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How To Start An Economic Recovery

Econophile's picture





 

From The Daily Capitalist

Regular readers of The Daily Capitalist know I think we are headed for a decline in economic growth in 2010 and that the data is starting to show this.

Why isn't our economy recovering? I ask that question often and have written about it many times. Perhaps a better question is: what needs to happen in order to make our economy grow? I offer some solutions.

There are many problems seen as hindering recovery. Here are the common ones I wish to examine:

  1. Too much debt encumbering consumers;
  2. The lack of consumer demand to fuel growth;
  3. Too much debt encumbering banks; and
  4. The government's interference in the economy.

There are a host of other issues that are also important but let me focus on these points and show what can be done to fuel a recovery.

Numbers 1 and 2 (debt/demand) are related.

Our economy is consumer driven and we are reminded over and over again that consumer consumption is 70% of our economy. To put this in perspective, for Germany it is about 57% of GDP.

Our economy is built on consumption which is fine as long as it is supported by real savings, productivity growth, and wage growth. The data reveal that most of the consumption binge of the boom phase of this current cycle was financed directly or indirectly by debt related to rising home values. Personal savings declined to almost zero. Now savings are back up to 4%.

Here is why this is seen as a problem for recovery: PCE will decline as consumers pay down debt and increase savings. Spending drives the economy and the economy will decline.

Is this really a problem?

Saving is a process necessary for a recovery. Consumers are acting rationally to uncertainty and they will give us the signal when they are ready to spend again. About $10 trillion in household net worth was wiped out during the bust. Until consumers see unemployment decrease, wages go up, and their debt go down, they aren't going to spend anyway.

But savings is never bad for an economy. Economists often fail to look at the other side of savings which is an increase in capital necessary to fuel future growth. In a normal cycle, increased savings reduces interest rates, which sends a signal to producers of capital goods that consumers don't want to buy consumer goods right now, and that there is opportunity for them to increase production of durable goods such as machines, homes, and basic equipment. They use the loan funds to pay workers who will spend which, as this capital works its way through the economy, will create new and real economic activity.

While manufacturers have been increasing production in response to normal business cycle activity (inventory recovery; weak dollar advantages), they are just utilizing current capacity. If they wanted to expand, unless they are a large company with access to money center capital, they now report they are having trouble getting a bank loan.

What does this mean? It means they can't expand and hire new workers whose spending will take up the slack from consumers who save. The government and the Fed have confused our ability to make economic decisions because they are artificially lowering interest rates.

What can we do to fix this? Savings is the fix. There is nothing that should be done to prevent this from occurring. In the longer term it will prepare the economy for new growth. See No. 4 for why flogging a dead horse is harmful to recovery.

The question is: why can't we get loans?

Number 3 is that banks have too many bad loans and, as a result, have too little capital.

The Fed and the Administration's economic advisers are very concerned that banks aren't lending. On Monday, Chairman Bernanke in a speech said that getting credit to America's small businesses was crucial to a recovery because they hire half the workers in America and create 60% of new jobs. After he went through his reasons for the credit crunch he came to this startling conclusion:

Though we believe that our and others' efforts are making a difference, we also know more must be done, and that additional effective action requires hearing firsthand from knowledgeable people who can speak from diverse perspectives about the challenges facing small businesses. The insights we obtained from small business owners, lenders, and others in this series of meetings have given us a more nuanced understanding of the problem and will help us identify areas where we might be able to do more. Not surprisingly, these meetings confirmed that facilitating small business financing is not a simple or straightforward matter.

Let me translate this for you: nothing we've done has worked and we don't have any ideas how to make it work.

I have explained in great detail why banks aren't lending in previous articles (e.g., Will We Have Inflation, Deflation, or Hyperinflation?). That is, they made a ton of bad loans as the result of cheap Fed money which created fake wealth in the form of a housing boom. Most of the troubling loans encumbering regional and local banks are for commercial real estate and it is tying up their balance sheets. They are afraid to extend credit to middle America because they know their CRE loans will need to be written down as real estate prices continue to decline and they will need to come up with more capital to satisfy regulatory requirements. Also, it is apparent that when banks do wish to lend, they aren't finding quality borrowers to whom they would like to extend credit.

What can we do to fix this? This one is easy.

Until those bad CRE loans are written down, written off, banks liquidated, banks raise more Tier 1 capital, they will continue to be reluctant to lend and the credit crunch will continue. The government's programs of extend and pretend, delay and pray, mark-to-make-believe, only serve to delay the healing process. Meanwhile valuable capital is locked up in failing or failed banks and the economy can't get credit (unless you have access to the big money center banks or the Fed's discount window). Do away with these policies, get rid of failed or failing banks, let the economy heal itself, and credit will return.

I urge you to read my above mentioned article on the inflation-deflation debate which goes into great detail on this topic.

That gets us to point 4, the government's interference in the economy.

Artificially stimulating spending is counter-productive to a recovery since such economic activity is not based on organic, market based consumer demand. In other words, since the spending is not being generated by increased business activity caused by consumer demand, no lasting economic activity is produced. Once the stimulus spending stop, the effect goes away and the economy resumes its decline. This is what is happening now. It makes no economic sense to encourage consumers to take on more debt after they have just suffered the results of the biggest debt binge in history.

Today Mrs. Romer, Chief Shaman of the Obama Administration's Council of Economic Advisors, reported that such stimulus spending is working, that it has achieved a Keynesian multiplier of 3:1, that is, for every dollar spent by the government, three dollars of private economic activity. Further they claim that they have saved or created three million jobs. They also claim that they increased GDP by between 2.7% and 3.2%. The only problem with this report is that it is wrong, misleading, and, how shall I say it, politically motivated. Another way to say it is that they are lying to make the Administration look good.

While Keynesians, such as Paul Krugman, argue for more government spending, there is no believable evidence that this is working now, that more spending will work, or that it has ever worked in the past. It's a fake science.

If government could create economic growth by either printing money or taking your money and spending on government-favored projects, then we'd all be gloriously rich. Of course Japan is the poster child of the failure of Keynesian economics. Professor Krugman told them they ought to spend more too. They did and the results were debt and stagnation.

Here is what Mrs. Romer and her staff are doing. They skew the numbers so that they represent the most favorable result under their faith-based assumptions, and then they claim that the results are caused by government spending. This is a logical fallacy known as post hoc, ergo propter hoc, or, because B event followed A event, then A caused B. I looked on Recovery.gov and they claim there that they have "funded" 682,370 jobs as of March 31. Is Mrs. Romer saying they added another 2.3 million jobs since March?

These Keynesian seem to equate private sector jobs with government jobs. A "job" in the economic sense isn't just paying someone to do something. A private employer will hire a person only if he sees market opportunities that will make him more money. If he hires someone just to be nice, and there isn't enough revenue to support the wages of this employee, he could go broke. His payments would be considered to be charity.

The government has never created a job, if you define a job as wages based on market productivity. If you define a job as the payments by the government to do something, it isn't work based on market forces. It's like welfare.

Now before you jump on me, I will admit that some government workers who maintain the commercial infrastructure, such as our roads, water and power systems, and enforce laws that support private property, personal safety, and commerce (commercial, tort, and criminal natural law--I know this is a big topic but ignore it for this discussion), then you could argue that it is a productive activity. Any job they do could most likely be done by private industry better and more cost effective, but ... we are saddled with what we have.

There is only one thing that the government can do to create jobs: get out of the way of businesses and entrepreneurs who create them.

As I have argued, the only result of government stimulus will be a stagnating economy saddled with a large government debt. The greater the government's percentage of GDP, the less productive will be the private sector (the Rahn Curve). The less productive the private sector is, the fewer jobs they will create.

Let me suggest my fixes for the economy:

  1. Stop all government stimulus programs immediately. They are a waste, create no lasting benefit, and result only in a burden on present and future taxpayers and are a drag on the economy.


  2. Encourage savings rather than consumption. Immediately repeal taxes on interest and dividend income. Allow all citizens to put an unlimited amount of savings into tax free vehicles like IRAs. Tax them only on the cash removed from the vehicle. (I would opt for a different tax structure entirely, but, let's work within the system for now).


  3. End all federal programs that encourage consumption, such as Cash for [Your industry here] and home buyer tax credits or subsidies. End Fannie, Freddie, Ginnie, and the FHA, and the myriad of other government backed loan guarantee programs.


  4. Let banks fail. Require banks to mark-to-market the assets securing their loans, and raise more capital or go out of business. Establish a program similar to the Resolution Trust Corporation (RTC) to quickly dispose of the assets of failed banks. Substantially raise leverage requirements for banks.


  5. End or suspend tax policies that require borrowers to incur phantom income as a result of real estate debt relief.


  6. Immediately raise the Federal Funds rate to stabilize money supply. We are in great danger of creating another boom-bust cycle, actually I think we are headed for a bust-bust (lose-lose) cycle of stagflation.


  7. Pass legislation that would prevent the government from bailing out private institutions. There is no such thing as too big to fail. It is a myth created out of the Great Panic of 2008, when Paulson and Bernanke panicked. We are now suffering the consequences whereby the bailed out institutions are still taking risks yet we are saddled with the cost of these programs. Let Citi or Morgan Stanley or AIG go down and there will be fewer gamblers in the future ("moral hazard"). Don't believe the propaganda that we can't do without them. They confuse Wall Street with the economy.


  8. Immediately cut all government spending 20% across the board, including the military. This should just be the start.


  9. Repeal Obama Care as soon as possible before an entitlement mentality sets in.


  10. Reform the Medicare structure by getting rid of the government as the manager of the system and give the elderly a voucher to spend on private health insurance.


  11. Reform Social Security by capping benefits now, push retirement ages out further, allow private option investment by young taxpayers, and prevent Congress from spending FICA payments.


Do these things, even just points 1 through 6, and I guarantee you that we will see an expanding economy and rising employment. If you want economic stagnation, high taxes, and a further rise in big government, stick with Obama, the Democrats and the Republicans. We know what we need to do.

 


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Thu, 07/15/2010 - 14:54 | Link to Comment organicfarmer
organicfarmer's picture

12. Enforce or rewrite anti-trust regulation! Break up the monopolies in every facet of the economy.

Thu, 07/15/2010 - 14:48 | Link to Comment kaiserhoff
kaiserhoff's picture

In short, restore free markets, and the rightful primacy of the private sector over the succubus sector.  Agreed, but much easier said than done.  I think there is broad agreement among the noncommunists about what needs to be done, but how?

Government is out of control at all levels, federal, state, and local, but one stat shows what we are up against.  The AVERAGE federal employee gets $100,000 in wages and benefits!  How do we bring that number down to something sane?  Starving the beast, the author's number 8, is hopeful but doubtful.  Either we are in for 15-20 years of low grade civil war between the public and private sector, or we need a sudden and complete reset of costs and benefits in this country.  Absent that, we are near the end of the road to serfdome.  godhelpus

Thu, 07/15/2010 - 14:20 | Link to Comment ejmoosa
ejmoosa's picture

"There are many problems seen as hindering recovery. Here are the common ones I wish to examine:

  1. Too much debt encumbering consumers;
  2. The lack of consumer demand to fuel growth;
  3. Too much debt encumbering banks; and
  4. The government's interference in the economy."

 

All those suggestions and not one about returning profitability to entrepreneurs and businesses.

Exactly how many of you would be trading stocks if there was a declining potential for profits day after day?

You think businesses are any different?

And the Financial Reforms being passed today---how much of a bite out of profits will they take?

Thu, 07/15/2010 - 14:10 | Link to Comment Porkbellytrader
Porkbellytrader's picture

Outstanding read...if we do not do these things are ourselves soon the bond market is going to do it for us.

Thu, 07/15/2010 - 12:52 | Link to Comment brodix
brodix's picture

We need to reconsider the concept of a debt based currency. Three hundred years ago it was a good idea because there were no economic measures to determine how much the money supply needed to grow and debt tends to grow in proportion to production. The problem is that production has to grow to pay off the debt and debt has to grow to finance production. The result is that every resource must be exploited as rapidly as possible to maintain production and a class of super-rentiers is established that must continually find ever more ways to invest their store of notational wealth. The result is this economic cyclone destroying human civilization and the environment it needs to exist.

 This first occured to me in trying to figure out how Volcker cured inflation by raising interest rates. Inflation results from loose monetary policies, but higher rates reduce the demand for capital, while rewarding those with a surplus. So how did they bring supply in line with demand by penalizing demand? Obviously by having the Treasury run up the deficit at the same time. The difference between the Fed selling debt it is holding and the Treasury issuing new debt is that while both draw down surplus capital, by paying off those with a surplus of capital, the Fed just retires it, while the Treasury spends it back in ways the private sector wouldn't, from infrastructure to the military to welfare. All of which encourage increased private sector spending and investment, even though some of it isn't very productive in the long run. This increase in the private sector further absorbs excess capital, which also brings inflation down.

 Of course, it is not politically viable to observe that large excesses of wealth are not economically useful, since those with it control whatever sectors of the economy and political structure they need to perpetuate it.

 It would be easy enough to develop a viable budgeting process for the government. Simply break the bills into their constituent line items and have every legislator assign a percentage value to each one. Then put them back together in order of preference and have the president draw the line at what would be funded. Since the narrow range of items that would be close to the line would have far more people paying for them, than receiving the benefits, the political impulse to gratify voters would be much reduced. This is what actual budgeting is, drawing up one's priorities and deciding what can be afforded. The problem is that it would eliminate all that government debt that is the alter ego of saved wealth.

What caused the mortgage crisis wasn't the deadbeats taking out more loans than they could afford, but the need to find ways to invest savings, whether of actual rich people, or enormous pension plans. The same is true for derivatives as well. It isn't about providing benevolently liquidity, but finding way to create it, in order to create the illusion of ever more wealth.

 Thinking that wealth can be maintained by simply loaning promises to people and governments which will never be able to keep them is a joke. Money is drawing rights to productivity and we need to develop a production based currency, not a debt based one. 

 A market needs a medium of exchange and whomever controls that medium controls the market. Do we really want this medium to be a private business, or do we want it to be a public utility, like a road system? There are various public functions, like courts, police, military etc, which no sane person with any knowledge of history would like to see run as private enterprise. I suspect we will eventually find that banking and control of the money is a public function. Just as we have layers of government, from the local, to the national, a public banking system would be equally divided, so that the profits from managing a public currency would flow back into the communities and levels of the economy which generate that wealth in the first place and not have it drained off, either into large banks in NYC, or big government in Washington. In this way, such things as retirement plans, education spending, roads, etc. would be paid for locally and there wouldn't be as much need for an enormous national government.

Thu, 07/15/2010 - 12:37 | Link to Comment Cammy Le Flage
Cammy Le Flage's picture

Our economy is based on fallacy.  Until reality and truth resurfaces it will suck for the many and be great for those that profit off of fallacy which is a few.  I wish someone would start a financial blog like the Onion.  Issue one:

1.  Goldman Sachs executives admit to massive fraud in the system and turn selves in without indictment.

2.  Federal Reserve votes to dissolve itself - realizes the jig is up and all members turn selves in without indictment.

3.  Dick Cheney dead.  Family admits he has been dead for years and the one that recently died is a clone.

4. Pentagon disappears from view - was an illusion the whole time - who knew?

5. Free and renewable energy in existence and available for thousands of years - hid from view by power elites but now available to all.

6. All country borders dissolved.  Passports no longer needed.

7.  Weapons mysteriously no longer work at all.  Impossible to hurt others - freak of nature?

8.  Money worthless (see above).

Any suggestions?  Maybe I will start the damn thing myself.

 

 

Thu, 07/15/2010 - 12:34 | Link to Comment CookieMonster
CookieMonster's picture

LET THE BIG BANKS FAIL, FREE UP CAPITAL TO ALLOW BUSINESSES TO HIRE PRODUCTIVE TAXPAYERS, GIVE THE BANKERS UNEMPLOYMENT BENEFITS OF $300/WEEK AND TELL THEM TO "GET A JOB"!!!

Thu, 07/15/2010 - 12:18 | Link to Comment OldTrooper
OldTrooper's picture

Fine policy suggestions.  Run these 11 points through congress (and the rest of the vultures) and you'd end up with about 30,000 pages of 'law' that did nothing but transfer the last of our wealth, health and freedom to Wall Street.

I'm sorry, but there is no way this gov't can do this.  They don't have it in em.

Maybe if we got a new batch of people it would help, maybe not.  There will need to be heads on pikes, figuratively, for anything to change this gov't.  Let's hope that literal heads on pikes is never needed.

Another option would be for the gov't to just start repealing laws.  They could start with the most recent and work their way back.  I figure that we'd have a recovery in all sectors about  the time they got back to 1930.  For even more robust growth they could keep going until they got to 1910.

It would be hard for them to fuck up "(Name of Law) is hereby repealed."  But if anyone could fuck it up it would be these ass-clowns.

Thu, 07/15/2010 - 12:12 | Link to Comment stpioc
stpioc's picture

The most amusing piece of Voodoo economics for a long time. Congrats.

There are so many points I could argue (which would be a waste of time since you are clearly a believer) but just a few comments:

1) Govt. always bad, markets always good. Why not abolish the govt. altogether? Go to failed states to see the result.

2) We need more savings, they would automatically lead to more investments. Are you aware that Say's law (which is what you are arguing there) has long been defunct?

Even if not, explain why companies would invest more when capacity utilization is already very low, when end demand is not there, when interest rates are rock bottom? If companies are not investing under these circumstances, how likely is it they will start to invest when interest rates rise and demand will be even lower (which are the consequences of what you argue?) Could it not be that it's credit demand, rather than supply, which is the real problem?

3) Public demand is no real demand?
["Artificially stimulating spending is counter-productive to a recovery since such economic activity is not based on organic, market based consumer demand."]

Really? What is "organic, market based consumer demand" and how does it differ from the demand for, say, publicly provided education (which bears very large long-term returns, apart from having numerous external benefits)? In what sense is the consumer demand exerted by those teacher salaries not "organic, market based consumer demand"? And would such demand not constitute the multiplier effect you so deride (without a single shred of evidence, apart from baselessly arguing is hasn't worked, but they you would have to show what would have happened without it..)

I could go on and on, but realize it's a waste of time.

Fri, 07/16/2010 - 02:09 | Link to Comment Econophile
Econophile's picture

Thanks for the comment, stpioc:

1. Yes, unless they adhere to The Constitution, which we don't.

2. Says law has to do with demand (production of a good in a society that produces goods, creates demand). How is that defunct? Sounds good to me. But what does that have to do with my point?

3. Well, my point was that the private market can do things better and education is a prime example. It's not a rant against education, but the failure of public education.

4. Market based demand is based on market dynamics of supply and demand and government doesn't and can't do that.

5. Teacher spending or any government spending comes from taxes and thus you are just redistributing cash from taxpayer to government employee. Yes, it is spending, but since it's not earnings derived from an ongoing profit based business, once the money dries up, the effect ceases. The fact teachers keep getting paid is probably built into the system and a teacher's spending is probably the same as my spending, but stimulus is just a redistribution of wealth. There is a problem when govt spending exceeds 20-25% and then it's a drag on the economy.

6. None of this stimulus works, never has, and Keynes is voodoo economics.

Thanks for reading.

Fri, 07/16/2010 - 07:31 | Link to Comment luigi
luigi's picture

Referring to education, it is my firm opinion that a certain minimum level should be granted to everyone and this cannot be accomplished by the private sector alone.

Failure of public education occurs when there is no political will to make public work properly: i guess scandinavian fellows would argue against your point with very valid arguments.

To your point 4 I guess that Hallyburton, Mc Donnel Douglas and many more would have something to say...

To your point 5 I may point out that government emplyee do buy goods at Wal-Mart, McDonalds and so on, which are so far private, thus redistributing cash from public sector to taxpayers. In the event of recession where the private sector languish and no private demand can support economy, the spending of a public employee is still better than nothing. Of course, in order to do that, as a State you should have a cumulated surplus, or, at least a sustainable financial background to allow yourself some deficit spending. This is a point Keynes made very clear, unless you take monetarism and the Chicago boys with their helicopters are keynesian, which they are not in my very humble opinion.

To your point 6, it looks a little to strongly assertive to me, but you are entitled to your opinion. In the present case there is also the possibility that the stimulus didn't work because it went in the wrong direction inflating bonuses and further financial bubbles instead of demand in real world market. It isn't for nothing that Keynes recommended that stimuli should reach the parts of population with higer propension to consume, i.e. the now extinguishing "middle class". In the reduction to absurd of his reasoning, he wanted people to be paid to dig holes in the street for other people to be paid in order to fill them again because these were the kind of people more likely to spend the most of their wages thus stimuling a demand driven recovery, he didn't advocate big managers to be paid in order to fill new bubbles for other managers to make them pop: hope you get the difference. Keynes theories are just tools as much as a any other economical theory is, it is up to the policy maker to stick (or better say to lean) to one or to another at any given time. I concur with you that with given deficit levels, it was maybe not the best thing to do to drive the printers red hot, but the worst in this decision was to my understanding that the cash was pumped in the TBTF instead of letting them go. The cash had be better spent in sustain the payment of mortages for the people struggling in doing so avoiding to give cash to the banks which would not use this for lendings in the "real world" and eventually find themselves with both cash AND the RE while more and more people go camping in the outskirts, thus demand goes backward and the better part of the population gets poorer.

Regards

Thu, 07/15/2010 - 12:33 | Link to Comment OldTrooper
OldTrooper's picture

That's got to be the dumbest post I've ever seen on this forum, maybe the whole internet.  We're all more stupid for having read it.

Do you work for the Fed?  Are you a Fed economist, with a PHD?

You are a waste of time.  Too bad this will show up underneath your post - so innocent people will not be warned to avoid this drivel  - and the subsequent mind-numbing effects.

What exactly are the 'long-term returns' and 'numerous external benefits' of having a huge number of high school graduates that can't read a newspaper and whose math is limited to how many grams in an ounce and how many ounces in a quarter-pound (but can't even get a cashier job because they can't make change)?

Thu, 07/15/2010 - 12:47 | Link to Comment stpioc
stpioc's picture

Sorry, forgot this:

["There is a strong consensus among economists that formal education is an important determinant of individual earnings as well as economic growth. The importance of formal education has been magnified by recent economic trends underlying U.S. labor market demand for skilled workers. The following is a review of the importance of education to both the individuals acquiring education and of the benefits received by society resulting from increased educational attainment."]
http://www.house.gov/jec/educ.htm

Your "argument" seems to be that education (in the US) has produced bad results, citing people with limited math and all that..

My question: How would the results be without education? Better or worse..

That should be a difficult one.. :)

Thu, 07/15/2010 - 13:21 | Link to Comment OldTrooper
OldTrooper's picture

Just because the gov't schools did such an obviously fine and thorough job of indoctrinating you does not mean that is the only way to become educated.

Your assumption that without gov't schools we would have no education at all is preposterous.

Thu, 07/15/2010 - 14:06 | Link to Comment stpioc
stpioc's picture

Apart from the fact that I didn't make that assumption..

Ah, because I disagree with you, I must have been indoctrinated. Beats arguing with someone. It's what the communists used to do, then they send people who disagreed with them to re-education camps..

Thu, 07/15/2010 - 17:34 | Link to Comment OldTrooper
OldTrooper's picture

Apart from the fact that I didn't make that assumption..

You're right.  I should have said 'assertion' or 'implication'.  Either way it is still preposterous.

I said 'indoctrinated' not because we disagree, but because you seem to have a misplaced faith in the state's ability to plan (or control if you like) the economy - such faith, even when maintained in the face of contrary evidence, is in my experience often the result of indoctrination.

Thu, 07/15/2010 - 12:41 | Link to Comment stpioc
stpioc's picture

If I am a waste of time then why respond?

So, according to you, education serves no purpose, has no return? Or has it only a return if it's private education? Enlighten us.

Couldn't detect another argument, which is typical of a 'true believer' who can't argue with facts and arguments and instead starts name calling (I know, in your circles it's bad to work for the Fed or have a PhD in economics..)

Explain to me: if business isn't investing when they have large capacity underutilization, facing weak end demand, and even in the face of record low interest rates (like now), how are they suddenly going to invest if end demand is even lower (because "savings is good", according to The Daily Capitalist) and facing higher interest rates?

Have you guys ever heard of balance sheet recessions? Deflationary debt spirals?
Here's a primer:
http://shareholdersunite.com/2010/07/04/keynesianism-zerohedge/

Thu, 07/15/2010 - 13:11 | Link to Comment OldTrooper
OldTrooper's picture

I respond out of charity - because even someone as obviously mal-educated, misinformed and reality-challenged as you should have a chance to experience a moment of clarity (not that I think you will).

The answers you seek are contained in the writings of Mises and Hayek.

Or you could, as I suspect you will, continue to rely on the theories you studied in your youth (theories that have yet to produce the end they claim to strive for) and religously keep faith with central planned economies (whose main claim to fame is hundreds of millions of dead).

Thu, 07/15/2010 - 14:04 | Link to Comment stpioc
stpioc's picture

Thanks for the charity.

Again I see no arguments, just name calling.

Yes I've read Hayek, I'm even on record that his 1945 article about the role of knowledge in society is the most important economic publication of the 20th century.

But I'm not a socialist, let alone a believer in planned economies. How you could ever deduct that from the two comments I wrote is, well, only you can answer that.

Could it be because you think that everyone who disagrees with your divine (uhh, Austrian, sorry) truth must necessarily be a socialist in favour of a planned economy?

I'm every bit as much a free-marketeer as you are, minus the blind faith in them and an open eye for instances in which they fail. Ever heard of information asymmetries? These lay at the heart of the crisis:
http://shareholdersunite.com/2009/03/30/government-captured-by-big-finance/
http://seekingalpha.com/article/96766-it-s-time-to-break-the-bubble-cycle

I just laugh at people who respond to argued criticism by referring to some canonical work (even being too lazy to spell it out). You know, that's EXACTLY what they used to do in the old Soviet Union..

Turns out the socialist is not me, you've mastered their methods, including the name calling for heretics..

Thu, 07/15/2010 - 19:03 | Link to Comment OldTrooper
OldTrooper's picture

Explain to me: if business isn't investing when they have large capacity underutilization, facing weak end demand, and even in the face of record low interest rates (like now), how are they suddenly going to invest if end demand is even lower (because "savings is good", according to The Daily Capitalist) and facing higher interest rates?

Against my better judgment I will give you the benefit of the doubt (you do claim to be a free-marketeer and claim to have read some Hayek) and reply, though if you are familiar with the Austrians you already know the answer.

They won't.  And there is no way to make them.

People and business will start spending and investing when the mal-investments of the last cycle are handled - and not even the Fed can make them do it before that point is reached.  Your information asymmetries are amplified during this period and people know this.  The situation is unpredictable and people tend not spend much on unpredictable things in unpredictable times.  Go figure.

So far, in our current situation, the central planner's response has been:  1.  Prop up the mal-investments they helped create and keep them from being dealt with, and  2.  Greatly impede predictability with arbitrary actions, new legislation (some, like health care, taking effect years from now) and huge deficits funded by newly created dollars.

If anyone expects significant spending/investment in this kind of environment they are a moron.

But if you are familiar with the Austrian school, or had any common sense, you already knew this and would have understood that the original article proposed ways to clear out mal-investments and restore predictability.

Thu, 07/15/2010 - 12:09 | Link to Comment Ripped Chunk
Ripped Chunk's picture

Many good points. Thanks to everyone that participates.

2 problems

The Fed and the big banks. They have to go.

Too much government intervention. Government is too big.

If these 2 things are fixed, everything else will fix itself.

Thu, 07/15/2010 - 12:06 | Link to Comment keating
keating's picture

I like it. I really like it. I hope the Repubs are listening to you, and if they get the chance, put these programs in place.

Thu, 07/15/2010 - 12:18 | Link to Comment DrLamer
DrLamer's picture

1. Stop total oil idolatry (Oil called "Whore of Babylon" in Revelation).

2. Stop total computer idolatry.

3. Admit :"Yes, I am stupido Americano. I have been listening to false prophets for decades. I was arrogant. I prayed to oil and to "magic" computers. Now I see they are not gods, just stupid and dirty tools.".

That is enough for salvation of the economy and the country.

The rest will be done by The Chief Lawyer.

... otherwise you will have 30+years of economic Asphyxia... and 100 meters flood.

 

Thu, 07/15/2010 - 12:03 | Link to Comment anony
anony's picture

What a wasted effort on your part.  So much erudition, common sense, and relatively simple measures to turn things around, and yet you knew beforehand that your prescriptions would never be administered, never considered let alone implemented, and likely thrown in the trash.

Feel like Sisyphus?

 

 

Thu, 07/15/2010 - 11:46 | Link to Comment Alfred E. Newman
Alfred E. Newman's picture

WHEN THE MACHINCE SHOPS ARE MAKING MACHINES FOR PEOPLE TO MAKE PRODUCTS FOR PEOPLE THEN AND ONLY THEN WILL AMERICA BE BACK.

 

America can't recover just consulting to each other. 

Until then were just wasting time....

 

I agree this is one of the best posting this year. 

 

regards

Alfred

 

Thu, 07/15/2010 - 11:32 | Link to Comment Muir
Muir's picture

How To Start An Economic Recovery

 

1. Renegotiate all Federal / State pensions

2. Reduce military spending by 60% (bring troops from both Iraq/Afghanistan home) make a deal with China on Taiwan and N. Korea, end military support of Israel)

3. Retirement age 70

4. Progressive tax starting at 250K 39% to 10M @ 60% (until National debt is eliminated)

5. Massive (massive) renewable energy Federal programs (not based on Spain's flawed model)

 

__

Yeap, that will do it.

Thu, 07/15/2010 - 11:57 | Link to Comment luigi
luigi's picture

Your avatar keeps deconcentrating me... what were you saing again? Ah! Whatever... agreed as long as the avatar keeps bouncing! :D

Thu, 07/15/2010 - 11:29 | Link to Comment augmister
augmister's picture

Thank you for providing America with a cure for her economic malaise.  Unfortunately, she is deaf and blind and about to go into cardiac arrest.  Long live the late great USA!

Thu, 07/15/2010 - 11:28 | Link to Comment DrLamer
DrLamer's picture

No. Nop. Nein. Nyet.

Thu, 07/15/2010 - 11:23 | Link to Comment DosZap
DosZap's picture

If we simply got rid of USELESS Gov't bureaucracies, (like the DOE),and so many more that are USELESS eaters, SS/Medicare, etc, would be easy to control.............these are long term items.

Government agencies are a daily, ongoing WORMHOLE, sucking the life from US.

Anyone have a link to the site for what Gov't Agencies cost US per year?.

The cost of our Federal  Government (60% of the employed), producing not a frigging thing), along with the cost of the Agencies that support them, has got to be MONUMENTALLY HUGE.

Thu, 07/15/2010 - 11:37 | Link to Comment downrodeo
downrodeo's picture

This has totals for federal spending, it doesn't list by agency unfortunately

 

http://usdebtclock.org/

 

Thu, 07/15/2010 - 11:21 | Link to Comment wyosteven
wyosteven's picture

Many of the authors points indicate there is absolutely no accurate price discovery.  This tells me that the way money is counted needs attention (beyond mark to market).

How about closing tax loopholes for offshore corporations?

Why did law enforcement and criminal prosecutions for criminals not make it on your list?

Love your blog.

Thu, 07/15/2010 - 09:56 | Link to Comment downrodeo
downrodeo's picture

The problem is, things are too ingrained at this point. I think that entitlement mentality is already very comfortably at home in the minds of the masses. The system works very well for itself and it doesn't really care to make drastic changes. Nobody in a position to make any of these changes would ever realistically do that. I would almost say you would have to dismantle the federal government in order to be able to realistically implement your (excellent) suggestions. Actually, I will say that. We need to dismantle the federal government before any of these items can be implemented. For now, I'll send this action list to my Representatives and Senators. Thanks for the article.

Thu, 07/15/2010 - 10:58 | Link to Comment Gwynplaine (not verified)
Thu, 07/15/2010 - 09:49 | Link to Comment mathdock
mathdock's picture

Two words crossed my mind while reading this article:  Archimedean leverage.  In the first case it was while reading about the consumer/employee, and in the second it was about the government policies that "stoke the fires", by the use of up-front debt, whether by Laffer or Keynes.

1.  In both cases, there must be a place to put the fulcrum to lean against and do (monetary) work.  For the consumer, that place was/is the FICO score, and lacking that, cash-on-hand.  Since FICO has moved, so to speak, too far away from a very large percentage of the potential population of borrowers, it falls to the cash-on-hand consumers to leverage its value through the purchase of distressed assets.  That takes a lack of fear, or equivalently, large confidence in one's current level of power. 

In the case of government, neither Laffer nor Keynes can work unless the derived liquidity goes exclusively to productive citizens with great ideas.  the author's ideas about infrastructure are spot-on, as those tasks must be done to either remove friction or to provide a place for the fulcrum of productive capitalists.  To this point, it seems 85% of the up-front debt has been filling holes of nonproductive (zero-sum, risk-transfer) capitalists.

 

Thu, 07/15/2010 - 09:28 | Link to Comment Grand Supercycle
Grand Supercycle's picture

 

As warned about for some time, EURUSD daily chart is bullish . . .

http://stockmarket618.wordpress.com/about

Thu, 07/15/2010 - 09:22 | Link to Comment luigi
luigi's picture

Excellent article: in my opinion, howewer, it goes quite off track in the last part when it comes to driving conclusions.

The "act of faith" that private sector would do almost all a public sector can do more cost effective and more efficiently lacks evidence. It may be true when looking at the "production cost" of a given service, but i contend this to be true in terms of final price paid by the citizen: as an example, if you compare medical care spending of public european systems vs US private one related to percentage of population taken care of, this should be quite evident.

Living in Europe it's beyond me to understand how points 9, 10 and somewhat 11 can follow from the previous reasoning. These are exactly the few areas where I would see justified for the State to spend in a period where unemployment rises and wages go down.

A further point is more of a somewhat "filosofical" nature: do we really need the economy to "recover"? I mean: i think "growth" doesn't necessairly equal "recover", why should productivity further increase when there is no market to absorb products and equipment are utilized well under their potential? Shouldn't it be more a matter of redistribution of wealth? Why is the idea of having reached a "steady state" so terryfing? Societies lived for centuries in a steady state economy...

In this context it should be a priority to fund little and medium enterprises to avoid big concentrations of TBTF-eat-it-all-monsters. The FED should use its Berniecopter to spread credit across those little and medium sized enterprises via little banks instead of inflating the Wall Street tick via TBTF credit zombies.

Thu, 07/15/2010 - 08:47 | Link to Comment dcb
dcb's picture

we were screwed once we decided not to nationalize the banks and allow the market place to allow them to recapitialize. we therefore had to pretend they were profitable using every policy tool we had and we had to distort the market. worse by pretending (mark to mysth) the banks put 40% of profits ino the bonus pool an don't recapitialize, so no reason to lend. why should I lend if the government is going to make sure I get my bonus while the economy starves.

No idiot (except the fed, and ur government) lest undercapitialized banks avoid write offs and lets 40% of profits go out the window as bonus money. there shouldn't be bonus money until write offs are over and done with. this is what we lost by going with the market. I use the term market as a joke because there are no real market forces allowed to work on the stock market anymore in our economy. so the real economy fails because it is a real market, and the rigged ponzi stock/bank market thrives. Look it is like communism. the bankers are the favored goonies so they are supported by the state and not allowed to face what should be market forces. they are even being protected as shareholder rights get stricken down. we have a joke of a democracy and and economic system.

Thu, 07/15/2010 - 08:46 | Link to Comment eludog
eludog's picture

Agreed on all points.  What the author does not mention though is if 1-6 took place, there would be somewhat of a global reset of asset prices that would be very painful over the short run.  I'm all for taking the pain right now instead of adding to it, which we are doing every day.  But once we take the pain, the global economy is going to be off to the races.

Thu, 07/15/2010 - 08:35 | Link to Comment dcb
dcb's picture

I will go over the article later, but there are very simple reasons we aren't having a recovery

the first and most important is the very people who got us into the crisis and didn't see it around the corner are still in charge.

 

This means that they are very conflcited. for instance if you were a screw up and still in charge you want to maintain your states. therefore you aren't going to expose yourself as an idiot.

 

the second reason is that the policy response allowed can only happen with bank approval. which means any policy can always be gotten around (mortgage reductions). The owners of the country care little about the recovery if they get their bonus and stay out of jail.

there are of course others like the influence of lobby money, but that fits in my second comment.

for a quick example. Bernanke wants small business lending. but he is against regulation of credit card rates. If I am a big bank the best thing for me to do is avoid giving you a loan forcing you to use your higher interest credit card. The idiot is so stupid, or he  is just a pawn of the banks. I would like to think no chair of the fed could be so stupid, hence he is just an evil owned F...ck

they came out against letting judges alter mortgages. this would have had a big impact just like credit card rates and would not involve money printing with a broken transmission mechanism. But it doesn't max bank profits.

Look when the big banks make profits trading starving the economy keeps rates low and allws higher almost risk free trading profits. since the federal reserve is a pawn of the banks they of course do nothing.

It is only those with very little brains who don't understand the real enemy is our own government, the fed, and the big banks. americans are at economic war with them and we have lost and not even known we were fighting.

Thu, 07/15/2010 - 08:35 | Link to Comment dcb
dcb's picture

I will go over the article later, but there are very simple reasons we aren't having a recovery

the first and most important is the very people who got us into the crisis and didn't see it around the corner are still in charge.

 

This means that they are very conflcited. for instance if you were a screw up and still in charge you want to maintain your states. therefore you aren't going to expose yourself as an idiot.

 

the second reason is that the policy response allowed can only happen with bank approval. which means any policy can always be gotten around (mortgage reductions). The owners of the country care little about the recovery if they get their bonus and stay out of jail.

there are of course others like the influence of lobby money, but that fits in my second comment.

for a quick example. Bernanke wants small business lending. but he is against regulation of credit card rates. If I am a big bank the best thing for me to do is avoid giving you a loan forcing you to use your higher interest credit card. The idiot is so stupid, or he  is just a pawn of the banks. I would like to think no chair of the fed could be so stupid, hence he is just an evil owned F...ck

they came out against letting judges alter mortgages. this would have had a big impact just like credit card rates and would not involve money printing with a broken transmission mechanism. But it doesn't max bank profits.

Look when the big banks make profits trading starving the economy keeps rates low and allws higher almost risk free trading profits. since the federal reserve is a pawn of the banks they of course do nothing.

It is only those with very little brains who don't understand the real enemy is our own government, the fed, and the big banks. americans are at economic war with them and we have lost and not even known we were fighting.

Thu, 07/15/2010 - 05:46 | Link to Comment Privatus
Privatus's picture

Superb suggestions. They won't be taken up, of course, as that would involve the state relinquishing significant power voluntarily. But the bond market will ultimate accomplish the same salubrious effects by collapsing, leading to the bankruptcy of the federal government, which will go bankrupt two ways: gradually and then suddenly.

Thu, 07/15/2010 - 02:54 | Link to Comment Eric Cartman
Eric Cartman's picture

WOW! AMAZING. One of the best articles I've read this year.I'm saving this and I'm gonna send it to my friends (except Kyle).

Thu, 07/15/2010 - 02:17 | Link to Comment Tic tock
Tic tock's picture

It looks as if you are suggesting measures which would balance the load on the Treasury. While that is part of the solution, there are still bound to be a number of non-govertnment markets where the Private corporations can continue to de-risk at the expense of economic growth.

Besides, the Treasury is responsible for funding the government, directly or fractionally. It is careless to consider that a nation with the imputed wealth of the US requires such draconian amputation of policy support. More likely is that the dollar itself is a flawed medium, begging the question: what are the resources which may be held or deployed from the Treasury- and how is this a separate account from taxes and wealth held by (other) citizens? 

Thu, 07/15/2010 - 02:51 | Link to Comment Eric Cartman
Eric Cartman's picture

Jesus fucking christ people! Let it go! Yes gold is good, yes having some gold bullion in your secret hiding spot is smart as it is and always has been the only real money to exist. BUT we can't be like Bush, we can't be stuck in our ways so much that we believe the only way for the economy to be fixed is through 100% Austrian based theories. We have to give a little... Not alot... just a little in order to negotiate or develop an economic plan that is not only feasible but practica. Ideas like the author of this piece suggest that will actually get this country back on the right path. 

So with all due respect (to most of you, but not all of you), please don't just flood the comments sections with stupid shit like "buy more gold!" or "got gold." I think the author makes a lot of very good points and clearly he's the fox, not the hedgehog! 

A Fox puts together diverse sources of information (and most of the above I think we can agree with) to arrive at the best possible decision. While a HedgeHog believes one macro viewpoint is correct and all the Hedgehog does is try to explain everything through that single minded viewpoint. 

Let's try to be a little more like the Fox. Learn a little about a lot of things and not let ourselves get married to gold and just assume it is the best and only possible solution to the worlds problems. 

Seriously guys, buy you're gold - it is smart. Don't trust government because they don't deserve our trust but until we can find some sort of general consensus, we're all going to be on here, pissed off and arguing. 

Fuck guys, I'm 8. I just want a better life one day.

Thu, 07/15/2010 - 11:27 | Link to Comment AR
AR's picture

This post raises good points and is a good debate. Thanks to everyone. After 30 years in this business, never, ever marry thyself to thinking that one singular methodology or strategy is the "end-all." It is not. More posts like these above are healthy. Hats off to everyone participating. Just keep them civil and professional (not personal).

And to Eric's comment here (his point is well taken):  "...Let's try to be a little more like the Fox. Learn a little about a lot of things and not let ourselves get married to gold and just assume it is the best and only possible solution to the worlds problems..." 

Good luck everyone.

Thu, 07/15/2010 - 08:55 | Link to Comment Apostate
Apostate's picture

...Bush was an Austrian?

That's news to me.

I mean, really? Do you even know who Murray Rothbard was?

Fri, 07/16/2010 - 13:24 | Link to Comment Eric Cartman
Eric Cartman's picture

Apostate, No Bush was not an Austrian. I was writing fast and forgot to separate the two points. When I said we can't be like Bush, I meant we can't be thick headed, narrow minded jerkoffs. In other words, lets NOT be like fox news.

Thu, 07/15/2010 - 11:36 | Link to Comment bookwurm
bookwurm's picture

so was Schicklgruber...

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