www.joinmda.org/downtowndallas2010/johnm and make a donation to help kids and families who really need help in these difficult times, and also help sponsor research that will eventually cure this disease. If you follow the link, you can see a cute video – and then make your donation!
I thank you and I am sure Jerry’s kids thank you too!
Secular Bull and Bear Markets
Market analysts (of which I am a minor variety) talk all the time about secular bull and bear cycles. I argued in this column in 2002 (and later in Bull’s Eye Investing) that most market analysts use the wrong metric for analyzing bull and bear cycles.
(For the record, even though I am talking about the US
"Cycles" are defined as events that repeat in a sequence. For there to be a cycle, some condition or situation must recur over a period of time. We are able to observe a wide variety of cycles in our lives: patterns in the weather, the moon, radio waves, etc.…
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Chris Whalen Calls for Reforms, But Gives Crony Capitalism and the Neo-Liberals a Rewrite
by ilene - July 13th, 2010 2:24 pm
"ALL THE GREAT THINGS ARE SIMPLE, AND MANY CAN BE EXPRESSED IN A SINGLE WORD: FREEDOM, JUSTICE, HONOR, DUTY, MERCY, HOPE." WINSTON CHURCHILL
Chris Whalen Calls for Reforms, But Gives Crony Capitalism and the Neo-Liberals a Rewrite
Courtesy of JESSE’S CAFÉ AMÉRICAIN
I enjoy Chris Whalen of the Institutional Risk Analyst. His outlook and perspective are generally well-informed and well to the point, fresh and practical.
In his most recent essay titled Building a New American Political Economy, excerpted below, he spends quite a few words in taking Paul Krugman and the stimulus crowd to task, or more accurately, out to the woodshed for what we used to call a ‘proper thrashing.’
I like his conclusion, which strikes a similar chord to the tag line which I have been promoting since 2002.
"The Banks must be restrained, and the financial system reformed, with balance restored to the economy, before there can be any sustained recovery."
There must be a fundamental restructuring of the US economy, a reconsideration of globalization and its scope and impact on domestic policy, and a significant reform of the role of the financial system before there can be any sustained recovery.
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The housing bubble was not only noticeable well in advance of its collapse, but it was predictable in my view, because of what Greenspan’s policies had been coupled with the fiscal irresponsibility of the government.
What I do not like, at all, is the revisionism that imputes the problems facing the US today to ‘the Keynesians,’ seemingly alone.
Deficits Don’t Matter, Until They Do
Who was it who proved, according to Dick Cheney, that ‘deficits don’t matter?’ Not some wild eyed liberal, but Ronald Reagan. And if Reagan was a Keynesian, then Tim Geithner is Leonardo da Vinci.
The greatest deficit growth in the US came from a belief that cutting taxes for the wealthy, without cutting spending, and even increasing spending by enormous amounts on military projects, even in peacetime, in the pursuit of empire and the New American Century, was viable because this would stimulate growth from the top down, trickle down as it were, and negate the deficits.
It was from the anti-government Republicans and faux Democrat elites like Bill Clinton and his economic advisor Robert Rubin, and the billionaire boys club’s think tanks, that the ‘efficient markets hypothesis’…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
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