This page has been archived and commenting is disabled.
Guest Post: Fire & Ice: Current Economic Policy Prescriptions, and Why They Fail
Submitted by Gonzalo Lira
Fire & Ice: Current Economic Policy Prescriptions, and Why They Fail
Some say the world will end in fire,
Some say in ice.
From what I’ve tasted of desire
I hold with those who favor fire.
But if I had to perish twice,
I think I know enough of hate
To say that for destruction ice
Is also great
And would suffice.
—Robert Frost, Fire and Ice, 1920.
Current global macro-economic policy is veering between two strategies: Fiscal austerity, or fiscal spending.
The first camp—fiscal austerity—argues that governments should cut spending, and perhaps even raise certain taxes, so long as those taxes do not harm general economic productivity. The rationale is, the sovereign debt has to be reduced now, as one day, there will be no more buyers for all the debt that’s being floated by countries. When that day comes, the countries will be broke—and broke countries often go up in revolutionary flames.
The second camp—fiscal spending—argues that cutting back and/or raising taxes in the middle of a slowdown is the sure path to macroeconomic suicide. To their way of thinking, the economic slowdown means lower aggregate demand. So the advocates of fiscal spending argue that to cut spending now would further depress aggregate demand—which would further slow down the economy, turning the situation into a vicious cycle: The dreaded Deflationary Death Spiral Freeze-Out. Therefore, to quote Cheney: Fuck the deficit. Rather than tighten its belt, the government should step in and spend more, so as to maintain the level of aggregate demand in the economy, until such time as it is once again back on its feet and able to expand without fiscal stimulus.
The fiscal austerity crowd counter that adding more spending to an already over-spent state will just exacerbate the problem of fiscal over-indebtedness. Indeed, to their way of thinking, adding more debt to the problem will only hasten and make inevitable a final day of reckoning.
The fiscal spenders don’t really have a counter-argument to this. Indeed, some of the more foolish members of the fiscal spenders’ camp argue that, with more spending, the economy will rev up to such a point that it will magically grow its way out of debt—but that’s just stupid; a mirror image of the Laffer Curve nonsense.
It’s not all that surprising, once you realize it: Certain hard-core neo-Keynesians (who argue for even more fiscal spending), and the Reaganaut Supply Siders of the Big Eighties (who argued for even more tax cuts for the rich), really are just twins separated at birth—really stupid twins, who probably should have been smothered in the crib. Both hard-core Neo-Keynesians and Reaganaut Supply Siders basically argue that the greater the fiscal shortfall, the greater the private sector stimulus which will result, said private sector stimulus being the engine which will in time rev up the economy and make up for the fiscal shortfall—an obvious fallacy for anyone who knows basic math.
The more honest members of the fiscal spending camp know this—they know that deficit stimulus will not result in such growth that it will wipe away the deficit through increased tax receipts. But they are also convinced that only government spending will keep the economy from that dreaded deflationary stall. So they hem and haw and equivocate, while all the while seeming to imply—with a weird little twitch—that over time, so as to service that monster debt, the state will simply have to devalue the currency, and thereby give U.S. Treasury bondholders a de facto haircut.
Currency devaluation—or specifically, dollar devaluation—has a lot of obvious benefits in a potentially deflationary crisis. The problem, however, is that it can’t be done by diktat. Roosevelt did it in March of ’33 when he confiscated gold and then repegged the dollar—but that was then, when the dollar was in fact pegged to gold. Since Nixon and the end of Bretton Woods, modern currencies float on nothing but air. So if currency devaluation is to happen, then it can only be done through “controlled” inflation (as if such a thing were possible).
In the fiscal spenders’ playbook—though it is never spelled out—this is the way by which the debt will magically disappear: “Controlled inflation” or “de fact devaluation” or whatever other term is invented for it, will force debt-holders to take the brunt of the shaft, while avoiding the deflationary death spiral. Or so the fiscal spending camp would seem to be implying, but carefully never stating: Krugman et al. are constantly arguing in favor of massive fiscal spending—fueled obviously by massive fiscal debt—but they never bother to give any reasonable alternative explanation as to how the monster fiscal debt will be serviced, aside from leaving the door discretely open for this posited stealth currency devaluation-slash-“controlled” inflation.
Some might argue that devaluation or “controlled inflation” or whatever it’s called is not at all the exit strategy of the fiscal spenders’ camp—after all, they haven’t said that it is. But I would argue that, if the total nominal fiscal debt crosses some as-yet indeterminate ratio of debt-to-GDP—say for the sake of argument two times the GDP—then would there possibly be any other way to service the debt, save by inflation or currency devaluation?
The fiscal austerity camp sees this too—and they give the big middle-finger to a de facto currency devaluation. Because just as the Neo-Keynesians are terrified of a deflationary stall, the fiscal austerity crowd are terrified of asset value destruction.
The fiscal austerity camp freely admits that austerity measures will cut government spending and indeed lead to a slowdown—but they claim it’s necessary to “clean out the dead wood”, or arguments to that effect. They insist that any enforced or triggered slowdown won’t be a self-perpetuating deflationary black hole. The reason, they argue, is because eventually, once overhanging inventory is wiped out either through write-offs or price cuts or just regular old consumption, the economy will reach an inflection point: There will be no overhang left to consume—the economy will have to start producing again, which will naturally lead to the end of any deflationary downward spiral, and an upturn in the economic fortunes of America.
To this scenario, however, the fiscal spenders camp asks the obvious question: How long will this process take? A year? Or a decade? Or maybe two? But we’ve got people hurtin’ now. So once again—fuck the deficit . . .
. . . and so off they go again, both camps arguing endlessly as they spin off into space like a top built out of PowerPoint presentations, PDF papers with more footnotes than arguments, and mathematical equations from all those cool and useless models that sure as hell did not see this mess coming.
These aren’t academic questions here: Both policy approaches are being tried out—fiscal spending on a world-historic scale in the United States, fiscal austerity for-real in the UK, and in-name-only in the Eurozone.
My sense is, both policy approaches will fail, because both are ignoring the elephant in the room—the real culprit responsible for the hole we’re in.
To understand the real culprit, let’s look first at the priorities of both policy camps:
The fiscal spending camp are basically Neo-Keynesian, “saltwater” economists; ‘cause they’re on the coasts. They consider the maintenance of aggregate demand as the primary goal of macroeconomic policy. More demand means more production, which means more jobs, which means more demand—voilà: A virtuous Neo-Keynesian cycle. (They are so into their vicious and virtuous cycles that they remind me of Tasmanian Devils.)
The fiscal austerity camp, on the other hand, are basically Monetarists, with a few Austrians thrown in for flavoring—so-called “sweetwater” economists; ‘cause they’re in Chicago and Middle America. This camp considers the stability of asset prices in real terms to be necessary for the sound running of the economy: Asset price stability means more investment, means more jobs, means more savings, means more assets, means more investment—and so on.
The two camps view it as “normal” for both aggregate demand and asset levels to continuously and predictably (on a macroeconomic level) accrete. When demand and/or assets plateau (or let alone fall), one or the other camp gets into a tizzy—which makes perfect sense: Each camp views either aggregate demand (for the Neo-Keynesian “saltwater” economists) or asset levels (for the “freshwater” austerity camp) as the cornerstone of economic activity, and therefore of economic prosperity. Whatever damages that economic cornerstone is exactly what ought to be avoided—just as whatever benefits that cornerstone is precisely the thing which ought to be implemented or encouraged.
They might as well just print up placards, and go march on either end of Wall Street: “What’s Good For Aggregate Demand is Good For America!!!” on one side, “What’s Good for Asset Levels is Good For America!!!” on the other.
Neither policy prescription is inherently evil—or even inherently wrong. Both policy prescriptions are simply trying to bring back the good ol’ days—when everyone had a multi-million dollar McMansion-slash-ATM, and everyone drove the latest 3-ton urban assault vehicles to go pick up little Junior and little Missy at the private daycare center and soccer practice. In essence, both approaches are seeking a status quo ante.
Neither camp, however, realizes that what they both want is impossible—not because they are contradictory or mutually exclusive: But because the aggregate demand increases and the asset level increases we have experienced over the past 30 years or so were artificial and illusory. Both the massive aggregate demand increases over the last 27 years, and the massive asset level increases over the last 27 years, were both caused by the same culprit: Subsidized money.
Not cheap money—subsidized money.
The prosperity in the U.S. over the last 27 years has not been earned. Those asset levels and aggregate demand levels that formed the basis of the prosperity of the last quarter century were both founded upon now-unpayable debt. That massive debt happened because debt was cheap—because the Federal Reserve, that bastion of free-enterprise, effectively subsidized the cost of money and made the debt cheap.
Rather than let the market determine the cost of money—just as with any other commodity—the Fed basically carried out a Marxist-Leninist top-down policy towards money (How ironic, considering Greenspan’s love of Ayn Rand). This money subsidy kept both economic camps happy—because subsidized money goosed both aggregate demand and asset levels. But subsidized money led to the massive distortions which, over time, crested and broke, causing the near-existential crisis of capitalism we are living through today.
The current crisis was caused by subsidized money. Period.
This shouldn’t be controversial—this is Eccy 101: The price of something is the intersection of supply and demand. If a price is subsidized, then demand will ramp up, often to an unsustainable level if it is an essential good. In every single economy where the price of something essential has been subsidized—be it food, fuel, housing—the result has been messy to the point of disastruous. Why should it be any different when you subsidize money?
The Fed artificially fixed the price of money—indeed, this policy was called The Great Moderation. The rationale for this money subsidy was an intellectually bankrupt hodge-podge ideology of Keynesian “pump-priming”, coupled with Monetarist “inflation fighting” bullshit. But then Greenspan, Bernanke, and all the rest of those self-important yahoos were never nearly as clever as they thought they were: That’s why they were all so surprised at the distortional effects of this subsidy, when the chickens came home to roost in September of ’08. That surprise was genuine—they didn’t have a fucking clue what they did wrong: And they still don’t.
Let’s take the distortional effects on asset levels first.
People today moan the fact that investors are constantly chasing returns, leading to serial asset bubbles. But let’s look at the obvious: If the Fed had not subsidized money, then plain vanilla FDIC-insured savings would have been getting decent returns (≥5%). Ten-year Treasuries would have been at average yields of 6% to 8%. We would not have had the asset inflation we’ve experienced since ’83. We would likely not had the fiscal deficits we’ve experienced, either—it would have been much too expensive for the U.S. Federal Government to service those deficits.
Asset inflation really started in ’73, with the first oil shock—but it was part of an across-the-board inflation spike, which was finally brought to heel by Volcker in ’82–’83. Asset inflation as an exclusive phenomenon took off in ’83, then really picked up speed after the ’86 “tax reform”, until the 2007/2008 top.
Subsidized money courtesy of the Fed—coupled with the perverse capital gains tax cut of ’86, which effectively abetted speculators—led to asset inflation on a scale not seen since the Tulipmania. I don’t think this needs much defense—the evidence is all around.
The principal effect of this subsidized-money-and-low-capital-gains-tax-leading-to-asset-inflation phenomenon was that it became more worthwhile to trade than to produce. Since all asset prices were rising, and on top of that the tax code was benefitting asset traders over income producers, it created the perverse financial incentive to outsource American industries.
This is what wreaked the American middle classes. Massive outsourcing, and the loss of manufacturing jobs it produced, wasn’t a case of “economic efficiencies” at work. Nor was it “globalization” at work either. Rather, this was the case of subsidized money wreaking American industries by making it more lucrative to trade away a company than to improve it. With the whole economy chasing returns, it was cheaper to “outsource” manufacturing to “cheaper” countries, since the Fed’s subsidized money, coupled with the lowered capital gains tax, made it more worthwhile to play roulette than to build a doo-dad.
This was on the asset side of the equation. But the Fed’s subsidized money policy (if anyone ever again calls it “cheap money” I swear to God I’m gonna get one of my gold bricks and bash someone’s head in, I swear to God!), also had tremendously distortional effects on aggregate demand.
Again, the obvious: Every consumer got cheap credit. So everyone went out and bought stuff with that cheap credit. Hence aggregate demand continued to rise inexorably—hence the Neo-Keynesians felt satisfaction that there was more demand (the engine of their economic ideology, don’t forget), even as they tut-tutted middle-class stagnation and “jobless recoveries”, and other weird distortions in the economy. Some people tried explaining this middle-class stagnation—of course they failed. They produced papers vaguely talking about globalization and improved efficiencies, but the explanations sounded as bogus as XVI century doctors blaming “the vapors” for a lethal case of pneumonia.
The reason for middle-class stagnation, of course, as well as the stratification of American society, is that the wealthy became traders, and traded away the middle-class jobs so as to benefit from the capital gains tax breaks. The middle-classes didn’t complain much—they were getting offers for new credit cards every week in the mailbox, with which they went out and shopped, shopped, shopped ’til they dropped.
Which they did: The middle-classes are in much worse shape than the macroeconomic numbers show. (This piece is a depressing case in point.)
The subsidized money which the Fed provided made both economic camps happy: It was the financial steroid that provided rapid asset level increases, while bulking up aggregate demand.
The only cost, of course, was that the subsidized money provided by the Fed hollowed out the American economy.
Now, as both policy camps try coming up with a solution to return to the good ol’ days of the status quo ante, it is increasingly and depressingly clear that the status quo ante won’t be coming back any time soon—because the days of status quo ante were all a lie.
So what to do?
If I were absolute dictator of the United States, I would ignore both of these policy “choices”. Instead, for the sake of the long term health of the American economy, and the other world economies intimately connected to it, this is what I would do:
- Allow interest rates to float at the whim of supply and demand. The Fed would provide liquidity, but only at market rates, never subsidized.
- Impose a flat tax across the board of 15% for individuals earning any income over the minimum wage, 25% for corporations, a 20% national VAT, and impose a capital gains tax of 40%, with no loopholes, subsidies, tax breaks or tax write-offs—not even amortization or depreciation.
- Cut government spending to the bare bones, until the budget is balanced. Cut military spending to 10% of what it is today.
- Eliminate Social Security and Medicare/Medicaid, and impose a private but highly regulated pension and health care system, like the ones here in Chile (which are damned good, BTW, and which were also, unsurprisingly, imposed by a dictator—but are still going strong 20 years after he left).
- Cut the Fed’s life-support of the Too Big To Fail banking system, and let those zombies die already. Whie we’re at it, prosecute the banksters.
- Finally—and this is the tough part—let the economy crash: Let the asset prices collapse to sustainable levels, and let aggregate demand collapse to sustainable levels.
If the above measures were imposed, and the U.S. economy were allowed to crash quickly, harshly, unemployment as measured by U-6 would spike to 50% or 60%, and hang around 35% for a good six months before slowly settling to 20% in a year or so—which is where we are now. Half the S&P and all the Too Big To Fail banks would go broke. Imports would evaporate. The idea of America as a consumer society would be gone almost overnight. There’d also be riots and general civil unrest for a year or two, but nothing that terrible—Americans are a remarkably docile people.
What would happen after that? What would the U.S. get for this short-term pain and suffering?
The two thing needed for true long-term prosperity, from where the U.S. economy is today: Asset price levels would collapse. And aggregate demand levels would also collapse.
It would mean that trading—in whatever assets—would cease to be financially beneficial, and instead production would reassert itself as the form of social wealth creation.
It would also mean that mindlessly consuming would also cease to be a macroeconomically beneficial policy priority, much less a personal goal. It might even lead to a truly Green economic mentality—true conservation, as opposed to the pseudo-brand, where buying more and more “green” stuff is supposed to be “helping the environment”, when of course it isn’t.
These measures would all be very painful—adaptation always is. But this approach—what I would call Free Market Redux—would be the healthiest way to rebuild the U.S. economy, and frankly American society.
Of course, no one’s ever going to let me be dictator of the United States. And no one is going to so much as contemplate the need to take the hits that I propose. I’m sure many clever readers are smirking at my “foolish measures”, dismissing them, while they take seriously the two policy prescriptions—fiscal spending versus fiscal austerity—which I outlined above. Both will continue slugging it out, while they both ignore the causes—or rather, the cause—of what brought us here.
Right now, in the U.S., there really is no debate: Fiscal spending on a world-historic scale is taking place. Fuck the deficit indeed.
But don’t be fooled—the deficit is being handled.
While world-historic fiscal spending is going on, a scam which I’d call Surreptitious Monetization is also taking place.
Like all good scams, Surreptitious Monetization is basically simple: The U.S. Treasury is issuing debt, in order to raise the cash to finance this world-historic fiscal spending. The Big Six banks, the Too Big To Fail banks, are dutifully buying up every scrap of Treasury paper . . . while through the backdoor, the Federal Reserve Board is providing liquidity to the banks, precisely so as to buy up this Treasury paper. In the details, it’s insanely complicated, of course—deceptions live or die on how opaque the details of the scam. But in its basic shape, that’s what’s going on: Surreptitious Monetization.
The Big Six banks are dutifully carrying out the game plan, while making themselves rich in the bargain, by way of massive bonuses. A lot of commentators have wondered why the U.S. authorities aren’t cracking down on the banksters bonuses—these commentators don’t seem to realize that the “bonuses” are in essence pay-offs from the Fed and the Treasury to the banksters, to keep them doing what they’re doing: They are effectively colluding with the authorities in their efforts to monetize the national debt.
It’s why there hasn’t been deflation—the Federal Reserve has been pumping cash out into the economy, halting price deflation in its tracks. (BTW, it’s also why the Fed is terrified to open its books to outside scrutiny.) Though there ought to be deflation, there won’t be deflation. Helicopter Ben will be true to his moniker.
Through Surreptitious Monetization, the U.S. economy is being kept afloat—but how will it end? Will the Fed close its windows, bringing about the much-feared Deflationary Ice Age? Or will the Fed continue printing money, until a hyperinflationary firestorm burns us all to a crisp?
At the start of this piece, I quoted Frost’s Fire and Ice in its entirety, drawing the analogy between these two policy camps and the lines of verse. I actually never cared for the poem. It’s always sounded to me like an over-serious limerick—I keep half-expecting to hear the word “Nantucket” crop up in the middle of it. But be that as it may, most readers basically take Frost to mean that he does not know how things will end—it might end in fire, or it might end in ice. But regardless of how it will happen, Frost suggests that it will indeed end—because everything ends, regardless of the manner.
Similarly, I have no idea if we will end in the revolutionary-hyperinflationary fire so feared by the austerity camp, or in the icy freeze-out of a deflationary death spiral as per the fiscal spenders camp.
All I know is how we got here—subsidized money. And all that I am certain of is that our current system will indeed end—one way or the other.
»
- 9626 reads
- Printer-friendly version
- Send to friend
- advertisements -
Until Stockmarkets are allowed to freefall and the proper values of assets,deficits and debt are allowed to establish themselves we are all pissing in the wind.You can,t fix anything until you know the true extent of the problems ......................................
The author has conveniently ignored the reason for as what he calls "subsidized" money -- as long as the USD is the reserve currency and the other commodity poor global participants are willing to go along (to keep picking up pennies in the form of exports) and the commodity rich countries are kept in line militarily, this easy money game can continue. This game will only stop when the other global participants feel that they are even more disadvantaged by continuation of the current exchange regime.
Until then, we can enjoy our "subsidized" money.
You have a really good point on the reserve status of the dollar. People in all parts of the world still quote and do business in us dollars instead of their own currencies. I rmember reading somewhere that it took 74 years for people to accept the zipper instead of buttons and almost 40 years for men to prefer a safety razor to a straight edge razor. It may take a lot longer for people to give up their dollars. I think the reserve currency game can go on a lot longer than some people are predicting.
Agreed
With (unlimited) fiat dollars, the US essentially “owns” the world’s oil,
at least for as long as oil-rich nations are obliged to sell with dollars.
Conveniently for that arrangement, Iraq, Iran, and Venezuela have been “discouraged” from abandoning the petrodollar. The Mideast sheikhdoms have little choice except to rely on the US military for protection.
Serendipity or an extortion racket?
The fiat dollar thereby becomes less “fiat” in nature, as it is oil backed (instead of gold backed).
Dollar reserve status is most directly and immediately tied to the functioning of the US military, not the US economy. That said, the capability of the global Pentagon is currently tied to functioning of the US economy and the latter’s global emoluments.
To maintain the arrangement, the US would have to:
a) prevent oil-rich nations from selling outside the petrodollar
b) prevent (contain and encircle) other nations (China) from purchasing outside the petrodollar or acquiring independent access to resources
c) establish a global military monopoly to indefinitely maintain the dollar monopoly
US leadership may be expected to:
a) have little desire to reduce global dependency on petroleum
b) denigrate and ignore environmental damage from petroleum use,
especially by the world’s biggest all-round polluter and user of petroleum, the global military enterprise.
c) outsource military arrangements globally to insure policing can be done at minimal political cost by unempathetic mercenary and non-native forces.
Is it too much to believe US leadership avoids geo-strategic planning, that the Wolfowitz and Brzezinski types are irrelevant, as are the hordes of Pentagon planners, and it is instead all about turbaned fanatics who hate our occupation forces for no reason, coupled with “misguided” monetary policies?
I quickly become bored with papers like these which attempt to utilize elementary fundamental analysis while failing to consider much larger macro events at play. Spending vs austerity? Come on, what is this, American Idol for the financially aware?
There is a much deeper game being played that deals with significantly more interesting components. First & foremost is demographics - not race, not really income, but history, experience & desire. Consider who/what constitutes an optimal employee - someone who is capable, eager & willing to work. Now, expand that concept so that it incorporates an entire nation, with bankers being substituted for employers.
Using this model, we can see that GB was initially targeted & developed during the early 1800s to maximize investment holdings. As a middle-class arose, however, expectations regarding wages, worker safety, hours, conditions, benefits, etc soon became much too much of a headache for their "employers".
The first off-shoring target was really just the USA - we took up the slack, following the same exact patterns (development stages). Like the British, however, we too have reached the end of the line of our usefulness in terms of maximizing possible returns from the investor class. As a result, China is the new darling, exhibiting all the trademarks of new, young eager beaver employees.
As to what happens to the husk of the former industrial powers, well, that's what the FIRE economy is all about. As real incomes diminish, serfs are fed the ability to substitute debt for wealth. Even better, rather than maintain a 1:1 replacement ratio (stasis), if you can utilize your captured/owned media in which to convince them to "live it up", then you can actually get them spending more than when they were actually earning an income! Sweet!
So back to this silly austerity vs spending debate. Think about from the bankers' perspective: they could hardly give a shit. They've already moved on to newer pastures. They were already made whole via TARP, Fed bailouts, etc. So, pose the question: what would you do if you really didn't care either way about the outcome? It is important to view this issue in the abstract, not as a concerned citizen, but as a vagabond. That is, someone who can set up operations where ever they please, but never fully integrate.
What would you do? The bottom line is you would be amongst the first to know that you already sucked the host dry - it's dead, it just doesn't know it (yet). So you see, the spending v austerity argument is just an illusion: neither solution works. Only collapse (after debt repudiation & default) & societal rebuilding offer any chance of redemption for the serfs.
+10
History people. This has been done repeatedly with different cycling rates. The answers lie not in the "fixing", but in the destruction of the status quo.
All actions by government are violent to the people whom abide by them. There are NO good government actions. It is only through society bereft of government that liberty can succeed.
repost, oops!
The system is set up so that it must FAIL. Every major religion has 'rules' against usury because fractional reserve banking is unstable and must fail at some point-debts cannot grow forever. Also, fiat currencies also fail again and again. Trying to tinker with the system we have is insane. It needs a sledgehammer. End The Fed.
There is one major religion that worships usury. Its headquarters is the “Inner Temple” which is located in the financial district of London. They are all Freemasons (AKA Knights Templar). It was almost destroyed by an unsuccessful “peasants revolt” in 1381. Let’s hope we have better luck over here.
http://en.wikipedia.org/wiki/Inner_Temple
The system is set up so that it must FAIL. Every major religion has 'rules' against usury because fractional reserve banking is unstable and must fail at some point-debts cannot grow forever. Also, fiat currencies also fail again and again. Trying to tinker with the system we have is insane. It needs a sledgehammer. End The Fed.
So true. We have been living in a phoney economic world for so long we dont even know that things are really worth anymore. I think you can make a good case for asset prices having a lot farther to fall.
Good article - Prophetical thinking says inflation is the end . I'll take biblical truth over economists lies any day . The inflation follows world war , preceeded by psetilence and disease. Thats the end of the system . I'd say Frost would lean to Fire and not ice .
"There’d also be riots and general civil unrest for a year or two, but nothing that terrible—Americans are a remarkably docile people."
How do you know this?
All such dicthotomies are always re-solved at a higher plane of thinking.
That is why our life is filled with trinities.
Two extremes and a balance point. Thing is, that balance point is not the middle of see-saw as we simplistically see it.
The great solutions transcend, they don't solve, re-solve, dis-solve.
What does the spend/not-spend di-chotomy look like from 50,000 feet?
Second, we always think that broad brush answers are needed to broad brush questions.
Might be another stumbling point in our seeking transcendent answers.
It's a money question, but there definitely is no answer in the money.
ORI
http://aadivaahan.wordpress.com
Robert Prechter makes a compelling case for a deflationary depression as the next phase. The basic arguement is that there is so much unpayable debt (private and government) that will have to default. Since that debt is functionally equivalent to money in our fractional reserve monetary system, the result is a massive drop in the total money supply, i.e., deflation. This also shows up in the real economy as people sell assets to pay debt, resulting in downward pressure on prices. The powers that be are starting to talk about how the "recovery" isn't really happening and to worry out loud about the possibility of deflation. Consider how much money has been poured into stimulus with so little result. When you do, Prechter's arguement that the deflationary forces are too big for ANY government effort to overcome start to make sense.
If there is a single, all-encompassing, start-to-finish theory of what is happening in the economy, culture, and world that makes logical sense (to me and some others) I agree it is Elliott Wave. While there is the issue of "timing," as with all market theories (right but early, in this case) what draws me most to Prechtor is his background, not in finance, but psychology. It has been stated here and elsewhere that the economists have failed us, part of the idea being that institutional economic curriculae as taught has been flawed for decades. If indeed that is true, then we and our economic perceptions have been deluded and rather off the mark as well, at least as chronicled by MSM and as institued by our legislators. As Prechtor implies (my take) there will be a point of recognition where perception and reality meet, social mood (psychology) will turn (as it alredy is) and things that need to be sorted out (debt) will assume a life of their own.
Tell me, O sage one, how will the national debt be resolved in your (or Prechter's) deflationary spiral? As we sag into not being able to aford anything, what happens to sovereign debt? And when that debt can't be paid, what happens to the currency? Has anyone ever gotten Prechter to answer that?
Social security, medicare/cade, public retirements, etc. will all be defaulted on before our international obligations... this is quite a bit of wiggle room. Obviously the feedback loop is going to be a doozy, but there is a chance they pull it off. At the very least, it will buy more time... that's all we can buy at this point. Certainty is too expensive.
The currency will die in due time... we'll either repudiate (my bet) or just flat out miss payments, despite our sincerest austerity efforts. But, at the current juncture, the entire world is all in on propping up the US...
The other issue is whether or not the multinationals and their principal actors care about sovereign debt... the looting is nearly complete, the wealth gap enormous... the spoils of the war already taken... deflation is where they get to enjoy the spoils. The banks will not aim to be repaid with monopoly money (that's just what they loan to us).
FRANKFURT (MarketWatch) -- U.S. stock futures rallied on Monday, buoyed by strong earnings reports from HSBC Holdings and BNP Paribas, as investors awaited manufacturing data and comments on the economy from the Federal Reserve chairman.
Futures on the Dow Jones Industrial Average jumped 100 points to 10,517. S&P 500 futures rose 12 points, or 1%, to 1,110.30 and Nasdaq 100 futures added 18.50 points to 1,880.70.
http://www.marketwatch.com/story/us-stock-futures-rally-amid-strong-bank...
The future is bright...
Everything will be fine...
Of all the "earnings" reports this season, it's stunning that folks can believe the nonsense from these banks. However, futures meltup from about 3 to 4a est has been going on for weeks. I think I will start "investing" there.
Um, dude thats the European open from 8am-9am in London. Get long Greece and Spain if you want, but....
Lots of bravado for early in the day SB. Let's see where we close today.
Gonzalo has done a great bit of analysis here... but any constructive solutions like he proposes won't happen. There's just too much at stake here.
Imagine if you were one of the millions of people who were working directly for the federal government / MIC / big banks - will you be OK to not only lose your only source of income, but also in face utter humiliation when all your power is gone, when it's apparent that your whole life you were nothing but a useless parasite and/or a mindless drone. I can't see how these people with typically huge egos would willingly come to grips with that, it's too much cognitive disonnance to endure for most except true sociopaths, who I reckon are only a small minority.
The scenarios I see are various degrees of collapse, with various degrees of violence. I sure hope the world won't experience any major wars, but looking realistically they're definitely a possibility.
That will be an issue. The bureaucrats will fight tooth and nail to keep the jobs that are paid for with money extorted from a cowed population.
Hot, or not? Fire and ice.
(tried to imbed image, but can't). Try this.
We common folk cannot post images, only contributors. We'll have to settle for providing links only. This is probably a good thing after looking at some of the chosen avatars...
I am not sure how a corporate income tax or VAT is not just simply a prepaid and invisible sales tax. Corporations don't really pay taxes but instead add them on and push them down the line. Hence, why not just a sales tax? And it's not an answer to say that states/locals would get upset, they would no doubt take their cut also. The other subtle advantage, every citizen that buys something would know the cost of their government. It wouldn't be hidden in a corporate or VAT "pass it on" tax.
Gee, you mean like the GST in Canada? Most provinces have now "harmonized" their sales tax with the GST, so you pay a combined "HST" on virtually everything (food and kids clothing are major exceptions), and it's right there on the bill - no hiding or fudging.
And, the Tory government cut the federal portion twice in the last four years, from 7% to 6% to 5% today. This is a master stroke, as it's political suicide to suggest raising the GST, and with the predicted growth in health care costs, government discretionary spending will be crowded out. When people are forced to choose between a heart operation and the bleating of the CBC, the CBC will go.
BTW, the Canadian government is forecasting a return to surpluses at the federal level next year, giving them room for tax cuts to help stave off the double dip.
OMG...adults may have to make choices and perhaps difficult ones at that. Choices that require sacrifice and planning and judgement that come with the realization that (i) they've been paying for it all along and (ii) there's no such thing as a free lunch.
oops,not so fast on the HST in B.C.
http://www.cbc.ca/canada/british-columbia/story/2010/07/29/bc-hst-flyer-cancelled.html
It's a truly draconian tax regime; how about 0% on the first $50k, 20% on the next 10K, 40% on the $10K after that, and so on - till 100% - that would force price deflation right across the board- leaving aggregate supply virtually unchanged, if not slightly improved.
As for high levels of government borrowing, stability and do-ability probably count for more than anything else right now. The big players have oceans of liquidity moving around under the cups and it get get anything done - and, spot-on, it's not worth their while to get anything done: this is three months from becoming a military operation.
Ultimately if obscene deficit spending is going to continue, then it's in Uncle Sam's interest to keep interest rates (borrowing costs) as low as possible, even if it does result in lower asset prices, no matter what the rhetoric about helicopters and QE.
Rates trending lower = stocks trending lower, maybe not last Friday, but over the past decade this correlation has been strong.
I would argue that there is already 'deflation' and the threat of a self-feeding 'cascade' effect is indeed real. When I was a kid, I remember that few people aspired to become rich in and of itself; they just wanted to be comfortable. But now, the US system is so far out of balance that you're perceived a loser if you aren't rich, so you get conned into playing a game where the already rich take your money and become yet richer.There may be more millionaires, but the result is that being a millionaire just doesn't impress anymore.
And thanks to Television (the drug of the nation) the poorly informed/educated get conned into thinking the hucksters are their best friends and mean them no far...'by running the roulette wheel, they're giving me the opportunity to get rich, what nice guys!'
Look to ze Germans und ze Canadians...mixed, balanced economies (part free market/part socially-conscious) may not be glamorous, but they're stable, which is good for the markets in the long-term.
No way in hell that the canadian and german economies won't collapse if the US collapses. Their markets are far too interwoven by a web of debt, derivatives and trade. Collapse will be global. No country left behind.
vietnam has a functioning gold based economy. they would escape the worst in my view.
It goes a little deeper than that.
Culprit: dishonesty. Going way back. 1694, at least. Usury.
Subsidized money is simply an extremely recent (and successful) measure to treat the symptoms.
I like the suggested remedies, but without the addition of a complete from the ground up reassessment and rebuilding of the monetary system, we will end up back here again, one day.
Don't waste a good crisis. Let's make sure we get a complete rebuild after this blows up.
Let's make sure we get a complete rebuild after this blows up.
This is the precise reason that now is the time I have chosen to become politically active. There is a growing case being made to blame the real crisis, when it arrives, on the free market system. The statists won last time (FDR, Hitler, Duce, Stalin). And then we blew up the freaking world. Not this time please.
You're going to get your wish, don't worry... the statists will not win this one.
Very interesting and on a topic very near and dear. Enjoyed reading the "solutions" proposed. Whether you agree or not, the real debate, and solutions tendered, have to start somewhere. I hope that this finds a much broader audience. It deserves one.
Re fire vs. ice if solutions fail (to materialize?) - why not both, back to back? Pick your order. Arguments could be made for either one.
Very much agree that subsidized money is a major, if not the major, elephant in the room. But there are other, impacting "elephants" as well. Developed world demographics comes to mind.
To which demographics are you referring?
The age breakdown of developed country populations. Most developed countries have reached their productive demographic peak.
There was either an article or comments to a prior ZH article where someone (else) made the very astute observation that countries are often like companies - they start out young and vigorous, and then mature and slow down. When you have fiscal policy that fails to take this into account, and instead is predicated on growth via debt (which needs vigorous growth not to collapse), you set yourself up for major problems, at best.
I don't really buy into this demographic peak theory thing - the west of previous centuries was a zone of many many young unproductive and unhealthy individuals where energy was expended to get them to a productive stage only for them to die off because there was no surplus or technology transfer.
Some say now there are too many pensioners in this world yet most of the younger workforce are not engaged in work that increases wealth - this is therefore obviously a canard.
To my mind the worlds problems are pretty simple and involve the flawed symbolic representation of money.
The debt fueled / credit engine monster is dependent on increased capital extraction via increased oil / gas / coal consumption to pay its future debts - what workers do is very secondary to the consumption increase although you do not want them to create more and more pig iron as this will not keep the human cogs in this great machine viable or useful as their brains are still the only mechanism for increased capital accumulation.
In the world pre 1971 there was still a system to register this capital extraction although it was a extremely flawed one given its fractional nature and political - economic dynamic.
But still America could have made a effort to curb consumption and increase capital spending on real technological energy projects and not just silicon valley fluff and increased personnel consumption.
But it decided not to do so - therefore we lost the only metric that measured capital extraction and particularly its net loss to the system.
I usually not dense, but I'm just not getting it. Is there any article on the web that you can provide a link on that goes into your concept in more depth? I have read some on EROEI (or EROI), but I'm not sure that is what you are getting at.
As for the demographic angle, I believe it does have an economic/wealth impact. Ran across this article a couple of years ago. http://cowles.econ.yale.edu/P/cd/d13b/d1380.pdf. The formulas, etc. are not my thing,but the chart on pp. 24 and 26 are pretty interesting. Have seen the same type of analysis done on Japan with similar results. http://www.financialsensearchive.com/Market/cpuplava/2008/1217.html.
I think that we both agree that the switch to a largely "service" based economy from a production-based one was not one of America's smarter moves, along with growth via debt-fueled consumption.
One of the few things that Obama has done that I largely agree with are the proposed loan guarantees for the nuclear power industry as it creates real jobs during the planning and building phase (if it ever gets through the red tape jungle), and provides a source of power and ongoing jobs for current and future generations. This is what I hoped the earlier stimulus would be targeted at - "gifts" that keep on giving, even after the money is spent. I'm sure there's a sow's ear somewhere in the purse, but given the colossal waste I view much of the prior stimulus to be, I'm thrilled that a potential political boondoggle should actually have a beneficial effect on multipe levels and timeframs - whether intended or not.
There is really no specific article I can direct you too - my concept of money is a simple one - A token of energy yet to be consumed.
Central banks and debt money systems can play games with the time energy dynamic but if they don't entertain the technology ,capital/energy creation game they are doomed to failure eventually.
Perhaps the simplest example would be a poor subsistence farmer who relies on wood for fuel - it would be best if he created a more efficient stove to burn wood.
He would first however have to come up with the invention , save a surplus so that he could acquire or build it.
This would create more surplus labour that he could decide to enjoy or create a new energy system.
If he remains static in efficiency withen a growing village the wood will eventually disappear and destroy his wealth or he could be more radical in his thoughts and create a new energy system.
As for Japan - it is a colony of the FED - if it was truly independent then American foreign policey would have to engage in more forceful games such as blockading its oil supply but it does not have too as the Japanese have no independent foreign policey.
Besides how do you think the west created the bubbles of the 90s and 00s - it siphoned off the wealth of a super efficient economy and blew bubbles from Iceland to Australia all for no net effect in productivity.
The same occurrence seems to have occurred in the European Union with Germany/France functioning as our Japan.
Thanks, I think I better understand the lense that you are using, which is different from what I have previously run across. One of the things I love about ZH - exposure to new and/or different ideas and viewpoints.
Outsourcing was not a strategic move by "America". It was a business decision by multinational corporations. See B9K9's post regarding "vagabonds". All we can do as a nation is facilitate an atmosphere for the multinationals to give us a piece of their spoils, unless of course we want to be the peons working for them (and bathing in our own shit to boot on pennies a day). [it's what is going to happen to us anyway, as labor costs conform to deflation].
In the global village you can either create wealth or steal it - but you are right - the multinationals now seem to be the beneficiaries of the spoils of war.
But if you rape and pillage every village the wealth you extract will diminish over time - we are now at or close to that point.
But that does not mean this activity will diminish indeed without leadership this process may accelerate.
That's the goal. Our leadership, including the FED, as well as our ability to lead are going to be destroyed and the extent of the spoils rubbed in our faces.
You don't need continued growth... the entities you jettison along the way (who were in debt) need growth... you just siphon profits along the way... and if taxpayers are stupid enough to try and reflate the entities, then you take them up on the offer (while continuing the siphoning if not increasing the rate).
The issue we're presented with now is exactly as you describe, where is the new wealth? There isn't... that's what globalization is... it too has a limited life cycle... but, the question we're presented with is how the hell do we have any upward mobility if the world's wealth is congregated in so few, who create barriers to entry for their upheaval? The war has been going on, in earnest, for many decades... we're just about at the end of it, being on the losing end. Upon its end, they can reveal themselves as our new owners.
The saddest part is, after how shitty our governments have been, we may end up welcoming them... (no one will stop to think that they actually put the mechanisms in place for us to hang ourselves and knew that we would as we have the discipline of two year olds).
deleted
deleted
T. Roosevelt busted the trusts. The situation today seems analagous to the Gilded Age in many ways. Let's hope that enough voters get clue and we get another Teddy sooner than later. However, like hope and investing, hope and politics have not been particularly good bedmates for some time.
No candidate fitting that bill will be allowed to be seriously voted upon... I suppose if we all write in some magical person...
Remember, who ran on a campaign of hope and change? That is who we get... not anyone that will actually do anything but remove the last guy's dick from our ass and insert his own.
some good points, a lot of nonsense, and the worst tax scheme ever. 40% capital gains ? That may be the stupidest thing I have read on zero hedge. This article belongs in Marketwatch or Yahoo finance.
I would love to see this article in Marketwatch and Yahoo, but for other reasons. Do agree re the 40% cap gains tax. But I am far from impartial in this area.
Lira's cap gain proposal would clobber much useful capital formation, and stunt real growth and opportunities. Take steps to curb the casino aspects of the markets. Ban HFT. Work to elect a Congress that will enact Brown-Kaufman and other changes that address some of the root causes and not symptions. ZH has put forth some articles with interesting ideas and solutions. But don't throw the baby out with the bath water.
Agree about the 40% cap gains.
Just a 10% flat tax on everything. No VAT. Let the gov learn to live within that. No deficit spending. Let the TBTF collapse and prosecute 'em and regulators who looked the other way.
I agree on principle that capital gains should be more heavily taxed, but one caveat, if you have 40% tax on those gains in the USA and 0% in Singapore, soon there won't be any capital gains left to be taxed in the USA.
I wasn't clear. Actually I was agreeing with SamuelMaverick that a 40% cap gains tax is bad.
0-10% is all I am for.
Here's a little nugget for ya;
http://housingstory.net/2010/07/28/the-aftermath-of-the-global-housing-bubble-chokes-the-world-banking-system/
So, basically, Americans have to learn how to live as French or Germans, with a small apartment instead of a McMansion and a small Aveo5 instead of a Hummer.
Hmmm... I think Americans will prefer destroy half world with a nuclear war, trying to get back the old status quo, than face reality.
You think Americans are the only ones with debt problems? Europe bought more derivatives than the US. Comparable sovereign debt is higher in Europe.
Debt reconciliation is impossible. Especially as the creators of debt are outside government control.
America has traditionally used war to quiet the masses. The masses are not in rebellion, they are cowed.
The question is: when banks come calling to collect on the debt, will people pay or repudiate? Will the banks have transferred enough of the debt to private bond holders to escape the probable refusal to service the debt?
I am an American, but I am NOT a United States of America American. I have never preferred war. I have never sanctioned the killing and torture of innocents. Like this government and every european power has done in their histories as well.
The rulers of all economies have no country-they only have proxies.
There is no point being frugal in a world wide debt based monetary system as your savings can only go into wages or profit - it becomes very difficult to build capital.
If German or Japanese people knew that large amounts of their savings were destroyed via the coming default of Germany's savings in the periphery of Europe or super low interest rates for the last 20 years in Japan they would not accept this crazy Friedmanite Monetary system of a free floating exchange system where the biggest boy in the room gets all the sweets while the smart guy gets punished.
In my opinion part of the problem is that many people in democracies have become lazy and greedy over the past decades. People want to get rich quickly like their political leaders and they take on debt to buy things for immediate satisfaction. We have an economic theory in thailand called sufficiency economy but we dont practice it becasue we want it all now and credit is a good way to get what we want. The lazy part is more of a western thing; people are leaving policy decision making up to "experts" and are content to focus on television and reality shows. People have to get back to working, saving, making things, valuing home and family, their culture and identity. The ruling class globably seem to be doing their best to break down the middle class, families and cultures in order to make it easier to control the people.
Don't blame lazy people. Laziness is the mover of technological progress.
It was a lazy guy who invented the wheel, to facilitate the work of pushing heavy things.
I think you should read this:
http://www.taipeitimes.com/News/world/archives/2010/02/16/2003466019
(UK think tank claims 21-hour work week is better)
Don't blame lazy people, blame an irrational economy.
In Philadelphia, Its worth 50 Bucks
how much for the gun?
Interesting thoughts, but you start off with a number of economic fallacies. First, the U.S. has a large, thriving manufacturing sector. It just isn't in Detroit or Cleveland--it's in the right-to-work states. We are also the world's largest exporter. We just also happen to be the world's biggest importer by an even grosser margin. Speaking with a little experience in that sector, however, all is not well--but it has nothing to do with the Fed. It has more to do with the EPA imposing greater and greater regulatory burdens on manufacturing, meaning that there ends up being no version of making some things that is cost-effective to do here vs. China, where the government happily dumps raw sewage and toxins into its rivers.
The second big fallacy is seeing trading as a sociopathic activity that needs to be punished with a confiscatory tax rate. It isn't. Strictly speaking, trading simply makes it much easier for producers to obtain capital, and the traders who hook up the producers the economy needs with said capital are the ones who make money. Our markets are *severely* distorted, but the answer isn't a 40% cap gains tax. The answer is simple anti-fraud legislation to require the big banks to disclose what's in their derivatives, tell clients which side of the trade they're on, end TBTF, end QE, end ZIRP, etc. It *might* be a good idea to end HFT (I am currently undecided) and for sure to end sub-pennying.
The third fallacy is the fear of income inequality. Zero never gets any bigger, and rich people tend to keep doing the things that got them rich in the first place. Now, it is true that many of the super-rich in this country got that way not through doing something economically useful, like making investments in successful companies or themselves being entrepreneurs, but did it through political patronage and having sweet hook-ups at the Fed. Again, though, the solution is not to punish success, but to end the patronage system.
Not that this will happen, of course. Only Congress can do that, and the current system is designed to enrich members of Congress and their friends.
We are also the world's largest exporter.
Wrong, chuckles. The EU is the world's largest exporter, but if you think that's cheating, then both China and Germany export more than the US. (source: CIA Factbook)
And two of the largest export sectors from the US are food and weapons. The former is hardly a testament to manufacturing prowess, and while the latter is, aren't you proud that you sell weapons of destruction to African dictators instead of, say, TV's or washing machines?
Thanks for playing.
I had just read we were the world's largest exporter...I guess what I was reading was wrong, or I misinterpreted the context. Anyway, we're still a very large exporter, and it's not just food and weapons:
Read more at Suite101: Top US Imports & Exports 2009: Civilian Aircraft and Military Equipment Lead American Export Sales http://import-export.suite101.com/article.cfm/top-us-imports--exports-2009#ixzz0vVox80kH
So much for the myth/lie that there's no American manufacturing or exporting.
I wish that articles like this would actually use an example of an Austrian thinker when bringing it up.
Austrian economics - just the idea of it - is causing cognitive dissonance among mainstream types. That's because it essentially calls for a total revolution and re-ordering of society.
It's not about cutting the budget by 17.7734% over the next 4.34 years or something. That would honestly probably solve very little. The whole society is fucked. This isn't reparable by mere pruning.
Austrians don't do graft. Austrians don't do government. Austrians don't do central banks. Solid economics-zero probability of utilization. Rothbard rocks.
Reading is hard... it's easier to pretend that it's a typical mainstream wrestling match of a debate.
It goes down to the very nature of reality and human nature.
Cheap money! Cheap Money! Cheap money!
It's debt that is subsidized.
When will the paitence of the Bond market end?
Our bankers, financial leaders, etc. are trying to make ice cubes by boiling water - good luck with that!
More brainwashing, you folks keep reading this, I will need someone to sell to. Soon you won't be able to take it and will buy into the market. By then I will be ready to sell.
Keep feeding your mind doom and gloom, don't go near the market yet.
+1.4T
One severely unaddressed notion is the future role of Corporations in America (World). No doubt, the very legislation that helarded TARP, FINREG, Stimulus I, two wars, unemployment benefits, etc. has been lobbied for and written by the Fortune 100, et al.
A Corporation may be an artifical person in the eys of the law, but a Corporation is NOT a Citizen. As an example, on the present course, Obamacare and its mandate for every person to purchase a private insurance contract from an opac indusrty exempt from anti-trust laws simply creates a private transfer of wealth to these Corporate super-Citizens. All the current economic fixes do exactly the same thing. Next up, Blackwater/Xe will be funded by Congress directly in order to privately police the streets of your fair city after the local cops are furloughed. Where does it stop?
The real battle is not the economy, its Corporates verses Citizens. The "economy" is simply the manifestation of this disproportional and insidious relationship.
Look over the horizon at your children's future. Will it be better than yours under the current way of doing things?
The clear endgame here is for the US gov't to fully nationalize the Federal Reserve System. They cannot create inflation by issuing more debt, it is that simple, no matter how much "quantitative easing" you throw out at it, printing money outright or haircutting the principle are the only solutions.
What will the next generation Fed (FRSV.4) look like? Who knows.
What is Lira talking about? "Let the economy crash" - nonsense. If you had a real devastating crash or SHTF event, then all bets are off regarding any reform or tax proposals. We would all be looking at a 1993 Russian scenario with no way of predicting what type of government that would emerge.
I did like the Frost quote though.
Good read, although, I can’t see how the author’s solutions lead directly to the proposed results. Nonetheless, I agree with the “it’s all been a big lie” concept. The challenge for us all now is not to get it back, but, to recognize that it never really was.
I also agree that subsidized money was the primary engine for it all. I once sat down and figured out just how much of the money I borrowed in my lifetime I actually paid off with my earnings. It was a surprisingly low percentage. Had it not been for asset appreciation driven by all the borrowing going on, I never would have succeeded in paying it all off. It still amazes me that people who find it almost impossible to save anything are perfectly comfortable borrowing 1-5 times their annual salary to buy almost anything.
Yep, but most people won't ever be able to pay off the debt........