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Guest Post: Liquidation Is Vital

Tyler Durden's picture





 

Submitted by John Aziz of Azizonomics

Liquidation Is Vital

Many Keynesians really hate the concept of liquidationism. I’m trying to grasp why.

Paul Krugman wrote:

One discouraging feature of the current economic crisis is the way many economists and economic commentators — apparently ignorant of what went on over the last 75 years or so of macroeconomic debate — have been reinventing old fallacies, imagining that they were coming up with profound insights.

 

The Bank for International Settlements has decided to throw everything we’ve learned from 80 years of hard thought about macroeconomics out the window, and to embrace full-frontal liquidationism. The BIS is now advocating a position indistinguishable from that of Schumpeter in the 1930s, opposing any monetary expansion because that would leave “the work of depressions undone”.

Andrew Mellon summed up liquidationism as so:

The government must keep its hands off and let the slump liquidate itself. Liquidate labor, liquidate stocks, liquidate the farmes, liquidate real estate. When the people get an inflation brainstorm, the only way to get it out of their blood is to let it collapse. A panic is not altogether a bad thing. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people.

In light of the zombification that now exists in Japan and also America (and coming soon to every single QE and bailout-heavy Western economy) — zombie companies, poorly managed, making all the same mistakes as before, rudderless, and yet still in business thanks to government intervention  — it is clear that the liquidationists grasped something that Keynesians are still missing. Markets are largely no longer trading fundamentals; they are just trading state intervention and money printing. Why debate earnings when instead you can debate the prospects of QE3? Why invest in profitable companies and ventures when instead you can pay yourself a fat bonus cheque out of monetary stimulus? Why exercise caution and consideration when you can just gamble and get a bailout?

Unfortunately, Mellon and his counterparts at the 30s Fed were the wrong kind of liquidationists — they could not heed their own advice and leave the market be. Ironically, the 30s Fed in raising interest rates and failing to act as lender-of-last resort drove the market into a deeper depression than was necessary (and certainly a deeper one than happened in 1907) and crushed any incipient recovery.

Liquidation is not merely some abstract policy directive, or government function. It is an organic function of the market. As the stunning bounce-back from the Panic of 1907 shows — especially when contrasted against the 1930s — a  market liquidation on the back of a panic avoids a depression. Prices fall as far as the market deems necessary, before market participants quickly come back in into the frame and setting the market on a new trail toward growth. For without a central bank, asset-holders who want to maintain a strong economy and growth (in 2008, that probably would have meant sovereigns like China and Arabia) have to come in and pick up falling masonry as lenders of last resort.

Under a central banking regime (especially a Bernankean or Krugmanite one committed to Rooseveltian Resolve) all expectations fall onto the central bank.

My own view is not just that liquidation is vital. It is that the market mechanism is vital. Without their own capital as skin in the game, central bankers are playing blind. The pace of the liquidation and the pace of the recovery should be dictated by market participants — in other words, by society at large — not by the whims of distant technocrats. Society has more skin in the game. The Great Depression was not a crisis of too little intervention — it was a crisis of too much well-intentioned intervention.

As we are learning in our own zombie depression, a central bank doing the opposite of the 1930s Fed and reinflating may solve the problem of debt-deflation, but it causes many of its own problems — zombie banks, zombie corporations, zombie markets, corporate welfarism, and the destruction of the market mechanism.

 


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Tue, 06/26/2012 - 18:53 | Link to Comment Cursive
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If you love someone, set them free.

Tue, 06/26/2012 - 18:54 | Link to Comment veyron
veyron's picture

Do you love Krugman ???

Tue, 06/26/2012 - 19:10 | Link to Comment Cursive
Cursive's picture

@veyron

No.  But this isn't about Paulie.  This is about liberty and freedom.  You can only have true love between absolute equals.  By the same token, you can only have free markets if all market particpants are equal; equal rights to succeed or fail.  As it is now, our economy is built on imbalances that would have the likes of Michael Jordan (in his prime) washing dishes and Paul Krugman playing center for the Miami Heat.

Tue, 06/26/2012 - 19:21 | Link to Comment vast-dom
vast-dom's picture

when the Bernankster is the one that needs to be washing them dishes most so we may save this motherfucker!

Tue, 06/26/2012 - 19:30 | Link to Comment Winston Churchill
Winston Churchill's picture

He would break them.

ABCD

Anything Bernanke Cannot Destroy.

Tue, 06/26/2012 - 20:08 | Link to Comment vast-dom
vast-dom's picture

yeah but at least he can print up some more dishes. paper picnic QE plates.

Tue, 06/26/2012 - 20:20 | Link to Comment CPL
CPL's picture

With spider man AND batman

Wed, 06/27/2012 - 06:21 | Link to Comment old naughty
old naughty's picture

they want in-organic growth, and didn't get it.

Tue, 06/26/2012 - 19:35 | Link to Comment BigJim
BigJim's picture

'Liquidation' is merely price discovery after the market realises asset prices have gotten out of whack.

Central planners like the Bernank and the KrugPot hate anything that even smacks of free market price discovery.

Tue, 06/26/2012 - 20:04 | Link to Comment The Watchman
The Watchman's picture

I recomend max strength xlax - that will get some shit movin'

Wed, 06/27/2012 - 00:01 | Link to Comment I am a Man I am...
I am a Man I am Forty's picture

"(in his prime)" was probably not necessary, but I digress

Tue, 06/26/2012 - 20:09 | Link to Comment GenX Investor
GenX Investor's picture

Scratch that, if you love someone, take them to Puppy Lake.

Tue, 06/26/2012 - 19:24 | Link to Comment vast-dom
vast-dom's picture

I have been saying this for quite some time here. Nothing new. Fundamentals, P/E, etc. have become as arcane as they are detested. We need a great purge. Period.

 

if you synthetically manage the cyclical nature of markets such that you do not allow the downward movement into the trough, you essentially distort and pervert said markets. if you believe markets are cyclical then you cannot avoid liquidity purge forever and can make the argument that The Fed will down the line cause a greater amplitude trough....

 

will these so-called values ever be recalibrated? the categorical imperative? justice? doubt it......

Tue, 06/26/2012 - 19:30 | Link to Comment Caviar Emptor
Caviar Emptor's picture

Amen bro, you n me both been sayin'. My version, which I got junked for lots in the beginning, is that the stock market is now just a surrogate for monetary intervention. It's such a sick old man that it requires not just a Bernanke put under it, but a Bernanke-Geithner call (QE, stim and more stupid Fed tricks) to keep it from spiraling down. 

Tue, 06/26/2012 - 19:31 | Link to Comment vast-dom
vast-dom's picture

junk builds character. lot of common sense haters up in here.

Tue, 06/26/2012 - 20:32 | Link to Comment dexter bland
dexter bland's picture

Intervention or not, we got our liquidation in real estate, prices now back at mid-1990's levels in real terms. In labour markets likewise, the liquidation is ongoing. Intervention only prolongs the process, it can't stop it entirely.

But its true financial assets haven't been properly liquidated (they were but briefly before reflation). Equities to some extent remain overvalued, but commodities even more so. Fed actions remain of interest to the market but its impact decreases with each new round. Finally when risk asset liquidation is complete, it might be time to take another look at treasuries.

 

Tue, 06/26/2012 - 22:11 | Link to Comment Bicycle Repairman
Bicycle Repairman's picture

If the market were set totally free RE would liquidate much, much further.

Wed, 06/27/2012 - 06:53 | Link to Comment eclectic syncretist
eclectic syncretist's picture

I predict that several years from now it will be recognized that there is extensive accounting fraud going on right now across all capital markets, and that the Fed/government knows it and is looking the other way rather than doing their proper duty to their fellow citizens.

Wed, 06/27/2012 - 08:46 | Link to Comment MeelionDollerBogus
MeelionDollerBogus's picture

Years from now? http://twitter.com/williamkblack - why wait for discovery, grab the bull by the horns

Tue, 06/26/2012 - 18:59 | Link to Comment carefreemanjoe
carefreemanjoe's picture

The Fed has unwittingly released the genie of deflation though its intent is to inflate. The Fed is lending HUGE / OBSCENE amounts of money to the large too big to fail banks without any commitment from these banks that they will lend out this money to businesses in need. Instead, the too big to fail banks are strengthening their balance sheets by parking these funds back with the Fed at higher interest rates and continuing to use the now stronger balance sheets to take more risks in investment banking. At this rate deflation cannot be avoided regardless of whether Obama comes back to power or Romney is crowned. Amen.

Tue, 06/26/2012 - 19:03 | Link to Comment q99x2
q99x2's picture

If they control the market mechanism should there not be a real war against them because they are truely the enemies of corporations with more to lose than countries?

Answer: Of course and it is under way.

Although sometimes a hugh blind multi-headed beast that is difficult to fight is best left utill it begins stumbling under its own weight a little help never hurts. It will fall quickly. Thursday at what time?

Tue, 06/26/2012 - 19:07 | Link to Comment midgetrannyporn
midgetrannyporn's picture

During the great depression if the gubbermint and fed had merely guaranteed bank deposits it would have mitigated much of the pain. This time around the maggots saved their own bacon bonuses after exporting all the manufacturing abroad. This depression in the usa is permanent.

Tue, 06/26/2012 - 20:24 | Link to Comment CPL
CPL's picture

This depression in the usa anywhere with a central bank is permanent.

Tue, 06/26/2012 - 19:07 | Link to Comment Rainman
Rainman's picture

Liquidation means pounding the snot out of the public pension funds...already 3 trillion fiatscos in the hole.

If that be the case, I'm all for it.

Wed, 06/27/2012 - 03:00 | Link to Comment Rick Masters
Rick Masters's picture

I understand and somewhat agree with the argument at hand but what I can't fathom on any level is sub-human comments like yours that appear to want to bring unimaginable pain to millions of your fellow countrymen. Your for leaving the elderly and retired completely fucked. Someone like you will never survive a situation like that where mass violence will occur by virtue of the sheer nature of the suffering. Because when fighting starts and groups form the ones that will win will be the ones that have team players that have human empathy which you clearly lack. They found a 10,000 year old female skeleton with no arms and feeble legs. She was born that way and she lived to the age of 33. That means 10,000 years ago a community of people took care of her cause she could not care for herself. That is what being a human is. I pray for you

Wed, 06/27/2012 - 03:00 | Link to Comment Rick Masters
Rick Masters's picture

I understand and somewhat agree with the argument at hand but what I can't fathom on any level is sub-human comments like yours that appear to want to bring unimaginable pain to millions of your fellow countrymen. Your for leaving the elderly and retired completely fucked. Someone like you will never survive a situation like that where mass violence will occur by virtue of the sheer nature of the suffering. Because when fighting starts and groups form the ones that will win will be the ones that have team players that have human empathy which you clearly lack. They found a 10,000 year old female skeleton with no arms and feeble legs. She was born that way and she lived to the age of 33. That means 10,000 years ago a community of people took care of her cause she could not care for herself. That is what being a human is. I pray for you

Tue, 06/26/2012 - 19:08 | Link to Comment XOFnews
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Breaking news! Romney says Krugman is his pick for Fed chair.

Tue, 06/26/2012 - 19:13 | Link to Comment SILVERGEDDON
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Yeah. Bent over the chair, getting rudely mounted from the rear. Oh. Wait. That is current standard operating procedure for Romney and friends versus the rest of the universe.

Tue, 06/26/2012 - 19:11 | Link to Comment bankruptcylawyer
bankruptcylawyer's picture

liberals are blindly faithful in krugmans word. 

they frequently have not done their homework, they and most people are intellectually lazy and take his word as gold. 

they understand his basic point which is that a slump in demand drives deflationary patterns whichare the stuff of depressions. 

that's as far as they get in understanding how the balance of conumption production debt creation, debt destruction constitutes economic behavior. they are misguided in seeing half a truth as 'the truth' and wind up frequently on the side of the banksters that they claim to hold grudges against. 

This political situation , that of 'well educated' liberals taking krugmans word as the full truth , ------is old enough. I thought for a whle that it would change. it hasn't , it has actually gotten worse to my understanding. The rise of the caricatured libertarian view point, along with many of its contradictions and paradoxes ( for example that the complex modern state can function without some acceptance of corporate taxes ) -------has operated to create a political oppositionism. the liberal sees themself not through their understanding of how things work, but through their opposition to who they percieve to be on the 'other side'. 

this diameteric opposition has gotten worse over time because the divide between the 'viewpoints' has accelerated. why? because as things get worse, people don't get smarter necessarily. they do not start seeing more of the subtleties. what they do is they get a taste for the truth only in so far as they can find enough of an explanation to let them 'choose sides'. the same impulse that allows people to divide themselves between republicans and democrats has allowed them into the trap of defining themselves as keynsians or austrians or whatever other bullshit, when it comes to 'picking a team' or picking a line of rhetoric and buzzwords to bring up during dinner parties. 

This will only get worse. more factionlism. Self Declared Backers of Occupy and the Tea party are generally more guilty of it than anyone else. Very few people who decide to put a flag or armpatch on their shirt----people who broadcast their team membership---are the types to understand where it is that the cohesion can be found. People are too stuck in their convictions---particularly the YOUNG people who mindlessly chant and join a team. The only quandary is that the OLD poeple are either Too Lazy, Too worried about their Families, or too bought off , to actually comprise the people that change things. 

SO where does this lead? Youth groups chanting slogans. that's where this goes.

 

 

Tue, 06/26/2012 - 19:17 | Link to Comment XOFnews
XOFnews's picture

Breaking news! GO RP!

Tue, 06/26/2012 - 19:19 | Link to Comment knukles
knukles's picture

If its not fair, its not liberal.

Tue, 06/26/2012 - 21:21 | Link to Comment Mr. Fix
Mr. Fix's picture

"If its not fair, its not liberal."

Good one!

 And since everybody knows that life is not fair,

 there is obviously no need for liberals.

 Everything they do is contrary to the way things work.

Tue, 06/26/2012 - 20:38 | Link to Comment OneTinSoldier66
OneTinSoldier66's picture

Get a clue.

 

Modern states do not accept Corporate taxes, they demand them!

 

Right is Might. Sound, honest money! You don't even have to be an Austrian to understand that money should be honest and sound, rather than a piece of paper with green ink and a Government stamp on it, and at their whim. Money is not something just because the Government says it is.

Tue, 06/26/2012 - 19:23 | Link to Comment Quinvarius
Quinvarius's picture

I'd love to see them try liquidationism with debt based paper money.  You lost it all in a liquidation?  Too bad.  You there.  You held onto your paper money through the liquidation?  It is now worthless because all the debts and banks that were counter party to it defaulted and died.  Sorry.  You lost it all too.

Mass liquidation will not make your paper money worth more.  It will be worth less.

Tue, 06/26/2012 - 20:06 | Link to Comment Manthong
Manthong's picture

Perfectly OK.. it's going to be worth nothing anyway, so let the (fire) hosing begin.

Tue, 06/26/2012 - 21:24 | Link to Comment Mr. Fix
Mr. Fix's picture

Maybe a very large canoe would help to liquidate some of that debt-based currency.

Tue, 06/26/2012 - 19:26 | Link to Comment lolmao500
lolmao500's picture

Aw yeah....

http://news.yahoo.com/german-court-outlaws-religious-circumcision-172728...

German court rules religious circumcision on boys an assault

Circumcising young boys on religious grounds amounts to grievous bodily harm, a German court ruled Tuesday in a landmark decision that the Jewish community said trampled on parents' religious rights.

The regional court in Cologne, western Germany, ruled that the "fundamental right of the child to bodily integrity outweighed the fundamental rights of the parents", a judgement that is expected to set a legal precedent.

"The religious freedom of the parents and their right to educate their child would not be unacceptably compromised, if they were obliged to wait until the child could himself decide to be circumcised," the court added.

Cue the angry jews and muslims... eh don't like it? Move back to where you belong, in that shithole called the middle-east.

Tue, 06/26/2012 - 21:27 | Link to Comment Mr. Fix
Mr. Fix's picture

"fundamental right of the child to bodily integrity outweighed the fundamental rights of the parents"

 

I wonder if that argument holds true  If they want an abortion.

 

 I doubt it.

Tue, 06/26/2012 - 22:49 | Link to Comment Demonoid
Demonoid's picture

"fundamental right of the child to bodily integrity outweighed the fundamental rights of the parents"

So no children in Germany have pierced earrings?

No dental fillings?

No pins inserted into broken bones?

Circumcision is currently out of favor with elites. All the right people know it, as they do with everything else PC.

Don't be fooled by the high-horse "principle." It's tribal, nothing more.

Tue, 06/26/2012 - 19:27 | Link to Comment RoadKill
RoadKill's picture

Ahmen. But sorry to say liquidation is deflationary and thats bad for.PMs. Obviously most of them will tell you they are betting on everyone doing the wrong thing. But what if they dont? What if like during the SNL crisis (and I dont mean loosing Chris Farley) the US and Eastern Europe choose to xlean things up, default and deflate, and stick with strong dollar/DM low interest rates low inflation policies.

Tue, 06/26/2012 - 19:40 | Link to Comment dwdollar
dwdollar's picture

That was a minor course correction on a bubble that was still inflating.

Tue, 06/26/2012 - 20:29 | Link to Comment Quinvarius
Quinvarius's picture

Sorry to tell you, but they will be liquidating paper money to buy real money, PMs, along with everything else.  Our money is based on debt.  When things liquidate, the economy goes south.  When the economy goes south, the debts and taxes go unpaid.  When the debt and taxes go unpaid, the money that was created from the debt has no demand on it to pay back the debt.

This is not 1930.  Our paper dollars have no value beyond pure utility of bill pay.  No one is going to hoard that trash.  Why is it so hard to understand what has been going on with gold since the start of this depression in 2000?  I am constantly amazed about people immediately jumping to some conclusion that was fed to them by the TV.  That green garbage in your wallet is not money and has no real value in a system where debt is defaulted on or ignored.

Tue, 06/26/2012 - 21:25 | Link to Comment malek
malek's picture

Inflating away is the opposite of orderly liquidation.

Tue, 06/26/2012 - 20:53 | Link to Comment OneTinSoldier66
OneTinSoldier66's picture

"But sorry to say liquidation is deflationary and thats bad for.PMs."

 

How so? Even if the prices go down in terms of Dollars, they can be going down even more in terms of PM's, even as the Dollar price of PM's goes down.

 

In other words, even as the dollar price of PM's goes down, the value of PM's can rise.

 

Speaking for myself, I (might)quit buying PM's... when the National Debt has been paid off! Because when it comes to the ability of a Government to borrow and spend beyond its means, there comes a point when, enough is enough! And I haven't seen that ability deflated yet. Haven't seen it in my lifetime and have wondered if I will ever see it. Now, it is to the point where I believe that I am within my right to say that I...

 

VOTE NO CONFIDENCE!

 

I know when I'm being undermined and outvoted in the market with the very money that I commanded to use!

Tue, 06/26/2012 - 19:30 | Link to Comment dwdollar
dwdollar's picture

Amen. Not going to happen though. Not without radical changes in policy, which means radical change in leadership, which means...

Tue, 06/26/2012 - 19:35 | Link to Comment RoadKill
RoadKill's picture

Let me ask you this... Putting aside what you own (PMs vs bear bets) choose a team...Forbes, Kudlow and Romney vs Krugman, Stiglitz and Obama.

I would suggest team 1 will go for free market interest rates, a strong dollar and deflation and defaults... Team 2 will go for central planning, monetization and inflation.

I know most of you wilk rag on me for daring to suggest Mitt isnt Barry... But its an incremental world and on the spectrum its hard to say hes not "to the right" of Obama on economic policy.

Tue, 06/26/2012 - 19:43 | Link to Comment fonzannoon
fonzannoon's picture

Kudlow was practically begging for QE not long ago. He probably still is. Here is my team if I had to choose. Schiff/Rogers/Bass.

Reality sucks but ignore it at your own peril.

Tue, 06/26/2012 - 19:44 | Link to Comment fonzannoon
fonzannoon's picture

and by the way if we had free market interest rates today we would be bankrupt tomorrow.

Tue, 06/26/2012 - 21:17 | Link to Comment geoffb
geoffb's picture

I don't know if you've noticed but we are bankrupt right now.

Tue, 06/26/2012 - 19:51 | Link to Comment dwdollar
dwdollar's picture

Mitt Romney (the Crony Capitalist who made his riches riding the inflation wave) will tighten up? He might talk about it to score some Rand Paul moron votes, but I seriously doubt he will. Like he (or Obama) is in charge anyway...

Tue, 06/26/2012 - 20:12 | Link to Comment RoadKill
RoadKill's picture

A totally unfair attack from someone that knows nothing about Mitt Romneys investment carrer or Bain Capital.

I guess you can make this claim about ANY and EVERY money manager to some degree. If you make a % of profits inflation is helpful. But Bains investment returns were truely spectacular compared to 95% of PE/VC funds.. So much so they get investors CLAMORING to pay 3 and 30 vs 2 and 20. And the company has made 4 or 5 people into billionaires not just one. (In fact Mitt made less then most because he made he money when the funds were small and the returns were truely spectacular vs big funds with just 20% IRRs)

Im sure im not the only person on here that has worked for or invested with Bain Capital. So if one of you cares to debatr me on the facts im happy to.

But I think its really unfortionate that you guys are so jaded youll use adhominum attacks vs a guy that is clearly smart, clearly hard working and clearly successful that is basically vollenteering to age himself 20 years for every 4 years hes in office trying to clean up other peoples mess.

Its not like he needs more money and hes running for president to

Tue, 06/26/2012 - 20:20 | Link to Comment fonzannoon
fonzannoon's picture

Take This!

Here's Stewart explaining the kind of business Romney practiced in, in a manner most of our Villagers in the mainstream media are apparently incapable of.

STEWART: It's like putting ten percent down on a car, then using the value of that car to get another loan and repay yourself that ten percent and and maybe a little twenty percent... on top for your troubles and then walking away, leaving the car on the hook for the payments.

But, for Bain Capital to borrow money from other people, knowing that those debts might never be repaid, while still profiting themselves, I don't know. I don't know how I feel about that business practice. Does it make anyone else uneasy?

ROMNEY: I think it's simply immoral for us as a nation and as a generation, to keep spending more and more money, by borrowing money from other people knowing that those debts will never be repaid during our lifetimes.

STEWART: I don't know who that ruggedly handsome guy is but I agree one hundred percent. So there you go and his pitch to Americans seems to be, elect me as your president. I have twenty five years of business experience doing something I believe this country should never ever do.

Tue, 06/26/2012 - 22:37 | Link to Comment GMadScientist
GMadScientist's picture

Those "returns" are a mirage, numnuts. I can affect wealth by issuing billions in debt too. So what? When you putzes can run a fund while paying income rates like the rest of society on your carry, then we'll talk, until then you're a goddamn joke pushing other people's money around and dodging taxes and don't fucking forget it, bitch ass punk.

The only thing you make is honest people sick at the sight of your stupid ass.

I'm pretty sure if you peel those blinders off your eyes you can see some vested interest on the part of Mittens. Or maybe not, you really don't seem too bright, honestly.

Wed, 06/27/2012 - 11:38 | Link to Comment Thisson
Thisson's picture

I do believe Romney is sincere in his beliefs, but he is still WRONG because he supports a system of central planners relying on central banking, fractional reserve banking, and other value-destroying practices.

Government can't spend more than it taxes, and yet nobody is going to stop the gravy train to their constituents,until we get a bond market crisis like Italy and Spain are facing.

Wed, 06/27/2012 - 11:34 | Link to Comment Thisson
Thisson's picture

Both teams would go for central planning.  Where's the third choice - Austrian economic policy proponents? 

Tue, 06/26/2012 - 19:38 | Link to Comment MrBoompi
MrBoompi's picture

I think a massive amount of debt forgiveness around the world is the only thing that will solve a debt problem.  The inflationists disagree, and they're in charge.

Tue, 06/26/2012 - 19:45 | Link to Comment slewie the pi-rat
slewie the pi-rat's picture

i've been beating that drum for 1.5 years here

benzelbub is in charge and one of the reasons which he may have for not QE-ing is to wring some more zombie outa the system

be ok with me

but it can't be disorderly at this point imo;  this could be prime alpha-bankster motivation to keep the markets screwed down tight and liquid also

see what happens...

Tue, 06/26/2012 - 19:58 | Link to Comment Seasmoke
Seasmoke's picture

Liquidation is reality.......and we cant have that

Tue, 06/26/2012 - 20:07 | Link to Comment JeffB
JeffB's picture

That Krugman quote is rich in irony:

"One discouraging feature of the current economic crisis is the way many economists and economic commentators — apparently ignorant of what went on over the last 75 years or so of macroeconomic debate — have been reinventing old fallacies, imagining that they were coming up with profound insights."

I was just reading a 50th anniversary edition of Henry Hazlitt's classic, Economics in One Lesson: The Shortest and Surest Way to Understand Basic Economics (re-published in 1996) and saw Krugman's ideas refuted over and over throughout. His idea of war being a good way to get out of a recession/depression is one of his classics.

I had to laugh at Peter Shiff making fun of his ideas, particularly his idea of tricking people into thinking we're being invaded by aliens to boost spending and get us out of our economic problems:

Peter Schiff on Paul Krugman's 'alien invasion' suggestion (15-Aug-11)(FINANCE & ECONOMICS series)

In fact, Krugman has swallowed the broken window fallacy hook line and sinker, a fallacy destroyed by Bastiat in 1850.

 

Tue, 06/26/2012 - 23:07 | Link to Comment JR
JR's picture

Ludwig von Mises said of Henry Hazlitt’s The Failure of the New Economics, 1959, reprinted 1973, “Hazlitt has entirely demolished the Keynesian misconceptions." Arguably the nation’s best-known and best-respected financial writer and commentator during his life time, Hazlitt shows again and again that Keynes pronounced his theories ex cathedra, without substantial statistics to back them up 

The artificial driving down of interest rates to “free up credit” not only does not work, according to Hazlitt, but it has the OPPOSITE effect of that intended – unemployment.

To decrease unemployment, Hazlitt said Keynesians recommended two main remedies during the Great Depression: Deficit spending and artificially low interest rates. Neither worked.

Said Hazlitt:“One is deficit spending.  How good is this remedy? It was tried in the United States for a full decade during the Great Depression. What were the results?" Official figures cited by Hazlitt in his books show that: The central and decisive fact is that heavy deficits were accompanied by mass unemployment…”

The other is low interest rates. Hazlitt continues: “The other main Keynesian remedy for unemployment is low interest rates… artificially produced by printing more money, i.e. by deliberate inflation… The question immediately before us is: Did low interest rates prevent mass unemployment?” …

No! Official statistics cited by Hazlitt show that:  In sum, over this period of a dozen years low interest rates did NOT eliminate unemployment. On the contrary, unemployment actually INCREASED as interest rates went down. In the seven-year period from 1934 to 1940, when the cheap money policy was pushed to an average infra-low rate below 1 percent (.77 of 1 per cent) an average of more than 17 in every 100 persons in the labor force were unemployed.”

Tue, 06/26/2012 - 23:46 | Link to Comment GMadScientist
GMadScientist's picture

"Official statistics"?!  Hey, let's not count '31 - '34 when the bulk of the UE reduction took place! Instead, let's cook statistics and make a futile attempt to refute reality on the ground.

Why attack stimulus on the grounds that you can't stop without causing a recession when you can make shit up, right?

Hazlitt was a decent economist, but in this instance, his argument is a complete and utter logic fail.

Tue, 06/26/2012 - 23:49 | Link to Comment GMadScientist
GMadScientist's picture

Depends on the war; if you can insure that the entire rest of the world will be leveled economically, if not in actuality, then you can profit immensely from the exercise (enough to pay off your gargantuan war debt even).

By way of analogy, if instead of the "broken window", you have the "raging fire that destroys every house in town" and you happen to be the owner of a nearby Holiday Inn, then you can make out pretty well, but I wouldn't try it too often.

 

Wed, 06/27/2012 - 16:48 | Link to Comment JeffB
JeffB's picture

Is that the type of war Krugman thinks would be beneficial for us? I've not seen him make any such distinctions.

A mega build up for imaginary aliens obviously wouldn't fit the scenario you mention.

 

Tue, 06/26/2012 - 20:20 | Link to Comment DaveA
DaveA's picture

The only reason Andrew Mellon's liquidation didn't work is that President Hoover rejected the idea, instead spending billions of dollars to "pump-prime" the economy. Roosevelt campaigned as a fiscal conservative, but upon taking office became an even bigger Keynesian than Hoover.

Keynes wrote that "Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist." How ironic that that "defunct economist" should be Keynes himself!

Tue, 06/26/2012 - 20:47 | Link to Comment JeffB
JeffB's picture

Nice catch on that Keynes quote.

Historian Thomas E Woods, Jr. gave an interesting talk on the two depressions we had in the 1920s. In the first, we did virtually nothing, the economy crashed, wrung out the excesses of the earlier Fed easy money, and promptly began a recovery. In the second, as you say, Hoover, and then Roosevelt intervened mightily and repeatedly in an effort to keep the free market from going through it's painful, yet necessary healing process and exacerbated the pain and misery and extended it out for many years:

Why You've Never Heard of the Great Depression of 1920 | Thomas E. Woods, Jr.

When we crabbed about studying history in high school they warned us that those who don't know their history are doomed to repeat it. Too bad I didn't know then what I know now... We're doomed to repeat stupid mistakes from the past whether we know our history our not if we elect stupid or crooked leaders.

 

Wed, 06/27/2012 - 00:03 | Link to Comment GMadScientist
GMadScientist's picture

No, Andrew Mellon pushed Harding to slash taxes from 73% to 24% and the dive in the economy did the rest.

Sound familiar yet?

Please do tell what substantive stimulus programs did Hoover "spend billions" on? A dole? Foodstamps? Tax credit for employers?!

(also please fess up that the number of billions could be counted on one hand and never rose above 8% of GDP during the depths of contraction)

And, finally, how did he end up with a budget surplus in 1930 after all this spending during a depression?

 

Wed, 06/27/2012 - 19:03 | Link to Comment JeffB
JeffB's picture

Of course a billion then would probably equate to some $80 billion now and government was far smaller then so percentage increases would be a more accurate way of looking at things I think.

Murry Rothbard's book, America's Great Depression, goes into some detail on the stimulus programs Hoover instigated. Here are a few excerpts from the 1931 section:

"Federal expenditures rose from $4.2 billion in
1930 to $5.5 billion in 1931—excluding government enterprises, it
rose from $3.1 billion to $4.4 billion, an enormous 42 percent
increase. In short, in the midst of a great depression when people
needed desperately to be relieved of governmental burdens, the
dead weight of government rose from 16.4 percent to 21.5 percent
of the gross private product (from 18.2 percent to 24.3 percent of
the net private product). From a modest surplus in 1930, the Federal
government thus ran up a huge $2.2 billion deficit in 1931.
And so President Hoover, often considered to be a staunch exponent
of laissez-faire, had amassed by far the largest peacetime deficit yet known to American history...

Of the $1.3 billion increase in Federal expenditures in 1931, by
far the largest sum, $1 billion, was an increase in transfer payments.
New public construction also increased at the same pace as
the previous year, by over $60 million; grants-in-aid to state and
local governments rose by almost $200 million. Of the $1 billion
rise in transfer payments, $900 million was an increase in “adjusted
compensation benefits,” largely loans to veterans...

The Committee strongly recommended
increased expenditures for public works at all levels of
government. The President’s Committee was one of the major
forces supporting the Wagner Employment Stabilization Act of
February, 1931—its Public Works Section being especially active...

The President’s Committee was the main government organ dealing with employers and urging them to maintain wage rates.(p. 263-265)

(p. 301-303 in the pdf linked to above)

Tue, 06/26/2012 - 21:07 | Link to Comment tony bonn
tony bonn's picture

thank you, john, for an outstanding essay - brief but full of essential principles for moving forward.

Tue, 06/26/2012 - 21:26 | Link to Comment cdskiller
cdskiller's picture

Oh, I'm all for liquidation. I just want selective liquidation. Let's liquidate the balance sheets of all the major investment banks, all the major hedge funds, all the defense contractors and all the oil companies and insurance companies. Let's liquidate the Saudi royal family, declare all $70 trillion worth of credit default swaps contracts void, and force all derivatives contracts to be traded on an exchange with total transparency and severe restrictions on type and leverage.

"Values will be adjusted, and enterprising people will pick up the wrecks from less competent people."

I nominate that for top prize as the most disingenuously naive statement ever made. When have values ever been adjusted for the better following an economic disaster? Give me one example in history. A more accurate statement by those who advocate for liquidation without draconian new rules in place would be "Those who gambled at the right time in the right rigged game and won, or who went short with sufficient ruthlessness or who bet the house would collapse at the right time, will party on their boats until the fallout settles, amnesia sets in and bribery can commence again. Those who lost their houses in the Ponzi scheme will retreat into bitterness and hopes of revenge. Given the chance and a return to deregulation, they will use what they learned and be more cynical and deceptive going forward.

"The pace of the liquidation and the pace of the recovery should be dictated by market participants — in other words, by society at large"

I nominate that for top prize as the most disingenuously deceptive statement ever made. As if, AS IF, I mean, really?, as if market participants and society at large are one and the same. Excuse me while I guffaw. That is the kind of disgusting thing I would expect to come out of Timmay's aparatchik mouth, or from the slimy tongues of Dimon or Blankfein.

 

Tue, 06/26/2012 - 22:29 | Link to Comment Yes_Questions
Yes_Questions's picture

 

 

I nominate your nominations..

 

 

Tue, 06/26/2012 - 22:30 | Link to Comment GMadScientist
GMadScientist's picture

"enterprising people" -> libertarian code for the top 1%

Wed, 06/27/2012 - 03:13 | Link to Comment janus
janus's picture

CDSkillah,

i nominate your statements as the most cacouphanous belches of bold-print i've seen in a while.  yup, a whole mess o sound and fury...signifying nothing.  let's pick this purile bluster apart, shall we?

1) Oh, I'm all for liquidation. I just want selective liquidation. Let's liquidate the balance sheets of all the major investment banks, all the major hedge funds, all the defense contractors and all the oil companies and insurance companies. Let's liquidate the Saudi royal family, declare all $70 trillion worth of credit default swaps contracts void, and force all derivatives contracts to be traded on an exchange with total transparency and severe restrictions on type and leverage.

right, and while we're at it, let's fix the price of gas, wheat and sugar.  let's also set wages.  ohh, now i've gots me a really 'fair' sounding scheme, let's give every man a share, make them all common stock holders, and fix the value of said share to appreciate nicely to assuage any potential inflation...and vise-versa for deflation.  hell, why don't we gulag the entire population of the world to insulate them from individual and collective folly.  valuations are like concentric circles; and the deep-dark center of gravity is pitted in our banking and money system -- once the center fails, everything else must necessarily follow. 

here's the scene that should inspire your future screeds:

http://www.youtube.com/watch?v=Kb26LaVuOBk

are you really naive enough to believe that the fallout from your proposal can in any way be contained?  if it could, bernake would've been time's man of the year for four running.  it is a matter of allowing forces of nature to run their course -- fires and floods generally breech containment...such is their nature.

2) I nominate that for top prize as the most disingenuously naive statement ever made. When have values ever been adjusted for the better following an economic disaster? Give me one example in history. A more accurate statement by those who advocate for liquidation without draconian new rules in place would be "Those who gambled at the right time in the right rigged game and won, or who went short with sufficient ruthlessness or who bet the house would collapse at the right time, will party on their boats until the fallout settles, amnesia sets in and bribery can commence again. Those who lost their houses in the Ponzi scheme will retreat into bitterness and hopes of revenge. Given the chance and a return to deregulation, they will use what they learned and be more cynical and deceptive going forward.

you do have one germ of an idea hidden in there...dis en: yes, laws must be scraped and rewritten.  but, laws will never impede the cunning.  the reason honest money has such an apt appelation is that it is, by its very nature, self-limiting.  regular and transparant audits of gold clearinghouses will do everything that the 'law' never could.  a gold or gold/silver standard is truly the only way forward.  

but, as for the rest...pish-posh.  "when have values every adjusted..."  well, that all depends on which side of the fence one finds one's self on; don't it, CDSkillah?  "those who gambled at the right time...blah, blah, blah."  do you intend to right every 'wrong', heal every wound, fill every cup that was drained by the vicissitudes of Fortune?  timing is, indeed, everything.  timin is why you carry your virginity around intact...timing is the difference between RIM and APPL...timing is just plain why.  timing and fairness will nevah be 'fairly' reconciled.

you call it cynicism and janus calls it wisdom.  that may be the nub of the whole thing.  

3) I nominate that for top prize as the most disingenuously deceptive statement ever made. As if, AS IF, I mean, really?, as if market participants and society at large are one and the same. Excuse me while I guffaw. That is the kind of disgusting thing I would expect to come out of Timmay's aparatchik mouth, or from the slimy tongues of Dimon or Blankfein.

 first of all, you've nominated two statements for top award.  but i nominate your final statement, and it alone, for most apoplectic statement on this whole comments section (and that's sayin a lot).  yes, my friend, market participants and society at large are one in the same.  they are endemic of one another.  this may be too large a concept for you to hold in your mind at once, so try breakin it into smaller parts...baby steps, if you prefer.

i'll quote Tyler Durden, "the economy may disappear; but markets will be around forever."  or something like that.

Tyler Durden is a great man.

dat's rite...time fo some mutha fuckin pixies:

http://www.youtube.com/watch?v=P0WjRmqHz48

http://www.youtube.com/watch?v=v6xU96KLBL4&feature=related

http://www.youtube.com/watch?v=CGOxi7U-sNw&feature=related

http://www.youtube.com/watch?v=0P3lhrwio-M

i was born to be a debaser,

janus



Tue, 06/26/2012 - 21:29 | Link to Comment luna_man
luna_man's picture

 

 

Good spiel!...But, before anything good can happen, "CRIMINALS", need to be dealt with!

 

Right?

Tue, 06/26/2012 - 21:31 | Link to Comment Aunt KatKat
Aunt KatKat's picture

Sorry to ask the obvious, but PM?

Wed, 06/27/2012 - 01:02 | Link to Comment Terrorist
Terrorist's picture

Precious Metals Dear.

Wed, 06/27/2012 - 18:01 | Link to Comment Aunt KatKat
Aunt KatKat's picture

Thank you.

Tue, 06/26/2012 - 21:35 | Link to Comment spanish inquisition
spanish inquisition's picture

Paul Krugman :     ........out the window, and to embrace full-frontal liquidationism .........

Who could possibly be against squirters?

Tue, 06/26/2012 - 22:28 | Link to Comment GMadScientist
GMadScientist's picture

The couth.

Tue, 06/26/2012 - 21:53 | Link to Comment Yes_Questions
Yes_Questions's picture

 

 

Blood in the streets.

 

Tue, 06/26/2012 - 22:17 | Link to Comment WallowaMountainMan
WallowaMountainMan's picture

i don't understand msm.*

don't they live on the planet earth too?

 

 

 

 

 

 

*main stream medium; yes i knew that.

Tue, 06/26/2012 - 22:28 | Link to Comment GMadScientist
GMadScientist's picture

Ah yes, libertardianism...where no company ever fails because of the liquidation of their customers and/or counterparties.

What part of connected is so difficult for you people to understand?!

 

Tue, 06/26/2012 - 22:31 | Link to Comment Yes_Questions
Yes_Questions's picture

 

 

Fear of others. 

Wed, 06/27/2012 - 10:56 | Link to Comment Nels
Nels's picture

Ah statism, where no company is smart enough to avoid risky counterparties, and nobody saves in gold or cash in order to buy things when liquidation occurs.

It's not that no company fails, but that overextended companies fail, and the prudent ones don't.  The unfortunate part is that it's hard to be prudent when TPTB punish it.  How do you save in cash prudently during inflationary times?  How do you save in PMs when capital gains bites you during inflationary times?

One way to socialism/fascism is to push an overconnectedness, so that everybody must do what they are told in order to avoid tipping the whole thing over.

Tue, 06/26/2012 - 22:39 | Link to Comment bigwavedave
bigwavedave's picture

What was happening in China and India in the 30's?

 

Yup. Half the planet population is now in the game. PhD losers seem to ignore this fact and will soon have their tenures outsourced along with the rest of the muppets.

Tue, 06/26/2012 - 23:56 | Link to Comment FreedomGuy
FreedomGuy's picture

This author get's the important point correct. The world no longer trades on companies, profits and future prospects of those companies. The entire world is a political economy and trades on the latest bailout news or odds of a national default. To me, this is a subtle and ominous indirect marker of how we are all ruled by the State. The State now has unlimited access to all our funds and productive labor as it infinitely funds failure. We are being lied to and ruled by economic alchemists like Krugman who swear they can turn economic and fiscal lead into gold through simple monetary policy.

I don't know how this all ends; inflation, deflation, monetary collapse, revolutions, etc., but I am sure it ends badly because the moronic true believers are in charge and doubling down on all their bets...which are actually our bets.

Events are the teachers of fools.

Wed, 06/27/2012 - 08:13 | Link to Comment Vince Clortho
Vince Clortho's picture

The Free Enterprise System has been subverted into a "structured" economy where the Central Planners determine who the primary players are, who the winners are, and who will be allowed to fail.

 

Pure Facism.

Wed, 06/27/2012 - 00:47 | Link to Comment reader2010
reader2010's picture

First, liquidate all motherfuckers the Stalin's style. 

Wed, 06/27/2012 - 02:21 | Link to Comment janus
janus's picture

yup!

seems melon, aziz and janus are all on the same page.

here's a song for ya, aziz...i think you'll like it.

new band with roots here in boston:

http://www.youtube.com/watch?v=ckd4Vk1Cw3Y

(the moron who put the lyrics to the video didn't understand some of them)

relevant, no?

janus

Wed, 06/27/2012 - 09:50 | Link to Comment R_J
R_J's picture

(a little old, but still valid)

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