Imagine a football coach who hasn’t caught onto the game’s complexities and continues to run the same play - call it a fullback dive - over and over. When we read calls for more monetary stimulus, we feel as though we're listening to that coach’s brethren in the economist community. These economists argue that the Fed should simply ramp the money supply higher and higher for as long as some economic statistic - GDP is a popular one - remains below a targeted outcome. Dive, dive, dive, punt and repeat. There’s an important difference between football and economics, though. One-dimensional approaches are quickly exposed in football, whereas economies don’t yield clear and timely verdicts on whether policies are effective. There are far too many moving parts to prove cause and effect in a way that everyone can understand and agree. Therefore, bad economic policies persist for a long time before they’re finally found out, and this may be the best way to describe the last 100 years or so of America’s economic history.
Someone once wrote that criticizing economist and New York Times columnist Paul Krugman and his "vulgar Keynesianism" is the internet’s favorite pastime. All along, the Princeton prof has stayed true to the cause of aggressive government action to forestall the downtrodden economy. Large fiscal expenditures, aggressive monetary stimulus, increased legal privileges for organized labor, and boosting the degree of state pillaging – Krugman is the caricature of a tyrannical apologizer who will defend the cause of rampant statism at any cost. But now, it appears Krugman has gone overboard with his progressive moaning. Instead of getting bogged down in the economic imbecility that frequents Krugman’s twice-weekly diatribes; there is a fallacy more fundamental in this latest theorizing. What Krugman is embracing in his latest attack on historical cases has much more to do with the man’s epistemological bent and approach toward economics.
Earlier we noted the rather peculiarly truthful (lack of optimistically-biased bullshit) annual report from the BIS as reading ZeroHedge-sermon-like. There is a smorgasbord of data, charts, and quotes strewn throughout the 204-page melodrama but one caught our eye. Reflecting on the fact that governments in several major economies currently benefit from historically low funding costs, and yet at the same time, rising debt levels have increased their exposure to higher interest rates, the BIS projects the dismal reality that any rise in interest rates without an equal increase in the output growth rate will further undermine fiscal sustainability. Although predicting when and how a correction in long-term rates will unfold is difficult, it is possible to examine the potential impact on the sustainability of public finances and how any normalization of rates (or Abe's success in creating 2% 'inflation' in Japan) leads the nation's debt-to-GDP ratio to explode to a surely-Krugman-mind-blowing 600% debt-to-GDP.
Paul Krugman meets Hannibal Lecter, Barack Obama stymies E.T., Ben Bernanke advises H.I. McDunnough, and more...
Four words: financialization, debtocracy, diminishing returns. The entire global economy, developed and developing nations alike, is now dependent on cheap, abundant credit for everything: for "growth," for asset inflation, and ultimately for central state deficit spending, which props up all the cartels, rentier arrangements, fiefdoms and armies of toadies, lackeys, apparatchiks and embezzlers that suck off the Status Quo. The wheels fall off the entire financialized debtocracy wagon once yields rise.There's nothing mysterious about this.
The Fed has created a Doomsday Machine. The Fed has nurtured moral hazard in every sector of the economy by unleashing an abundance of cheap credit and low interest mortgages; the implicit promise of "you can't lose because we have your back" has been extended from stocks to bonds (i.e. the explicit promise the Fed will keep rates near-zero forever) and real estate. An abundance based on the central bank spewing trillions of dollars of cheap credit and free money (quantitative easing) is artificial, and it has generated systemic moral hazard. This is a Doomsday Machine because the Fed cannot possibly backstop tens of trillions of dollars of bad bets on stocks, bonds and real estate. Its power is as illusory as the abundance it conjured. This loss of faith in key institutions cannot be fixed with more cheap credit or subsidized mortgages; delegitimization triggers a fatal decoherence in the entire Status Quo.
One of the enduring analogies of the Federal Reserve's quantitative easing (QE) program is that the stock market is now addicted to this constant injection of free money. The aptness of this analogy has never been more apparent than now, as the market plummets on the mere rumor that the Fed will cut back its monthly injection of financial smack. (The analogy typically refers to crack cocaine, due to the state of delusional euphoria QE induces in the stock market. But the zombified state of the heroin addict is arguably the more accurate analogy of the U.S. stock market.)But like all highs based on addictive substances, the stock market high cannot be sustained without an increase in the drug. But there is a diminishing-return dynamic to ever higher doses of QE smack--the higher doses are no longer generating the same highs. The addict (the stock market) has become desensitized to the QE free money injections, and higher doses no longer generate the desired state of bullish euphoria. The more Ben talks about eventually decreasing the injection of financial smack, the more panicky the addict becomes.
Kyle Bass covers three critical topics in this excellent in-depth interview before turning to a very wide-ranging and interesting Q&A session. The topics he focuses on are Central bank expansion (with a mind-numbing array of awe-full numbers to explain just where the $10 trillion of freshly created money has gone), Japan's near-term outlook ("the next 18 months in Japan will redefine the economic orthodoxy of the west"), and most importantly since, as he notes, "we are investing in things that are propped up and somewhat made up," the psychology of negative outcomes. The latter, Bass explains, is one of the most frequently discussed topics at his firm, as he points out that "denial" is extremely popular in the financial markets. Simply put, Bass explains, we do not want to admit that there is this serious (potentially perilous) outcome that disallows the world to continue on the way it has, and that is why so many people, whether self-preserving or self-dealing, miss all the warning signs and get this wrong - "it's really important to understand that people do not want to come to the [quantitatively correct but potentially catastrophic] conclusion; and that's why things are priced the way they are in the marketplace." Perhaps this sentence best sums up his realism and world view: "I would like to live in a world where it's all rainbows and unicorns and we can make Krugman the President - but intellectually it's simply dishonest."
There was non-Fed news in the overnight market. Such as Nikkei reporting that Germany's Angela Merkel was the first G-8 member to be openly critical of Japan's credit-easing policy "that has led to the yen's weakening against major currencies" in what was the first shot across the bow between the two export-heavy countries. Not helping risk in Asia was also news that China May new home prices rose in 69 cities over the past year, compared to 68 the prior month, thus keeping the PBOC's hands tied even as the liquidity shortage in traditional liquidity conduits continues to cripple the banking system and forcing the Agricultural Development Bank of China to scale back the size of two bond offerings today by 31% "as the worst cash crunch in at least seven years curbs demand for the securities." Rounding up Asia were the latest RBA meeting minutes which noted the possibility of further weakness in AUD over time, adding downside pressure on the currency and pressuring all AUD linked equity pairs lower. Still, the USDJPY caught a late bid pushing it above 95 on some comments by the economy minister Amari who said that the government would not be swayed by day-to-day market moves and the BOJ "should continue making efforts to convey its thinking to markets" adding the government was not making policy to pander to markets, confirming that Japan is making policy solely to pander to markets.
Nike recently published a series of ads declaring “winning takes care of everything,” in reference to Tiger Woods’ recapture of the world #1 golfer ranking. The slogan went over with certain critics like an illegal ball drop. Many economists insist that “economic growth takes care of everything,” and the related debate is no less contentious than the Nike ad kerfuffle. Listening to some pundits, you would think there’s one group that appreciates economic growth while everyone else wants to see the economy crumble. It seems to me, though, that growth is just like winning – there’s no such thing as an anti-winning camp, nor is there an anti-growth camp. More fairly, much of the growth debate boils down to those who think mostly about long-run sustainable growth and those who advocate damn the torpedoes, full speed ahead growth. I’ll break off one piece of this and consider: How much of everything does growth take care of?
Earlier this month, in an article for “Project Syndicate” famous American economist Nouriel Roubini joined the chorus of those who declare that the multi-year run up in the gold price was just an almighty bubble, that that bubble has now popped and that it will continue to deflate. Gold is now in a bear market, a multi-year bear market, and Roubini gives six reasons (he himself helpfully counts them down for us) for why gold is a bad investment. His arguments for a continued bear market in gold range from the indisputably accurate to the questionable and contradictory to the simply false and outright bizarre. But what is most worrying, and most disturbing, is Roubini’s pathetic attempt to label gold bugs political extremists. It is evident from Roubini’s essay that he not only considers the gold bugs to be wrong and foolish, they also annoy him profoundly. They anger him. Why? – Because he thinks they also have a “political agenda”. Gold bugs are destructive. They are misguided and even dangerous people.
It's a central bank world, and we are all just suckerfish attached to the Great Central Planning Whites, hoping for little scraps to trickle down as trillions (Yen-denominated) in bonds are monetized every day.
Since Mr. Krugman tells us all this spending and debt issuance/guarantees are not only good and necessary but in the long run, painless, why are we bothering with personal income taxes?
The US government will collect approximately $2.0bn this year in Personal Income and Payroll taxes. But why? Why are we even bothering with this when today’s leading economists and politicians are telling us that debts/deficits don’t matter and running up astronomical debts is a long-term painless process? It’s practically patriotic. So why shouldn’t we just add our tax burden to the list of items the Fed should be monetizing? Seriously. Why not relieve the burden on every tax paying citizen in the United States (about 53% of us according to Mitt Romney)? You want an economic recovery? Reduce my taxes to zero and see how fast I go out and start spending some of that extra income.
We discussed the new skirmishes this weekend in the very public debate about Carmen Reinhart’s and Kenneth Rogoff’s (RR) government debt research as they fought back against Paul Krugman's smear campaign. Krugman, of course, is one of the pundits who last month published “incomplete, exaggerated, erroneous and misleading” reports about RR’s research, as we explained at the time. We still haven’t found an RR critic who’s made a genuine effort to estimate how much debt is too much and in an effort to, we read Krugman's book (cover-to-cover) to see if there was anything more to Krugman’s positions than über-Keynesianism and boasts that his adversaries were proven wrong. Krugman's logic is full of holes. Near-term inflation and interest rate predictions have little to do with one’s beliefs about the mostly long-term risks of excessive debt. Krugman’s use of decidedly non-Keynesian episodes of debt reduction to justify his Keynesian beliefs reminds me of the many times (too many) that I’ve encountered 'circular reference' errors in Excel. His logic is no less flawed or 'circular.' But since there’s no spreadsheet involved, we’ll call it an error of induction. We think it’s time to change focus and consider the questionable thresholds, selective data use and induction error in Krugman’s work.
The wild ride in Japan's bond market is a prelude to what will happen in other developed markets.