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Where's the Help When You Need It?
The fellows who won the Nobel Prize for Economics, Alvin Roth and Lloyd Shapley, are Micro guys. They came up with models/algorithms that make the process of connecting needs to resources better/faster. This appears to be promising stuff that will have broad applications in years to come. The award sure sounds important:
"For the theory of stable allocations and the practice of market design."
The 2012 Nobel for Economics is not unlike the prize that was awarded to Myron Scholes and Bob Merton for their pioneering work back in 1997. The description from the deep thinkers in Stockholm for that award:
"For a new method to determine the value of derivatives"
The Black-Scholes model is the basis upon which 100s of trillions of derivative contracts have been created. We know what an important contribution to growth and prosperity derivatives have proven to be, right?
Forget Micro economists. What the world needs is a few Macro guys who can provide some direction for the incredible number of economic problems that are at hand (and the bigger ones that are looming). Damn near every country on earth is staring critical issues in the face.
Where are the economists that have creative and viable solutions? There aren't any. The reason is, there are no creative and viable solutions. There are only two schools of thought:
Austerity - This sounds good, but it has been a miserable failure so far. Look at Spain, Ireland and Greece. Think about what the Fiscal Cliff will do for America. If the US goes down the road of austerity on 1/1/2013, the immediate consequence will be a substantial recession. Unemployment would rise, tax receipts would go down, budget deficits would balloon. Nothing would be accomplished by American austerity, other than more pain and more red ink.
Keynesian Economics - This takes many forms, but ends with the same thing; Governments borrow money in a effort to maintain demand. Keynesian pump priming works for your garden variety economic slowdown. But there is nothing about the past four years that is garden variety. Deficit spending may have blunted the global decline for a few years, but at what cost? In the USA, federal debt has risen from $9.2T to $16.2T in the past four years. It may have "felt good" when the borrowed money was being spent, but it will hurt like hell as the interest and principal has to be paid back for the next twenty years.
There are a lot of good economists working at the Central Banks. They have short-term solutions for long-term problems. They have been applying those short-term solutions for four years now. Guys like Bernanke have promised that short-term monetary measures will be continued for at least another two more years. No doubt, oodles of zero cost money can provide a boost to an economy, but at what cost?
If you break your leg, you go to the emergency room, get a cast and begin the process of healing. Monetary policy is not unlike the emergency room. Y0u get patched up, and shortly thereafter you have to start walking on your own. The Fed moved at ambulance speed in 2008/09 to provide much needed emergency treatment. Four years later Bernanke has moved the patient to a hospice. The patient is receiving constant doses of morphine. The palliative care has made the patient comfortable, but death is inevitable and the clock is ticking.
Want proof? Look at Japan. Twenty years of ZIRP has translated to 300% Debt/GDP. Japan is an accident waiting to happen. The USA is (functionally) in year eleven of the Japanese experience.
The fact is, western economies have to adjust to the realities of a rapidly aging population. China has its own set of aging issues as the one-child policy is now creating a shortage of young people to support old. These forces are far more powerful than the puny tools of the the Keynesians and the uber-monetary policy wonks.
We need a few economists to step forward to acknowledge the aging trap. The "deciders" of global monetary and fiscal policy have been constantly sending the same message:
Give us another year or two, and we'll have all the problems licked!
There is not a chance in hell that they will succeed. It's as if they don't understand the essence of the problem.
A friend sent me some thoughts related to this. Quite dismal, but accurate:
The only way to have a soft landing is to accept a global recession as a consequence of the fiscal and monetary consolidation needed to get the world on a sustainable path. It's either that, or blast off and nuke the place from space, it worked in Aliens, maybe that's what we need here.
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That's right. Ambrose Evans-Pritchard (AEP) is a City of London propagandist, plain and simple.
Well said BGIB. I especially liked this:
the Powers That Be are either so incompetent they are stuck repeating
past mistakes and failed practices, or, perhaps even more credibly, the
Powers That Be have some agenda of destruction of the Western world
I think they are just incompetent, but who knows?
BGIB and Bruce, the issue isn't economics is it?
The issue is politics.
You'll never see a sovereign nation that has control of its own currency take anything but the easy route (i.e. a nod and a wink to its central bank, and another few hundred billion is in the bag). The endgame therefore is always going to be currency collapses.
Ironically, although BGIB and you often criticise the Eurozone's approach, you fail to see two things. One is that the EZ is taking its medicine and allowing market forces to play out, and forcing govts to live within their means (most EZ govts will have a primary budget surplus next year BTW). The other is that the EZ and the Euro currency for the first time in history has seperated the method of exchange and unit of account from the nation state (and also from physical gold). Therefore govts can't just write themselves a cheque.
I commend to anyone that wishes to really grasp why the world is in such a mess (and what comes next) to read the writings of Another and FOA (just google them). Or go here and read the Another/FOA compendiums, then FOFOA (if you can stand his poor start and eventual descent into irrelevant weirdness):
http://matrixsentry.wordpress.com/2012/01/15/fofoa-rpg-freegold-pdfs-for...
Until you grasp why the dollar's reserve currency role is what has caused the lack of settlement of growing international imbalances you are clutching at straws in trying to find a solution. The solution will be the end of the dollar-based monetary system, and a new model based on the currency structure of the Euro will follow. This does not mean a gold standard, but gold will flow around the world correcting imbalances as they occur.
As I've said before, the EZ is doing it right, and will pass through this tough period lean and ready to start afresh, with capital preserved (in Euros) to do so. The US and Japan and the UK will just wipre out their capital base to wipe out the debts.
I know a few "priviledged" individuals who have done very well coming out of the Harvard/Stanford business schools. You are both wrong. Here's my take; these people really do beleive that they are somehow better than everyone else, they really beleive the shit that the likes of krugman and all the other indoctrinators have been preaching. They simply do not believe that anything that they have done has resulted in anything that could have ever been bad for another human being. The arrogance is what it is and it is only re-enforced by those they choose to associate with, so stop worrying about it. These "people" will believe this (just like the French boujois) even when the guillotine falls on their neck. So don't sweat it Bruce.
Sorry Bruce, too much of your article is bullshit.
How about you check your facts about the austerity of hitting the so called fiscal cliff?
That's a net positive to the budget of more than $532 billion in one damn year. Exactly the opposite of your "tax receipts would go down, budget deficits would balloon" lie.
Yes, there would be higher unemployment and there would be some dynamic effect reducing the $532 billion total. But will it be wiped out? Not on your life and even a Keynesian would admit that (otherwise, they would have to agree that lower rates would result in more revenue).
Sure they would be pain, but there would be less red ink and less spending, which is the real damn problem.
Keep in mind, the annual adjustment needed to account for all future liabilities and the current deficit (according to the BIS) is 10% of GDP, or 1.5 Trillion annually. Those forced changes just get us 1/3 rd there!!
I'll take 1/3rd over digging the hole deeper. And fuck most of the future liabilities. Sorry kids, the money has run out so we changed the law. Poof, the future liabilities are gone.
Raising tax rates does not automatically mean that tax revenues go up.
that was the Laffer Curve, wasn't it?
anyway, whenever someone mentions US tax rates I have to note that during the Ike/Nixon presidency the highest marginal tax rate in the US was at 92%. And some say it was a Golden Age. I understand now some pay 13%.
Pisses off people like a charm - as facts often do. Watch the red arrows
Ghordius - if you are going to troll, at least do so in an apples to apples manner. You can't talk about the marginal rate of 92% and then want to compare an effective rate of 13%. How do I know it is an effective rate? Because there is no 13% bracket.
The same person making the same relative dollars during the 92% period would pay similar total taxes as they would today.
You think so? look, without hands - I mean numbers: there were two periods in the 20th Century when heiresses and oligarchs were leaving in droves the USA and giving up their citizenships to escape the taxman
nevertheless, you are right: it's not comparable. thousands of pages of tax code have made sure that it's impossible to compare now with then
And the inflation adjusted income for the 92% bracket would be $3.5 million and above in taxable income today. Sure this will make some feel better, but there is no real tax revenue generated.
Correct. See my posts above. If you have something productive and fucking real to offer society, you have nothing to fear.
Some programs are by intent, some by happenstance... regardless, the result is the same.
They are corrupt AND incompetent, whcih is even worse.
It's pretty hard to wrestle a bone from a rabid animal.
And rarely a good career move;)
The good news is...
If..."the Powers That Be have some agenda of destruction of the Western world"
...they are so incompetent, they are bound to fuck it up !:O)
They would rather the world burns than lose power.
All that inbreeding doesn't help either.
Growth is a solution. "getting from here to there" on the other hand...
BK said:
It figures that the 1997 "Sveriges Riksbank Attempt to Purchase Legitimacy for the Economic 'Sciences' by Deceptively Associating Itself with the Nobel Prize" award went to guys who were principals of the 1998 winner of the Train Wreck of the Year Award, Long Term Capital Management.
What the world needs is a lot more people who can tie a good hangman's noose. The countries of the world are not facing economic problems, they are facing economic dilemmas. A problem implies a solution. A dilemma implies the necessity of a choice between undesireable alternatives. Because economists played a big part in creating the current situation, a prudent course of action would make sure that a sufficient number of them are hanged to prevent them from making things worse.
Any such persons have probably abandoned the field of economics in order to pursue work in an honest and useful occupation.
There are no solutions, only various unpleasant choices.
Strange article Bruce.
You are correct there is no easy way out. One way or another the debts need to go away.
It seems clear to me they will go away via currency collapses in Japan/America/UK, and via austerity/defaults in Europe.
Hence, the Eurozone will be through it and out again quicker, and its savers will not be raped en route.
Hence, gold is the only asset wrth holding through this and probably for quite a long while after.
Freegold is highly likely, more likely than a gold standard, but either will result in gold at $50k plus in today's terms.
Don't fret Bruce, keep spreading the word, but be aware of the different approaches across the globe.
Growth is not a solution because it isn't possible. You cannot organically grow your way out of a credit collapse at a rate which exceeds the rate of credit contraction.
We have pulled forward demand for 30 years. There must now be a contraction, and without it there cannot be growth.
There is an answer and it is called "financial collapse". The nature of this collapse is that those who are leveraged must by definition be obliterated. Leverage (when it is long) is merely an expectation of prolonged growth. "Stability" at this time is therefore merely a code word for protecting the positions of leveraged players.
Stability is now the enemy of a healthy economy, because it can only be achieved at this time through artificial means -- and the net result of "stability" is to perpetuate the leveraged growth of institutions who are parasitic to the real economy. We will, and must, have an epic collapse.
The longer central planners attempt to stave off the collapse through "stability", the more the healthy economy is damaged by the growth of leveraged players -- and the worse the ultimate collapse must be.
That it is coming is a certitude. The only question is when, and corollary to "when" is how large the blast-radius will be.
POPO
Well-written and I agree but I had to give you a red arrow because it was 24-0 in favor of your post and we are just not THAT SMART.
I get very nervous about 'reality' when everyone says the same thing, so the down vote is there to avoid a consensus that is not true. Sheep will always agree om
Well put. The debt currently in the system will be repaid - under inflation it is repaid by the borrowers, under default/deflation it is paid by the lenders. Of course, Bernanke & Co. are trying to make damn sure it isn't the lenders that repay it, but rest assured it will be repaid.
The only questions are when and how quickly? Until we have that figured, true organic growth will be nearly impossible to come by.
Agreed. The numbers are just too big for a "fix it" solution. There will have to be massive defaults and a reset.
Exactly right!
isn't this the hyperdeflation argument?
to which Ben usually answers by putting on his helmet, boarding his helicopter and switching on Wagner's "Ride of the Walkyres"?
I remember Bush II sending a big check to every citizen, once. a trial run? just trying to understand you. in fact, +1 for the intriguing post
I am slightly agnostic towards the hyperinflation / deflation argument because when people argue about hyper-inflation or hyper-deflation they are actually agreeing on one central issue: that the financial system is dying. The only difference is the nature of the death. Cancer or heart attack? Supernova or black hole?
Both ultimately turn into economic contractions but by different means. Either we suffer a massive overhang in productive capacity as spending plunges, or we suffer a massive spike in input costs of food and energy as too much liquidity seeks yield. The resulting margin compression has a similar effect, although that road leads first through hyperinflation. Both roads ultimately lead to financial (and likely political) collapse in the longer term.
Certainly it's better to collapse now vs. later, but the course taken becomes a question of policy and politics, and isn't mathematically predictable. Collapse however, is.
The term "stability" is a canard though. It is merely a policy of life-support for the players who continue to drain the life from the real economy. If you want to continue to damage the economy and impoverish the population, all you need to do is insure more "stability" -- and the players who re leveraged 100:1 will become exponentially more powerful and dangerous.
intriguing. and as much as I rationally believe in an inflationary "solution", my gut only stopped hurting when I deleveraged to zero.
what happened to your avatar, btw?
Hey. What did happen to my avatar?
Well... Now I'm on my mobile so I'll have to be a baghead for a while.... 'swear I didn't change it though,.. Weird.
you can have mine if you want. makes you very popular, here
Not easy for small business to grow when the government steals 110% of your marginal income.
See Obammycare.., or Kalifornica - sorry state of...
You left out regulate them to death. This article is a bunch of crap we already are in a Recession or a Depression. Bruce sounds like Paul Krugman now he even uses an Alien reference mixed with the Broken Window phallacy. Since government doesn't really create jobs it only creates debt cutting them isn't austerity. Bruce is a Limousine Liberal so it doesn't surprise me that his only line of thinking is to screw Granny on the Social Security she was forced to pay into.
Income Tax Cut, JFK Hopes To Spur Economy 1962
http://www.youtube.com/watch?v=aEdXrfIMdiU
America’s Greatest Depression Fighter
(No, it wasn’t Franklin Delano Roosevelt)
snip
America’s greatest depression fighter was Warren Gamaliel Harding. An Ohio senator when he was elected president in 1920, he followed Woodrow Wilson who got America into World War I, contributed to the deaths of 116,708 Americans, built up huge federal bureaucracies, imprisoned dissenters and incurred $25 billion of debt, for which he has been much praised by historians.
Harding inherited the mess, in particular the post-World War I depression – almost as severe, from peak to trough, as the Great Contraction from 1929 to 1933, that FDR inherited and prolonged. Richard K. Vedder and Lowell E. Gallaway, in their book Out of Work (1993), noted that the magnitude of the 1920 depression "exceeded that for the Great Depression of the following decade for several quarters." The estimated gross national product plunged 24% from $91.5 billion in 1920 to $69.6 billion in 1921. The number of unemployed people jumped from 2.1 million in 1920 to 4.9 million in 1921.
In Only Yesterday (1931), historian Frederick Lewis Allen described Harding as "superbly handsome. His face and carriage had a Washington nobility and dignity, his eyes were benign; he photographed well and the pictures of him in the rotogravure sections won him affection and respect. And he was the friendliest man who ever had entered the White House."
Harding was much more open than his predecessor. Biographer Francis Russell wrote in Warren G. Harding and His Times(1968), "One of Harding’s early friendly gestures had been to restore the twice-a-week White House meetings with the press that Wilson had given up. Wilson had detested subjecting himself to the overt criticism of such meetings. Harding, the old newspaperman, liked the reporters, and they liked him. Press conferences in the Oval Room had the happy atmosphere of reunions. Harding was open with reporters, answering all questions."
Compared to FDR, Harding had a much better understanding of how an economy works. Harding, wrote historian Robert K. Murray, in The Harding Era (1969), "always decried high taxes, government waste, and excessive governmental interference in the private sector of the economy. In February 1920, shortly after announcing his candidacy, he advocated a cut in government expenditures and stated that government ought to ‘strike the shackles from industry.’ ‘We need vastly more freedom than we do regulation,’ he said. Surprisingly, big business took very little notice of him at the time."
Murray added, "To Harding, a profession, a newspaper, a grocery store, even a farm, was as much a ‘business’ as was a steel corporation. In a typical small-town manner Harding used the term ‘business’ to indicate a state of independence rather than to delimit a specific enterprise. This is quite different from saying that Harding was oriented toward big business and Wall Street as was sometimes charged."
One of Harding’s campaign slogans was "less government in business," and it served him well. Harding embraced the advice of Treasury Secretary Andrew Mellon and called for tax cuts in his first message to Congress, April 12, 1921. The highest taxes, on corporate revenues and "excess" profits, were to be cut. Personal income taxes were to be left as is, with a top rate of 8% of incomes above $4,000. Harding recognized the crucial importance of encouraging investment essential for growth and jobs, something that FDR never did.
Powerful senators, however, favored giving bonuses to veterans, as 38 states had done. But such spending increases would have put upward pressure on taxes. On July 12, Harding went to the Senate and urged tax and spending cuts. He noted that a half-billion dollars in compensation and insurance claims were already being paid to 813,442 veterans, and 107,824 veterans were enrolled in government-sponsored vocational training programs, the total cost of which was estimated to involve another half-billion dollars.
The senators were determined to push through this spending bill, and Senator Pat Harrison of Mississippi accused Harding of having "attacked the soldiers of America who fought and won the recent war." Meanwhile, a tax cut bill emerged from the Senate Finance Committee and was passed, while debate on the veterans’ bonus bill continued.
Harding’s Budget and Accounting Act of 1921 provided a unified federal budget for the first time in American history. The act established (1) the Bureau of the Budget with a budget director responsible to the president, and (2) the General Accounting Office to help cut wasteful spending.
In the fall of 1921, Harding’s Secretary of Commerce Herbert Hoover prompted him to call a Conference on Unemployment. Hoover wanted government intervention in the economy, which as president he was to pursue when he faced the Great Depression a decade later, but Harding would have none of it. Good thing, since Hoover’s policies were to prolong the Great Depression. Harding said, "There will be depression after inflation, just as surely as the tides ebb and flow." Harding insisted that relief measures were a local responsibility.
In 1922, the House passed a veterans’ bonus bill 333–70, without saying how the bonuses would be funded. Harding let senators know that if they passed the bill, he would veto it. The senate passed it 35–17. Despite intense lobbying from the American Legion, Harding vetoed the bill on September 19 – just six weeks before congressional elections, when presidents generally throw goodies at voters. Harding said it was unfair to add to the burdens of 110 million taxpayers.
Federal spending was cut from $6.3 billion in 1920 to $5 billion in 1921 and $3.2 billion in 1922. Federal taxes were cut from $6.6 billion in 1920 to $5.5 billion in 1921 and $4 billion in 1922. Harding’s policies started a trend. The low point for federal taxes was reached in 1924. For federal spending, in 1925. The federal government paid off debt, which had been $24.2 billion in 1920, and it continued to decline until 1930.
Conspicuously absent was business-bashing that became a hallmark of FDR’s speeches. Absent, too, were New Deal–type big government programs to make it more expensive for employers to hire people, to force prices above market levels, to promote cartels and monopolies. Frederick Lewis Allen wrote, "Business itself was regarded with a new veneration. Once it had been considered less dignified and distinguished than the learned professions, but now people thought they praised a clergyman highly when they called him a good business man."
With Harding’s tax cuts, spending cuts and relatively non-interventionist economic policy, the gross national product rebounded to $74.1 billion in 1922. The number of unemployed fell to 2.8 million – a reported 6.7% of the labor force – in 1922. So, just a year and a half after Harding became president, the Roaring 20s were underway! The unemployment rate continued to decline, reaching a low of 1.8% in 1926 – an extraordinary feat. Since then, the unemployment rate has been lower only once in wartime (1944), and never in peacetime.
"The seven years from the autumn of 1922 to the autumn of 1929," wrote Vedder and Gallaway, "were arguably the brightest period in the economic history of the United States. Virtually all the measures of economic well-being suggested that the economy had reached new heights in terms of prosperity and the achievement of improvements in human welfare. Real gross national product increased every year, consumer prices were stable (as measured by the consumer price index), real wages rose as a consequence of productivity advance, stock prices tripled. Automobile production in 1929 was almost precisely double the level of 1922. It was in the twenties that Americans bought their first car, their first radio, made their first long-distance telephone call, took their first out-of-state vacation. This was the decade when America entered ‘the age of mass consumption.’"
Warren Harding made additional contributions to liberty. In 1922, he nominated George Sutherland to the Supreme Court – and Sutherland went on to become one of the greatest champions of liberty who ever served there. The next year, Harding nominated Pierce Butler. These were to be two of the "Four Horsemen of Reaction" who, during the 1930s, courageously struck down FDR’s early New Deal legislation that had been suppressing recovery.
Harding denounced lynching and liberated the socialist Eugene Debs who had been imprisoned by Woodrow Wilson during the war. With Debs, Harding defied opposition from the American Legion and the New York Times that editorialized, "He is where he belongs. He should stay there." Harding was supported by socialists like George Bernard Shaw, H.G. Wells, Clarence Darrow and Upton Sinclair, who certainly didn’t vote for him. Harding insisted that Debs be free by Christmas, and Harding graciously invited him to the White House.
Finally, Harding championed peace through a non-interventionist foreign policy, as with these words from his Inaugural Address, March 4, 1921: "The recorded progress of our Republic, materially and spiritually, in itself proves the wisdom of the inherited policy of noninvolvement in Old World affairs. Confident of our ability to work out our own destiny, and jealously guarding our right to do so, we seek no part in directing the destinies of the Old World. We do not mean to be entangled…the America builded on the foundation laid by the inspired fathers, can be a party to no permanent military alliance. It can enter into no political commitments, nor assume any economic obligations which will subject our decisions to any other than our own authority."
in full
http://www.lewrockwell.com/orig4/powell-jim4.html
Cut Spending to Fix 'Fiscal Cliff': Norquist
http://www.cnbc.com/id/49418238